A Report ON Merger and Acquisition For HDFC & CBoP

Submitted to
SARDAR PATEL COLLEGE OF ADMINISTRATION & MANAGEMENT

Bakrol-Anand

Faculty
Ms. Varsha Kuchara (ASSOCIATE PROFESSOR)

Submitted by Patel Prashant S. (2111) Patel Hardik B. (2091) Patel Unnati N. (2124) Patel Priya J. (2112) Vahora Tasnim U.(2158) M.B.A Semester IV 2013-14
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INDEX

NO

PARTICULARS

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INTRODUCTION OF COMPANY

BRIEF HISTORY OF BOTH COMPANY

REASON , NATURE AND OBJECTIVE OF MERGER PRE MERGER VALUATION OF COMPANIES POST MERGER VALUATION OF COMPANIES RATIO COMPARISON AFTER MERGER

VALUATION OF APPROACH FOR M & A

IMPACT OF THE DEAL ON HDFC BANK

CONCLUSION

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LIST OF TABLE
TABLE NO 1
Profile of Centurion Bank of Punjab and HDFC Bank for the last three financial years is ending before the merger announcement. Combined Profile of Centurion Bank of Punjab and HDFC Bank for the last three financial years was ending before the merger announcement. Profile of HDFC Bank (Bidder Bank) for the next three financial years was ending after the merger announcement. Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined (CBOP &HDFC Banks) and Acquiring Bank (HDFC Bank)

PARTICULARS

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NOPAT and Cost of debt of HDFC bank

The Beta and cost of equity of HDFC bank

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LIST OF GRAPH

GRAPH NO 1

PARTICULARS

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Combined Profile of Centurion Bank of Punjab and HDFC Bank for the last three financial years was ending before the merger announcement. Profile of HDFC Bank (Bidder Bank) for the next three financial years was ending after the merger announcement. Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined (CBOP &HDFC Banks) and Acquiring Bank (HDFC Bank)

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Introduction of company
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ABOUT HDFC BANK

In 1994, as a part liberalisation of banking industry by RBI the Housing Development Finance Corporation Limited (HDFC) was the first private bank to receive approval in principle. The bank was incorporated in August 1994 in the name of HDFC Bank Limited. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. The Bank provides a wide range of banking and financial services including commercial banking and treasury operations. The Bank has one overseas wholesale banking branch in Bahrain, a branch in Hong Kong and two representative offices in UAE and Kenya. The Bank has two subsidiary companies, namely HDFC Securities Ltd and HDB Financial Services Ltd. The Bank has three primary business segments, namely banking, wholesale banking and treasury. The retail banking segment serves retail customers through a branch network and other delivery channels. This segment raises deposits from customers and makes loans and provides other services with the help of specialist product groups to such customers. The wholesale banking segment provides loans, non-fund facilities and transaction services to corporate, public sector units, government bodies, financial institutions and medium-scale enterprises. The treasury segment includes net interest earnings on investments portfolio of the Bank. The Bank's shares are listed on the Bombay Stock Exchange Limited and The National Stock Exchange of India Ltd. The Bank's American Depository Shares (ADS) are listed on the New York Stock Exchange (NYSE) and the Bank's Global Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange. In the year 1999, the Bank launched online, real-time Net Banking. In February 2000, Times Bank Ltd, owned by Bennett, Coleman & Co. / Times Group amalgamated with the Bank Ltd. This was the first merger of two private banks in India. The Bank was the first Bank to launch an International Debit Card in association with VISA (Visa Electron). In the year 2001, they started their Credit Card business. Also, they became the first private sector bank to be authorized by the Central Board of Direct Taxes (CBDT) as well as the RBI to accept direct taxes. During the year, the Bank made a strategic tie-up with a Bangalore-based business solutions software developer, Tally Solutions Pvt Ltd for developing and offering products and services facilitating on-line accounting and banking services to SMEs. During the year 2001-02 the bank was listed on the New York Stock Exchange. Also, they made thealliance with LIC for providing online payment of insurance premium to the customers. During the year 2006-07, they commenced direct lending to Self Help Groups. Also, they opened a dedicated branch for lending to SHGs, in Thudiyalur village (Tamil Nadu). On May 23, 2008, the merger of Centurion Bank of Punjab with HDFC Bank which is considered as one of the biggest merger in domestic banking was formally approved by Reserve Bank of India to complete the statutory and regulatory approval process. The shareholders of Centurion Bank of Punjab received 1 share of HDFC Bank for every 29 shares of CBoP. The merger has been advantageous to HDFC Bank in terms of increased branch network, geographic reach, and customer base, and a bigger pool of skilled manpower. In October 2008, the bank opened their first overseas commercial branch in Bahrain. The branch offers the bank's suite of banking services including treasury and trade finance products for corporate clients and wealth management products for Non-resident Indians. As on 31st March, 2012 the authorized share capital of the Bank is Rs. 550 crore. The paid-up

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capital as on the said date is Rs. 469,33,76,540. The net profit is Rs. 5,167 crore, with Total deposits of Rs. 246,706 crore, and Total advances of Rs.195,420 crore. The bank is having a strong network with number of branches are 2544 of which 70% of bank branches are outside metro areas and 8913 ATMs in 1399 cities.

