Professional Documents
Culture Documents
STUDY
ON
MERGERS &
ACQUISITION IN BANKING INDUSTRYA GLOBAL PHENOMENON
Table of Contents
S.NO.
TOPIC
Preface
Acknowledgement
Executive Summary
INTRODUCTION:
Introduction
10
Market Definition
11
Evaluative Criteria
12
13
14
15
16
17
Is bigger better?
18
19
PAGE NOS.
20
21
22
LIMITATIONS
23
24
25
26
27
28
29
30
31
The European Bank Experience
32
Consolidation and Human Resource Management
33
METHODOLOGY
WORK
34
AND
PROCEDURE
OF
35
Managed Transition
36
Current Investment Banking Scenario in India
37
Most famous Merger and Acquisition in India
38
39
40
Hutuch-Essar goes to Vodafone
42
43
Findings
44
45
Mega Acquisition by Indian Company changing brand
India
46
Matrix Bid : Fight between Infosys & Wipro
47
ANALYSIS OF DATA
Tools for data collection
48
49
50
Rediff Takeover : Rumour or Reality?
51
Indian Merger
exponentially
&
Acquisition
are
growing
52
Indias new found confidence : global Acquisitions
53
54
FINDINGS,
INFERENCES
RECOMMENDATIONS
55
56
Conclusion
57
58
ANNEXURES
59
Proposal
References
60
AND
PREFACE
Practical training imbibes an integral part of management studies. One cannot merely upon the
theoretical knowledge. It is to be coupled with practical for it to be fruitful classroom lectures make
the fundamental concept of management clear. They also facilitate the learning of practical things.
However class lectures must be correlated with practical training in the company has a significant role
to play in the subject in business management. To develop managerial and administrative skill in
future managers have to enhance their analytical skills, it is necessary that they combine their
classroom learning with the knowledge of real business environment.
After liberalization Indian Economy Scene is really a buzz with activity. Lots and lots of multinational
companies are coming in with their technical expertise and proven management concepts. Industrial
activity in Indian has become a thing to watch and I really wanted to be of it and it was essential for
me being a management student.
It is difficult to elaborate everything, which I learned during the training however, I have endeavored
to many, comprehensive picture of details about working in the following pages.
I have accumulated the desired information through personal observations, study of documents and
discussions.
ACKNOWLEDGEMENT
This work is a culmination of sincere efforts put in during the making of this project. This task could
not have been accomplished without the support and help of lots of people. It is with great pleasure
and privilege that I wish to thanks all of them who actively supported me in this project.
I would like to place on record my gratitude to Mr. Sandeep Gupta(Senior Manager, Finance) whose
valuables advice and suggestions were available through out the preparation of this project.
Executive Summary:
Consolidation in the Banking sector is very important in terms of mergers and acquisitions for the
growing Indian Banking Industry. This can be achieved through Cost Reduction and Increasing
Revenue. The important part over here is that why do we need consolidation in Indian Banking and
what is the Challenges Ahead. The role of the Central government is also very necessary to be
analyzed in the entire process as they play a crucial role in the policy formation required for the
growth of Indian Banking.
In the recent times, we have seen some M&A as voluntary efforts of banks. Merger of Times Bank
with HDFC Bank was the first of such consolidations after financial sector reforms ushered in 1991.
Merger of Bank of Madura with ICICI Bank, reverse merger of ICICI with ICICI bank, coming
together of Centurion Bank and Bank of Punjab to form Centurion Bank of Punjab and the recent
decision of Lord Krishna Bank to merge with Federal Bank are voluntary efforts by banks to
consolidate and grow.
Is growing is size better for the Indian banks? India is still an unbanked country and by global
standards, even the biggest of Indian banks are minnows in a business where size means clout and
where geographical boundaries are blurring. Even by Indian standards, most of the banking sector is
disadvantaged by size: the top 25 banks of which, 18 are owned by the government account for
about 85 per cent of banking assets.
An analysis of the Indian banking industry shows that due to factors like stability, return to
shareholders, adhering to regulatory norms, etc make m&a as an imperative. Also m&a gives an
opportunity to these Indian banks of creating a universal bank. Also mergers can be used as a strategic
tool and also there is a possibility of strategic investments where traditional M&A are not possible. In
the changing economic and business environment characterized by speed, flexibility and
responsiveness to customers, size has a lot to contribute to staying ahead in the competition. It is in
this context that mergers and acquisitions (M & As) as a tool to gain competitive strength comes into
the forefront with Partnering for competitiveness being a recognized strategic argument for the same.
Also deregulation plays a very important role in the entire economy if its going to opened to foreign
players. A careful study needs to be done before the foreign players are allowed to enter into the
market and examples from different economies across the globe must be considered.
Also there needs to be a proper consideration of the human resource i.e. the employees interest must
not be affected due a particular merger. Also the various other threats need to be considered.
Mergers like the one between Centurion bank and Bank of Punjab and also CBOP and Lord Krishna
Bank shows that its upto the private sector players to understand the need to grow inorganically and
that too without any pressure from a third party. These type of merger and the latest one that is going
to happen between CBOP and HDFC bank would ensure that Indian banks are to take on the foreign
banks when they enter the market in 2009.
OBJECTIVES
The project was undertaken to analyze why merger and acquisition is necessary from a companys or a
banks point of view, when two or more of them are agree to combine their operations, then what will
happen to the merged co and to the surviving co.
Objectives are strategic decisions leading to the maximization of a companys growth by enchancing
its production and marketing operations.
A company can expand internally or externally. If internally there is a problem due to lack of
resources and managerial skill it can to the same externally through mergers and acquisitions. This
helps a company to grow at a faster pace in a convinent and inexpensive way. Combination of
companies may result in more than the average profitability due to reduction in cost and effective
utilization of resources.
The main objective of research is to show the merger and acquisition between two or more companies.
Mergers and Acquisitions are there both in public or private company or whether it is a bank. The
research shows why mergers and acquisitions are necessary in day to day life of a business which is
continuously running in a loss, or for a businessman who want to expand his entire business or a
particular existing unit. What are the major roles played by the acquiring company? What the major
factors behind merger and acquisition?
This research shows the need of merger and acquisition both in banking sector and public/private
sector. I added some biggest hikes and slides in the history of merger and acquisition.
In this report I also added some mega mergers and acquisitions by some bigger companies in the year
2007 other than bank merger.
Research Design
In order to make this project effective and to show the real picture of Merger and Acquisition, I have
undertaken the following steps:
I first searched the different companies like Dimension consulting pvt Ltd., Centurion Bank,
HDFC bank, Hutuch, Reliance.
Then I collected the data from top companies and Bank who provide fundamental reseach to the
customers.
After I searched for the modes for collecting the information regarding Merger and Acquisition
which is provided by these companies.
Then I started off one by one firstly with Mr. Ajay Kapoor, Finance Manager, and his views about
merger and acquisitions done by Dimension Consulting Pvt. Ltd.
In this report two methods were used for the data collection:
Primary Data
Secondary Data
The primary data collection system consisted of, collection of annual report of the company, merger
and acquisition information, the business profile of the company and the relevant literature one merger
and acquisition.
The mechanism involved in secondary data collection, mainly borrowing through adequate journal
(related to merger and acquisition), web portals, books, white papers.
The methodology adopted for the project was divided into two types of analysis:
Qualitative analysis required studying the business profile of the company, the performance of the
company in last few years and what policy they adopt and studying what role merger and acquisition
play.
Quantitative analysis required analyzing the current assets and current liabilities of the company, the
statement of analysis, analyzing the operating cycle and ratios to reveal the financial position and
soundness of the business and give a good basis for quantative analysis of financial problems.
The information has been primarily sourced and administered from company websites and/or the stock
exchanges. The questionnaire sought details on aspects such as management, memberships, reach &
access, size & strength, products & services, technology platforms & solution providers, growth &
consolidation plans and areas of focus and thrust in the future.
Besides, information has also been collected from secondary sources such as annual reports of the
companies , banks and their respective websites. Every effort was made to ensure that companies
respond to the questionnaire..
At last after collecting all the essential data, I omitted the incomplete/unnecessary data.
INTRODUCTION
INDIAN BANKING
AN OVERVIEW
M&A
A
GLOBAL
PHENOMENON
MERGER &
ACQUISITION
AN
OVERVIEW
Introduction
The banking industry is one of the prominent indicators of the health of an economy. A banks ability
and freedom to borrow from other banks and lend to corporates has a great impact on the growth rate
of the economy. Deregulation of US banks in the 1970s was followed by a drastic change in US
banking banks became larger and better diversified. Soon banks of other developed nations also
began to operate in more competitive markets. Developing countries also followed suit in the last
decade of the 20th century. Similar to the US, the Indian banking industry too has undergone several
changes since the initiation of financial sector reforms in 1992. Deposits and credit have grown at a
fast pace driven by the booming economy, increasing disposable income and increased corporate
activity; credit penetration has increased significantly though it remains way below the numbers in
developed markets; and foreign banks have set the trend in product and service innovation.
The future of Indian banking looks quite exciting with Competition intensifying which would lead to
consolidation, though foreign banks are likely to jump into the fray only by 2009, New regulations
pertaining to corporate governance and BASEL II coming into effect which would make the banking
infrastructure more robust and transparent, Technology being adopted aggressively by banks to make
processes efficient and cost-effective, provide services 24X7 and analyze customer data to offer
products and services tailor-made to suit their tastes new segments emerging which would enable
banks to tap into new markets and offer new products and services product and service innovation by
banks (both foreign and Indian), offering the customer greater choice.
From the Public sector dominated scenario, Indian Banking has come a long way to the current
scenario where private banks co-exist with their public bank counterparts who have adjusted to the
changing times. While The Indian Banking system has done fairly well in adjusting to the changing
market dynamics, greater challenges lie ahead.
Consolidation in the Banking sector is very important in terms of mergers and acquisitions for the
growing Indian Banking Industry. This can be achieved through Cost Reduction and Increasing
Revenue. The important part over here is that why do we need consolidation in Indian Banking and
what is the Challenges Ahead. The role of the Central government is also very necessary to be
analyzed in the entire process as they play a crucial role in the policy formation required for the
growth of Indian Banking.
Are we seeing the beginning of a phase of consolidation in Indian banking? Will liberalization and
globalization make consolidation through Mergers and Acquisitions a logical way forward for banks to
survive and grow? Will banks in India willingly agree to be taken over by other banks? Do we need
changes in our legal framework for facilitating mergers and acquisitions in the Indian banking
industry? Will Mergers and Acquisitions always lead to an appreciation in shareholder value? Well,
these are some of the questions which need to be analyzed keeping in the mind the future prospects of
the Indian Banking Industry.
The banking industry in India is governed by Banking Regulation Act of India, 1949. Since 1949, this
sector has undergone phenomenal reforms due to the eddorts and the vision of the policymakers. The
first phase of reform began with nationalization if the 14 banks in 1969. At this stage, priority sectors
were identified and banking support was given to them. The second phase was the nationalization of 6
more banks in 1980. However, what can be considered as a breakthrough in banking services was the
entry to private sector banks whish was initiated in 1993. Eight new banks entered the market at this
stage with state of art technology and a brought with them a new wave of professionalism. It was at
this time that India was introduced to the concept of Debit and Credit cards, e-transfer of funds,
ATMs.
Post-liberalisation, the banking industry in India has grown at a fast pace. Increased economic activity
coupled with de-regulation has further strengthened the position of Indian banks. By the end of March
2006, the total deposits held by the scheduled commercial banks stood at INR 21 lakh crores, a growth
of 15.8 percent over 2005 and a compound annual growth rate (CAGR) of 14.9 percent since 2001-02.
The total loans and advances offered by commercial banks grew by 36 percent between March 2005
and March 2006 to reach INR 15 lakh crores, recording a CAGR of 23.6 percent since 2001-02.
By the end of fiscal year 2005-06, there were 26 public sector banks (including seven associates of the
State Bank of India), 29 private sector banks (21 old and 8 new private banks) and 30 foreign banks as
Scheduled Commercial Banks (SCBs) in India. As more foreign banks and aggressive new private
banks are looking towards increasing their footprints in an already crowded Indian banking industry,
the competition for nationalised banks is likely to escalate.
Banks have witnessed a significant decline in NPAs over the last few years (Figure 9). This trend is
visible for almost all categories of banks. This is primarily due to the stringent lending norms
implemented by banks and their better knowledge of Indian customers. Moreover, the RBI has been
tightening norms in line with the best international practices in recent years.
Few Facts
The nationalized banks have more branches than any other types of banks in India. Now there are
about 33,627 Branches in India, as on March 2005.
Investments of scheduled commercial banks (SCBs) also saw an increase from Rs 8,04,199 crore in
March 2005 to Rs 8,43,081 crore in the same month of 2006.
India's retail-banking assets are expected to grow at the rate of 18% a year over the next four years
(2006-2010).
Retail loan to drive the growth of retail banking in future.
Housing loan account for major chunk of retail loan.
Current Scenario
The industry is currently in a transition phase. On the one hand, the PSBs, which are the mainstay of
the Indian Banking system are in the process of shedding their flab in terms of excessive manpower,
excessive non Performing Assets (Npas) and excessive governmental equity, while on private sector
banks are consolidating themselves through mergers and
acquisitions. PSBs, which currently account for more than 78 percent of total banking industry assets
are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues from traditional
sources, lack of modern technology and a massive workforce while the new private sector banks are
forging ahead and rewriting the traditional banking business model by way of their sheer innovation
and service. The PSBs are of course currently working out challenging strategies even as 20 percent of
their massive employee strength has dwindled in the wake of the successful Voluntary Retirement
Schemes (VRS) schemes.
The private players however cannot match the PSBs great reach, great size and access to low cost
deposits. Therefore one of the means for them to combat the PSBs has been through the merger and
acquisition (M& A) route. Over the last two years, the industry has witnessed several such instances.
For instance, Hdfc Banks merger with Times Bank Icici Banks acquisition of ITC Classic, Anagram
Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said
to be on the lookout. The UTI bank- Global Trust Bank merger however opened a pandoras box and
brought about the realization that all was not well in the functioning of many of the private sector
banks.
Private sector Banks have pioneered internet banking, phone banking, anywhere banking, mobile
banking, debit cards, Automatic Teller Machines (ATMs) and combined various other services and
integrated them into the mainstream banking arena, while the PSBs are still grappling with disgruntled
employees in the aftermath of successful VRS schemes. Also, following Indias commitment to the W
To agreement in respect of the services sector, foreign banks, including both new and the existing
ones, have been permitted to open up to 12 branches a year with effect from 1998-99 as against the
earlier stipulation of 8 branches.
Talks of government diluting their equity from 51 percent to 33 percent in November 2000 has
also opened up a new opportunity for the takeover of even the PSBs. The FDI rules being more
rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A route to acquire
willing Indian partners. Meanwhile the economic and corporate sector slowdown has led to an
increasing number of banks focusing on the retail segment. Many of them are also entering the new
vistas of Insurance. Banks with their phenomenal reach and a regular interface with the retail investor
are the best placed to enter into the insurance sector. Banks in India have been allowed to provide fee-
based insurance services without risk participation, invest in an insurance company for providing
infrastructure and services support and set up of a separate joint-venture insurance company with risk
participation. Aggregate Performance of the Banking Industry Aggregate deposits of scheduled
commercial banks increased at a compounded annual average growth rate (Cagr) of 17.8 percent
during 1969-99, while bank credit expanded at a Cagr of 16.3 percent per annum. Banks investments
in government and other approved securities recorded a Cagr of 18.8 percent per annum during the
same period.
In FY01 the economic slowdown resulted in a Gross Domestic Product (GDP) growth of only 6.0
percent as against the previous years 6.4 percent. The WPI Index (a measure of inflation) increased
by 7.1 percent as against 3.3 percent in FY00. Similarly, money supply (M3) grew by around 16.2
percent as against 14.6 percent a year ago.
The growth in aggregate deposits of the scheduled commercial banks at 15.4 percent in FY01 percent
was lower than that of 19.3 percent in the previous year, while the growth in credit by SCBs slowed
down to 15.6 percent in FY01 against 23 percent a year ago.
The industrial slowdown also affected the earnings of listed banks. The net profits of 20 listed banks
dropped by 34.43 percent in the quarter ended March 2001. Net profits grew by 40.75 percent in the
first quarter of 2000-2001, but dropped to 4.56 percent in the fourth quarter of 2000 -2001.
On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill the norms, it was a
feat achieved with its own share of difficulties. The CAR, which at present is 9.0 percent, is likely to
be hiked to 12.0 percent by the year 2004 based on the Basle Committee recommendations. Any bank
that wishes to grow its assets needs to also shore up its capital at the same time so that its capital as a
percentage of the risk-weighted assets is maintained at the stipulated rate. While the IPO route was a
much-fancied one in the early 90s, the current scenario doesnt look too attractive for bank majors.
Consequently, banks have been forced to explore other avenues to shore up their capital base.While
some are wooing foreign partners to add to the capital others are employing the M& A route. Many are
also going in for right issues at prices considerably lower than the market prices to woo the investors.
Governmental Policy
After the first phase and second phase of financial reforms, in the 1980s commercial banks began to
function in a highly regulated environment, with administered interest rate structure,
quantitative restrictions on credit flows, high reserve requirements and reservation of a significant
proportion of lendable resources for the priority and the government sectors. The restrictive regulatory
norms led to the credit rationing for the private sector and the interest rate controls led to the
unproductive use of credit and low levels of investment and growth. The resultant financial
repression led to decline in productivity and efficiency and erosion of profitability of the banking
sector in general. This was when the need to develop a sound commercial banking system was felt.
This was worked out mainly with the help of the recommendations of the Committee on the Financial
System (Chairman: Shri M. Narasimham), 1991. The resultant financial sector reforms called for
interest rate flexibility for banks, reduction in reserve requirements, and a number of structural
measures. Interest rates have thus been steadily deregulated in the past few years with banks being free
to fix their Prime Lending Rates(PLRs) and deposit rates for most banking products.
Credit market reforms included introduction of new instruments of credit, changes in the credit
delivery system and integration of functional roles of diverse players, such as, banks, financial
institutions and nonbanking financial companies (Nbfcs). Domestic Private Sector Banks were
allowed to be set up, PSBs were allowed to access the markets to shore up their Cars.
Implications Of Some Recent Policy Measures
The allowing of PSBs to shed manpower and dilution of equity are moves that will lend greater
autonomy to the industry. In order to lend more depth to the capital markets the RBI had in
November 2000 also changed the capital market exposure norms from 5 percent of banks
incremental deposits of the previous year to 5 percent of the banks total domestic credit in the
previous year. But this move did not have the desired effect, as in, while most banks kept away almost
completely from the capital markets, a few private sector banks went overboard and exceeded limits
and indulged in dubious stock market deals. The chances of seeing banks making a comeback to the
stock markets are therefore quite unlikely in the near future.
