INTRODUCTION

This project is about the mergers and acquisitions in banking industry. A merger occurs
when two companies combine to form a single company. A merger is very similar to an
acquisition or takeover, except that in the case of a merger existing stockholders of both
companies involved retain a shared interest in the new corporation. By contrast, in an
acquisition one company purchases a bulk of a second companys stock, creating an uneven
balance of ownership in the new combined company.

Recent years have also brought about a change in the nature and quality of
employment in the sector. As far as retail banking is concerned, most of the Indian private
sector banks are becoming more aggressive. They are following the acquisition route for
getting more and more retail customers. During the last few years the Indian Banking system
has witnessed some very high profile mergers, such as the merger of ICICI Ltd. with its
banking arm ICICI Bank Ltd. the merger of Global Trust Bank with Oriental Bank of
Commerce and more recently the merger of IDBI with its banking arm IDBI Bank Ltd.

Basically, a merger involves a marriage of two or more banks. It is generally accepted

that mergers promote synergies. This project is all about the factors motivating mergers and
acquisitions, its procedure, its impact on employment, working condition & consumer, its
obstacles and the examples of mergers and acquisitions of banks in India.

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 SIGNIFICANCE OF STUDY

With the globalization of the world economy, companies are growing by merger and
acquisition in a bid to expand operations and remain competitive. The complexity of such
transactions often makes it difficult to assess all risk exposures and liabilities, and requires the
skills of a specialist advisor.
Banks are facing an increasingly competitive business environment, which is driving
them to constantly improve services and increase efficiency. Growth by cross-border Mergers
and Acquisitions (M&A) is one way for them to respond to this challenge, but a number of
serious obstacles still hamper this kind of expansion.

Mergers and acquisitions (M&As), joint ventures (JVs) and other forms of strategic
alliances have recorded a tremendous growth in recent years.
Acquisitions have become a generic strategy for many companies.
To drive the global economy and control
Facilitate synergies between merged organizations,
Generate efficiency improvements and increase competitiveness.
Indeed, they hold that mergers, by increasing economies of scale and spreading costs over
a larger customer base, enable financial operators to provide services at lower prices.
If mergers improve efficiency, then larger, combined firms may be expected to pass some
savings on to consumers through lower prices or improved service.

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 Many financial executives argue that preventing consolidation and the efficiency gains
M&As make possible would be tantamount to forcing enterprises to engage in social
policy through retaining unnecessary levels of employment and preserving distribution
outlets that would be redundant in the event of a merger. They therefore believe that
M&As are part of necessary restructuring to improve efficient use of resources which
can only be beneficial for long-term employment.
The basic argument that M&As increase shareholder value through exploitation of
synergies is based on the assumption that the combined organization can be operated in a
way that generates greater value than would be the sum of the value generated by the
stand-alone companies (the 2+2>4 equation).
Mergers and acquisitions (M&As) are driving most profit-making sectors towards
consolidation and concentration and nowhere is this more true than in the financial
services sector.

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 REVIEW OF EXISTING LITERATURE

Merger Review Process - A must for successful consolidation in the Banking Industry
Kishor Mundargi
The Shamrao Vithal Co-operative Bank Ltd.
Mumbai
While considering any proposal for merger of banks, it will be necessary to evaluate
the impact of the merger on the safety and soundness of the banking system. There is a
definite need to develop a merger review process and to identify the authority that will be
responsible for conducting the merger review process.

The Impact of Mergers and Acquisitions on the Stakeholders of Banking Sectors.

Dr. S. Hasan Banu,
Reader
H.K.R.H. College
Uthamapalayam

Consolidation through mergers and acquisition is considered one of the best ways of
restructuring for effectively facing the competitive pressures. Mergers are only one of the
alternatives for restructuring of the financial sector and there could be better and more
advantageous option to leverage optimum utilization of bank stakeholders.
Consolidation in Banking Industry through Mergers and Acquisitions: Corporate Restructuring
Widens
Ms. Shallu Singh Lobana
Lecturer, Guru Nanak Girls College,Ludhiana

The factors favouring growth, enrichment and renovation should be taken into due
consideration before stepping into the process of M&As so that Indian Banking Industry will
be able to stand right forth the global banking competition hurricane.

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 CONCEPTUALIZATION

The phrase mergers and acquisitions or M&A refers to the aspect of corporate finance
strategy and management dealing with the merging and acquiring of different companies as
well as other assets. Usually mergers occur in a friendly setting where executives from the
respective companies participate in a due diligence process to ensure a successful combination
of all parts. Historically, though, mergers have often failed to add significantly to shareholder
value.
Although the economic consideration are similar for both Mergers & Acquisitions but
the legal procedure involved in Mergers and Acquisitions are different

A) Mergers: The term merger or amalgamation refers to a combination of two or more

corporate (in this case banks) into a single entity. Mergers are governed by companies Act, the
court & law.

B) Acquisition: This may be defined as an act of acquiring effective control by one

corporate over the assets or management of the other corporate without any combination of
both of them. Acquisitions are a regulated activity by SEBI.

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 FOCUS OF THE PROBLEM

The research problem focuses in identifying various market leading banks in banking
industry. Now a day in India so many banks are emerging and are giving tough competition to
the existing banks. Because of this increased competition, sometimes the banks are merged to
give better quality and provide better services.

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 INTRODUCTION TO FINANCIAL SERVICES

Financial services support employment in two ways: as a source for high-quality

employment and through a pivotal role in providing credit to other sectors.

A well-functioning financial sector is essential in financing the operations of an

economy through both intermediation (borrowing money from one sector to on-lend to
another) and through auxiliary services such as securities broking and loan flotation, where
financial enterprises arrange the processes of funding but do not step between the borrower
and lender.

The institutions, services and products that comprise the financial sector vary from
country to country, but generally include: the central bank; depository organizations such as
banks, building societies or mortgage banks; credit unions or cooperatives; insurance and
pension funds; general financiers; cash management firms; and others engaged in financial
intermediation. The last category might include securitizes, investment companies, leasing
companies, hire purchase and the provision of personal and consumer credit. In some
instances, a wider perspective needs to incorporate not only the finance sector but also the
business services that support its operation.

The financial system in any country has three overlapping components financial
enterprises (such as banks) and regulatory authorities; the financial markets (for instance, the
bond market) and their participants (issuers and investors); and the payment system cash,
cheque and electronic means for payments and its participants (e.g. banks).

Financial institutions mainly engage in intermediation and provision of financial

services for example, by taking deposits, borrowing and lending, supplying all types of
insurance cover, leasing and investing in financial assets. Banks in most countries are the
largest deposit-takers and financial services providers, but the market shares and power of
other organizations like insurance companies is increasing. Banks and insurers are also among
the largest and most profitable enterprises in both domestic and global markets.