ABOUT CENTURION BANK OF PUNJAB BANK

Centurion Bank of Punjab is one of the leading new generation private sector banks in India. The bank serves individual consumers, small and medium businesses and large corporations with a full range of financial products and services for investing, lending and advice on financial planning. The bank offers its customers an array of wealth management products such as mutual funds, life and general insurance and has established a leadership 'position'. The bank is also a strong player in foreign exchange services, personal loans, mortgages and agricultural loans. Additionally the bank offers a full suite of NRI banking products to overseas Indians. On August 29, 2007, Lord Krishna Bank (LKB) merged with Centurion Bank of Punjab, post obtaining all requisite statutory and regulatory approvals. This merger has further strengthened the geographical reach of the Bank in major towns and cities across the country, especially in the State of Kerala, in addition to its existing dominance in the northern part of the country. Centurion Bank of Punjab now operates on a strong nationwide franchise of 394 branches and 452 ATMs in 180 locations across the country, supported by employee base of over 7,500 employees. In addition to being listed on the major Indian stock exchanges, the Banks shares are also listed on the Luxembourg Stock Exchange.
Brief Introduction

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Brief History of Both Company

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HDFC
Founded - August 1994 Indias largest private sector bank by market capitalization as of 25 th September 2013, [152,815 (Rs.cr)] Fifth largest bank in India by assets India's largest housing finance company As on August 2013: HDFC Bank has 754 branches 11,088 ATMs, in 1,891 cities in India 2000 -Times bank Limited was merged with HDFC Bank Ltd 2008- Centurion Bank of Punjab

CENTURION BANK OF PUNJAB BANK

Founded in 1994 (as Centurion bank) It operated on a strong nationwide 394 branches and 452 ATMs in 180 locations across the country, 2005- Centurion Bank merge with Bank of Punjab and renamed as Centurion Bank of Punjab 2006 CBoP acquired Lord Krishna Bank.

As of March 31, 2008: Loans outstanding Rs. 161,818.7 million Deposits outstanding Rs. 218,092.7 million 7|Page

Reason, Nature and Objective of Merger

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REASON / WHY HDFC BANK CHOSE CBoP

Cultural fit between the organizations The bank had a large nationwide network Strong leadership positions in retail segment Strong asset quality High earning growth Both the banks had a strong position in vehicle financing Attractive route to supplement HDFC Banks organic growth 7,500 talented employees

NATURE AND OBJECTIVE OF MERGER

Horizontal merger (Both the companies were from same industry)

Core objectives: Achieve economies of scale Widening the line of products To get more dominance on the market To face the competition posed by foreign banks and domestic banks (ICICI)

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Pre-Merger valuation of Ratio

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Profile of Centurion Bank of Punjab and HDFC Bank for the last three financial years is ending before the merger announcement. Financial Ratios (in Percentage)

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Combined Profile of Centurion Bank of Punjab and HDFC Bank for the last three financial years was ending before the merger announcement. Financial Ratios (in Percentage)

Pre merger
300 250 200 In % 150 100 50 0 Gross Profit 2005 2006 2007 72.33 68.43 69.88 Net profit 20.23 18.81 15.48 Operating Profit 51.52 42.42 46.32 ROCE 1.24 1.17 1.15 ROE 169.19 218.79 256.25 D/E Ratio 109.97 153.77 182.54

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Post-Merger valuation of Ratio

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Profile of HDFC Bank (Bidder Bank) for the next three financial years was ending after the merger announcement. Financial Ratios (in Percentage)
HDFC

Post -merger
900 800 700 600 500 400 300 200 100 0 Gross Profit 74.76 74.66 76.29 Net profit 13.75 18.23 19.7 Operating Profit 54.61 51.12 54.53 ROCE 1.22 1.32 1.41 ROE 527.75 644.18 843.96 D/E Ratio 342.04 393.93 497.29

In %

2009 2010 2011

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Pre and Post Merger valuation of Ratios

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Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined (CBOP &HDFC Banks) and Acquiring Bank (HDFC Bank)

MEAN
75.24 70.21 Pre-merger Post-Merger

53.43 46.76

18.84 17.23 6.72 2.18 ROE 4.05 1.49 D/E Ratio

1.181.32 Gross Profit Net profit Operating profit ROCE

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Std.Deviation
Pre-merger Post-Merger

159.93

69.3

48.04 36.55

1.97 0.91 Gross Profit

3.37 3.1 Net profit

4.56

1.99

0.05 0.09 ROCE ROE D/E Ratio

Operating profit

Except Gross profit margin all other ratios Net profit margin, Operating profit margin, Return on capital employed, Return on equity and Debt-Equity ratio the pvalue is greater than 5 percent, it can be concluded that there is no significant difference in these ratios before after merger.