The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during the
first quarter of this fiscal came as a welcome announcement to foreign players wanting to get a foot
hold in the Indian Markets by investing in willing Indian partners who are starved of networth to meet
CAR norms. Ceiling for FII investment in companies was also increased from 24.0 percent to 49.0
percent and have been included within the ambit of FDI investment. The abolishment of interest tax of
2.0 percent in budget 2001-02 will help banks pass on the benefit to the borrowers on new loans
leading to reduced costs and easier lending rates. Banks will also benefit on the existing loans
wherever the interest tax cost element has already been built into the terms of the loan. The reduction
of interest rates on various small savings schemes from 11 percent to 9.5 percent in Budget 2001-02
was a much awaited move for the banking industry and in keeping with the reducing interest rate
scenario, however the small investor is not very happy with the move Some of the not so good
measures however like reducing the limit for tax deducted at source (TDS) on interest income from
deposits to Rs 2,500 from the earlier level of Rs 10,000, in Budget 2001-02, had met with disapproval
from the banking fraternity who feared that the move would prove counterproductive and lead to
increased fragmentation of deposits, increased volumes and transaction costs. The limit was thankfully
partially restored to Rs 5000 at the time of passing the Finance Bill in the Parliament.
April 2001-Credit Policy Implications
The rationalization of export credit norms in will bestow greater operational flexibility on banks,and
also reduce the borrowing costs for exporters. Thus this move could trigger exports growth in the
future. Banks can also hope to earn increased revenue with the interest paid by RBI on CRR balances
being increased from 4.0 percent to 6.0 percent The stock market scam brought out the unholy nexus
between the Cooperative banks and stockbrokers. In order to usher in greater prudence in their
operations, the RBI has barred Urban Cooperative Banks from financing the stock market operations
and is also in the process of setting up of a new apex supervisory body for them. Meanwhile the
foreign banks have a bone to pick with
the RBI. The RBI had announced that forex loans are not to be calculated as a part of Tier-1 Capital
for drawing up exposure limits to companies effective 1 April 2002. This will force foreign banks
either to infuse fresh capital to maintain the capital adequacy ratio (CAR) or pare their asset base.
Further, the RBI has also sought to keep foreign competition away from the nascent net banking
segment in India by allowing only Indian banks with a local physical presence, to offer Internet
banking Crystal Gazing On the macro economic front, GDP is expected to grow by 6.0 to 6.5 percent
while the projected expansion in broad money (M3) for 2001-02 is about 14.5 percent. Credit and
deposits are both expected to grow by 15-16 percent in FY02. India's foreign exchange reserves should
reach US$50.0 billion in FY02 and the Indian rupee should hold steady. The interest rates are likely to
remain stable this fiscal based on an expected downward trend in inflation rate, sluggish pace of nonoil imports and likelihood of declining global interest rates. The domestic banking industry is
forecasted to witness a higher degree of mergers and acquisitions in the future. Banks are likely to opt
for the universal banking approach with a stronger retail approach. Technology and superior customer
service will continue to be the imperatives for success in this industry.
Public Sector banks that imbibe new concepts in banking, turn tech savvy, leaner and meaner post
VRS and obtain more autonomy by keeping governmental stake to the minimum can succeed in
effectively taking on the private sector banks by virtue of their sheer size. Weaker PSU banks are
unlikely to survive in the long run. Consequently, they are likely to be either acquired by stronger
players or will be forced to look out for other strategies to infuse greater capital and optimize their
operations.
Foreign banks are likely to succeed in their niche markets and be the innovators in terms of
technology introduction in the domestic scenario. The outlook for the private sector banks indeed
looks to be more promising vis--vis other banks. While their focused operations, lower but more
productive employee force etc will stand them good, possible acquisitions of PSU banks will definitely
give them the much needed scale of operations and access to lower cost of funds. These banks will
continue to be the early technology adopters in the industry, thus increasing their efficiencies. Also,
they have been amongst the first movers in the lucrative insurance segment.Already, banks such as
Icici Bank and Hdfc Bank have forged alliances with Prudential Life and Standard Life respectively.
This is one segment that is likely to witness a greater deal of action in the future. In the near term, the
low interest rate scenario is likely to affect the spreads of majors. This is likely to result in a greater
focus on better asset-liability management procedures. Consequently, only banks that strive hard to
increase their share of fee-based revenues are likely to do better in the future.
case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the
takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer.
Hostile acquisitions can, and often do, turn friendly at the end, as the acquiror secures the endorsement
of the transaaction from the board of the acquiree company. This usually requires an improvement in
the terms of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will acquire management control of a larger or longer established
company and keep its name for the combined entity. This is known as a reverse takeover. Another type
of acquisition is reverse merger, a deal that enables a private company to get publicly listed in a short
time period. A reverse merger occurs when a private company that has strong prospects and is eager
to raise financing buys a publicly listed shell company, usually one with no business and limited
assets. Achieving acquisition success has proven to be very difficult, while various studies have shown
that 50% of acquisitions were unsuccessful] The acquisition process is very complex, with many
dimensions influencing its outcome. There is also a variety of structures used in securing control over
the assets of a company, which have different tax and regulatory implications:
The buyer buys the shares, and therefore control, of the target company being purchased. Ownership
control of the company in turn conveys effective control over the assets of the company, but since the
company is acquired intact as a going concern, this form of transaction carries with it all of the
liabilities accrued by that business over its past and all of the risks that company faces in its
commercial environment.
The buyer buys the assets of the target company. The cash the target receives from the sell-off is paid
back to its shareholders by dividend or through liquidation. This type of transaction leaves the target
company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the
transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and
liabilities that it does not. This can be particularly important where foreseeable liabilities may include
future, unquantified damage awards such as those that could arise from litigation over defective
products, employee benefits or terminations, or environmental damage. A disadvantage of this
structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers
of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges
or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders.
The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where one
company splits into two, generating a second company separately listed on a stock exchange.
Business valuation
The five most common ways to valuate a business are
asset valuation,
historical earnings valuation,
future maintainable earnings valuation,
relative valuation (comparable company & comparable transactions),
discounted cash flow (DCF) valuation
Professionals who valuate businesses generally do not use just one of these methods but a combination
of some of them, as well as possibly others that are not mentioned above, in order to obtain a more
accurate value. The information in the balance sheet or income statement is obtained by one of three
accounting measures: a Notice to Reader, a Review Engagement or an Audit.
Accurate business valuation is one of the most important aspects of M&A as valuations like these will
have a major impact on the price that a business will be sold for. Most often this information is
expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for interest's
sake. There are other, more detailed ways of expressing the value of a business. These reports
generally get more detailed and expensive as the size of a company increases, however, this is not
always the case as there are many complicated industries which require more attention to detail,
regardless of size.
Financing M&A
Mergers are generally differentiated from acquisitions partly by the way in which they are financed
and partly by the relative size of the companies. Various methods of financing an M&A deal exist:
Cash
Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the
shareholders of the target company are removed from the picture and the target comes under the
(indirect) control of the bidder's shareholders.
confidence in investing in the company. However, this does not always deliver value to shareholders
(see below).
Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction
of target and acquiring firm resources can create value through either overcoming information
asymmetry or by combining scarce resources
Vertical integration: Vertical integration occurs when an upstream and downstream firm merge (or one
acquires the other). There are several reasons for this to occur. One reason is to internalise an
externality problem. A common example is of such an externality is double marginalization. Double
marginalization occurs when both the upstream and downstream firms have monopoly power, each
firm reduces output from the competitive level to the monopoly level, creating two deadweight losses.
By merging the vertically integrated firm can collect one deadweight loss by setting the downstream
firm's output to the competitive level. This increases profits and consumer surplus. A merger that
creates a vertically integrated firm can be profitable
However, on average and across the most commonly studied variables, acquiring firms' financial
performance does not positively change as a function of their acquisition activity. Therefore,
additional motives for merger and acquisition that may not add shareholder value include:
Diversification: While this may hedge a company against a downturn in an individual industry it fails
to deliver value, since it is possible for individual shareholders to achieve the same hedge by
diversifying their portfolios at a much lower cost than those associated with a merger.
Manager's hubris: manager's overconfidence about expected synergies from M&A which results in
overpayment for the target company.
Empire-building: Managers have larger companies to manage and hence more power.
Manager's compensation: In the past, certain executive management teams had their payout based on
the total amount of profit of the company, instead of the profit per share, which would give the team a
perverse incentive to buy companies to increase the total profit while decreasing the profit per share
(which hurts the owners of the company, the shareholders); although some empirical studies show that
compensation is linked to profitability rather than mere profits of the company.
Effects on management
A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that
mergers and acquisitions destroy leadership continuity in target companies top management teams for
at least a decade following a deal. The study found that target companies lose 21 percent of their
executives each year for at least 10 years following an acquisition more than double the turnover
experienced in non-merged firms.
The Great Merger Movement
The Great Merger Movement was a predominantly U.S. business phenomenon that happened from
1895 to 1905. During this time, small firms with little market share consolidated with similar firms to
form large, powerful institutions that dominated their markets. It is estimated that more than 1,800 of
these firms disappeared into consolidations, many of which acquired substantial shares of the markets
in which they operated. The vehicle used were so-called trusts. To truly understand how large this
movement wasin 1900 the value of firms acquired in mergers was 20% of GDP. In 1990 the value
was only 3% and from 19982000 it was around 1011% of GDP. Organizations that commanded the
greatest share of the market in 1905 saw that command disintegrate by 1929 as smaller competitors
joined forces with each other. However, there were companies that merged during this time such as
DuPont, US Steel, and General Electric that have been able to keep their dominance in their respected
sectors today due to growing technological advances of their products, patents, and brand recognition
by their customers. The companies that merged were mass producers of homogeneous goods that
could exploit the efficiencies of large volume production. However more often than not mergers were
"quick mergers". These "quick mergers" involved mergers of companies with unrelated technology
and different management. As a result, the efficiency gains associated with mergers were not present.
The new and bigger company would actually face higher costs than competitors because of these
technological and managerial differences. Thus, the mergers were not done to see large efficiency
gains, they were in fact done because that was the trend at the time. Companies which had specific
fine products, like fine writing paper, earned their profits on high margin rather than volume and took
no part in Great Merger Movement.
Short-run factors
One of the major short run factors that sparked in The Great Merger Movement was the desire to keep
prices high. That is, with many firms in a market, supply of the product remains high. During the panic
of 1893, the demand declined. When demand for the good falls, as illustrated by the classic supply and
demand model, prices are driven down. To avoid this decline in prices, firms found it profitable to
collude and manipulate supply to counter any changes in demand for the good. This type of
cooperation led to widespread horizontal integration amongst firms of the era. Focusing on mass
production allowed firms to reduce unit costs to a much lower rate. These firms usually were capitalintensive and had high fixed costs. Because new machines were mostly financed through bonds,
interest payments on bonds were high followed by the panic of 1893, yet no firm was willing to accept
quantity reduction during that period.[citation needed]
Long-run factors
In the long run, due to the desire to keep costs low, it was advantageous for firms to merge and reduce
their transportation costs thus producing and transporting from one location rather than various sites of
different companies as in the past. This resulted in shipment directly to market from this one location.
In addition, technological changes prior to the merger movement within companies increased the
efficient size of plants with capital intensive assembly lines allowing for economies of scale. Thus
improved technology and transportation were forerunners to the Great Merger Movement. In part due
to competitors as mentioned above, and in part due to the government, however, many of these
initially successful mergers were eventually dismantled. The U.S. government passed the Sherman Act
in 1890, setting rules against price fixing and monopolies. Starting in the 1890s with such cases as
U.S. versus Addyston Pipe and Steel Co., the courts attacked large companies for strategizing with
others or within their own companies to maximize profits. Price fixing with competitors created a
greater incentive for companies to unite and merge under one name so that they were not competitors
anymore and technically not price fixing.
Merger waves
The economic history has been divided into Merger Waves based on the merger activities in the
business world as:
Period
1889 - 1904
1916 - 1929
1965 - 1989
1992 - 1998
2000 -
Name
First Wave
Second Wave
Third Wave
Fourth Wave
Fifth Wave
Facet
Horizontal mergers
Vertical mergers
Diversified conglomerate mergers
Congeneric mergers; Hostile takeovers; Corporate Raiding
Cross-border mergers
Cross-border M&A
In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals
cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirers.
The rise of globalization has exponentially increased the market for cross border M&A. In 1997 alone
there were over 2333 cross border transactions worth a total of approximately $298 billion. This rapid
increase has taken many M&A firms by surprise because the majority of them never had to consider
acquiring Due to the complicated nature of cross border M&A, the vast majority of cross border
actions have unsuccessful anies seek to expand their global footprint and become more agile at
creating high-performing businesses and cultures across national boundaries
Even mergers of companies with headquarters in the same country are very much of this type (crossborder Mergers). After all,when Boeing acquires McDonnell Douglas, the two American companies
must integrate operations in dozens of countries around the world. This is just as true for other
supposedly "single country" mergers, such as the $29 billion dollar merger of Swiss drug makers
Sandoz and Ciba-Geigy (now Novartis).
Horizontal Merger
Conglomeration,
Vertical Merger,
Product-Extension Merger
Market-Extension Merger.
Horizontal Merger
Horizontal mergers are those mergers where the companies manufacturing similar kinds of
commodities or running similar type of businesses merge with each other. The principal objective
behind this type of mergers is to achieve economies of scale in the production procedure through
carrying off duplication of installations, services and functions, widening the line of products, decrease
in working capital and fixed assets investment, getting rid of competition, minimizing the advertising
expenses, enhancing the market capability and to get more dominance on the market.
Nevertheless, the horizontal mergers do not have the capacity to ensure the market about the product
and steady or uninterrupted raw material supply. Horizontal mergers can sometimes result in
monopoly and absorption of economic power in the hands of a small number of commercial entities.
According to strategic management and microeconomics, the expression horizontal merger delineates
a form of proprietorship and control. It is a plan, which is utilized by a corporation or commercial
enterprise for marketing a form of commodity or service in a large number of markets. In the context
of marketing, horizontal merger is more prevalent in comparison to horizontal merger in the context of
production or manufacturing.
Horizontal Integration
Sometimes, horizontal merger is also called as horizontal integration. It is totally opposite in nature to
vertical merger or vertical integration.
Horizontal Monopoly
A monopoly formed by horizontal merger is known as a horizontal monopoly. Normally, a monopoly
is formed by both vertical and horizontal mergers. Horizontal merger is that condition where a
company is involved in taking over or acquiring another company in similar form of trade. In this way,
a competitor is done away with and a wider market and higher economies of scale are accomplished.
In the process of horizontal merger, the downstream purchasers and upstream suppliers are also
controlled and as a result of this, production expenses can be decreased.
Horizontal Expansion
An expression which is intimately connected to horizontal merger is horizontal expansion. This refers
to the expansion or growth of a company in a sector that is presently functioning. The aim behind a
horizontal expansion is to grow its market share for a specific commodity or service.
Examples of Horizontal Mergers
Following are the important examples of horizontal mergers:
Theformation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond
The merger of Bank of Mathura with ICICI (Industrial Credit and Investment Corporation of India)
Bank
Themerger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply Company
Themerger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar Cement
reducing production scale of an individual form of commodity. On the other hand, economies of scope
denote effectiveness principally related to alterations in the demand side, for example growing or
reducing the range of marketing and supply of various forms of products. Economies of scope are one
of the principal causes for marketing plans like product lining, product bundling, as well as family
branding.
2) Economies of scale
Economies of scale refer to the cost benefits received by a company as the result of a horizontal
merger. The merged company is able to have bigger production volume in comparison to the
companies operating separately. Therefore, the merged company can derive the benefits of economies
of scale. The maximum use of plant facilities can be done by the merged company, which will lead to
a decrease in the average expenses of the production.
For attaining economies of scale, there are two methods and they are the following:
Increased fixed cost and static marginal cost
No or small fixed cost and decreasing marginal cost
one example of economies of scale is that if a company increases its production twofold, then the
entire expense of inputs goes up less than twofold.
Conglomeration.
As per definition, a conglomerate merger is a type of merger whereby the two companies that merge
with each other are involved in different sorts of businesses. The importance of the conglomerate
mergers lies in the fact that they help the merging companies to be better than before.
The mixed conglomerate mergers are ones where the companies that are merging with each other are
doing so with the main purpose of gaining access to a wider market and client base or for expanding
the range of products and services that are being provided by them
There are also some other subdivisions of conglomerate mergers like the financial conglomerates, the
concentric companies, and the managerial conglomerates.
This was evident in the 1960s when the conglomerate mergers were the general trend. The term
conglomerate mergers also implies that the two companies that are merging do not even have the same
customer base as they are in totally different businesses.
It has normally been seen that a lot of companies that go for conglomerate mergers are able to manage
a wide variety of activities in a particular market. For example, these companies can carry out research
activities and applied engineering processes. They are also able to add to their production as well as
strengthen the marketing area that ensures better profitability.
It has been seen from case studies that conglomerate mergers do not affect the structures of the
industries. However, there might be significant impact if the acquiring company happens to be a
leading company of its market that is not concentrated and has a large number of entry barriers.
Vertical Merger
Vertical mergers refer to a situation where a product manufacturer merges with the supplier of inputs
or raw materials. In can also be a merger between a product manufacturer and the product's distributor.
Vertical mergers may violate the competitive spirit of markets. It can be used to block competitors
from accessing the raw material source or the distribution channel. Hence, it is also known as "vertical
foreclosure". It may create a sort of bottleneck problem.
As per research, vertical integration can affect the pricing incentive of a downstream producer. It may
also affect a competitors incentive for selecting input suppliers. Research studies single out several
factors, which point to the fact that vertical integration facilitates collusion. Vertical mergers may
promote collusion through an outlets effect. A corollary of vertical integration is that integrated
business structures are able to perform better in crisis phases.
There are multiple reasons, which promote the vertical integration by firms. Some of them are
discussed below.
The prime reason being the reduction of uncertainty regarding the availability of quality inputs as
also the uncertainty regarding the demand for its products.
Firms may also enter vertical mergers to avail the plus points of economies of integration.
Vertical merger may make the firms cost-efficient by streamlining its distribution and production
costs. It is also meant for the reduction of transactions costs like marketing expenses and sales taxes. It
ensures that a firm's resources are used optimally.
It is interesting to note that vertical mergers do not lead to a fall in the number of operating economic
agents at a particular market level. However, it may result in a change of industry behavior pattern.
At its worst suppliers might be faced with a loss of product market. The retail chains may run out of
stock. Competitors may also face blockages for supplies as well as outlets.
Vertical mergers by virtue of their market power may effectively block new firms from entering the
market thereby violating the competitive flavor of the market.
The Supreme Court of USA has given a ruling on just 3 cases pertaining to vertical merger under the
Clayton Act ( section 7 ) as per the latest available information.
In the first case the Court contradicted the general assumption that section 7 was not applicable for
vertical mergers.
In the following vertical merger case the US Supreme Court observed that the primary disadvantage of
vertical merger lies in the throttling of the spirit and essence of competition. Business rivals may be
denied a fair chance at competition.
The Court observed that regarding vertical mergers two areas need close scrutiny and regulation.
One concerns the purpose and nature of the vertical merger arrangement. The other parameter
concerns the industry concentration trend in that specific sector.