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 THE INDIAN BANKING SYSTEM

Under the Reserve Bank of India Act, 1934, banks were classified as scheduled banks
and non-scheduled banks. The scheduled banks are those, which are entered, in the Second
Schedule of RBI Act, 1934. Such banks are those, which have a paid-up capital and reserves
of an aggregate value of not less than Rs. 5 lacs and which satisfy RBI that their affairs are
carried out in the interest of their depositors. All commercial banks- Indian and Foreign,
regional rural banks and state co-operative banks-are Scheduled banks. Non-Scheduled banks
are those, which have not been included in the Second Schedule of the RBI Act, 1934. The
organized banking system in India can be broadly divided into three categories:
(i) Commercial banks,
(ii) Regional Rural Banks and
(iii) Co-operative banks.
The Reserve Bank of India is the supreme monetary and banking authority in the
country and has the responsibility to control the banking system in the country. It keeps the
reserves of all commercial banks and hence is known as the Reserve Bank.
Commercial Banks has been in existence for many decades. Commercial banks
mobilize savings in urban areas and make them available to large and small industrial and
trading units mainly for working capital requirements. After 1969 commercial banks are
broadly classified into nationalized or public sector banks and private sector banks.
Current Scenario:
The Indian Banking industry has been undergoing rapid changes reflecting a number of
underlying changes. Liberalization and deregulation witnessed in the Indian markets in the
1990s have resulted in a spurt in banking activity in India. Significant advances in
communication have enabled banks to expand their reach, both in terms of geography covered
as well as new products introduced. With increased competition in wholesale banking due to
the entry of foreign banks and new private sector banks, the sector has witnessed a squeeze in
margins.
This has led to banks increasing their focus on retail banking so as to obtain access to
low cost funds and to expand into relatively untapped, potential growth areas. Banks and
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financial institutions are thus continuously exploring new avenues for increasing their
footprint and safeguarding their margins. Competition from multinational banks and entry of
new private sector banks has rewritten the rules of the retail lending business in India.
Slow growth in corporate lending, pressure on corporate spreads due to competition
and concerns over asset quality have induced public sector banks to follow the private sector
banks in placing emphasis on growth through expansion of retail portfolio. The Indian retail
lending market is relatively unexplored with the per-capita usage of retail product offerings
such as housing finance, credit cards, auto loans, consumer finance, etc. lower as compared to
Asian peers. Also the relative size of the Indian market, backed by factors such as a growing
population of bankable households, low penetration rate for retail finance products and the
increased propensity of the urban populace to take credit, offers scope for expansion.

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 MERGERS & ACQUISITIONS

A merger occurs when two companies combine to form a single company. A merger is
very similar to an acquisition or takeover, except that in the case of a merger existing
stockholders of both companies involved retain a shared interest in the new corporation. By
contrast, in an acquisition one company purchases a bulk of a second companys stock,
creating an uneven balance of ownership in the new combined company.

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 Difference between Merger and Acquisition

Basically, there is no difference between merger and acquisition. Both relate to an investment
in acquisition of a bank/company. The difference lies only in the operational process of
acquisition. In merger, one bank gets merged with the other losing its own identity by way of
share transactions/asset/liability transfers. In acquisition/takeover, one company/a group of
companies acquires the controlling interest on ownership of capital without making any
corporation to lose its own individual identity.
But in the eyes of law, the operational process marks a big difference. While merger is
covered regulated/covered by the Companies Act, 1856, the acquisition/takeover is
regulated/covered by the takeover norms prescribed by SEBI. As such, the process is
supervised by the High Court and the Registrar of Companies, while the process of
acquisition/takeover is undertaken as per norms of SEBI.
Merger refers to finding an acceptable partner, determining upon how to pay each
other and ultimately creating a new company, which is a combination of both the companies.

Acquisition refers to buying out another company and taking it into the fold of the
acquiring company. This is done by paying the acquired company, the value of its capital and
depending upon the circumstances, a premium over the capital amount.

Acquisitions and mergers both involve one or multiple companies purchasing all or
part of another company. The main difference between a merger and an acquisition is how
they are financed.

Mergers are often financed by a stock swap, in which the owners of stock in both
companies receive an equal quantity of stock in the new company. Mergers are also known as
"merger of equals, meaning that both companies are about equivalent.

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On the other hand, the term "acquisition" is used to refer to two unequal companies becoming
one (one is bigger than the other). Financing can involve a cash and debt combination, all
cash, stocks or other equity of the company.
Mergers and acquisitions can lead to reductions in costs for a variety of reasons.
Consolidation can lead to increased revenues through its effects on firm size, firm scope or
market power.

The Basics: -
If marriages are made in heaven, you need a lot of important people who would
facilitate them. Our interest in any marriage would be limited to the fun and frolic associated
with it. Believe me, corporate marriages are not fun. The mega-buck, mega-sized deals
make or break the company, enrich or pauperize investors, and ultimately may or may not
change the way business was done.

Basically, a merger involves a marriage of two or more banks. It is generally accepted

that mergers promote synergies. The basic idea is that the combined bank will create more
value than the individual banks operating independently. Economists refer to the phenomenon
of the 2+2 = 5 effect brought about by synergy. The resulting combined entity gains from
operating and financial synergies.

Operational synergies generally refer to gains in economies of scale and economies of

scope. Economies of scale refer to the lower operating costs (per-unit) arising from spreading
the fixed costs over a wider scale of production and economies of scope refer to the utilization
of skill assets employed in the production in order to produce similar products or services. In a
combined entity, the skill used to produce separate and limited results will be used to produce
results on a wider scale.
Additionally, financial synergies refer to the effect of a merger on the financial
activities of the resulting company. The cash flows arising from the merger are expected to
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present opportunities in respect of the cost of financing and investment. The argument is that
combining two banks gives rise to savings in costs, maximization in the use of resources and
increase in revenues.
Similarly mergers and takeovers also play a crucial role in efficient allocation of
resources.

The value of worldwide M&As has grown dramatically during the past two decades
(1980-99), at the rate of 42 per cent a year. In 1999, their completed value was about $2.3
trillion, representing 24,000 deals.

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 MERGERS & ACQUISITIONS: VALUATION

Investors in a company that is aiming to take over another one must determine whether the
purchase will be beneficial to them. In order to do so, they must ask themselves how much the
company being acquired is really worth. Naturally, both sides of an M & A deal will have
ideas about the worth of a target company: its seller will tend to value the company at as high
of a price as possible, while the buyer will try to get the lowest price that he can. There are,
however, many legitimate ways to value companies. The most common method is to look at
comparable companies in an industry, but dealmakers employ a variety of other methods and
tools when assessing a target company. Here are just a few of them:
1. Comparative Ratios - The following are two examples of the many comparative
metrics on which acquiring companies may base their offers:

Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring
company makes an offer that is a multiple of the earnings of the target company.
Looking at the P/E for all the stocks within the same industry group will give the
acquiring company good guidance for what the target's P/E multiple should be.

Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company

makes an offer as a multiple of the revenues, again, while being aware of the price-to-
sales ratio of other companies in the industry.