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1. NOPAT and Cost of debt of HDFC bank:

2.

The cost of debt is showing a continues increase because of the monetary policies of the Reserve Bank of India The NOPAT of the bank was increasing at a higher rate before merger. The Beta and cost of equity of HDFC bank:

The 4 years average Beta of HDFC bank before merger was 0.63 which is increase to 0.72 after merger. The 4year average cost of equity before merger was 24% which is decreased by 2.14% in past four year after merger (4year average after merger is 21.86%)

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Valuation of Approach for M &A -----------------------------------------------------------------------------

Pre- merger analysis of the year 2007

particulars Earning(rs) 11414500000 123800000 NES 319389608 1698989540 EPS(premerger)(rs) EXCHANGE RATIO 35.74 0.03448(1/29) 0.72

HDFC CBOP

Total number of shares in the merged entity=

319389608 + (0.03448* 1698989540) = 377975454 shares

POST MERGER EPS(2012)

= ( 11414500000 + 123800000) / 377975454 = 33.41

EPS Pre merger Post merger

HDFC
35.74 33.41

CBOP
0.72 1.15

From the eps analysis we can say that the acquiring company HDFC losses.So there may be some synergy losses for the HDFC bank.In pre merger the hdfc EPS is 35.74 pershare.After merger the EPS for HDFC is fall to 3 3.41 per share.thats why the shareholder of HDFC bank do not have the interest for merging with CBOP in HDFC bank.

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POSITION OF HDFC BANK AFTER MERGER

BANKS

Branch Metros

in

Branch in Non metros

TOTAL

ATMs

CBoP

127

267

394

452

HDFC Bank

287

467

754

11,088

MERGED

414

734

1148

11540

Total branched 1148 Total ATMs pan India 11540 Deposit base was around Rs. 1,200 billion Net advances of around Rs. 850 billion. The balance sheet size of the combined entity was Rs. 1,500 billion
At a swap ratio of 1:29, it would lead to dilution of 21% for HDFC Bank. HDFC Bank would issue 76m shares ( fully diluted) to CboP shareholders.The merger would worsen HDFC Banks RoEs, CASA ratio and asset in the near term and make valuations additionaly expensive.P..

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Impact of the deal on HDFC bank

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Positive impact: Increased geographical presence Recorded growth figures as follows: [by march-2013]

Net profit by 44.6% to Rs. 4.6 billion Net Interest Income by 74.9% to Rs.17.2 billion Advances grew by 79.8% & deposits by 60.4%

Negative impact: High level of write-offs due to bad asset quality of CBoP in personal loan and 2 wheeler loans Gross profit is increased but net profit is decreased because of the huge expenses. Very costly merger in term of the ratio is 1:29 for CBoP.

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Conclusion
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The banking industry is one of the rapidly growing industries in India. It has transformed itself from a sluggish business entity to a dynamic industry. The growth rate in this sector is remarkable and it has become the most preferred banking destinations for international investors. In the last two decades, there have been paradigm shift in Indian banking industries. The Indian banking sector is growing at an astonishing pace. A relatively new dimension in the Indian banking industry has accelerated through mergers and acquisitions. Mergers in banking sector are a form of horizontal merger because the merging entities are involved in the same kind of activity. By the way of Mergers and acquisitions in the banking sector, the banks can achieve significant growth in their operations, minimize their expenses to a considerable extent and also competition is reduced because merger eliminates competitors from the banking industry. Based on the analysis of 4 years pre and post merger financial ratios merger data of Indian overseas bank, it can be concluded that Net profit margin, Operating profit margin, Return on capital employed, Return on equity and Debt- Equity ratio there is significant difference but no significant difference with respect to Gross profit margin. Based on the analysis of 3 years financial ratios pre and merger data of HDFC bank data it can be concluded that Net profit margin, Operating profit margin, Return on capital employed, Return on equity and Debt-Equity ratio there is no significant difference in these ratios before after merger. However, significant difference with respect to Gross profit margin.

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