In the third judgment passed on vertical merger US Supreme Court quashed Ford's claim that its
acquisition of Autolite had made the latter a better competitor.
Thus a vertical merger is a situation where a firm acquires a product supplier or a customer. Vertical
mergers may at times violate the US federal antitrust laws.
The guidelines cited instances where conglomerate and vertical mergers significantly affected the
competitive nature of the market.
The European Commission normally is not bothered about 'competition concerns' in what is
commonly known as 'safe harbors'. The guidelines set benchmarks for market share levels and
concentration levels below which comes the 'safe harbors'. Market analysts consider this 'safe harbor'
aspect of the new guidelines to be an innovative one.
Seen in overall terms the new guidelines from the European Commission aims at providing a
transparent regulatory guideline framework for the business community as well as the legal fraternity.
Mobil ink Telecom Inc. deals in the manufacturing of product designs meant for handsets that are
equipped with the Global System for Mobile Communications technology. It is also in the process of
being certified to produce wireless networking
chips that have high speed and General Packet Radio Service technology. It is expected that the
products of Mobilink Telecom Inc. would be complementing the wireless products of Broadcom
.
Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in the
metropolitan Atlanta region as far as deposit market share is concerned. One of the major benefits of
this acquisition is that this acquisition enables the RBC to go ahead with its growth operations in the
North American market.
With the help of this acquisition RBC has got a chance to deal in the financial market of Atlanta ,
which is among the leading upcoming financial markets in the USA. This move would allow RBC to
diversify its base of operations.
In case of the market extension merger the two merging companies are operating in the same market
and as far as product extension merger is concerned the two merging companies are operating in
different markets.
MARKET DEFINITION
EVALUATIVE CRITERIA
IS BIGGER BETTER?
BENEFITS OF CONSOLIDATION
RISKS OF CONSOLIDATION
Market Definition
Outlines the conceptual framework that underlies the approach taken to market definition, and
describes the various factual criteria that are typically assessed in the case-by-case application of this
framework. In general, a relevant market is defined as the smallest group of products and the smallest
geographic area in relation to which sellers could impose and maintain a significant and nontransitory
price increase above levels that would likely exist in absence of the merger.In most contexts, the
Bureau considers a 5 percent price increase to be significant, and a one year period to be nontransitory.
However, a different price increase or time period may be employed where the Director is satisfied
that the application of the 5 percent or one year thresholds would not reflect market realities, Where
potential competition from new entrants or expansion by fringe firms within the market would require
significant construction or adaptation of facilities, or overcoming significant difficulties related to
marketing and distribution, it is considered subsequent to market definition, in the assessment of
whether new entry into the relevant market would ensure that competition would not likely be
prevented or lessened substantially.
Evaluative Criteria
Addresses the various evaluative criteria that are analyzed in the determination of the likely effects of
a merger on competition in a relevant market. The first matter discussed is the significance of
information relating to market share and concentration. Mergers generally will not be challenged on
the basis of concerns relating to the unilateral exercise of market power where the post-merger market
share of the merged entity would be less than 35 percent. Similarly, mergers generally will not be
challenged on the basis of concerns relating to the interdependent exercise of market power, where the
share of the market accounted for by the largest four firms in the market post-merger would be less
than 65 percent. Notwithstanding that market share of the largest four firms may exceed 65 percent,
the Director generally will not challenge a merger on the basis of concerns relating to the
interdependent exercise of market power where the merged entity's market share would be less than 10
percent. These thresholds merely serve to distinguish mergers that are unlikely to have anticompetitive
consequences from mergers that require further analysis, of various qualitative assessment criteria
such as those highlighted in section 93. No inferences regarding the likely effects of a merger on
competition are drawn from evidence that relates solely to market share or concentration. In all cases,
an assessment of market shares and concentration is only the starting point of the analysis.
The Guidelines then address the seven qualitative assessment criteria specifically mentioned in section
93 of the Act, together with two additional criteria that are often important to consider. As is the case
with high market share and concentration, the presence of impediments to new competition that would
impose on entrants a significant cost disadvantage, irrecoverable costs, or time delays is generally a
necessary, but not sufficient precondition to a finding that competition is likely to be prevented or
lessened substantially. In the absence of such impediments, a significant degree of market power
generally cannot be maintained. Where future entry or expansion by fringe firms within the market
would likely occur on a sufficient scale within two years to ensure that a material price increase could
not be sustained beyond this period in a substantial part of the relevant market, the Bureau would
likely conclude that the merger does not require enforcement action.
Similarly, information relating to either the failing firm or the effective remaining competition factors
can be sufficient to warrant a decision not to challenge a merger. In cases where one of the merging
parties is likely to exit the market in absence of the merger, and there are no alternatives to this exit
that would result in a materially higher degree of competition than if the merger proceeded, the merger
will generally not be found to be likely to contravene the Act. Likewise, where the degree of effective
remaining competition that would remain in the market is not likely to be reduced, the merger likely
will not be challenged.
sector to global competition. The regulator used suasion to create 10 anchor banks through the
consolidation of 22 banks and 39 finance companies. FDI capped at 30% is expected to be increased in
the second phase of reforms scheduled to commence from 2007.
In Singapore, there are 3 main banking groups and they have given boost to consolidation process not
only within the country, but also in South Korea and Malyasia
Thailand has implemented a Financial Sector Master Plan aimed at removing obstructions to M & A
and also allows FDI flow to strengthen the banking system.
Japan is a country which has witnessed a virtual collapse of the banking system along with economic
stagnation which lasted over 15 years. Japan had some of the leading names in global banking arena.
The economic slowdown saw the NPA levels going up over the roofs and the banks virtually looking
for governments support. Needless to say, the low interest rate regime (near zero rates) would have
eased their sufferings somewhat. However, the banking system has recovered in recent years helped
by liberal financial assistance from the government and an environment of extremely loose monetary
policy. Consolidation process which was kicked off as restructuring strategy has resulted in emergence
of three large banks viz. Mitsubishi UFJ, Mizuho and Sumitomo Mitusui.
Today NPA levels have come down to an acceptable level of 2% from a peak level of 8.4% in the year
2002. Capital adequacy ratios have improved above the Basel Benchmark of 8%. Banks have started
showing profits and there is a pick-up in their credit portfolio. Japanese banks may still have a long
way to go as their ratings continue to be low and they are heavily dependant on interest income with
heavy reliance on low margin corporate loans.
Another interesting development taking place in Japan is the government move to privatise the postal
agency, which doubles as a financial institution that holds the worlds largest pool of household
savings. The Housing Loan Corporation managing the advances of the postal agency had, at one time,
nearly 50% of all mortgage loans in Japan. As part of privatisation this Corporation is being wound up
with the assets getting transferred to the banking system. The privatisation of the postal agency would
see the emergence of a new bank (named as Yacho Bank) which could probably be one of the largest
banking entities in the world.
of Punjab and the recent decision of Lord Krishna Bank to merge with Federal Bank are voluntary
efforts by banks to consolidate and grow.
Consolidation fever has not been confined to the Scheduled Commercial Banks. We have seen
consolidation process gaining strength in other sectors as well. We had 196 RRBs since 1989. The last
year and a half has seen their numbers dwindle to 103 with merger of RRBs sponsored by commercial
banks within the same state. This move is expected to bring most of the RRBs into profit making
entities capable of playing their role in the way they were expected to do when the RRB Act was
passed in 1996.
Well, the big question is When will we see M&A activity among Public Sector Banks? Public
Sector Banks form nearly 75% of Indian Banking and we need to see consolidation in this sector for
the Indian Banking sector to stand up and be counted in the Global Banking map.
Increasing Revenue
a) A bigger entity will be able to serve a large customer better. By offering more services and taking
bigger share in the business of the customer the bank will be able to increase the revenue per customer
b) Product diversification will facilitate one stop shopping by the banks customers.
c) A larger customer base will generate more revenue
d) Greater visibility in the market place will enhance the ability to attract new customers.
e) A bigger size and share in the market will boost the banks ability to raise product prices without
losing customers
f) The merged entity will be able to take bigger risk and reap its rewards.
The lack of size and scale acts as a major inhibitor to the Indian banks competing against the foreign
banks. Currently, the banking sector is very strictly regulated, limiting the growth of foreign banks in
India. Indian banks require approval from RBI for expanding overseas. These measures have shielded
the Indian banks from competing with foreign banks.
With India strongly pushing for liberalisation and globalisation, this situation is bound to change.
The RBI has proposed opening the banking sector and providing a level playing field to foreign and
national banks in 2009. This has spurred the Indian banks to consolidate to achieve size and scale
comparable to foreign banks. Further, the pressure on capital structure to meet prudential capital
adequacy norms as prescribed by Basel II necessitates the need for consolidation in the banking
industry.
Besides achieving scale and size, consolidation can reduce the cost of operations through economies
of scale, for example, the effective use of manpower and offering multiple products using the same
infrastructure. The larger banks are in a better position to manage credit risk by spreading it across
geographies and multiple product range. The bigger entities are also in a better position to attract
customers and provide diversified products to the customers.
Is Bigger Better?
At around $780 billion, Indias GDP (gross domestic product) is comparable to that of South Korea,
yet Korean banks have seven times more banking assets than Indian banks. With assets of around Rs
4,93,000 crore, State Bank of India (SBI) is the countrys largest bank, yet it is only ranked 84 in the
world, according to The Banker; the next biggest is ICICI Bank, which is half the size of SBI and
ranked around 200 globally.
Two things become clear. One, India is still an unbanked country. Two, by global standards, even the
biggest of Indian banks are minnows in a business where size means clout and where geographical
boundaries are blurring. Even by Indian standards, most of the banking sector is disadvantaged by
size: the top 25 banks of which, 18 are owned by the government account for about 85 per cent
of banking assets.
Such fragmentation is a matter of concern, more so approaching 2009 the date set by the Reserve
Bank of India (RBI) to relax operational norms for foreign banks. The sweep, nature and timeline of
those changes havent been articulated yet, but as and when foreign banks are allowed unrestricted
access, or even something approaching that, they could muscle out the smaller banks with their large
capital base.
Squeezed by size and competition, a similar fate could await banks that are small or are uncompetitive,
where theres a lot of duplication of products and services without any value-addition to the customer.
The set of public sector banks, which account for 75 per cent of banking assets, are ripe for mergers
and acquisitions, and hold the key for any meaningful change in the dynamics of the banking sector.
Barring SBI, theres not much to distinguish one public sector bank from another. Its common to find
10 public sector banks in an area, all offering an identical banking proposition. Consolidation will lead
to more efficient use of resources branches, ATMs, employees, technology enabling them to
offer cheaper banking services.
Compared to their smaller peers, big banks can allocate more towards technology, the benefits of
which are being able to service more customers and reach the desired economies of scale. In some of
the new, large private sector banks, as much as 75 per cent of banking transactions are now conducted
through the automated route (ATMs, Internet banking and call centres), compared to 20 per cent about
four years ago.
The common consensus among banking sector experts is that M&As are desirable, even inevitable.
But since the Left doesnt think the same way, the sense of urgency is missing in the set of banks that
need it the most: public sector banks. Since any merger moves are likely to be scuttled by employee
unions and the Left, the best public sector banks are able to do today is form loose alliances of the kind
struck by Corporation Bank, Indian Bank and Oriental Bank of Commerce, which agreed to, among
other things, rationalise branch network, and share IT and treasury resources.
Private Banks have to grapple with survival issues of their own. Being financial intermediaries that
mobilise public savings and lend them onwards, banks have a fiduciary responsibility. Hence, the
ownership pattern of banks is considered crucial to protecting the interests of depositors. As some of
the private sector banks are community-based or promoter-driven, their shareholding pattern is
concentrated in the hands of a few, which raises the possibility of misappropriation of funds. If their
stakes are to be reduced, some of the smaller banks will necessarily have to merge among themselves.
Compared to public sector banks, theres less overlap between private banks, as they have different
business models and cater to different segments, but that also creates its own shortcomings.
The RBI has also mandated a net worth of at least Rs 300 crore for banks. Some of the smaller banks
with a lower net worth will be forced to become bigger and find ways to raise more capital. In a short
period of time till 2009, it will be difficult for banks to grow organically; hence they are left with no
option but to merge. The RBI has paved the way over the next few years for banks to grow bigger,
whether by themselves or through M&As.
Banks/Entities Merged
Time of
Merger
IDBI Bank
Bank of Punjab
Bank
IDBI Bank
September
2006
Centurion
August
2007
Federal
January
2006
IDBI Limited
April
2006
Centurion
June 2005
Oriental Bank of
July 2004
Nedungadi Bank
Punjab
Bank of
December
2002
Bank of
June 2002
Bank of Madura
ICICI Bank
March
2001
10
ICICI Limited
ICICI Bank
January
2000
11
Times Bank
HDFC Bank
December
1999
12
Sikkim Bank
Union Bank
December
1999
13
Bank of
June 1999
Stability
Fragmentation poses increasing risk in the Indian Banking Sector. During the financial period 20012005, only four banks have been able to cross the market capitalization of Rs. 50 billion included Bank
of Baroda, HDFC Bank, ICICI Bank, and State Bank of India. Considerable fragmentation exists in
the Banking sector for banks with market capitalization of less than Rs. 50 billion.
Moreover the created value is moving away from the top 5 banks thus indicating fragmentation indeed
has increased over the period of last five years. Shown below are the deposit shares of the Banks
operating in India over the period 2000-2004. It is observed that the share of the top 5 players has
eroded and been consumed by the next fifteen players.
Considering that the base of total deposits has been consistently increasing, consequently the value in
deposits gained by the next 15 banks has been tremendous.
Year
Top 5 Banks
Next 15 Banks
Remaining
Banks
2000
52.40%
34.39%
13.21%
2004
47.09%
38.04%
14.87%
Similar trends are observed in profit after tax, borrowings and interest and non interest incomes of the
banks, thereby hinting at increased levels of fragmentation in the top 20 banks. Though this could be
the sign of a competitive bank market with healthy banks remaining in the market the goal of globally
competent banks would be missed.
In other words, while a fragmented Indian banking structure may very well be beneficial to the
customers (given increased competition due to lower market power of existing players), at the same
time this also creates the problem of no player having the critical mass to play the game at the global
banking industry level. This has to be looked at significantly from the states long-term strategic
perspective. Furthermore, it is observed that in an increasing competitive arena the smaller fragmented
banks with no economies of scale, low capabilities to manage risks and poor market power at times
end up taking excessive risks resulting in irreparable loss to their depositors. This also results in
affecting the state and its regulators i.e., central bank negatively. Take the following cases of trouble
in the recent past:
Global Trust Bank: Significant exposure to high risk mid size corporates and an excessive exposure
to capital market operations.
Madhavpura Mercantile Co-operative Bank: Nineteen customers had unsecured loans of more than
Rs. 10 billion.
South Indian Co-operative Bank: Non Performing Assets (NPAs) from excessive lending to small
group of clients.
Nedungadi Bank: This bank based in Southern part of India had significant exposure to plantation
industry and had weak credit risk management systems and processes.
Further recent cases (in 2005-06) of two banks in India namely United Western Bank and Sangli Bank
became attractive targets for acquisition by private sector banks because of their risk profile. The
merger with these larger banks is expected to improve the asset profile, NPA management and protect
the depositors at the same time offer the acquiring private sector banks further reach in terms of
branches and customer base.
The above figure shows that in the year 1998 the share of market value mostly remained not with the
top 5 banks but with the next 15 banks. As time has moved, the value has moved away to a fewer
banks. In 2004 the top 5 banks had a share of market value at 36.4% with the next 15 banks getting
41.5% of the Indian Banking. This also shows that no particular banks have a complete control in the
Indian Banking Industry.
Another important thing to consider is that the valuations still remain low as compared to other
markets.
Countries
Germany
USA
Hong Kong
Brazil
Thailand
India
Korea
P/E
15.2
14.1
17.7
9.0
8.1
6.7
8.5
P/B
1.2
2.3
2.6
1.7
1.5
1.39*
1.1
Private
P/E
8.0
P/B
2.6
Private
4.8
1.5
Sector
3.4
0.8
A small analysis of performance of the bank sector and the equity market benchmark index in India
and USA showed the following results:
India
Beta
Mean
Returns
(daily)
Std.
Devn.
Bankex
0.807
Nifty
0.17%
0.12%
1.97%
1.40%
Beta
Mean
Returns
(daily)
Std.
Devn.
USA
NYSE
Financial
0.95
NYSE
Composite
0.06%
0.06%
0.84%
0.78%
Source: Note on opportunities and imperatives in Indian Banking for M&A by Jay Mehta and Ram
Kumar Kakani, XLRI and S.P Jain Centre of Management, Nov 2006
The above table clearly indicates that the banking portfolio in US is as risky as the composite portfolio
which is not the case in India. Though the returns are more in India the risk is also higher as shown by
the standard deviation. A report as early as August 1991 recognized the trend in shareholder returns in
the US and hence was one of the reasons for the bank M&A wave in the USA1.
3. Benefit to Customers
Benefits to customers can be seen in a number of ways. One such way is lowering in the
intermediation costs. A 10 year trend in the intermediation costs as a percentage of Total assets in
Indian Banks shows that the Indian private sector banks have the least intermediation costs as a
percentage of total assets. During the time frame of study, a significant decreasing trend can also be
observed in the Private Sector banks of India in the decade. Being non fragmented they could claim
greater efficiency and hence lower intermediation costs. Thus, building a strong case where
intermediation costs can be lowered and M&A could be a way for the same.
Comparison within the Indian banking sector reveals that consolidation will help in reducing the
intermediation costs and this will in fact benefit the customers and will also give the customers better
access to quality products and services which is restricted to a small part of the market.
Public Sector
Private Sector
Foreign
Banks
Top 5
Next 10
Remaining
Average*
2.4
2.52
2.86
2.45
1.59
2.91
---
1.82
1.79
--3.03
90
Source: FICCI Presentation on M&A in Banks, 2005 and RBI and Mckinsey analysis
*: Average for 4 years; FY 2000-2003
U.S. Banking Industry Finds Salvation in Merger Binge, By John J. Duffy International Herald
Tribune
4. Adhering to International Capital Adequacy Ratio and Supporting Regulatory
Framework
Supporting institutional and regulatory framework in India is vital for domestic banks aspiring for
global operations. The Central Bank i.e., the Reserve Bank of India (RBI) has suitably changed the
countrys regulatory framework from time to time to support Indian financial institutions to withstand
the competitive pressures placed on them by increasing globalization. Proper steps have been taken to
guide the banking sector to see that the banks pass through this transition phase by and large
successfully.
With the RBI regulating the Capital to Risk-Weighted Asset Ratio (CRAR) at 9%, a percent above the
Basel II CRAR, going forward many banks would not be able to meet these requirements and may
have to go through restructuring in order to meet the regulatory requirements. Furthermore there are a
number of banks in India whose growth is restricted due to unavailability of capital. These banks have
a significant depositor base but the market perception does not enable them to raise further funds. Take
a look at the
banks that have raised equity from the capital markets at least twice in the past five years to get
indicative cues. Hence such banks also become potential targets of acquisition.