2. Replacement Cost - In a few cases, acquisitions are based on the cost of replacing the
target company. For simplicity's sake, suppose the value of a company is simply the
sum of all its equipment and staffing costs. The acquiring company can literally order
the target to sell at that price, or it will create a competitor for the same cost. Naturally,
it takes a long time to assemble good management, acquire property and get the right
equipment. This method of establishing a price certainly wouldn't make much sense in
a service industry where the key assets - people and ideas - are hard to value and
develop.
3. Discounted Cash Flow (DCF) - A key valuation tool in M&A, discounted cash flow.

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 Synergy: The Premium for Potential Success

For the most part, acquiring companies nearly always pay a substantial premium on the
stock market value of the companies they buy. The justification for doing so nearly always
boils down to the notion of synergy; a merger benefits shareholders when a company's post-
merger share price increases by the value of potential synergy. Let's face it, it would be highly
unlikely for rational owners to sell if they would benefit more by not selling. That means
buyers will need to pay a premium if they hope to acquire the company, regardless of what
pre-merger valuation tells them. For sellers, that premium represents their company's future
prospects. For buyers, the premium represents part of the post-merger synergy they expect can
be achieved. The following equation offers a good way to think about synergy and how to
determine whether a deal makes sense. The equation solves for the minimum required
synergy:

In other words, the success of a merger is measured by whether the value of the buyer is
enhanced by the action.

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 TYPES OF MERGERS

1. Horizontal Mergers
2. Vertical Mergers
3. Conglomerate Mergers

Horizontal Mergers

This type of merger involves two firms that operate and compete in a similar kind of
business. The merger is based on the assumption that it will provide economies of scale from
the larger combined unit.

Vertical Mergers

Vertical mergers take place between firms in different stages of production/operation,

either as forward or backward integration. The basic reason is to eliminate costs of searching
for prices, contracting, payment collection and advertising and may also reduce the cost of
communicating and coordinating production. Both production and inventory can be
improved on account of efficient information flow within the organization.

Unlike horizontal mergers, which have no specific timing, vertical mergers take place
when both firms plan to integrate the production process and capitalize on the demand for the
product. Forward integration take place when a raw material supplier finds a regular procurer
of its products while backward integration takes place when a manufacturer finds a cheap
source of raw material supplier.

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 Conglomerate Mergers

Conglomerate mergers are affected among firms that are in different or unrelated business
activity. Firms that plan to increase their product lines carry out these types of mergers. Firms
opting for conglomerate merger control a range of activities in various industries that require
different skills in the specific managerial functions of research, applied engineering,
production, marketing and so on. This type of diversification can be achieved mainly by
external acquisition and mergers and is not generally

possible through internal development. These types of mergers are also called concentric
mergers. Firms operating in different geographic locations also proceed with these types of
mergers. Conglomerate mergers have been sub-divided into:

Financial Conglomerates
Managerial Conglomerates
Concentric Companies

Financial Conglomerates

These conglomerates provide a flow of funds to every segment of their operations,

exercise control and are the ultimate financial risk takers. They not only assume financial
responsibility and control but also play a chief role in operating decisions. They also:

Improve risk-return ratio

Reduce risk
Improve the quality of general and functional managerial performance
Provide effective competitive process
Provide distinction between performance based on underlying potentials in the product
market area and results related to managerial performance.

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Managerial Conglomerates

Managerial conglomerates provide managerial counsel and interaction on decisions

thereby, increasing potential for improving performance. When two firms of unequal
managerial competence combine, the performance of the combined firm will be greater than
the sum of equal parts that provide large economic benefits.

Concentric Companies

The primary difference between managerial conglomerate and concentric company is

its distinction between respective general and specific management functions. The merger is
termed as concentric when there is a carry-over of specific management functions or any
complementarities in relative strengths between management functions.

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 TYPES OF ACQUISITION

1. Friendly Takeover
2. Hostile Takeover

Friendly Takeover

The acquiring firm makes a financial proposal to the target firms management and
board. This proposal might involve the merger of the two firms, the consolidation of two
firms, or the creation of parent/subsidiary relationship.

Hostile Takeover

A hostile takeover may not follow a preliminary attempt at a friendly takeover. For
example, it is not uncommon for an acquiring firm to embrace the target firms management in
what is colloquially called a bear hug.

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 MERGERS & ACQUISITIONS IN BANKING SECTOR

As far as retail banking is concerned, most of the Indian private sector banks are
becoming more aggressive. They are following the acquisition route for getting more and
more retail customers, NPAs notwithstanding. So do you think you are fighting an uneven
battle, because firstly the rules do not allow you to acquire Indian banks and secondly, there
are restrictions on the number of branches you can open. The only way to expand in India will
be to acquire a foreign bank overseas (which has operations in India), like you bid for ANZ.
During the last few years the Indian Banking system has witnessed some very high
profile mergers, such as the merger of ICICI Ltd. with its banking arm ICICI Bank Ltd. the
merger of Global Trust Bank with Oriental Bank of Commerce and more recently the merger
of IDBI with its banking arm IDBI Bank Ltd.
The Union Finance Minister, P.Chidambaram gave an inkling of the governments
stance on mergers in the banking sector when he stated that The Government would
encourage consolidation among banks in order to make them globally competitive. The
Government will not force consolidation, but if two banks want to consolidate, we would
encourage them. We will encourage them if it helps banks grow in size, scale and muscle so
that they can compete globally. To facilitate such mergers, a small amendment to the Income-
tax Act would be made during the budget session of Parliament next year. Similarly, banks
would be encouraged to go to the market to raise resources.
The above statement of the Honorable Finance Minister has to be understood in the
context of the Basel II Accord, which was proposed in June 1999 by the Basel Committee on
Banking Supervision. As per the Quantitative Impact Study published by the Basel Committee
in May 2003, there would be an increase in capital requirements by 12% for banks in
developing countries on implementation of the Basel II Accord. Mergers among banks will be
one of the ways to increase market power and thereby increase the revenue generation of
banks, which would in turn enable them to access the capital market to raise funds and meet
the increased capital requirement.

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 Banks are introducing Automated Teller Machine (ATM) cards and, lately, debit cards
as well. This promises to change the face of banking forever. 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 the other hand
the 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. 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 . 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. Foreign banks are likely to succeed in their
niche markets and be the innovators in terms of technology introduction in the domestic
scenario. 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

21
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.

In India, we have four category of banking players

Public sector banks,

Old private sector banks
New private sector banks and
Foreign banks.
These four categories in terms of asset size as of March 31, 2004, namely;

(a) There are 6 banks whose assets size is higher than Rs. 80,000 crores and such
banks constitute 50% of the overall total assets of the industry

(b) 15 banks whose assets size is greater than Rs. 25,000 crores and below Rs.
80,000 crores constitute 32% of the total assets

(c) 15 banks, whose assets size between Rs.10,000 crores and below Rs. 25,000
crores constitute 14% and

(d) There are 12 banks whose assets size below Rs.10,000 crores constitute only
4%.

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From this, it is apparent a few banks managing a larger proportion of total banking assets are
evident.