20002001
17.04
12.13
10.98
12.43
20012002
20.22
12.64
10.81
12.96
20022003
24.58
12.66
12.05
13.11
20032004
32.28
13.41
13.18
13.02
Source: www.indiastat.com
The reforms initiated in the banking sector have now reached a crucial stage. Governments stake in
many Public Sector Banks (PSBs) has gone down and as a consequence other shareholders equity
ownership in these PSBs has gone up. This leads to greater responsibility on the bank managements
since the level of accountability has increased. Pressures of performance and profitability will keep the
PSBs on their toes all the time as the public shareholders expect good financial performance along
with good returns on their equity. Many PSBs have already started the exercise of cleaning up of their
balance sheets by shedding the excess baggage. The Voluntary Retirement Scheme (VRS) in the
recent past in some of the banks was aimed not only at downsizing the manpower but also at cutting
down the future staff costs and increasing the performance levels of the staff in the long run. Some of
these PSB banks are able to run the show to a certain extent by low cost funds that are available thanks
to the branch network spread over the length and breadth of the country. M&A activity will further
boost this process for many other banks that cannot go through this exercise individually and need
larger partners to execute them in terms of processes and resources.
Mergers and Acquisitions or Restructuring may also help banks improve in three other areas as listed
below:
Economies of Scale: An acquirer would have the capabilities to improve the collections, service
processes, distribution, infrastructure and IT of the target bank.
Economies of Scope: An ability to grow products and segments and an opportunity to cross sell
would enhance revenue. This could also result in more geographic growth could also be obtained.
Synergy Benefits: Treasury performance would be improved as the cost of funds would reduce
(hence, improve spread) as it would have a better credit rating. A bank would also be able to leverage
scale and improve its trading income.
2. Technological Expertise
New entrants in the banking sector are armed with technological expertise while older players are well
equipped with experience in practices. Mergers would thus help both parties gain an expertise in areas
in which they lack. In India, the retail banking market biased towards the urban markets is growing at
a Compounded Annual Growth Rate (CAGR) of almost 18-20% while the rural market is yet to be
fully tapped. Keeping in focus the population profile, technology would be a major enabler for
banking in the future. A number of state owned banks in India are adopting sophisticated core banking
solutions and these are just the larger ones. For smaller banks to adopt technology platforms the
expenditure may not be sustainable and hence this may be one more reason for M&A.
Growing integration of economies and the markets around the world is making global banking a
reality. The surge in globalization of finance has also gained momentum with the technological
advancements which have effectively overcome the national borders in the financial services business.
Widespread use of internet banking, mobile banking, and other modern technologies (such as SWIFT)
has widened frontiers of global banking, and it is now possible to market financial products and
services on a global basis.
In the coming years globalization would spread further on account of the likely opening up of financial
services under WTO. India is one of the signatories of Financial Services Agreement (FSA) of 1997.
This gives Indias financial sector including banks an opportunity to expand their business on a quid
pro quo basis. An easy way for this is thus to go through adequate reconstruction to acquire the
necessary technology and get an early mover advantage in globalizing the Indian Banks.
For this to happen there are a certain market requirements that need to be achieved.
Also there needs to be a proper regulatory backup which is very essential for any market to have
proper investors and an easy procedure for consolidation.
Accommodating regulations
Open to foreign ownership / competition
Repatriation conditions not too onerous
M&A is accepted as a critical aspect of strategic planning and a key component of business strategy
execution.
1) Macroeconomic factors
Accommodating regulations & practical-minded government
Strong underlying economic growth
Workable business infrastructure (e.g. legal, communications & accounting framework)
2) Business Conditions
Market receptivity to foreign ownership of operating businesses
Critical mass of possible targets
Stable markets
Availability of funding
3) Deal Conditions
Willing Buyer + Willing Seller
Reasonable market valuation
Commercial (and international) standards in non-price business terms
Factor Analysis
Macroeconomic Factors
Business Conditions
Deal Conditions
Asia 10 Total
0
1990 1991
1992
1993 1994
1995
1996
2000
2001
2002
2003 2004
YTD
Note: Asia 10 refers to China, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore,
South Korea, Taiwan and Thailand
2000
1,918
1800
1600
1400
1200
990
1000
800
600
400
200
132
115
12
0
1998
22
1999
7
2000
20
2001
200
139
72
2002
2003
2004 YTD
The above figure clearly shows that in the year 2004, the Indian banking targets by foreign investors
or banks are clearly very less as compared to its Chinese counterparts. Indian banks primarily suffer
from the fact that they are not large in terms of its assets and also its wide reach. Not many private
sector banks have a pan India reach. As compared, the Chinese banks have had more than $1900 mn
m&a in value of deals that have happened in 2004. Moreover the Chinese banks are bigger in size as
compared to its Indian counterparts and also the regulatory norms and also the entire market
conditions are very favourable for the foreign banks or investors to enter the Chinese market and get
into the merger and acquisitions market over there.
The Indian banks in comparison to its Asian counterparts are highly overvalued and its valuation is
highly demanding. As shown in comparison chart below, the valuation in most of the countries in Asia
are less as compared to that of India and also the fact that most of the Indian banks are not so huge in
size as compared to many of the global banks and also its Asian counterparts as well. Apart from SBI
or State Bank of India none of the banks are in the top 100 list of The Banker. The list states top
1000 banks in terms of its assets size and only SBI is the top 100 list. So the high valuation of some of
these banks though justified is highly demanding and in some cases overvalued.
Median
Price to
Earnings
Price to
Book
China
Hong Kong
Taiwan
Indonesia
Singapore
Malaysia
Thailand
Korea
19.8 x
13.7
11.1
8.0
14.4
13.2
7.6
9.4
3.51 x
1.82
1.71
1.61
1.58
1.48
1.46
1.39
combination that will increase competitive advantage. Competitive advantage accrues since through
M & As, firms seek strategic positioning, industry-wide consolidation, increased market share and
shareholder value, synergy through economies of scale, revenue enhancement, risk reduction, shared
cost of product development and improved access to markets and new technologies. However, it is
also a fact that many M &As have produced disappointing results with three out of four mergers and
acquisitions failing to achieve their financial and strategic objectives. While many reasons have been
advanced for the failure ranging from financial, organizational, to people related; it remains true that
M & As pose strategic challenges for both academicians and researchers.
While M & As have become a global trend, the resurgence in the Indian economy would provide a
momentum to such activity in the near future, driven by factors such as boom in the financial markets,
rising stock prices, persistently low interest rates, Specifically, sectors such as Banking, Pharma, and
Telecom are reported to drive the M & As as per an ASSOCHAM study.
The Indian banking industry is today witnessing a spate of mergers and acquisitions. This phenomenon
is indicative of a global trend wherein banking is witnessing the twin trends of consolidation and
convergence. This is driven by the need to acquire strength through bigger size and therefore be able
to compete on a global scale in a competitive and deregulated banking environment.
It is to be noted that the situation facing the Indian banking industry is in contrast to that prevailing
more than a decade back wherein the Indian banking sector was a monopoly dominated by the State
Bank of India. M & As in the banking sector were initiated through the recommendations of the
Narasimham Committee on banking sector reforms which suggested that 'merger should not be viewed
as a means of bailing out weak banks.
They could be a solution to the problem of weak banks but only after cleaning up their balance sheet.'
One of the first initiatives in this regard i.e. the HDFC-Times Bank merger in 1999 created history
since it signaled size as a competitive advantage, that mergers amongst strong banks can be both a
means to strengthen the base, and of course, to face the cut-throat competition. Prior to this private
bank merger, there have been quite a few attempts made by the government to rescue weak banks and
synergise the operations to achieve scale economics; unfortunately these proved futile. Subsequently,
we witnessed two more mega mergers in the history of Indian M & As, one the merger of Bank of
Madhura with ICICI Bank, and second that of Global Trust Bank with UTI Bank, (the new bank being
called UTI-Global bank).
The future outlook of the Indian banking industry is that a lot of action is set to be seen with respect to
M & As, with consolidation as a key to competitiveness being the driving force. Both the private
sector banks and public sector banks in India are seeking to acquire foreign banks. As an example, the
State Bank of India, the largest bank of the country has major overseas acquisition plans in its bid to
make itself one of the top three banks in Asia by 2008, and among the top 20 globally over next few
years. Some of the PSU banks are even planning to merge with their peers to consolidate their
capacities. In the coming years we would also see strong cooperative banks merging with each other
and weak cooperative banks merging with stronger ones.
While there would be many benefits of consolidation like size and thereby economies of scale, greater
geographical penetration, enhanced market image and brand name, increased bargaining power, and
other synergies; there are also likely to be risks involved in consolidation like problems associated
with size, human relations problems, dissimilarity in structure, systems and the procedures of the two
organizations, problem of valuation etc which would need to be tackled before such activity can give
enhanced value to the industry.
LIMITATION
S
SIZE,
CHALLENGES,
FINAL BALANCE
OF
OPPORTUNITIES
AND THREATS
IMPORTANCE OF
DEREGULATION
AND ITS IMPACT
INDIAN
SCENARIO
DEREGULATION
imposing discipline. Internet banking is also a challenge with which large banks have to contend.
Moreover, in the present framework, regulation is essential to avoid system failures that have
devastating consequences, as was the case in South East Asia in 1977.Hence big size poses challenges
to Government, ownership, management, and regulatory and regulatory bodies in management or
control of its operations. But the final balance of cost and benefits associated with mergers favour the
creation of universal banks. The possible benefits of scale or scope economies, the revenue
enhancement, and the added stability all favour the movement toward universal banks.
The United Kingdom was the earliest to remove interest rate controls in the seventies. The United
States commenced the process of elimination of interest rate ceilings on deposits in 1980 and
concluded it in the early eighties. Interest rate controls in France and Switzerland were removed
during the eighties. In Japan too, domestic deposit rate deregulation started in 1985. In the eighties
barriers between banks and securities markets were progressively
lowered in the United States giving freedom to banks to conduct trading and underwriting of domestic
securities. The Glass-Steagall act of 1993, which prohibited affiliations between securities firms and
banks was scrapped in 1999 (The Economist, October 30, 1999). Banks in Germany, Switzerland and
the United Kingdom always had greater freedom to conduct investment activities, the model of
banking followed in these countries being that of Universal Banking. The trend of liberalization has
been seen in other countries as well. Deregulation has had a widespread impact on financial markets
and institutions. Disintermediation is one by-product of deregulation. The trend towards disintermediation in Japan started in the late 1980s with the deregulation of the capital market. This
included the lifting of prohibitions on short-term Euro yen loans to domestic borrowers; gradual
removal of restrictions on corporate bond market and creation of a commercial paper market.
Following these developments, banks faced price competition with borrowers finding it cheaper to
borrow directly from the markets. This situation was further worsened by the fact that banks were not
permitted by regulators to underwrite securities when the bond market was booming. They were
allowed to set up subsidiaries to deal in securities in 1994 (Akihiro and Woo, 2000). The trend of disintermediation is also captured by data, which show that the share of banks borrowing and lending
business in the total financial services market is falling. In the United States of America bank assets
formed 28 percent of all financial assets in 1999, roughly half of what they were 20 years ago. Though
bank lending accounted for 55 percent of all financial assets in Britain and 75 percent in France and
Germany in 1999, these shares are showing a downward trend (The Economist, March 13, 1999).
These trends of dis-intermediation and competition resulting from deregulation have squeezed the
margins of banks. In the US regional banks had margins of more than 5.5 percent points in 1970s,
which fell to 4 percent in 1999. Margins for bigger money-center banks have fallen from 3 percent to
around 1.25 percent in the same time period (The Economist, April, 1999). At the same time banks
have had to approach capital markets themselves to raise capital in line with their risk weighted assets
owing to the Basel Committee's norms on capital adequacy. Investors in the share markets require
higher earnings per share from banks in return for contributing to their capital. The trends of
falling spreads and investor's demanding higher returns have pushed banks to generate additional
returns.
The major changes would be through removal of Section 12(2) of Banking Regulation Act,
allowing voting rights in proportion to the shareholding. This was not the case earlier and was a major
hindrance to the entry of foreign banks in India.
Traditionally, Indian banks have used very conservative risk managing strategies, shying away from
derivatives, commodities and real estate. However as the appetite for credit and newer banking
products are increasing, this sector is no longer limited to Private Sector banks (PSBs). This also
implies that there is a scope for consolidation, amongst various sectoral banks as well as financial
institutions so as to be able to provide these newer products and services to customers.
The fact that this sector is being deregulated has thrown up several issues, several of which have been
debated both by the financial and the political experts but keeping in mind the consolidation thats
happening in this sector and also with a view on the entry of foreign banks into the country an
important issue is the regulation pertaining to the foreign banks into the country.
This mainly deals with the permission to be extended to foreign banks to set up subsidiaries
and transact in bank buy-outs. Even though the FDI ceiling in a bank was raised to 74%, the ceiling of
10 per cent on voting rights irrespective of the shareholding in a bank was
preventing foreign banks from venturing into India. The RBI has now proposed to do away with this
ceiling on voting rights in banks, to smoothen mergers and acquisitions of private banks and to permit
foreign banks to set up subsidiaries in India.
Political View
The Left has claimed that these regulations shall benefit only those banks that intend to make a quick
buck by providing high-profile corporate service, as opposed to those who wish to intensify their rural
operations. They have further stated that since foreign players could on a yearly basis keep on
increasing their holding size in a particular bank, this would lead to an imbalance of power.
Their main concern is the effect on the domestic banks, especially the public sector
banks. They
have opposed the acquisition of domestic banks by foreign players, primarily since this would give
these new players a direct advantage in terms of an already existing banking structure, complete with a
national presence in terms of branches, ATM networks, and of course skilled personnel knowledgeable
of local needs and consumer behavior
The various benefits and pitfalls of RBIs decision can best be assessed by looking into the examples
of other countries that have undergone similar transformations by opening up this sector to the worl
THEORETICAL PERSPECTIVE
VALUE CREATED BY MERGER
COST AND BENEFIT OF MERGER
CROSS BORDER M&A IN BANKS
UNDERLYING THEORIES IN MERGER & ACQUISITIONS
STAGES OF MERGER & ACQUISITION INTEGRATION PROCESS
THE FOREIGN EXPERIENCE
THE EUROPEAN BANK EXPERIENCE
CONSOLIDATION
AND
HUMAN
RESOURCE
MANAGEMENT
A merger will make sense to the acquiring firm if its shareholders benefits. Merger will create an
economic advantage (EA) when the combined present value of the merged firms if greater than the
sum of their individual present values as separate entities. For example: if firm P and Q merge than
they are separately worth Vp and Vq, respectively and worth Vpq in combination, then the economic
advantage will occur if:
Vpq>(Vq+Vp)
EA= Vpq-(Vq+Vp)
Suppose that firm Pacquires firm Q. After merger P will gain the present value of Q i.e. VQ, but it will
also have to pay a price (say in cash) to Q. Thus, the cost of merger of P is:
Cash paid-Vq
For P, the net economic advantage of merger (NEA) is positive if the economic advantage exceeds the
cost of the merging.
Thus
NEA = (Vpq-(Vq+Vp))
Represent the benefits resulting form operating efficiencies and synergy whentwo firms merge. If the
acquiring firm pays cash equal to the value of the acquiring firm value of the acquired firm.
Then the entire advantage of the merger will accrue to the shareholder of the acquiring firm. In
practice the acquiring firm and the acquired firm may share the advantage between themselves.
The acquiring firm can issue share to the target firm instead of paying cash. The effect will be the
same if the share are exchanged in the ratio of cash-to-be-paid to combined value of the merged firms.
Cost = Cash-PVb
Thus,
NPV for A = Benefit-Cost = (PVab-(PVa+PVb))-(Cash-PVb)
The net present value of the merger from the point of view of firm B is the same as the cost of the
merger for A. Hence,
NPV to B = (Cash-PVb)
NPV of A and B in case the compensation is in stock
In the above scenario, we assumed that compensation is paid in cash. However in real life
compensation is paid in terms of stock. In that case, cost of merger needs to be calculated carefully. It
is explained with thr help of an illustration
Firm A plans to acquire Firm B. Following are the statistics of firms before the merger
Rs. 50
Rs. 20
5,00,000
2,50,000
Prolonged
anxiety
and
uncertainty
Social identity
theory
Sources
of
Problems
Uncertainty
and anticipated
negative
impact
on
career and job
Mental
and
physical
illness
Lack
of
motivation
Loss of old
organizational
Identity
Interacting
with other
Organizations
members
Intergroup bias
& conflict
Acts
of
noncompliance
Acculturation
theory
Contact with
or adjustment
to
different
organizational
culture
Ambiguous
and conflicting
roles
Role conflict
theory
Job
characteristics
theory
Organizational
justice theory
Changes
in
post-M&A
job
environments
Perceived fair
treatment of
surviving and
displaced
employees
Predicted Outcomes
Low productivity
Self-centered
behaviors
Related
Prescriptions
Top-down
communication
On-going
communication
Speeding up transition
Disengagement
efforts (grieving
meetings)
Low productivity
Low job satisfaction
Two-way
communication
Leadership of
role
clarification
Post-M&A job
redesign
Job-transfer
training
Fair
and
objective
human
resource
management
Equal
participation in
decision
Fostering
multiculturalism
Facilitating
intercultural
learning
making
Descriptions
Pre-merger stage
Initial
planning
and formal
combination stage
Operational
combination stage
Stabilization stage
1. South Africa
Before the entry of foreign banks, the four big local banks in South Africa, Standard, Nedcor, FNB
and Absa had 80-85% of the domestic market share. After the restriction on this entry were removed,
firms like Deutche, Meryll Lynch and ABN Amro entered the higher end of the market in corporate,
investment and private banking by acquiring local players in some cases and now, have become the
countrys top equity houses. The local banks have been relegated to the retail market which they still
dominate. The entire sector has become more competitive with incidences of mergers and the
emergence of niche players.
The local banks have been unable to compete with the foreign owned banks on price parameters
owing to the latters lower cost of funds and have also been forced to decrease their cost-income
ratios. At the same time, they have superior local knowledge and the advantage of an established
customer base and are still favored by some local corporates. To reduce their costs, the domestic banks
have started cutting down their branch networks and exploring alternative less-costly delivery channel
like phone banking and net banking. For instance, Nedcor has reduced its branched by 36 % and have
reduced their cost-income ratio to 58.7% form 70%. Absa has consolidated its operation and increased
focus on its core competencies instead of being all things to all people. The increase in competition
has also led to higher attrition rates of about 35% among the employee base of domestic banks.
Salaries of the employees with local experience are increasing as foreign banks offer their recruits esops and generous bonus.
2. Latin America
The entry of foreign banks in Latin American occurred in the post 1995 period when regulatory
limitations of foreign ownership were eased after a severe banking crisis. Today, foreign banks own a
majority of assets in almost all the Latin American countries (except Brazil). The entry of the foreign
banks also led to sector-wide financial reforms, better regulations and better accountability through
increased disclosure requirements.
Source: http://ideas.repec.org/a/fip/fednci/y2002ijannv.8no.1.html
By Mishra, Garima and Goyal, Rashi, IIM Ahemdabad
On The world and the Indian Banking, 26th August 2006
During 1995-2000, both the foreign and domestic private banks outperformed the state owned banks.
Also, the local banks that had been acquired by the foreign sector banks did not substantially
outperform the ones that were under domestic control. This indicates that both domestic and foreign
markets can co-exist in the market. However, in terms of other financial parameters, foreign banks had
more asset liquidity and a higher rate of loan growth than domestic banks. They also relied less on
deposit financing and had better loan recovery records, which made them more efficient then the latter.
Figure 1
Source: By Mishra, Garima and Goyal, Rashi, IIM Ahemdabad
On The world and the Indian Banking, 26th August 2006
From the preceding examples, it is clear that allowing foreign entry is helpful if not essential for the
development and betterment of the financial markets. Though, in the short term the profitability of the
domestic banks takes a hit (as seen by the CEEC example) and there are incidences of mergers and
acquisition, in the long term, the domestic banks are able to effectively compete with the entrants.
Increased competition would only weed out the inefficiencies in the domestic sector and force the
incumbents to become more profitable either by cost cutting and consolidation or through a renewed
focus on their core competencies as is successfully being done by the South African banks.
Source: Strategies of Mergers followed in Europe, Centre for European Policy Studies
Note on opportunities and imperatives in Indian Banking for M&A by Jay Mehta and Ram Kumar
Kakani, XLRI and S.P Jain Centre of Management, Nov 2006
In Europe, the motive for M&A is dependant on the environment of the bank. In countries where
concentration threshold admitted by the competition authorities is reached cross border consolidation
is motivated. Cavallo and Rossi (2001) use empirical work and point to a significant existence of
economies of scale and scope in European banking industries, after a merger being tagged along. The
reform of the European community merger regulation has also been motivating bank mergers in the
European Union (EU). Moreover, as global investment banking is highly concentrated it also drives
EU to help in creating a fewer players. The above discussion also hints to us that the primary drivers
of M&A in India are different from the primary drivers of M&A in Europe.
The biggest merger in Indian banking is about to happen. HDFC Bank will take over Centurion Bank
of Punjab (CBoP) in an all-stock deal. The share-swap deal, worth over Rs 10,000 crore, may be
worked around the current market price of Rs 57 a share of CBoP. The Share-Swap ratio could be in
the region of 1:27-1:28. A CBoP shareholder would get one share of HDFC Bank for every 27-28
shares he/she holds.
In the pecking order, the merged entity will still be way below Indias biggest private sector bank
ICICI in terms of assets, but it will be significantly bigger than Axis Bank. On Wednesday, officials of
both the banks held marathon meetings with a leading investment banker to discuss the finer points.
This is the second time after almost six years that these two banks are discussing a merger. While last
time it fell through on valuation reasons, what has worked this time is the personal equation between
the top brass of the two banks. HDFC Bank MD Aditya Puri, CBoP chief executive Shailendra
Bhandari and CBoP chairman Rana Talwar are all ex-Citigroup bankers. Mr. Bhandari was also a part
of the core team that set up HDFC Bank in 94. Interestingly, Citigroup is also the single biggest
shareholder in HDFC - the mortgage giant and parent of HDFC Bank.
Centurion had 394 branches and HDFC Bank 754 branches as on Dec. 31 2007, the statement said.
However, the merged entity's total advances of about 870 billion rupees ($21.7 billion) are far lower
than ICICI's 2.2 trillion rupees. The merger will allow HDFC Bank to extend its reach in the country
before a central bank review next year that may allow foreign banks such as Citigroup and Standard
Chartered to buy Indian lenders. HDFC Bank has 754 branches and has received RBI permission for
another 250. The addition of 394 branches of CBoP will help the bank overtake ICICI Bank in terms
of branch presence. In the North, CBoP has 170 branches while HDFC Bank has around 250 while in
the South, CBoP has 140 branches and HDFC Bank has 150. At present, CBoP is active in home
loans. Can it continue?
The question will crop up since the mortgage biggie HDFC and HDFC Bank have an understanding
that the bank will not enter into home loans, the mainstay of the parent HDFC. HDFC Bank simply
sources the mortgage and passes it on to HDFC for a fee. On the other hand, 60% of CBoP loans are
retail, of which 32% (around Rs 2,887 crore) are home loans. Analysts view is that Centurions
branch network is a main draw for HDFC. Also Fee-based income has become crucial for banks as
margins in their core business of lending are on a decline due to competition and interest rate
pressures. Having a large branch network helps distribute more
97
Products that bring in fee-based income, such as mutual fund schemes and insurance plans and
Centurion can afford as much as 30% commission on premiums.
HDFC will, in all likelihood, have to buy from the market or subscribe to a fresh issue of HDFC Bank
shares to preserve its shareholding in the bank, post-CBoP merger. HDFCs holding in HDFC Bank
may slip below 19% from 23.28%.
Unlike most other bank shares, the face value of CBoP shares is Re 1. The deal, which will be the
largest in the Indian banking sector, will be well over Rs 10,000 crore.
Banks
Rs. Crore
SBI
ICICI Bank
HDFC+Centurion BOP
Axis Bank
Kotak Mahindra Bank
Punjab National Bank
Bank of India
Bank of Baroda
Canara Bank
Union Bank (I)
133556
122320
62827
34709
28109
18250
18200
13854
11304
9496
98
Managed Transition
India may have to follow a managed transition model to ensure a stronger banking sector. This can be
achieved by undertaking the following route:
99
100
101
Morgan Stanley has teamed up with JM Financial Group, Goldman is aligned with Kotak Mahindra
Bank Ltd. And Merrill works with DSP Financial Consultants Ltd.
A year ago, the conventional wisdom in our industry was if a company wanted to raise $200 million,
they had to leave the country,said Rajeev Gupta, joint managing director for DSP Merrill. The
threshold for going overseas today is $2billion, not $200 billion.
The local network enjoyed by the joint ventures becomes more important as the domestic markets gets
bigger.
We can give (companies) a choice of which market fits their needs, said Gupta. They know you are
not giving them a recommendation linked to their limitations.
But the stand-alone banks are gaining momentum with deliberate expansions. In the 1990s, JPMorgan
ended a joint venture with ICICI Bank Ltd. In 1998 and set out on its own, taking many of the
ventures bankers with it.
By beefing up its investment banking staff, the bank has been able to win high-profile deals such as
the $1.17 billion IPO of Tata Consultancy Service Ltd.
Basically the (India) storys a great one, and its getting better,said JPMorgan senior country officer
Dominic Price. You cant ignore 7-percent plus growth.
102
This year, amongst the biggest overseas buys by an Indian company was the acquisition of AngloDutuch company Corus for $12.2 billion by Tata Steel. The deal is likely to catapult the combined
entity to among the worlds largest steel companies with a total capacity of about 24 million tones per
year.
The Tata Steel-Corus deals would be at No.5 among the top deals witnessed by the global steel
industry over the last couple of years. The highest rank goes to Arcelor-Mittal Steel deal of $32 billion
followed by the NKK Crop-Kawasaki Steel deal of $14.1 billion.
Hindalcos acquisition of Canadian company Novelis Inc for $5.9 billion is also one of the biggest
overseas acquisitions by an Indian company. Hindalco is Adtiya Birla Groups flagship company. The
all-cash transaction also makes Hindalco the worlds largest aluminium rolled products company. The
acquisition bodes well for both the entities. Novelis, processes primary aluminium to sell downstream
high value added products. This is exactly what Hindalco manufactures. This makes it a marriage
made in heaven.
103
Suzlon Energy acquired German wind turbine maker REpower for $1.7 billion. Suzlon has taken
controlling stake in the company. French company Martifer already holds a 25 per cent stake in
REpower. Suzlon has the call option to acquire the 25 per cent stake that Martifer holds at a later date.
Similar to Suzlon, REpower is exclusively focused on the wind power business, but the two were not
competitors. REpowers growth plans fitted into Suzlons expansion plans for the near future.
Vijay Mallyas United Spirits bought out the Scotch major Whyte & Mackay for $1.11 billion, which
includes a payout to bridge a pension fund deficit in W&Ms pension Trust. Whyte & Mackay has an
array of brands including their USP W&M Sctoch Whisky, Dalmore Scotch Whisky, Isle Jura Single
Mlt and Vladivar Vodka. United spirits will look to promote these productsin India and several
markets overseas.
Essar Global Limited, through its wholly owned subsidiary Essar Steel Holdings Limited, acquired
majoritiy stake in Canadian company Algoma Steel Inc for an amount aggregating$1.74 billion. This
acquisition fits in with Essars global steel vision. Algoma provides an excellent platform for the
Canadian and North America markets. The Canadian companys revenues are derived primarily from
the manufacture and sale of rolled steel products including hot and cold rolled steel and plate. Essar
Sreet already operates a cold rolling complex in Indonesa and has now finalized plans to setup an
integrated steel plant for flat products in Trinidad and Tobago and a hot strip mill in Vietnam.
Acquisition by Indian pharmaceutical companies have also taken centre stage this year. Ranbaxy
Laboratories has acquired Be-Tabs, the South Aferican pharma major for a whopping $70 million.
This will make the company the fifth largest generic pharmaceutical company in South Africa. In
March, Glenmark pharmaceuticals acquired 90 per cent stake in Medicmenta, a pharma marketer and
manufacturer in Czech Republic for an undisclosed amount. Wockhardt bought out Negma
Laboratories of France for $265 million in May. In June 2007, Zydus Cadila acquired a privately
owned mid-sized Brazilian company, Nikkho, for $26 million. In July. Elder pharmaceuticals acquired
20 per cent stake in the Neuta Helath of UK for 5.63million pound.
104
loan and commercial vehicle loan segments, is a strong player in foreign exchange services, personal
loans, mortgages, education loans and agricultural loans, and has recently entered the credit cards
market. The bank also offers its customers an array of wealth management
products such as mutual funds and life and general insurance. Centurion Bank of Punjab operates on a
strong nationwide franchise of 249 branches and 402 ATMs across 123
locations, and has approvals from the Reserve Bank of India to open a further 30 branches before the
end of this fiscal year. Centurion Bank of Punjab is supported by over 5,000 employees. In addition to
being listed on the major Indian stock exchanges, the Banks shares are also listed on the Luxembourg
Stock Exchange. With strengths in the Retail, SME and Agriculture businesses the bank is well poised
to capture the opportunities that exist in the Indian market.
Centurion Bank of Punjab was actually Centurion Bank before it got merged with Bank of Punjab in
October 2005.
Lord Krishna Bank had an unsuccessful attempt at merger with another South Indian banking major
Federal Bank. The deal didnt go through due to valuation problems.
106
There is little overlap in the businesses of the two banks. Their respective branch networks are also
concentrated in different parts of the country. CBP needs the additional business to compensate for its
relatively higher cost structures. It can cross-sell its banking products through the LKB network,
including traditional banking products and fee-based services like wealth management products, to
affluent NRI customers.
However, LKB seems to be getting a valuation similar to that of large public sector bank. This may be
on account of its recovery from the red during the previous fiscal.
Centurion Bank had successfully merged the erstwhile Bank of Punjab with itself last year in a share
swap ratio of 4:9 that means 4 shares of BOP fetched 9 shares of Centurion. Bank of Punjab had a
strong regional franchise, good banking relationships with non-resident Indians, but a relatively high
level of net non-performing assets. LKB is in a relatively better position. While the NPA level in CBP
is at 1.6 per cent, the net NPA level is 3 per cent for LKB.
LKB on its part could not strike a deal with Federal Bank and GE last year. However, there wouldve
have been serious branch overlap given the Kerala roots of both LKB and Federal Bank.
If the merger takes place, the combined entity would have a nationwide network of 361 branches and
12 extension counters. While CPB has 249 branches, 402 ATMs, 5,000 employees and is listed on
major Indian bourses and Luxembourg Stock Exchange, LKB has 112 branches, 44 ATMs, mostly in
Kerala and south India. CPB has already applied for licenses to an additional 30 branches.
CBP's business (deposits and advances) stood at Rs 17,824.5 crore while LKB's business stood at Rs
3,699.8 crore till June 30 and March 31, 2006 respectively. The combined entity
is looking at a business figure in excess of Rs 20,000 crore which will help its standing among private
sector banks. The new entity is also hoping to grow at 35 per cent year-on-year. The merger will add
about Rs 2,500 crore to CBPs existing balance sheet size of Rs 12,500 crore.
Post merger, the foreign holding in the entity will come down to around 65 per cent and Bank Muscat
will have a 20 per cent shareholding. At present, the foreign holding in CBP is at 73.6 per cent.
As part of the integration of both banks, it is envisaged that there will be no retrenchment of staff of
either bank and there will be no closure of any rural branches. Additionally, the scheme of
amalgamation provides for a one-time increment to all existing employees of Lord Krishna Bank.
108
The Share Holding pattern in Centurion Bank of Punjab (CBOP) before the
deal:
Source: Company Presentation for investors
109
110
111
112
It can be seen that before the merger Centurion Bank had vast presence in North India with around
56% of its branches situated in this region and only 18% in the Southern part of the country.
After the merger, it has a significant 35% branches in South India and it overall provides a Pan India
reach and thereby making it one of the larger private sector banks in the country and due to this the
customers will be better served with good retail banking products and also a good presence in the SME
segment.
Financial gains from Merger
Centurion Bank of Punjab (CBOP) has reported Rs398mn of net profit (consolidated for Lord Krishna
Bank (LKB)). Adjusted of losses of LKB, the net profit would have been higher at Rs439mn, which is
far ahead of expectations. The NII (gross of amortisation) has grown by 34.7% yoy to Rs1.8bn driven
by 70% growth in assets and better than expected NIMs.
The deteriorating asset quality continues to worry as the gross NPA stood at 3.5% of advances.
However, with prudent provisioning, the net NPA have been arrested at 1.6% of advances.
113
Rs mn
Reported
NII
Add: HTM
Amortisation
Adjusted NII
Adjusted NII
Q2FY08
Q2FY07
Q1FY08
%
yoy
chg
1,704
1,262
1,394
35
22
115
89
113
29
1,819
1,351
1,507
35
21
114
%
qoq
chg
The better than expected growth in NII was driven, much lower contraction in the NIMs.
The NIMs (adjusted for amortisation expenses) have contracted by 70bps (vis--vis our expectations
of 100bps). In fact on the sequential basis, the margins have expanded by 20bps. Also without the
LKB merger, the standalone NIMs would have been higher by 50bps qoq.
Yield
Analysis
(%)
yoy
Column1
Q2FYo8
Q2FY07
Q1FY08
chg(bps)
Yield on
advances
13.3
11.3
13.2
210
Yield on
assets
9.9
8.4
10
150
Cost
of
funds
6.8
4.6
7.1
218
NIM
3.4
4.1
3.2
-74
NIM
reported
3.7
4.7
3.6
-100
NIM
reported
(ex LKB)
4.1
4.7
3.6
-60
Source: Company Presentation to Investors, Emkay Research Report on the bank
qoq
chg(bps)
12
-8
-31
20
10
50
While the cost of funds has gone up by 218bps yoy for Q2FY08, the same has been fairly
compensated by expansion in advances yield thereby helping the bank to arrest the contraction in
NIMs.