Emergence of Two Scenarios

There could be two basic banking structures that could emerge. The first structure
involves a big bank taking over a smaller bank or a group of smaller banks. Whereas in the
second structure could involve a merger of group of mid-sized banks to form a larger
institution.
The first structure is a perfect fit for the new private sector bank taking over an old
smaller bank or a group of small banks. In the second structure, a group of midsize public
sector banks going for a merger.
The primary advantage of the first structure could be seen as the creation of a larger
branch network. Whereas it could be argued that the merger of a group of small sized banks as
envisaged in the second structure is still insufficient to create institutions that are regionally
competitive and may require further consolidation.

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First Structure Consolidation within the Private Sector

We are assuming here an existing new private sector bank taking over a smaller bank
or a group of smaller banks. When we look at the table, it is apparent that ICICI Bank emerges
as the largest player in the private sector bank. There is always a possibility for HDFC Bank to
merge with HDFC Ltd. and hence it could be reckoned as another large player.
When we look at the next category of asset size between Rs.10,000 - Rs. 25,000 crores,
we have only four players, namely; UTI Bank, Federal Bank, Indusind Bank and IDBI Bank.
There is already the merger announcement of IDBI Bank with IDBI Ltd. UTI has significant
holding in UTI Bank and the possibility of UTI Bank merging with IDBI or any of the
nationalized banks. Hence there is a need for the remaining 16 banks to look at the options
growth in size. Either larger bank could absorb them or these small banks could group together
and merge.
The scenario that could emerge will be that each of new private sector banks, such as
ICICI Bank, HDFC Bank, merged entity of IDBI Bank absorbing 4 or 5 old private sector
banks. Even some foreign banks, when they are permitted will be interested in this route. From
the list of 20 odd private sector banks, we could see not more than 5 banks to survive after 3 or
4 years. Consolidation is inevitable.

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25
Second Structure Consolidation within the Nationalized Banks/PSU Banks

A) Consolidation within the SBI group

The consolidation within the SBI group is always on the cards. The group is already in
the process of integrating treasury practices. Similarly, the group will be integrating risk
management practices. SBI group as one entity in the future will become a largest bank in the
country.
The combined entity of the SBI group is currently holding close to one-third of the
market share. SBI is already a player who is well positioned to be on the global map. It is
important for the group not to loose the market share.

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B) Consolidation within the Nationalised Banks
A cluster approach could emerge in the case of nationalised banks. There are five
banks with size of over Rs. 80,000 crores. Each of the banks could look at absorbing one bank
in the size category of Rs. 25,000-80,000 crores. In addition, they could absorb one bank with
size less than Rs. 25,000 crores. The ideal scenario that will merge will be that not more than
five banks among the nationalized banks to remain in the long run. The process of M&A is
comparatively easier for the Nationalised banks as the controlling interest is with the
Government.

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 FACTORS DRIVING M&A

Supporters of M&As allege that they facilitate synergies between merged

organizations, generate efficiency improvements and increase competitiveness. Indeed, they
hold that mergers, by increasing economies of scale and spreading costs over a larger
customer base, enable financial operators to provide services at lower prices.

Demonstrating that M&As improve efficiency is thus central to making the case for the
consumer benefits of mergers and in assessing their potential impact on consumers. If
mergers improve efficiency, then larger, combined firms may be expected to pass some
savings on to consumers through lower prices or improved service.

If mergers are primarily cost-cutting exercises, involving job cuts and branch closures,
the impact on consumers is most likely to be a lowering in the quantity and quality of
services; individuals are affected by branch closures in rural regions and low-income urban
neighbourhoods and have to bear the brunt of a generalized decline in quality resulting from
reduced effort in certain product lines or service modes (e.g. teller service, cheque-cashing,
transaction and other basic services). Those opposing financial sector M&As strongly contest
their consumer gains and maintain that they only result in employment losses and
diminishing access to services. Claims that small businesses generally agreed to generate
most employment worldwide also benefit from mergers have met with considerable
skepticism among those businesses themselves.

Broadly there are five reasons that drive mergers viz.

(a) Economies of scale,
(b) Economies of scope
(c) Potential for risk diversification
(d) Personal incentives of management and
(e) Public policy, e.g., a desire to have a small number of global players rather than a large
number of local players.

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Dominant Factors

A number of issues emerge in the consideration of the expected continuation of bank M&A
activity. High on the list is what factors are likely to dominate in future
bank mergers and acquisitions. In their 1996 article, Spiegel and Gart compiled a list of factors
motivating bank merger and acquisition activity:

(a) Revenue growth from a larger customer base

(b) Efficiencies in operations
(c) Ability to spread fixed costs over a larger customer base
(d) Diversification of income from both products and geographic area
(e) Stabilization of asset quality
(f) Optimal deployment of excess capital and
(g) The search for higher value of common shares

29
A) Revenue enhancement
Consolidation can lead to increased revenues through its effects on firm size, firm
scope (through either product or geographic diversification), or market power. Research
suggests that mergers may provide some opportunities for revenue enhancement either from
efficiency gains or from increased market power. However, many indicated that revenue
enhancement due to increased size was a moderately important factor motivating
consolidation. The merger of ICICI Limited and ICICI Bank clearly demonstrate in the Indian
context that consolidation can lead to increased revenue.

B) Efficiencies in operations
Mergers and acquisitions can lead to reductions in costs for a variety of reasons. The
existing research literature, which focuses on cost savings attributable to economies of scale,
economies of scope, or more efficient allocation of resources, fails to find much evidence
suggesting that cost savings constitute an important outcome of mergers and acquisitions.
However, many pointed to economies of scale as a very important motivating factor for
consolidations.

C) Ability to spread fixed costs over a larger customer base

New technological developments have encouraged consolidation because of their high
fixed costs and the need to spread these costs cross a large customer base. At the same time,
dramatic improvements in the speed and quality of communications and information
processing have made it possible for financial service providers to offer a broader array of
products and services to larger numbers of clients over wider geographic areas than had been
feasible in the past.

D) Diversification of income from both products and geographic areas

The one area where consolidation seems most likely to reduce firm risk is the potential
for diversification gains, although even here the possibilities are complex. Such gains are most
likely to arise due to asset diversification across geographies; some gains may also derive from
geographic diversification on the liabilities side of the balance sheet. In addition,

30
diversification gains may result from consolidation across financial products and services. On
the other hand, after consolidation some firms shift towards riskier asset portfolios, and
consolidation may increase operating risks and managerial complexities. For example,
organizational diseconomies may occur as financial institutions become larger and more
complex if senior management teams stray far from their areas of core competency. More
broadly, there is no guarantee that cost savings or efficiency gains will be realized.

E) Stabilization of Asset Quality

Small sized banks with weaker assets would find it difficult to survive in the long run
as they need to meet the additional capital requirements. The exit route for such banks will be
to get absorbed by banks with strong asset quality. In the developed economies, the average
NPA levels are at a level of 1-2 per cent and the average for the Indian context around 2.5 per
cent is within the acceptable range. The average NPA level for the banks whose size lesser
than Rs.10,000 crores is around 4.98 per cent, which is substantially high. Weaker asset
quality necessitates infusion of additional capital and hence stabilization of asset quality is
important.
F) Changing environment Capital allocation using Basel II framework, require a huge
cost outlay
Reserve Bank of India has indicated the desire that banks must move towards adopting
Standardized approach for credit risk management and Basic Indicator approach for
operational risk management as per Basel II framework. Effective credit risk assessment is
fundamental in banking. And it is an especially important skill in India where credit ratings
and traded security prices are less available as additional information for credit risk managers.
There is very limited data on default histories. Even if there were data, calculating the key
variables of Basel II default probabilities, loss given default and so on would not provide a
good guide to the current situation, because the economic environment in which banks operate
has changed so much since the mid-1990s.

31
 In fact, Basel II expects banks to assess those parameters Default probabilities and loss
given default are terms used in the context of Basel IIs Pillar one, the minimum capital
requirements. Basel II, however, is more than just its Pillar 1. It is based on three pillars. An
important innovation of Basel II is the incorporation of supervisory review into the
international framework. This is the second Pillar. It is critical that the minimum capital
requirements set out in the first Pillar be accompanied by a robust implementation of a
supervisory review process, including efforts by banks to assess their capital adequacy. This is
expected to result in bankers and regulators engaging in more focused discussions of risk
management. Pillar 2 recognizes that national supervisors may have different ways of
entering. In view of the much higher complexity of the Basel Accord regime, the cost of
setting up an appropriate Basel II compliant risk control system is likely to be a formidable
challenge for both banks and regulators. In other words, the first impact of the reform in the
New Accord which supposedly is intended to improve the banks capital adequacy could
possibly be to erode a substantial share of such capital. The question of costs resulting
particularly from implementation of the first two pillars of the New Accord could impact even

32
more acutely on small banks in a number of ways. Thus, it is likely that the adoption by banks
of the more sophisticated approaches found in the New Accord could require a huge cost
outlay especially if the concept of internal ratings is a new one for these banks. At the same
time the issue of cost-effectiveness in this regard cannot be ignored. Would it be feasible for
local banks in India to go for the more advanced approaches if the benefits of doing so are not
so marked? Further to this, the need for additional human resources in the supervisory
functions could penalize particularly small banks where technically proficient personnel are
relatively scarce. While budgeting huge cash outlay is inevitable, the size of total assets of the
bank plays a critical for spreading the fixed cost over a larger size of assets.
Hence, under the changing environment of implementing Basel II framework, the
small banks tend to loose out their competitiveness. The way out of this situation is to go for
consolidation and this would ensure creating shareholder value as against destroying
shareholder value if no action is taken. on the basis of a long period of time, preferably
through a full economic cycle. In such circumstances, the skills of credit risk managers are
very important.

G) Search for higher value of shares

Increased competition has helped to squeeze profit margins, resulting in shareholder
pressure to improve performance. Importantly, shareholders have gained power relative to
other stakeholders in recent years. This development is expected to continue, as it is the result
of a structural move towards the institutionalization of savings. The bank has to remain rich in
order to enhance the credibility among the various stakeholders. There are several parameters
under which one could measure whether the business is really creating shareholder value. One
such important parameter is the profitability of the overall business. It is not enough that Net
Interest Margin is high, lower NPA, etc., but in addition the shareholder looks at earnings per
share accretion year on year. It is interesting to note that almost all sizes of banks are
generating profit and hence the shareholder interest is currently taken care of completely.
However, the equity market has reacted differently for different type of banking categories.

33
PROCESS OF MERGER & ACQUISITION

34
 The entire merger process is usually kept secret from the general public, and often
from the majority of the employees at the involved companies. Since the majority of merger
attempts do not succeed, and most are kept secret, it is difficult to estimate how many
potential mergers occur in a given year. It is likely that the number is very high, however,
given the amount of successful mergers and the desirability of mergers for many companies.

A merger may be sought for a number of reasons, some of which are beneficial to the
shareholders, some of which are not. One use of the merger, for example, is to combine a
very profitable company with a losing company in order to use the losses as a tax write-off to
offset the profits, while expanding the corporation as a whole.

Increasing ones market share is another major use of the merger, particularly amongst
large corporations. By merging with major competitors, a company can come to dominate the
market they compete in, giving them a freer hand with regard to pricing and buyer incentives.
This form of merger may cause problems when two dominating companies merge, as it may
trigger litigation regarding monopoly laws.

Another type of popular merger brings together two companies that make different, but
complementary, products. This may also involve purchasing a company which controls an
asset your company utilizes somewhere in its supply chain. Major manufacturers buying out
a warehousing chain in order to save on warehousing costs, as well as making a profit
directly from the purchased business, is a good example of this. Pay Pals merger with eBay
is another good example, as it allowed eBay to avoid fees they had been paying, while tying
two complementary products together.

A merger is usually handled by an investment banker, who aids in transferring

ownership of the company through the strategic issuance and sale of stock. Some have
alleged that this relationship causes some problems, as it provides an incentive for investment
banks to push existing clients towards a merger even in cases where it may not be beneficial
for the stockholders.

35
 The merger process will no doubt change in the near future, as dynamic technologies
allow for the development of a more streamlined marketplace which manages to protect the
privacy of interested companies while linking up ideal candidates for a merger.

Merger Procedure
I. Accounting

When mergers and acquisitions take place, the combined entity's financial
statements have to reflect the effect of combination. According to the Accounting Standard
14 (AS 14) issued by the Institute of Chartered Accountants of India, an amalgamation can
be in the nature of pooling of interests, referred to as "amalgamation in the nature of
merger', or acquisition. The conditions to be fulfilled for an amalgamation to be treated as
an "amalgamation in the merger " are as follows:

1. All assets and liabilities of the "Transferor Company" before amalgamation

should become assets and liabilities of the "Transferee Company".
2. Shareholders holding not less than 90% of shares (in value terms) of the
"Transferor Company" should become the shareholders of the "Transferee
Company".

3. The consideration payable to the shareholders of the "Transferor Company"

should be in the form of shares of the "Transferee Company" only; cash can
however, be paid in respect of fractional shares.

4. Business of the "Transferor Company" is intended to be carried on by the

"Transferee Company."

5. The "Transferee Company" incorporates, in its balance sheet, the book values of
assets and liabilities of the "Transferor Company" without any adjustment
except to the extent needed to ensure uniformity of accounting policies. An
amalgamation, which does not satisfy all the conditions stated above, will be
regarded as an "Acquisition".

36
The accounting treatment of an amalgamation in the books of the "Transferee
Company" is dependent on the nature of amalgamation. For a merger, the 'pooling
of interest' method is to be used and for an Acquisition the 'purchase' method is to
be used. Under 'the pooling of interest' method, the balance sheet of the combined
entity is arrived at by a line-by-line addition of the corresponding items in the
balance sheets of the combining entities. Hence, there is no asset write-up or write-
down or even goodwill. Under the 'purchase' method, however, the "acquiring
company" treats the "acquired company" as an acquisition investment and, hence,
reports its tangible assets at fair market value. So, there is often an asset write-up.
Further, if the consideration exceeds the fair market value of tangible assets, the
difference is reflected as goodwill, which has to be amortized over a period of five
years. Since there is often an asset write-up as well as some goodwill, the reported
profit under the purchase method is lower because of higher depreciation as well as
amortization of goodwill.