115
% yoy
Rs mn
Q2FY08
Q2FY07
change
Total advances
139,849
83,847
66.8
SME
23,050
9,570
140.9
Corp/Others
28,423
17,260
64.7
Retail
88,376
57,017
55
Personal
18,925
7,982
137.1
Mortgages
25,306
12,544
101.7
2-W/CV/CE
29,164
27,368
6.6
Source: Company Presentation to Investors, Emkay Research Report on the bank
Financial Highlights
31st
March,05
31st
March,06
31st
March,07
Paid-up
Capital(Rs.mn)
1013
1408
1567
Reserves
&
Surplus(Rs.mn)
4886
7769
12149
CAR (%)
21.42
12.52
11.05
Tier 1 CAR (%)
17.8
10.84
9.91
Tier 2 CAR (%)
3.62
1.68
1.14
Source: Company Presentation to Investors, Emkay Research Report on the bank
116
117
Valuations
Y/E March
31
FY2007
FY2008E
FY2009E
FY2010E
Net
income
Rs mn
10,102
13,315
18,152
23,510
Net
profit
Rs mn
1,207
1,846
3,088
4,448
EPS
(Rs)
0.8
1
1.6
2.3
ABV
(Rs)
7.9
10.6
12.1
14.4
RoA
(%)
0.8
0.8
1.1
1.2
RoE
(%)
10.6
10.6
13.6
17
P/ABV
(x)
5.5
4
3.5
3
118
PE (x)
67.8
44.3
26.5
18.4
H1FY
08
H1FY
07
%
yoy
chg
3,098
2,407
28.7
Other Income
3,118
1,831
70.3
Fee income
3,003
1,817
65.3
Net income
Operating
expenses
Pre-provision
profit
Provisions
&
Contingencies
Profit before tax
Provision
for
Taxes
6,215
4,238
46.7
4,423
3,195
38.4
Q2FY
08
1,70
4
1,57
1
1,57
2
3,27
5
2,32
4
1,793
1,043
71.8
705
1,088
221
822
403
224
685
599
179
703
Net
income
interest
Net Profit
Exceptional
item
Reported net
profit
Q2F
Y
07
Q1FY % yoy
08
chg
% qoq chg
1,262
1,394
35.1
22.3
881
1,547
78.4
1.5
857
1,431
83.4
9.8
2,142
2,941
52.9
11.4
1,609
2,099
44.5
10.7
951
534
842
78
12.9
219.4
32.2
321
629
28
506
384
458
1,055.40 -16.4
24.4
37.4
80
231
195
172
18.6
34.6
14.4
398
311
286
179
599
17.4
416
119
311
Result
Annual
Statement
More
Sales
Operating Profit
Interest
Gross Profit
EPS
(Rs)
Mar
'02
144.13
75.27
130.87
50.52
Mar '01
123.44
87.12
103.15
15.19
3.48
1.86
Mar
'02
Mar '01
75.32
0
0
0
21.04
0
0
0
0
0
0
0
0
38.06
30.81
0
0
19.71
0
0
0
0
0
26.14
10.18
0
0
5.01
Other Income
Stock adjustment
Raw Material
Power and fuel
Employee
expenses
Excise
Admin and selling expenses
Research and development expenses
Expenses capitalised
Other expenses
Provisions made
Depreciation
Taxation
Net profit/loss
120
Extra
ordinary
item
Prior year adjustments
Equity capital
Equity
dividend
rate
Agg.of non-prom.shares (Lacs)
Agg.of non-promto Holding (%)
OPM
(%)
GPM
(%)
NPM
(%)
0
0
56.69
0
0
26.86
0
0
0
0
0
0
52.22
70.58
23.02
10.51
8.98
3.46
Result
Annual
Statement
More
Balance Sheet
Mar '06
Mar '05
Mar '04
R
M
94.45
0
0
94.45
0
0
56.69
0
0
5
0
0
88.39
87.46
82.55
Loan funds
Secured loans
Unsecured loans
0
2,278.88
0
2,176.13
0
2,311.22
0
1
Total
2,461.71
2,358.03
121
2,450.46
Sources of funds
Owner's Fund
Equity
share
capital
Share application money
Preference share capital
Reserve
&
surplus
Uses of funds
Fixed assets
Gross block
less : revaluation reserve
less : accumulated depreciation
Net
Block
Capital work-in-progress
51.61
0
26.97
50.74
0
21.67
44.62
0
18.86
3
0
1
24.64
0
29.06
0
25.76
0
1
0
Investment
789.49
847.03
1,047.1
Net
current
assets
Current assets, loans & advances
less : current liabilities& provisions
Total net current asset
140.79
137.16
3.63
117.24
146.44
-29.2
64.84
153.47
-88.63
4
7
-2
Total
817.77
846.89
984.27
0
0
0
0
0
0
0
0
506.49
943.81
398.62
943.81
567.68
566.29
3
5
Notes :
Book value of unquoted investment
Market value of quoted investments
Contingent
liabilities
Number of equity shares outstanding (Lacs)
Result
Annual
Statement
More
Mar
'05
122
Mar
'04
Mar
'03
Income
:
Operating income
Expenses :
Material consumed
Manufacturing expenses
Personnel expenses
Selling expenses
Administrative expenses
Expenses capitalised
Cost of sales
Operating profit
Other recurring income
Adjusted PBDIT
Financial expenses
Depreciation
Other write offs
Adjusted PBT
Tax charges
Adjusted PAT
Non
recurring
items
Other non cash adjustments
Reported net profit
Earnings before appropriation
Equity dividend
Preference
dividend
Dividend tax
Retained earnings
190.74
166.99
220.16
211.0
0
0
34.01
1.48
35.88
0
71.36
-10.26
12.94
2.68
129.63
5.3
0
-2.62
-19.45
3.70
0
0
26.33
1.59
44.35
0
72.26
-43.62
14.49
-29.13
138.35
2.81
0
-31.94
-33.97
-24.32
0
0
20.77
2.79
33.74
0
57.31
30.34
14.26
44.6
132.52
5.28
0
39.32
2.70
26.28
0
0
18.09
1.16
33.51
0
52.76
29.15
8.59
37.74
129.1
4.06
0
33.68
6.70
22.25
-0.01
0
3.69
-18.09
0
-0.09
0
-24.41
-21.76
0
0.07
0
26.35
27.05
5.66
0.01
0
22.31
23.81
10.19
0
0
-18.09
0
0.01
-21.78
0
0
21.39
0
1.31
12.31
123
Result
Annual
Statement
More
Cash flow
(Rs
crore)
Mar
'06
3.69
96.92
1.64
0
98.56
124.99
223.55
Mar
'05
-24.41
256.63
-6.2
38.90
223.93
348.92
124.99
Mar
'04
26.35
Mar
'03
23.05
109.68
-14.19
39.20
47.83
-3.61
-11.50
134.69
214.23
348.92
32.73
181.5
214.23
Result
Annual
Statement
More
Capital structure
(Rs. C
From
Year
To
year
Class
of
Authorized
Capital
Issued
Capital
124
Paid up
Shares
Paid
Up
Share
2005
2006
2004
2005
2003
2004
2002
2003
2001
2002
2000
2001
1999
2000
1998
1999
1997
1998
1996
1997
1995
1996
1994
1995
Equity
Share
Equity
Share
Equity
Share
Equity
Share
Equity
Share
Equity
Share
Equity
Share
Equity
Share
Equity
Share
Equity
Share
Equity
Share
Equity
Share
(No)
Face
Value
300.00
94.38
94381342
10
300.00
94.38
94381342
10
100.00
56.63
56628805
10
100.00
56.63
56628805
10
100.00
56.63
56628805
10
50.00
27.00
26934116
10
50.00
27.00
26934116
10
50.00
27.00
12000000
10
50.00
27.00
14934116
50.00
27.00
12000000
10
25.00
12.00
12000000
10
25.00
12.00
12000000
10
Net Profit
Margin
Operating
Margin
EBITD
Margin
Returns
on
Average
Assets
Return on Average Equity
Employees
Quarterly
(Dec.07)
Annual
{2007}
Annual
(TTM)
13.79%
12.45%
11.52%
21.09%
18.84%
18.27%
0
0
4,471
0.81%
10.43%
0
0
0
0
125
BSE: 532273
Industry
NSE: CENTBOP
ISIN: IN
Bank-Private
Sector
in Rs.
Cr.
Balance Sheet
Mar '03
Mar '04
Mar '05
12 mths
12 mths
12 mths
126
152.47
56.75
101.32
152.47
56.75
101.32
0.00
0.00
0.00
0.00
0.00
0.00
Reserves
23.35
136.2
488.72
Revaluation Reserves
0.00
0.00
0.00
Net Worth
175.82
192.95
590.04
Deposits
2,834.71
3,028.79
3,530.38
127
Borrowings
60.48
43.97
43.75
Total Debt
2,895.19
3,072.76
3,574.13
314.46
283.16
447.51
Total Liabilities
3,385.47
3,548.87
4,611.68
Mar '03
Mar '04
Mar '05
12 mths
12 mths
12mths
Assets
128
219.84
260.95
331.9
268.63
248.66
131.04
Advances
1,313.72
1,556.41
2,193.95
Investments
999.25
1,004.18
1,479.64
Gross Block
731.49
740.29
670.4
Accumulated Depreciation
501.15
555.61
533.97
Net Block
230.34
184.68
136.43
0.00
0.00
0.00
Other Assets
353.69
293.99
338.72
Balance with
Money at Call
Banks,
Money at Call
129
Total Assets
3,385.47
3,548.87
4611.68
Contingent Liabilities
1,295.99
1,024.37
1,394.82
97.09
102.2
458.28
11.53
3.40
5.82
BSE:
532273
NSE:
CENTBOP
Reuters:
BSE: 532273
Industry
ISIN: INE484A01026
BankPrivate
Sector
in Rs.
Cr.
Mar
'05
Mar '06
12mths
12mths
Mar
'03
12
mths
Mar
'04
12
mths
371.34
79.88
451.22
333.79
62.98
396.77
346.09
72.20
418.29
803.2
311.37
1,114.57
Interest Expected
Employee Cost
Selling and Admin Expenses
Depreciation
Miscellaneous Expenses
Preoperative Exp Capitalised
Operating
Expenses
Provisions & Contingencies
269.3
24.82
115.92
48.75
26.69
0.00
203.82
31.29
193.11
36.14
-0.50
0.00
168.21
42.7
126.11
29.73
21.39
0.00
404.43
139.27
282.77
51.48
114.14
0.00
209.84
6.34
284.57
-24.53
226.81
-6.88
577.71
9.95
Total Expenses
485.48
463.86
388.14
992.09
Income
Interest Earned
Other Income
Total Income
Expenditure
131
Mar
'03
12mths
Mar
'04
12mths
Mar
'05
12mths
Mar '06
12mths
-34.26
-67.09
30.15
122.48
-1.00
2.70
131.39
0.00
-120.4
-38.05
155.66
Total
155.66
-260.8
-98.54
1.09
Preference
Dividend
Equity Dividend
Corporate Dividend Tax
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
-2.25
-1.18
0.30
0.87
0.00
11.53
0.00
3.40
0.00
5.82
0.00
6.61
15.11
121.39
0.00
121.39
-107.31
0.00
155.66
0.00
155.66
129.41
131.39
0.00
131.39
Total
311.32
392.19
227.67
-121.39
BSE: 532273
NSE: CENTBOP
0.00
0.00
73.72
-33.59
BSE: 532273
Industry
Bank-
ISIN: INE484A01026
132
Private
Sector
Half
Results
in Rs.
Cr.
Yearly
Sep
'05
Mar
'06
Sep
'06
Mar
'07
6 mths
6 mths
6 mths
6 mths
Sales Turnover
Other Income
Total Income
370.28
98.63
468.91
432.92
150.23
583.15
522.85
183.08
705.93
728.15
248.77
976.92
Total Expenses
248.74
374.29
341.56
458.77
Operating Profit
Profit on Sale of Assets
Profit on Sale of Investment
Gain/Loss On Foreign Exchange
VRS Adjustment
Other Extraordinary Income/Expenses
Total Extraordinary Income/Expenses
Tax on Extraordinary Items
Net Extra Ordinary Income/Expenses
121.54
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
58.63
0.00
0.00
0.00
0.00
0.00
62.51
0.00
0.00
181.29
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
269.38
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Gross Profit
220.17
208.86
364.37
518.15
Interest
PBDT
Depreciation
Depreciation for Previous
Years Written Back/Provided
Dividend
Dividend Tax
Dividend (%)
Earning Per Share (Rs)
Book Vlue (Rs)
Equity
Reserves
Face Value (Rs.)
191.24
28.93
0.00
213.19
-4.33
0.00
282.13
82.24
0.00
416.82
101.33
0.00
0.00
0.00
0.00
0.00
0.37
0.00
104.45
0.00
1.00
0.00
0.00
0.00
0.00
0.00
0.00
140.83
776.93
1.00
0.00
0.00
0.00
0.00
0.40
0.00
147.82
0.00
1.00
0.00
0.00
0.00
0.00
0.39
0.00
156.69
0.00
1.00
BSE: 532273
NSE:
CENTBOP
133
Bank of Punjab (BoP) and Centurion Bank (CB) have been merged to form Centurion Bank of Punjab
(CBP) in a share swap ratio of 9:4. This means, for every four shares of Rs 10 of Bank of Punjab, its
shareholders will receive nine shares of Re 1 of Centurion Bank.
Chairman of CB, Rana Talwar and MD Shailendra Bhandari will be the chairman and MD of the new
entity respectively. ED of BoP Tejbir Singh will be ED of CBP. The merger will be subject regulatory
and shareholder approvals.
After the merger, the paid up capital of the merged entity will be around Rs 128 crore and the net
worth will be Rs 692 crore. After the merger, the bank will have a total assets of Rs 9,395 crore and
deposits of Rs 7,837 crore. The merger will change the holding pattern in the bank. Bank Muscat,
which holds 31% in CB, will now hold 25% in the merged bank. The holdings of Capital Corporation
and Sabre Capital, which were 14% and 5.4% respectively in CB, will come down to 11% and 4.4%
respectively in the new bank. At the same time, 27% holding of Tejbir Singh in BOP, will come down
to 5% in the merged bank.
134
Column1
Net Profit
Operating
Profit
NIM
Total
Advances#
Net Retail
Advances#
Deposits
Low Cost
Deposits
(CASA)
Net NPA
Capital
Adequacy
Ratio***
Quarter
Ended
Dec 05
223
Quarter
Ended
Dec 04*
71
349
4.80%
Y-O-Y
Chg
227.70%
Q-O-Q
Chg**
11.30%
73
6.10%
376.40%
28.80%
56948
19205
196.50%
11.40%
40582
85885
15612
29886
159.90%
187.40%
14.90%
6.40%
37.80%
2.60%
28.10%
3.40%
10.20%
10.20%
135
Results for the quarter ended Dec 2004 are for Centurion Bank standalone and hence may not be
Q-O-Q change demonstrates a comparison between the 3rd Q FY06 and 2nd Q FY06 results of
Capital Adequacy does not include the proposed Rs.3.84 Billion that will be raised through a
preferential allotment
#
Post Securitization
On Wednesday, May 09, 2007: Vodafone has completed the acquitision of controlling stake in
Hutuch-Essar from Hutchison Telecommunications International Limited(HTIL) for $10.9 billion.
Vodafone will pay $10.9 billion in cash to HTIL, reflecting retention and closing adjustments agreed
between Vodafone and HTIL.
Commenting on the transaction, Arun Sarin, Chief executive, Vodafone, said, I am delighted that,
having secured all the necessary regulatory approvals, we are now able to complete this important
transaction and move onto the process of integration.
136
India is a tremendously exciting, fast-moving market and I am confident that the Hutuch Essar
business will make a major contribution to the Vodafone Group over the coming years, he added.
It has been decided that Ravi Ruia, vice chairmen, Essar would be chairman of the new joint venture
while Vodafones Sarin would be vice chairman.
Vodafone has said it would invest $2 billion within two years in the Hutuch-Essar telecom venture to
particularly tap the rural market, expand infrastructure and improve the tele-density in the coultry.
HTIL and Essar group of India have 67% and 33% respectively in Hutchison Essar Ltd. which runs
mobile phone services across India under the brand Hutch. Hutch is one of the leading mobile phone
companies in India, at the fourth position in terms of subscriber numbers after Bharti, Reliance and
govt. owned BSNL.
About three months back, HTIL surprisingly decided to pull out of the venture and put up its stake for
sale. The Indian operation amounts to a significant part of HTIL. Apparently HTIL felt that the
telecom investments were turning out to be quite high in the competitive Indian environment. I think
the main reason is HTIL's relationship with Essar which was going nowhere.
Hutchison Essar was supposed to go to the stock markets but that didn't happen because of internal
fight between HTIL and Essar. The required investment for further growth could have easily come
from the stock markets. The enterprise value at which Vodafone has acquired the stakes is about 18
billion USD or about Rs. 81,000 crores. A dilution of around 15% would have resulted in well over
10,000 crores from the markets for further investment. (This is the kind of number Vodafone is
indicating it will spend. Bharti too will be spending only of this order.)
137
Vodafone may find dealing with Essar a difficult proposition. Essar does not seem to have a clear
telecom strategy or the money and capability to execute on plans. If at all possible, Vodafone should
try to buy out Essar completely, find some financial investors in India, and go IPO in Indian stock
markets (since there is a limit of foreign holding in telecom companies in India).
Besides Bharti and Reliance Infocomm which are listed, Idea (of Aditya Birla group) has just now
listed. Spice Telecom (operating in Karnataka and Punjab) has filed a draft red herring prospectus.
BSNL, after a merger with MTNL, may also list.
Vodafone's purchase would also mean a complete rebranding. Hutch as a brand will go completely out
of the country and Vodafone will enter India (and in my handset too!)
138
The legendary pug (Chika) gets a new home. Chikas little master is unlikely to feature in
campaigns. Vodafone has retained the pug as he is synonymous with the brand.
139
The acquisition of Hutchison stake by Vodefone in Hutuch-Essar has created history in India
mergers and acquisitions.
Why pink? seems to be the first question on everyones mind when Hutuch decided to get
rid of the brand name orange. "Pink is brave, confident and exuberant, and that goes with the product
itself," said Renuka Jaypal, President, Ogilvy One Worldwide - India. Ogilvy & Mather, which did the
re-branding for Hutch, decided to go with an unusual colour, because over 90 per cent of the brands in
India are either red, blue or green, according to Jaypal. Hutch's background now have a bit more
flexibility, sporting several optional shades of blue in addition to the traditional white background,
giving the backroom creative force a little bit more leeway.
140
Type
Public
(LSE:
NYSE: VOD, FWB: VOD)
Founded
Headquarters
VOD,
Newbury, England, UK
Key people
Vittorio
Colao,
Sir
John
Bond,
John Buchanan, Deputy Chairman
Industry
Mobile telecommunications
Products
Revenue
Net income
Website
www.vodafone.com
CEO
Chairman
141
Majorityowned
Minority-owned
No Ownership
Albania
France
Austria
Belgium
Czech Republic
Poland
Bulgaria
Channel Islands
Germany
Croatia
Cyprus
Greece
Denmark
Estonia
Hungary
Finland
Faroe Islands
Ireland
Iceland
Latvia
Italy
Lithuania
Luxembourg
Malta
Macedonia
Norway
Netherlands
Serbia
Slovenia
Northern Cyprus
Sweden
Switzerland
Portugal
Romania
142
Spain
Turkey
UK
Networks in Asia-Pacific
Majority-owned
Minority-owned
No Ownership
Australia
China mainland
Afghanistan
Hong Kong
India
Fiji
Indonesia
Japan
New Zealand
India
Malaysia
Samoa
Singapore
Sri Lanka
143
Majority-owned
Minority-owned
Egypt
DR Congo
Kenya
Ghana
Lesotho
Mozambique
Qatar1
South Africa2
Tanzania
1
2
Network yet to be
Network 50% owned.
launched.
Details
No Ownership
pending
Bahrain
further
announcements.
144
Minorityowned
No Ownership
USA
Anguilla
Antigua
Barbuda
Barbados
&
Argentina
Aruba
Bermuda
Bonaire
Brazil
Cayman
Islands
Chile
Colombia
Curaao
Dominica
Ecuador
El
Salvador
French
West Indies
Grenada
Guatemala
Guyana
Haiti
Honduras
Jamaica
Mexico
Nicaragua
Paraguay
Peru
St Kitts &
Nevis
St Lucia
St Vincent &
the Grenadines
Trinidad and
Tobago
Turk
Caicos
Uruguay
&
145
Chief Executives
Name
Between
Arun Sarin
Vittorio Colao
146
Profit
before
tax m
Profit
for the
year
m
Basic
eps
(pence)
Propo
rtiona
te
custo
mers
(m)
35,478
9,001
6,756
12.56
260
2007
31,104
(2,383)
(5,297)
(8.94)
206.4
2006*
29,350
(14,835)
(21,821)
(35.01)
170.6
2005
34,073
7,951
6,518
9.68
154.8
2004
36,492
9,013
6,112
8.70
133.4
Year
ended
31
March
Turnover
m
2008
Vodafone-Hutch update
Vodafone purchased Hutchison Telecommunications 67 per cent stake in Hutchison Essar for $11.1
billion (Rs 48,540 cr), which values the Hutch Essar at $18.8 billion, including debt.
Hindu Businessline quotes Sunil Mittal of Bharti Airtel saying that the company would up the ante
knowing that Vodafone would come hard to grab more market share.