II. Legal/ Statutory approvals

The process of mergers or amalgamations is governed by sections 391 to 394 of

the Companies Act, 1956 and requires the following approvals

Shareholder Approval:

The shareholders of the amalgamating and the amalgamated companies are

directed to hold meetings by the respective High Courts to consider the scheme
of amalgamation. The scheme is required to be approved by 75% of the
shareholders, present and voting, and in terms of the voting power of the shares
held (in value terms)

37
Further, Section 395 of the Companies act stipulates that the shareholding of
dissenting shareholders can be purchased, provided 90% of the shareholders, in
value terms, agree to the scheme of amalgamation. In terms of section 81(IA) of
the Companies Act, the shareholders of the "amalgamated company" also are
required to pass a special resolution for issue of shares to the shareholders of the
"amalgamating company".

Creditors/Financial Institutions/Banks Approval: -

Approvals from these are required for the scheme of amalgamation in terms of
the agreement signed with them.

High Court Approval: -

Approvals of the High courts of the States in which registered offices of the
amalgamating and the amalgamated companies are situated are required.

High Court Approval

38
Reserve Bank of India Approval:-

In terms of section 19 of FERA, 1973 Reserve Bank of India permission is

required when the amalgamated company issues shares to the nonresident
shareholders of the amalgamating company or any cash option is exercised.

SEBI's Takeover Code for substantial acquisitions of shares in listed companies

In India take-over are controlled. On 4th November 1994, SEBI announced a

take-over code for the regulation of substantial acquisition of shares, aimed at
ensuring better transparency and minimizing the occurrence of clandestine
deals. In accordance with the regulations prescribed in the code, on any
acquisition in a company, which makes acquirers aggregate shareholding
exceed 15%, the acquirer is required to make a public offer. The take-over code
covers three types of takeovers-negotiated takeovers, open market takeovers and
bail-out takeovers.

III. Valuation

There are several approaches to valuation. The important ones are the
discounted cash flow approach, the comparable company approach, and the
adjusted book value approach. Traditionally, the comparable company approach
and the adjusted book value approach were used more commonly. In the last
few years, however, the discounted cash flow approach has received greater
attention, emphasis, and acceptance. This is mainly because of its conceptual
superiority and its strong endorsement by leading consultancy organizations.

39
 The discounted cash flow approach to corporate valuation involves four broad
steps:

Forecast the free cash flow

Compute the cost of the capital

Estimate the continuing value

Calculate and interpret results.

The organization and the job

The consultation experts for M&A are normally referred to as M&A bankers or
executives. They work in the M&A department of Investment Banks, the financial services
organization that chiefly cater to such demands of their corporate clients. Investment banks
offer wide range of services to its clients. The services can be in different forms:

The investment bank approaches a prospective client with the suggestion to take over a
company and expand its operations.
The client comes to the investment bank and asks whether it should go for an M&A, in
the first place.

The client recognizes the need to go in for M&A, but is not able to find a suitable
partner. So the investment bank searches for a suitable partner, based on the profile of
the client as well as its ideas and ambitions regarding growth.

Either the investment bank or the client by itself would identify a company (say, X) for
acquisition or merger. The M&A team would now go to the management of X
representing the client, to convince X to sell out or merge with the client. The banker
would also negotiate on behalf of the client to determine the price to be paid, the
mode of payment and other terms of the deal. (If X doesnt want to sell out, there
might also be a case of hostile takeover bid).

40
 The process can happen on the reverse side when the client approaches the investment
bank for selling out to a bigger company.

Merger Strategy

Various aspects of the M & A deal such as valuation, legal compliance, accounting and
negotiation are highly specialized areas. The advisors are often investment and merchant
bankers who are well versed with the M&A market players and have experience and
knowledge. Advisors take fees for performing various tasks:

Target identification
Determination of appropriate price

Structuring the finance

Assisting in negotiation

Advising on post-merger integration

The fees charged by the intermediary are often negotiable. The Lehman formula (also
known as 5-4-3-2-1) formula is most popular.

If the target is being sought, the seeker should carefully state the objectives. For
example, the objective(s) may be one or more of:

- Increasing market share in domestic market,

- Eliminating a competitor,

- Enhancing production capacity,

- Entering fast growing markets abroad,

- Leveraging distribution channels,

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42
 CONSOLIDATION PROCESS NOT NEW TO INDIAN BANKING

The consolidation process of Indian banks has started in the early 1960s itself. The
rapid branch expansion resulted in stretching beyond the optimum level of supervision and
control. The banks were faced with losses. Then there were a series of policy initiatives taken
by the RBI. As a result of these measures, there was marked slowdown in the branch
expansion and attention was paid to improve housekeeping, customer service, credit
management, staff productivity and profitability of banks. Steps were also taken to reduce
the structural constraints that obstructed the growth of banking industry.

Banks merged since 1961

All the banks listed below (except New Bank of India) were amalgamated under
Section 45 of the Banking Regulation Act, 1949 while the New Bank of India amalgamated
under Section 9 of the Banking Companies (Acquisition of Undertakings) Act, 1980. Besides
these banks, from 1960 to June 1993, there were 21 voluntary amalgamations, 18 mergers with
the State Bank of India or its Associates and 132 transfers of assets and liabilities.

43
44
45
 M & A IN INDIA-EXAMPLES

Merger of Ganesh Bank with Federal Bank (January, 2006)

The RBI was planning to merge Ganesh Bank of Kurundwad Ltd, which had run into
serious financial problems with the Federal Bank. RBI had prepared a draft scheme for the
merger and put it in public domain for suggestions.

Ganesh Bank of Kurundwad Ltd. was placed under an order of moratorium by Reserve
Bank of India on January 7, 2006.

The court had stayed the Government order dated January 25, 2006 allowing
amalgamation of Ganesh Bank with Federal Bank but restored the order of moratorium on
Ganesh Bank dated January 7, 2006.

The order was effective up to April 6, 2006 or an earlier date if alternate arrangements were
in place. The Reserve Bank was to decide the future set up of the Ganesh Bank of
Kurundwad Ltd. during the period of moratorium. The Ganesh Bank of Kurundwad was
taken under moratorium after being given time to arrange for infusion of capital as also to
explore other options for its future set up. Due to the continued inability of Ganesh Bank to
raise the required capital, the Reserve Bank of India had to exercise the option of compulsory
merger available to it under Section 45 of the Banking Regulation Act, 1949.

46
Merger of Centurian Bank and Bank of Punjab (October, 2005)

Bank of Punjab (BoP) and Centurion Bank (CB) have been merged to form Centurion
Bank of Punjab (CBP). RBI has approved merger of Centurion Bank and Bank of Punjab
effective from October 1, 2005. The merger is at a swap ratio 9:4 and the combined bank is
will be called Centurion Bank of Punjab. The merger of the banks will have a presence of 240
branches and extension counters, 386 ATMs, about 2.2 million customers. As on March 2005,
the net worth of the combined entity is Rs 696 crore and the capital adequacy ratio is 16.1 per
cent

Due to intensifying competition, access to low-cost deposits is critical for growth.