Target Name
Acquiror Name
Deal Date
$
Value
of
Deal
(mil)
Conroe
Field,Houston,Texas
Denbury Resources
Inc (DNR)
08-21-2008
725.00
Hochschild
Corp
08-21-2008
33.30
Eurocastle Investment
Ltd
Eurocastle
Investment
Buyback
08-21-2008
28.30
08-21-2008
27.80
Undisclosed
Quality
Assets
LSI Industries
(LYTS)
08-21-2008
23.00
High
Lighting
Mining
Ltd
Inc
Semelab PLC-Business
TT electronics PLC
08-21-2008
18.20
Pacific
Vislink PLC
08-21-2008
148
17.00
Microwave
Research Inc
DiamondWare Ltd
Nortel
Networks
Corp (NT)
08-21-2008
9.40
GreenCap Ltd
08-21-2008
8.90
GreenCap Ltd
08-21-2008
8.00
Noble
Investments(UK)PLC
08-21-2008
2.30
Clearford
Inc
SC
Stormont
Holdings Inc
08-21-2008
1.10
NCI Ltd
08-21-2008
n/a
Mold-Tek
Technologies Ltd
08-21-2008
n/a
Changing
Vitamins Inc
08-21-2008
n/a
Indo Internacional SA
08-21-2008
n/a
IGA Ltd
08-21-2008
n/a
Tidalwave Holdings
Inc
08-21-2008
n/a
Kobenhavns Lufthavns
A/S
Macquarie European
Infrastructure Fund
III
08-21-2008
n/a
OAO
Tomskaya
Raspredelitelnaya
Kompaniya
08-21-2008
n/a
Shareholders
08-21-2008
n/a
Spectrum
Mapping
Cardno Ltd
08-21-2008
n/a
OAO
Krasnoyarskenergosbyt
OAO RusHydro
08-21-2008
n/a
Altana AG
08-21-2008
n/a
Zhengzhou Quanwei
Foods Co Ltd
Zhengzhou Sanquan
Foods Co Ltd
08-21-2008
n/a
Arcelor Mittal NV
(MT)
08-20-2008
810.00
Industries
Times
Survey &
149
Liberty International
Holdings
PLC(Liberty
Holdings/Liblife
Controlling)
08-20-2008
201.10
SoCal Portfolio
Pacific
Office
Properties Trust Inc
(PCE)
08-20-2008
195.00
08-20-2008
100.10
AC/P33,Oliver Oilfield
08-20-2008
74.10
Bintang
Mitra
Semestaraya Tbk PT
08-20-2008
53.90
InStranet Inc
SalesForce.com
(CRM)
08-20-2008
31.50
Global
Microwave
Systems Inc
Cobham PLC
08-20-2008
26.00
Arcelor Mittal NV
(MT)
08-20-2008
23.60
Unicircuit Inc
08-20-2008
22.50
Xinjiang
XinXin
Mining Industry Co
Ltd
08-20-2008
13.90
Van
Et
Ticari
Yatirimlar
Gida
Sanayi Turizm Ic ve
Dis Tic AS
08-20-2008
10.60
Astmax Co Ltd
08-20-2008
7.60
Red
Dragon
Resources Corp
08-20-2008
7.50
MYOB Ltd
08-20-2008
6.10
Van
Et
Ticari
Yatirimlar
Gida
Sanayi Turizm Ic ve
Dis Tic AS
08-20-2008
5.50
Gay
International
Ltd
Asian
Harvest
Enterprise Ltd
08-20-2008
3.10
08-20-2008
150
3.00
OAO
Giano
Group
Inc
OJSC Magnitogorsk
Bashmetalloptorg
Innovative
Technologies
America Inc
NuVim Inc
08-20-2008
2.30
Zeki Gumussu
Van
Et
Ticari
Yatirimlar
Gida
Sanayi Turizm Ic ve
Dis Tic AS
08-20-2008
1.20
08-20-2008
0.80
E40/212,Western
Australia
Lumacom Ltd
08-20-2008
0.20
08-20-2008
0.20
Republic
Financial
CorpIntellectual
Property Portfolio
08-20-2008
n/a
ST-NXP Wireless SA
STMicroelectronics
NV
08-20-2008
n/a
151
NEW LOGO: The bank has retained the burgundy colour, but has changed the logo. The logo uses
the alphabet 'A' from the word Axis. The logo depicts a strong growth path for the bank supported by a
strong base, indicating that the bank is moving on from a position of strength. Earlier, the bank's logo
used the letters U, T and I.
The bank is likely to spend around Rs50 crore in the re-branding exercise.
The name of the country's third largest private sector lender UTI Bank has been officially changed to
the Axis Bank Ltd with effect from 31st July,2007. Some reasons for change in name of 'UTI Bank to
Axis Bank' - are :
2) UTI Bank to shed its brandname after the split of the erstwhile UTI. Though UTI was a government
instutition, its subsidiary UTI Bank has been categorised as a private sector bank, according to RBI
guidelines.
152
3) UTI Bank was started as a part of the entire UTI (Unit Trust of India) Group. But, when there were
losses incurred by UTI ( due to failure of US 64 scheme probably ) because of other reasons, it was
decided by RBI that UTI Bank should be separated as private sector bank, as several unrelated
entities were using the UTI brand.
4) The change of name to Axis Bank has been cleared from shareholders and regulators.
5) The government still has a 26% stake in UTI Bank. This stake is up for sale.
Regarding the re-branding strategy, Executive director (corporate strategy) of the bank R Ashok
Kumar said the bank had hired advertising firm O&M to help in creating awareness of the new brand
across the country. The bank would change logo and colour of logo, he had said, adding, the bank is
likely to spend around Rs 50 crore (Rs 500 million) in the re-branding exercise
These were some reasons I could find for the change of name of UTI bank to Axis Bank.
I will look into further details as well. I would like to know if I am proceeding in the right
direction or not.
I tried to find out the reason for UTI Bank changing its name from UTI to AXIS bank. My findings
are as follows:-
Axis Bank is born out of the pressure on UTI Bank to shed its brandname after the split of the
erstwhile UTI. Though UTI was a government instutition, its subsidiary UTI Bank has been
categorised as a private sector bank, according to RBI guidelines.
The name change to Axis Bank means that UTI Bank will have to undergo a rebranding exercise soon.
The rebranding process is expected to be complete by September 2007.
153
After the split of UTI, entities like UTI Securities, UTI MF and UTI Bank were all allowed to retain
the UTI brand name for a while. Now that it is time for UTI Bank to shed the brand name, it has opted
to go for the more modern-sounding Axis Bank.
Axis Bank is born out of the pressure on UTI Bank to shed its brand name after the split of the
erstwhile UTI. Though UTI was a government institution, its subsidiary UTI Bank has been
categorized as a private sector bank, according to RBI guidelines.
Axis Bank was the first of the new private banks to have begun operations in 1994, after the
Government of India allowed new private banks to be established. The Bank was promoted jointly by
the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life Insurance
Corporation of India (LIC) and General Insurance Corporation Ltd. and other four PSU companies, i.e.
National Insurance Company Ltd., The New India Assurance Company, The Oriental Insurance
Corporation and United Insurance Company Ltd.
The name change to Axis Bank means that UTI Bank will have to undergo a rebranding exercise soon.
The rebranding process is expected to be complete by September 2007.
After the split of UTI, entities like UTI Securities, UTI MF and UTI Bank were all allowed to retain
the UTI brand name for a while. Now that it is time for UTI Bank to shed the brand name, it has opted
to go for the more modern-sounding Axis Bank.
The name has been changed to Axis Bank due to existence of several shareholders-unrelated entities
were using UTI Brand name, resulting in brand confusion.
The name has been changed after the approval of shareholders, Reserve Bank of India and Central
Government of India.
154
UTI brand was given in 1994 by its promoters and UTI Bank could use the brand only till January
2008 as per Govt directives.
Many unrelated shareholder entities like UTI Technological Services, UTI Investor Services and UTI
Securities were carrying the UTI brand thereby leading to confusion of the "BRAND UTI".
Axis Bank brand aims to portray the bank as modern and innovative
The Bank has decided to create a distinct brand identity for itself as for instance ICICI Infotech
rebranding itself as "3i Infotech".Rebranding provides an opportunity to communicate elements of
personality, values and vision, which are specific to the Bank.
This rebranding becomes more important as the Bank takes its initial steps in establishing a global
footprint.
LIC eyeing UTI bank
Life Insurance Corporation (LIC), the public sector life insurer, wants the government to provide it the
first right to purchase the 27.47 per cent stake held by Specified Undertaking of Unit Trust of India
(SUUTI) in UTI Bank, a mid-sized private sector bank. A senior LIC official said LIC should be given
the first right (to buy SUUTI's stake) as it was the co-promoter of the bank." LIC already holds 10.39
per cent stake in UTI Bank.
LIC's interest in the deal is obvious: it can merge UTI Bank and Corporation Bank(27% stake) in due
course and become a force in the banking sector. But it is unlikely to get the government's nod. UTI
Bank is a "private bank" originally promoted by UTI, a public sector entity. Ever since UTI ran into
problems, it has become more of a private entity with only notional control by the government directly
or indirectly. The pay scales, for instance, are totally private sector- the CMD gets a package that
public sector bank chairmen cannot dream of.
155
I guess that the government would like it to stay that away. It is not able to privatise public sector
banks; the least it would like to do is not to add to the public sector stable, which would be the
result if LIC took it over. That is part of the reason the government has prised UTI Bank away from
UTI, its promoter.
The chances are government will offer SUUTI's stake to a combination of domestic and overseas
investors through a public offer. That means UTI Bank will emerge as a professionally-run bank with
a diversified base of investors like ICICI Bank.So may be rebranding has been done deliberately to
favour this and thwart the chances of LIC taking over UTI.
On investigating I have found out that a conflict of brand name between UTI mutual fund and
UTI Bank resulted in UTI Bank changing its name to Axis Bank.
Following is a brief description.
HISTORY:
The setting up of the Unit Trust of India (UTI) in 1963 heralded the birth of the Indian mutual fund
industry. The fund's sponsors are public sector financial giants like Life Insurance Corporation, SBI,
Bank of Baroda and Punjab National Bank. The sponsors hold equal stakes in the asset management
company, UTI Asset Management Company Private Limited. UTI Mutual Fund remains the largest
fund in the country with assets of over Rs.35,028 crore under management as of Aug 2006.
In 2003, UTI was divided into two parts, UTI Mutual Fund (UTI MF) and a specified undertaking of
UTI or UTI-I. UTI MF was brought under SEBI regulations while UTI-I was kept under direct
government control since its schemes offered guaranteed returns.
156
UTI Bank
UTI Bank began its operations in 1994 when the Government of India allowed new private banks
to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of
the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance
Corporation Ltd. and its associates viz. National Insurance Company Ltd., The New India Assurance
Company, The Oriental Insurance Corporation and United Insurance Company Ltd.
According to a deal between the government and the fund's four sponsors State Bank of India, Life
Insurance Corporation, Bank of Baroda and Punjab National Bank UTI's nine subsidiaries could
use the brand name for free till January 2008.
After the period ended, UTI Bank, UTI Securities, UTI Technology Services and UTI Investor
Advisory Services had to pay royalty to the fund house.
UTI Bank was offered to keep the brand name beyond 2008 without any royalty payment. But UTI
MF wanted a non-compete clause to be built in besides insisting on investing jointly in brand
promotion.
But last year, UTI Bank decided to set up an asset management company to operate a venture capital
fund and get into the private equity business. That's when UTI MF objected to the use of a common
brand name since it already had a Bangalore-based subsidiary UTI Ventures.
The year long conflict ended when UTI Bank finally decided to change its name to Axis Bank.
Chairman and CEO of UTI bank Mr P J Nayak told thatthe decision to re-brand the Bank emanated
157
from the need to move out of a scenario of brand confusion that is created by several shareholderunrelated entities using the UTI brand.
--The usage of the UTI brand by several shareholder-unrelated entities was becoming untenable
--With this re-branding the bank plans to diversify into other financial services and restructure its
corporate banking.
--The re-branding becomes more important as the bank takes its initial steps in establishing a global
footprint
--The bank has offices in Singapore, Hong Kong, Shanghaiand Dubai. It seeks to expand further its
international presence to become a multinational bank
--The name Axis is chosen as it is simple and it conveys a sense of solidity and a sense of maturity. It
also has a universal appeal.
158
Anil Ambani is firing all cylinders in the quest to become Indias largest group (and Richest Indian),
the coveted place currently held by his elder brother Mukesh. Close to the heels of Reliance Power - a
$2.8 billion mammoth IPO, Anil has already announced his intentions of going public with his
entertainment division.
Now another big news has started making rounds. Anil Ambani run Reliance Communications is in
talks with up-for-grabs French IT consulting firm Capgemini.
Times Online reports:
Capgemini, the French IT services group, has held early-stage talks with Reliance Communications, of
India, that could result in the first acquisition of a significant Western IT house by one of Indias fastgrowing competitors.
Reliance Communications interest confirms Mr Ambanis hopes to build a significant IT business.
A move on Capgemini would give it access to a client base in continental Europe and catapult it
among the worlds top ten IT groups by market share.
Mr Ambani, Indias second-richest man after his estranged brother Mukesh, has already suggested that
he aims to be among the worlds five biggest video games developers.
159
Auto
and
FMCG
are
all
buzzing
with
Mega
Indian
acquisitions.
The latest and probably the most talked about after Mittals buy-out of Arcelor, is Jaguar- Land Rover
bid by Tata group.
The trends of Indian companies buying US based companies is becoming increasingly common. In
2007 itself, more than 15 acquisitions have been made by Indian software companies. Like I have
mentioned before on this blog, these kind of deals are the best ways for Indian companies to grow
aggressively. It helps them on multiple levels, primarily fighting resource crunch, increasing global
client based and addition of Intellectual property not easily available in open market.
160
ANALYSIS OF DATA
DATA :Data to know various factors affecting the merger and acquisition is collected from various websites.
TOOLS OF DATA COLLECTION :Secondary and primary data has been used in this research in this project the data has been collected
from various sites ,book, journal and newspaper and various analysts.
Being in I.T Industry, I do understand the importance of these kinds of deal by Indian companies. It
not only helps the Indian software firm to gain a strong foothold with local presence, but it provides
with an added advantage of resourcing. As all of you know, the US government has a cap of 65000
H1B visas, which unfortunately will not be increased in near future. With such small number of visas
available, it is
161
extremely difficult for Indian software houses to expand aggressively. So the route of these
acquisitions gives Indian companies added advantage of securing existing people from acquired
company and also providing Indian people as part of Intra company transfers, which circumvent the
requirement of getting the H1B visa for the person traveling to US.
Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to US$ 4.3 billion
in 2005, and further crossed US$ 15 billion-mark in 2006. In fact, 2006 will be remembered in Indias
corporate history as a year when Indian companies covered a lot of new ground. They went shopping
across the globe and acquired a number of strategically significant companies. This comprised 60 per
cent of the total mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent of
acquisitions were made with cash payments.
This is not a confirmed news, still in rumor stages, but because Hindustan times has published this
news, it needs to be taken note of. According to the news Google and Yahoo are eyeing Rediff, one of
the Indias most popular consumer portals. I am actually surprised that this has not happened earlier.
Rediff now for sometime has been forefront capturing good market share of Indian Internet Readers.
162
in detail, including the legal and operational tangles; currently, the Indian Banks Association (IBA) is
having a look in.
At around the same time, the Deputy Governor of RBI, Ms K.J.Udeshi, has favoured consolidation of
old private banks, a ploy which anearlier RBI deputy governor, MR. S.P.Tlawar, worked on and met
with resistance form the community-based banks in Kerala and Tamil Nadu.
She is proper in arguing for a move from a large no of small banks to a small no of large banks as
most, if not all, old private sector banks do not have the financial stamina to last a long game. On their
own it is hard to see Federal Bsnk, South Indian Bsnk, Lord Krishna Bank and Catholic Syrian Bank
becoming a single entity.
Mergers of private banks could be a rare happening with the many RBI circulars on the subject. On
January 22, 1993, the RBI issued guidelines on the entry of new private sectior banks to be registered
as public limited companies under the Companies Act, 1956. The three-page press note did nit have a
word on ownership.
On January 3,2001, an RBI press note specifically barred large industrial houses from setting up a
bank but allowed companies linked to a corporate house to hold a maximum of 10 percent stake in the
bank sans controlling interest.
On February 26,2002, a third RBI press note set a limit of 49 percent on FDI under the automatic route
in the banking sector without being sufficiently clear on the status of FII holding in private banks.
However, it said FDI and portfolio investment in nationalized banks were subject to overall statutory
limits of 20 percent as provided under Section 3(2D) of the Banking Companies (Acquisition &
Transfer of Undertakings) Act, 1970/80. The same ceiling would apply to SBI and its associate banks,
the press note added.
The point was also made that transfer of shares of 5 percent and more of the paid-up capital of a
private banking company, requires prior acknowledgement of RBI.
On January 29,2004, in a detailed note to clarify its position to potential domestic and foreign
investors, the RBI said as hitherto, the acknowledgement from RBI for acquisition/transfer of shares
164
will be required, for all cases of acquisition of shares which will take the aggregate holding of an
individual or group to equivalent of 5 percent or more of the paid-up capital of the bank. RBI while
granting acknowledgement may require such acknowledgement to be obtained for subsequent
acquisition at any higher threshold as may be specified.
On March 5,2004, the Department of Industrial Policy &Promotion, Ministry of Commerce (not RBI,
a mystery indeed), came out with rules upping FDI stake in private sector banks to 74 percent
including FII. But this key circular shut out foreign bank may operate in India private banks by stating
a foreign bank may operate in India through only one of the three channels:
Branches
A wholly
owned
subsidiary
A subsidiary
with
aggregate
foreign
investment in
to a
maximum of
74 percent
165
The RBI notification on July 2, 2004 implictly ruled out any merger or acquisition of any colour
among private banks by laying the 5 percent and 10 percent caps. Does this not conflict with the
earlier norm of 74 percent for FDI and FII.
RBI says it is going by international norms. Agreed. But from where will banks raise fresh capital? Dr.
Rakesh Mohan, Deputy Governor, RBI, contends funds are aplently for banks to tap. Public sector
banks have little scope to raise fresh capital, as Government stake cannot go below 51 percent.
Private sector banks will have problems, as they will not be able to command huge premiums and also
tackle various RBI circulars. The banking industry is stuck. Will bank boards have diversified or
fragmented holdiongs? It looks it may be fragmented holdings? It looks it may be fragmented enough
to hobble bank board from performing.
166
And it is highly recommended to take in view the following policies before a merger and acquisition:
Section 6 of the Act provides for regulation of combination having an adverse effect on competition
by Competition Commission.
168
CRITICAL ISSUES
Bar to initiate inquiry after expiry of one year from effect of a combination.
Likely logistical limitations of the Commission to be able to take cognizance of every violate
combination
Overlapping of powers with that of High Courts and Securities & Exchange Board of India
(SEBI) as regarded merger/acquisition.
Time bound disposal as provided does not seem realistic in view of likely workload
No residuary provision available to the Commission to inquire into a combination not falling
within laid down criteria but giving rise to appreciable adverse effect on compeititon in the relevant
market.
169
CONCLUSION
Mergers and Acquisitions (M&A) have immensely evoked and still continue to capture scholars
interests. More so, M&A in the banking sector evokes high interest simply for the fact that after
decades of strict regulations, easing of the ownership & control regulations has led to a wave of M&A
in banking industry throughout the world.
Considering the changed environment conditions, we believe that M&A in the Indian
Banking are an important necessity. The reasons include (a) fragmented nature of the Indian banking
sector resulting in poor global competitive presence and position; (b) large intermediation costs and
consequent probability in increasing its risk profile; and (c) meet the new stringent international
regulatory norms. While a fragmented Indian banking structure may very well be beneficial to the
customers (given increased competition due to lower market power of existing players), at the same
time this also creates the problem of not having any critical mass to play the game at the global
banking industry level. This has to be looked at significantly from the states long-term strategic
perspective. Given that economic power is increasingly used as a tool by nations to defend their
position, to signal power, to signal intent, and to establish their supremacy over others hence owning
and managing large powerful global banks would be an obvious interest for every country.
Consolidation through M&A may be requirement of future. M&A of future should aim at creation of
strong entity and to develop ability to withstand the market shocks instead of protecting the interests of
depositors of weak banks. The M&As in the banking sector should be driven by market related
parameters such as size and scale; geographical and distribution synergies and skills and capacity. The
emerging market dynamics like falling interest rate regime which makes the spread thinner; increasing
focus on retail banking, enhanced quest for rural credit, felt need for increasing more profits especially
from operations, reduction of NPA's in absolute terms, need for more capital to augment the
technology needs, etc are the major drivers for mergers and acquisitions in the banking sector.
M&As are no substitute for poor assets quality, lax management, indifference to technology up
gradation and lack of functional autonomy and operational flexibility. The banking system will have
170
to be managed by competent and independent people having adequate power and full operational
autonomy.
With increasing globalisation, attaining size advantages will become critical for Indian banks.
Combined with the need to attain higher capital standards under Basel II Accord, consolidation in the
Indian Banking industry will become imminent. However, the issues that need to be addressed include
maximizing synergies in terms of regional balance, network of branches, HR culture, and asset
commonality and legacy issues in respect of technology. In the present scenario, we must develop
small number large banks of global size instead of large number of smaller banks as we are having
now.
171
SUMMARY
Mergers and Acquisitions in Banking Sector
Mergers and acquisitions in banking sector have become familiar in the majority of all the countries in
the world. A large number of international and domestic banks all over the world are engaged in
merger and acquisition activities. One of the principal objectives behind the mergers and acquisitions
in the banking sector is to reap the benefits of economies of scale.
With the help of mergers and acquisitions in the banking sector, the banks can achieve significant
growth in their operations and minimize their expenses to a considerable extent. Another important
advantage behind this kind of merger is that in this process, competition is reduced because merger
eliminates competitors from the banking industry.
Mergers and acquisitions in banking sector are forms of horizontal merger because the merging
entities are involved in the same kind of business or commercial activities. Sometimes, non-banking
financial institutions are also merged with other banks if they provide similar type of services.
Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in the
banking sector. They also try to enhance their customer base.
In the context of mergers and acquisitions in the banking sector, it can be reckoned that size does
matter and growth in size can be achieved through mergers and acquisitions quite easily. Growth
achieved by taking assistance of the mergers and acquisitions in the banking sector may be described
as inorganic growth. Both government banks and private sector banks are adopting policies for
mergers and acquisitions.
172
In many countries, global or multinational banks are extending their operations through mergers and
acquisitions with the regional banks in those countries. These mergers and acquisitions are named as
cross-border mergers and acquisitions in the banking sector or international mergers and acquisitions
in the banking sector. By doing this, global banking corporations are able to place themselves into a
dominant position in the banking sector, achieve economies of scale, as well as garner market share.
Mergers and acquisitions in the banking sector have the capacity to ensure efficiency, profitability and
synergy. They also help to form and grow shareholder value.
In some cases, financially distressed banks are also subject to takeovers or mergers in the banking
sector and this kind of merger may result in monopoly and job cuts.
Deregulation in the financial market, market liberalization, economic reforms, and a number of other
factors have played an important function behind the growth of mergers and acquisitions in the
banking sector. Nevertheless, there are many challenges that are still to be overcome through
appropriate measures.
Mergers and acquisitions in banking sector are controlled or regulated by the apex financial authority
of a particular country. For example, the mergers and acquisitions in the banking sector of India are
overseen by the Reserve Bank of India (RBI).
173
Major Mergers and Acquisitions in the Banking Sector of the United States
Following are some of the important mergers and acquisitions that took place in the banking sector of
the United States:
The merger of Chase Manhattan Corporation with J.P. Morgan & Company. The name of the new
company formed as a result of the merger is J.P. Morgan Chase & Company.
The merger of Firstar Corporation with U.S. Bancorp. The name of the resultant entity is U.S.
Bancorp.
The merger of First Union Corporation with Wachovia Corporation. The name of the newly formed
company is Wachovia Corporation.
The merger of Fifth Third Bancorp with Old Kent Financial Corporation. The name of the merged
company is Fifth Third Bancorp.
The merger of Summit Bancorp with FleetBoston Financial Corporation. The new company is named
FleetBoston Financial Corporation.
The merger of Golden State Bancorp, Inc. with Citigroup Inc. The name of the newly formed company
is Citigroup Inc.
The merger of Dime Bancorp, Inc. with Washington Mutual and the name of the merged entity is
Washington Mutual.
The merger of FleetBoston Financial Corporation with Bank of America Corporation. The newly
formed entity is Bank of America Corporation.
The merger of Bank One with J.P. Morgan Chase & Company. Name of the new company is J.P.
Morgan Chase & Company.
The merger of SunTrust with National Commerce Financial and the newly formed entity is also named
SunTrust.
The merger of Hibernia National Bank with Capital One Financial Corporation and the merged entity
is known as Capital One Financial Corporation.
The merger of MBNA Corporation with Bank of America and the resultant entity is known as Bank of
America Card Services.
The merger of AmSouth Bancorporation with Regions Financial Corporation and the name of the
newly formed entity is Regions Financial Corporation.
174
The merger of LaSalle Bank with Bank of America and the new entity formed is called as Bank of
America.
The merger of Mellon Financial Corporation with Bank of New York Company, Inc. and the newly
merged entity is known as Bank of New York Mellon.
Merger waves
The economic history has been divided into Merger Waves based on the merger activities in the
business world as:
Period
Name
Facet
1889 - 1904
First Wave
Horizontal mergers
1916 - 1929
Second
Wave
Vertical mergers
1965 - 1989
Third Wave
1992 - 1998
Fourth
Wave
Congeneric
mergers;
Corporate Raiding
2000 -
Fifth Wave
Cross-border mergers
Hostile
175
takeovers;
Cross-border M&A
In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals
cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirers.
The rise of globalization has exponentially increased the market for cross border M&A. In 1997 alone
there were over 2333 cross border transactions worth a total of approximately $298 billion. This rapid
increase has taken many M&A firms by surprise because the majority of them never had to consider
acquiring Due to the complicated nature of cross border M&A, the vast majority of cross border
actions have unsuccessful anies seek to expand their global footprint and become more agile at
creating high-performing businesses and cultures across national boundaries.[7]
Even mergers of companies with headquarters in the same country are very much of this type (crossborder Mergers). After all,when Boeing acquires McDonnell Douglas, the two American companies
must integrate operations in dozens of countries around the world. This is just as true for other
supposedly "single country" mergers, such as the $29 billion dollar merger of Swiss drug makers
Sandoz and Ciba-Geigy (now Novartis).
176
Rank
Year
Purchaser
1999
2
3
4
1999
1998
1998
1999
1999
Vodafone Group
7
8
1998
1998
1999
Bell Atlantic[12]
BP[13]
Qwest
Communications
10
1997
Vodafone
Airtouch PLC[8]
Pfizer[9]
Exxon[10][11]
Citicorp
SBC
Communications
Worldcom
Purchased
Transaction
value (in mil.
USD)
Mannesmann
183,000
Warner-Lambert
Mobil
Travelers Group
Ameritech
Corporation
AirTouch
Communications
GTE
Amoco
90,000
77,200
73,000
US WEST
48,000
MCI
Communications
42,000
63,000
60,000
53,360
53,000
177
Rank
Year
2000
2000
2004
2006
2001
2009
Purchaser
Fusion:
America
Online
Inc.
(AOL)[14][15]
Glaxo
Wellcome
Plc.
Royal
Dutch
Petroleum Co.
AT&T Inc.[16][17]
Comcast
Corporation
Pfizer Inc.
Purchased
Transaction
value
(in
mil. USD)
Time Warner
164,747
SmithKline
Beecham Plc.
Shell Transport &
Trading Co
BellSouth
Corporation
AT&T Broadband
& Internet Svcs
Wyeth
75,961
74,559
72,671
72,041
68,000
178
2000
Spin-off:
Networks
Corporation
Nortel
2002
Pfizer Inc.
Pharmacia
Corporation
59,515
2004
58,761
10
2008
Inbev Inc.
Anheuser-Busch
Companies, Inc
52,000
59,974
179
180
MDM Bank
MDM Bank
Type
JSC
Industry
Founded
1993
Headquarters
Moscow, Russia[1]
Products
Financial Services
Website
www.mdmbank.com
MDM Bank (Russian: ) is a Russian Joint Stock commercial bank, one of Russia's largest
private banks based in Moscow. As of August 2009, the bank completed a merger with Novosibirskbased URSA Bank. The new bank will operate under MDM Bank brand name, but the merger is
actually structured as an acquition of MDM by URSA. The new corporate headquarters will be bases
in Novosibirsk. The merger was announced in December 2008;[2] MDM and URSA estimated that the
new MDM Bank would have capital of 2.5 billion and total assets of 18.7 billion US dollars, although
in practise the numbers ended up being somewhat lower.[3]
Igor Kim, chairman and shareholder of URSA, has been the new bank's chief executive officer during
the transition period; Oleg Vyugin chairs the board of the bank's holding company and the former
MDM CEO Igor Kuzin is chief executive of the holding company.[2]
MDM Bank was founded in December 1993 and holds a General Banking License issued by the
Central Bank of Russia (#2361 dated 13 February 2003, which will be voided as the bank migrates
under URSA Bank license #323).[4] It had one of the highest credit ratings among privately-owned
Russian banks Standard & Poor's (BB, stable), Fitch Ratings (BB, stable) and Moody's (Ba1, stable)
and is the only Russian financial organization that has been given a public corporate governance
rating by Standard & Poor's (6+).
URSA Bank was founded in 1990 as Sibakadembank by the Siberian Branch of Russian Academy of
Sciences. It was restructured from a privately held bank to a joint-stock bank in 1997. After a series of
mergers with local Siberian banks, in 2006 Sibakadembank merged with Yekaterinburg-based
Uralvneshtorgbank (established 1991) and assumed the new name, URSA Bank.
181
ANNEXURES
PROPOSAL
REFERENCE
LIST OF
FIGURES,
CHARTS
LIST OF
,
TABLES
DIAGRAMNS
182
References
http://www.evalueserve.com/Media-And-Reports/WhitePapers.aspx#
http://www.coolavenues.com/know/fin/rachna_4.php3
http://www.indianmba.com/Faculty_Column/FC397/fc397.html
http://iimk.ac.in/GCabstract/Shilpa%20Surana.pdf
bank mergers-possibilities and preparation by meera Sharma.pdf
http://ssrn.com/abstract=1008717 jay Mehta and ram kumar kakani motives for m&a
www.mckinsey.com/locations/india/mckinseyonindia/pdf/India_Banking_2010.pdf
www.ficci.com/.../banking/Session%20III/Presentation%20to%20FICCI%20on%20M&Adraft%
20version-v7final.ppt
www.crisil.com/crisil-young-thought-leader-2006/dissertations/Nitin-Dhawan_Dissertation.pdf
http://medcindia.org/cgi-bin/Sept06/Banking%20&%20Finance.HTM
www.rediff.com
www.indiastat.com
www.rbi.org.in
www.hindubusinessline.com
http://mpra.ub.uni-muenchen.de/1266/
http://www.indianexpress.com/story/13847.html
Centurion bank investor presentation.pdf
Press release by centurion bank on 12th Jan 2006
myiris.com/shares/research/ESSBL/CENBANK_20071031.pdf
http://sify.com/finance/fixedincome/fullstory.php?id=14288405
http://economictimes.indiatimes.com/Banking/Centurion_Bank_of_Punjab_to_merge_with_HDFC_B
ank/articleshow/2802712.cms
times of india.indiatimes.com/articleshow/1156032.cms
www.vodafone.com
183
With the help of mergers and acquisitions in the banking sector, the banks can achieve significant
growth in their operations and minimize their expenses to a considerable extent. Another important
advantage behind this kind of merger is that in this process, competition is reduced because merger
eliminates competitors from the banking industry.
Mergers and acquisitions in banking sector are forms of horizontal merger because the merging
entities are involved in the same kind of business or commercial activities. Sometimes, non-banking
financial institutions are also merged with other banks if they provide similar type of services.
Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in the
banking sector. They also try to enhance their customer base.
In the context of mergers and acquisitions in the banking sector, it can be reckoned that size does
matter and growth in size can be achieved through mergers and acquisitions quite easily. Growth
achieved by taking assistance of the mergers and acquisitions in the banking sector may be described
as inorganic growth. Both government banks and private sector banks are adopting policies for
mergers and acquisitions.
In many countries, global or multinational banks are extending their operations through mergers and
acquisitions with the regional banks in those countries. These mergers and acquisitions are named as
cross-border mergers and acquisitions in the banking sector or international mergers and acquisitions
in the banking sector. By doing this, global banking corporations are able to place themselves into a
dominant position in the banking sector, achieve economies of scale, as well as garner market share.
184
Mergers and acquisitions in the banking sector have the capacity to ensure efficiency, profitability and
synergy. They also help to form and grow shareholder value.
In some cases, financially distressed banks are also subject to takeovers or mergers in the banking
sector and this kind of merger may result in monopoly and job cuts.
Deregulation in the financial market, market liberalization, economic reforms, and a number of other
factors have played an important function behind the growth of mergers and acquisitions in the
banking sector. Nevertheless, there are many challenges that are still to be overcome through
appropriate measures.
Mergers and acquisitions in banking sector are controlled or regulated by the apex financial authority
of a particular country. For example, the mergers and acquisitions in the banking sector of India are
overseen by the Reserve Bank of India (RBI).
185
186
The merger of AmSouth Bancorporation with Regions Financial Corporation and the name of the
newly formed entity is Regions Financial Corporation.
The merger of LaSalle Bank with Bank of America and the new entity formed is called as Bank of
America.
The merger of Mellon Financial Corporation with Bank of New York Company, Inc. and the newly
merged entity is known as Bank of New York Mellon.
Merger waves
The economic history has been divided into Merger Waves based on the merger activities in the
business world as:
Period
1889 1904
1916 1929
1965 1989
1992 1998
2000 -
Name
Facet
First Wave
Horizontal mergers
Second Wave
Vertical mergers
Third Wave
Fourth Wave
Fifth Wave
Cross-border M&A
In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals
cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirers.
187
The rise of globalization has exponentially increased the market for cross border M&A. In 1997 alone
there were over 2333 cross border transactions worth a total of approximately $298 billion. This rapid
increase has taken many M&A firms by surprise because the majority of them never had to consider
acquiring Due to the complicated nature of cross border M&A, the vast majority of cross border
actions have unsuccessful anies seek to expand their global footprint and become more agile at
creating high-performing businesses and cultures across national boundaries.[7]
Even mergers of companies with headquarters in the same country are very much of this type (crossborder Mergers). After all,when Boeing acquires McDonnell Douglas, the two American companies
must integrate operations in dozens of countries around the world. This is just as true for other
supposedly "single country" mergers, such as the $29 billion dollar merger of Swiss drug makers
Sandoz and Ciba-Geigy (now Novartis).
188
Rank
Year
Purchaser
Purchased
Transaction
value
(in
mil. USD)
1999
Vodafone Airtouch
PLC[8]
Mannesmann
183,000
1999
Pfizer[9]
Warner-Lambert
90,000
1998
Exxon[10][11]
Mobil
77,200
1998
Citicorp
Travelers Group
73,000
1999
SBC
Communications
1999
Vodafone Group
Ameritech
Corporation
AirTouch
Communications
1998
Bell Atlantic[12]
GTE
53,360
1998
BP[13]
Amoco
53,000
1999
Qwest
Communications
US WEST
48,000
10
1997
Worldcom
MCI
Communications
42,000
63,000
60,000
Year
Purchaser
Purchased
Transaction value
189
2000
Time Warner
164,747
2000
2004
2006
AT&T Inc.[16][17]
2001
Comcast
Corporation
SmithKline
Beecham Plc.
Shell Transport &
Trading Co
BellSouth
Corporation
AT&T Broadband
& Internet Svcs
2009
Pfizer Inc.
Wyeth
2000
Spin-off:
Networks
Corporation
2002
Pfizer Inc.
Pharmacia
Corporation
59,515
2004
58,761
10
2008
Inbev Inc.
Anheuser-Busch
Companies, Inc
52,000
75,961
74,559
72,671
72,041
68,000
Nortel
59,974
Fairness opinion
International Financial Reporting Standards
IPO
List of bank mergers in United States
Management control
Management due diligence
Merger control
Merger integration
Merger simulation
Second request
Shakeout
Tulane Corporate Law Institute
Venture capital
Vermilion Partners Ltd
MDM Bank
MDM Bank
Type
JSC
Industry
Founded
1993
Headquarters
Moscow, Russia[1]
Products
Financial Services
Website
www.mdmbank.com
191
MDM Bank (Russian: ) is a Russian Joint Stock commercial bank, one of Russia's largest
private banks based in Moscow. As of August 2009, the bank completed a merger with Novosibirskbased URSA Bank. The new bank will operate under MDM Bank brand name, but the merger is
actually structured as an acquition of MDM by URSA. The new corporate headquarters will be bases
in Novosibirsk. The merger was announced in December 2008;[2] MDM and URSA estimated that the
new MDM Bank would have capital of 2.5 billion and total assets of 18.7 billion US dollars, although
in practise the numbers ended up being somewhat lower.[3]
Igor Kim, chairman and shareholder of URSA, has been the new bank's chief executive officer during
the transition period; Oleg Vyugin chairs the board of the bank's holding company and the former
MDM CEO Igor Kuzin is chief executive of the holding company.[2]
MDM Bank was founded in December 1993 and holds a General Banking License issued by the
Central Bank of Russia (#2361 dated 13 February 2003, which will be voided as the bank migrates
under URSA Bank license #323).[4] It had one of the highest credit ratings among privately-owned
Russian banks Standard & Poor's (BB, stable), Fitch Ratings (BB, stable) and Moody's (Ba1, stable)
and is the only Russian financial organization that has been given a public corporate governance
rating by Standard & Poor's (6+).
URSA Bank was founded in 1990 as Sibakadembank by the Siberian Branch of Russian Academy of
Sciences. It was restructured from a privately held bank to a joint-stock bank in 1997. After a series of
mergers with local Siberian banks, in 2006 Sibakadembank merged with Yekaterinburg-based
Uralvneshtorgbank (established 1991) and assumed the new name, URSA Bank.
References
1. ^ HQ moves to Novosibirsk in the process of merger with URSA Bank
2. ^ a b "Russias MDM, Ursa Merge as Credit Crisis Deepens". Bloomberg. 2008, December 3.
http://www.bloomberg.com/apps/news?pid=20601085&sid=atC5jgxI4SN4&refer=europe. Retrieved
2009-06-18.
3. ^ "Capital from MDM-Bank, URSA merger to reach $2.5 bln". RIA Novosti. 2008, December 3.
http://en.rian.ru/business/20081203/118663584.html. Retrieved 2009-06-18.
4. ^ "MDM Bank EGM Approves Merger with URSA Bank". MDM Bank. 2009, May 8.
http://www.mdmbank.com/articles/42924/2326/news-material. Retrieved 2009-06-18.
192
193