Therefore, size and geographical reach becomes the key for smaller banks. The choice before
smaller private banks is to merge and form bigger and viable entities or merge into a big
private sector bank.

The proposed merger of Bank of Punjab and Centurion Bank is sure to encourage other
private sector banks to go for the M&A road for consolidation.

Combined entity the Punjab-centurion bank would be the among the top 10 private
sector banks in the country. Merged entity would benefit from the fact that centurion bank had
recently written of its bad loans against equity. Branch network of the two banks will
complement each other. The combined entity will have a nationwide reach.

Centurion Bank is strong in South India, Maharashtra and Goa whereas Bank of
Punjab is strong in Punjab, Haryana and Delhi. While Centurion Bank has 82 per cent of its
business coming from retail, Bank of Punjab is strong in the Small and Medium Enterprises
(SMEs) segment and agricultural sector.

47
Merger of Global Trust Bank Ltd. with the Oriental Bank of Commerce (August, 2004)
MUMBAI, JULY 26,2004, Reserve Bank of India (RBI) today announced its intention
to merge the troubled Global Trust Bank (GTB) with the public sector Oriental Bank of
Commerce (OBC).
Global Trust Bank Ltd., (GTB) was placed under an Order of Moratorium on July 24,
2004. The option available with the Reserve Bank was to compulsory merger under section 45
of the Banking Regulation Act, 1949. Oriental Bank of Commerce (OBC) interest was
examined by the Reserve Bank of India keeping in view its financial parameters, its retail
network and its synergies as well as strategic advantages. Taking into account the interests of
the millions of depositors of GTB, as well as the banks strengths and weaknesses, the Reserve
Bank prepared following draft scheme of amalgamation of GTB with OBC.
The Government of India has sanctioned the scheme for amalgamation of the Global
Trust Bank Ltd. with the Oriental Bank of Commerce. The amalgamation came into force on
August 14, 2004.
Hyderabad-headquartered GTB was in deep trouble has been public knowledge for
three years; that the regulator had frowned on the bank's revival proposals was also well
known. It should have been possible therefore to oversee a quieter shutdown of GTB as an
independent entity, followed by an RBI-directed merger with a stronger bank. Mergers
between healthy and failing banks have been the preferred rescue strategy of the central bank
and it is a natural inference that the sudden announcement by the public sector Oriental Bank
of Commerce must have been the result of prodding by the RBI and the Government of India.

Global Trust Bank is now Oriental Bank of Commerce

The Government of India has sanctioned the scheme for amalgamation of the Global
Trust Bank Ltd. with the Oriental Bank of Commerce. The amalgamation will come into force
on August 14, 2004. All the branches of Global Trust Bank Ltd. will function as branches of
Oriental Bank of Commerce with effect from this date.

48
Customers/Depositors of GTB

Customers, including depositors of the Global Trust Bank Ltd., will be able to operate
their accounts as customers of Oriental Bank of Commerce with effect from August 14, 2004.
Oriental Bank of Commerce is making necessary arrangements to ensure that service, as usual,
is provided to the customers of the Global Trust Bank Ltd.
Shareholders of GTB
In accordance with the Scheme of Amalgamation if any surplus remains after meeting
all the liabilities out of the realization of assets of the Global Trust Bank Ltd., the shareholders
may receive pro-rata payment.
As part of the merger proposal, the OBC would get Income Tax exemptions in
transferring the assets of GTB in its book during the merger process, while all the bad debts of
the merged entity would be adjusted against the cash balances and reserves of the Hyderabad-
based bank.

Merger of Nedungadi Bank with Punjab National Bank(November, 2002)

On 11th September, 2002, Punjab National Bank (PNB) was set to take over Nedungadi
Bank .The banking division under the ministry of finance was processing the application on
the part of PNB at that time. The Reserve Bank of Indias (RBI) approval for the takeover had
already been obtained.

The acquisition was done as per the internal valuation done by the RBI. After the
internal valuation, the central bank had restricted the Bhantias the majority equity-holders
of the bank from being on the banks board.

Both the banks are listed following PNBs listing after its maiden initial public offering
in March 2002. PNB closed at Rs 43.7 on the Bombay Stock Exchange (BSE) on 9 September
while Nedungadi Bank closed at Rs 30.5 on the BSE. PNB had a volume of 25,125 shares on
the BSE and 80,502 on the National Stock Exchange (NSE) while a total of 5,425 shares had
traded on the NSE in the case of Nedungadi Bank and 949 shares on the BSE.

49
 Punjab National Bank (PNB) had sought clarifications from the Reserve Bank of India
(RBI) on the issue of PNBs merger with Nedungadi Bank (NBL) on 9 November, 2002,
which was under moratorium.

PNB was established in 1895 in Lahore in Undivided India. Freedom fighter Lala
Lajpat Rai was one of the founders of the bank. The bank was nationalized along with 13
others in 1969.

Merger of ICICI Ltd. & ICICI Bank(October, 2001)

AFTER being on the cards for a long time, ICICI Ltd October 24, 2005 announced
that it has decided to take the final step towards universal banking. The boards of ICICI Ltd
and ICICI Bank took up a proposal to reverse merge the financial institution with the banking
subsidiary at separate meetings.

The proposal also envisages merging ICICI Personal Financial Services Ltd and ICICI
Capital Services Ltd with the bank. Analysts expect the swap ratio to be two shares of ICICI
for one share of ICICI Bank. Alternatively, it could be three shares of ICICI to two shares of
ICICI Bank.

ICICI is understood to have received the Finance Ministry's blessings for its proposal.
The RBI had also, in its Credit Policy, assured prompt processing of universal banking
applications should any institution wish to submit a proposal.

The company would also be the first entity in India to offer almost every financial
product, wholesale and retail, under one roof.

For ICICI, it is a great benefit as it would have access to the low-cost funds of the
bank. FIs, especially ICICI, have been trying to become universal banks with an eye on cheap
funds. At present they do not have access to low-cost savings and current account funds, the
mainstay of banks.

50
 ICICI entered the insurance sector too with Prudential of the UK for the life segment
and with Lombard of France for general insurance. While the life insurance subsidiary has
started operations, the non-life business is yet to take off.

Merger of Bank of Madura with ICICI Bank (December, 2000)

Bank of Madura had an equity base of Rs.11.77 crores and for the year ended 31-3-
2000 this bank had a total income of Rs.370 crores and net profit of Rs.45.60 crores, resulting
in an EPS of Rs.38.75. For six months ended 30-9-2000, the total income of the bank is placed
at Rs.247 crores and net profit of Rs.26.30 crores resulting in an annualized EPS of Rs.44.70.

ICICI Bank had an equity base of Rs.196.82 crores and for the year ended 31-3-2000
this bank had a total income of Rs.853 crores and net profit of Rs.105 crores resulting in an
EPS of Rs.5.33. For the six months ended 30-9-2000 the total income of the bank was placed
at Rs.635 crores and net profit at Rs.70 crores resulting in an annualized EPS of Rs.7.10.
While ICICI Bank had a declining trend of profitability with net profit of Rs.40 crores in first
quarter of FY 2001 as against Rs.30 crores in second quarter of FY 2001, Bank of Madura had
marginally lower profitability trend. This bank had a net profit of Rs.13.70 crores in first
quarter of FY 2001while it was Rs.12.60 crores in the second quarter of FY 2001.

This merger was effective from 1-2-2001 the full effect of merger are seen in FY 2001-
02. Even the shareholders of Bank of Madura stand to gain, as now they will have double
quantity of ICICI Bank shares. The share price of Bank of Madura had a 52-week high/low of
Rs.165 and Rs.65 prior to announcement of merger, with the average being Rs.120. Now, the
value of one share shall rise to anything between Rs.280 to Rs.300, since the share price of
ICICI Bank rules above Rs.150. So the shareholders of this bank have almost trebled their
worth. However, future appreciation in the share price of ICICI Bank has not been considered.

Apart from this, ICICI Bank shall emerge as a giant in private sector banking industry
and may even surpass the financial performance of HDFC Bank with higher income, higher
bottom-line but with lower equity base.

51
 OBSTACLES TO SUCCESS IN FINANCIAL SERVICES M&A

Efficiency improvements through mergers were frequently overestimated.

Contemporary research confirms this observation. Worldwide, two-thirds of mergers end in
failure some because of staff hostility and others because of insufficient preparation and
inability to integrate personnel and systems. Even more failures are due to irreconcilable
differences in corporate cultures and management. This section examines a number of
obstacles to mergers and acquisitions in the financial services.

The race for size An obstacle course?

Regulation
Competition policy
Resistance at the national level
Legal status of financial institutions
Inadequate assessment of cultural aspects of M&As
Neglecting the human factor is a frequent cause of failure

The race for size An obstacle course?

Most retail banks try to obtain economies of scale by expanding either by extending
their networks or widening their range of products and services. However, there is no
automatic link between size and profitability. In fact, this attempt to expand can often produce
the opposite effect. The complexity of managing large operations can nullify the benefits and
losses related to top-heavy organization are often underestimated. The lack of transparency of
financial activities and the fragmented nature of debts and capital, especially for mega banks,
prevent creditors, shareholders and regulators from imposing discipline. Internet banking is
also a challenge with which large banks have to contend.

52
Regulation

Central banks wanted to make firms assume greater responsibility for managing
liquidity and credit risk in payment and settlement systems. When financial difficulties were
widespread in some cases, the authorities opted for a rationalization of the banking sector.

Bank regulation poses another obstacle to M&As worldwide. Although some current
de-mutualization of previously mutual banks and insurance companies was driven by the need
to expand access to capital and financial markets, many banks are unable to tap the loan and
bond markets to finance acquisitions partly because they cannot borrow as freely as
industrial companies. Limits on banks capital ratios mean they cannot leverage their balance
sheets to buy competitors.

Competition policy
Banking and financial M&As are horizontal (between competitors) and not vertical
(involving supplier and customer which are frequent in industry). While there might be
occasional conglomerate mergers when, for instance, a financial institution specializing in the
development of products integrates with another specializing in distribution, few financial
M&As result in the creation of conglomerates, which occur when the companies are not
competitors and do not have a buyer-seller relationship.
In practice, M&As are often a product of market shocks (for example in the financial
services sector, privatization or sectoral deregulation), sharpening competition and attacks on
established market positions. Higher profitability after M&As can provide not only the sought-
after synergies, but eventually, in horizontal combinations of previously competing interests,
increased market power. According to UNCTAD, cross-border M&As can be used to reduce or
even eliminate competition, thus posing challenges for maintaining effective competition in
host economies by increasing market concentration at the time of entry. Like all firms,
affiliates resulting from cross-border M&As can engage in various forms of anti-competitive
behaviour once established, when conditions permit.

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Resistance at the national level
Cross-border M&As are sometimes seen as eroding the national enterprise sector and,
more broadly, economic sovereignty. Concerns of this kind are not new and, in the past, were
particularly associated with the natural resource sector. Although banks are cross-border,
moving outside their home base involves sensitive cultural issues and such moves rarely
produce comparable cost-savings as in-market consolidation. Indeed the promise of
minimizing job reductions and maintaining significant local autonomy are often the price
foreign bidders have to pay to succeed in cross-border acquisitions. However, there may be
economic gains from cross-border M&As if they help to strengthen the capabilities and
competitiveness of acquired firms, or simply save them; the risk of denationalization may
therefore need to be balanced against possible gains in economic restructuring and
competitiveness.

Legal status of financial institutions

A product of national social and economic history, their legal status, which prevents
stock exchange listing, constitutes an obstacle to M&As. These institutions, which generally
include savings funds or agricultural banks, have resisted adopting purely capitalist structures
and thus modifying the balance of internal power for fear of losing their historical and local
rationale.

Inadequate assessment of cultural aspects of M & As

M&A deals were 26 per cent more likely than average to be successful if they paid
satisfactory attention to cultural issues and those acquirers who left cultural issues until the
post-deal period severely hindered their chance of deal success, compared with those who
dealt with them early in the process.
Cultural aspects therefore constitute a significant obstacle to cross-border
combinations even though the differences continue to ease with time, education and training.
Any merger or acquisition is a complex process taking up more time than usually expected: it
requires integrating very different organizations, blending often very diverse cultures and
dealing with complex questions of dissimilar work organization. This requires high levels of

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managerial capacity in change management, the constitution of effective teams and network
integration

Neglecting the human factor is a frequent cause of failure

The human factor is taken into account in only 5 per cent of M&As explains why more
than half of them in all sectors fail. Teams are usually put together to oversee merger and
acquisition operations. These teams almost always comprise specialists in legal and financial
issues as well as experts in strategy but rarely do they include human resource directors. One
possible explanation is the fact that speed is generally considered of capital importance for
success.
Since a majority of mergers end up with the elimination of overlapping functions and
positions, the first 100 days are likely to be those when staff are most uncertain about jobs,
career prospects and the disappearance of their own corporate culture.

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 EMPLOYMENT EFFECTS OF M&A
M&As, technological and work organization changes and enterprises pursuits of
competitive advantages are having a profound impact on sectoral employment worldwide.
There has been a decline in permanent employment, increased job instability and insecurity,
and rapid growth of various non-standard forms of work, including part-time and temporary
employment.

Financial markets and the financial press invariably expect cost savings from staff
expenses as a clear signal that the merged entity intends to move aggressively to reduce
operating costs and increase its income-cost ratios.

Employee turnover and mobility, important measures of the extent to which

employment relationships have changed, are on the increase. Over the last ten years job tenure
has been on the decline, especially for those who have not systematically upgraded their skills
and general employability. The pressure to reduce costs, especially fixed costs and to adopt
flexible staffing and work methods has had a pervasive effect on employment. Nevertheless, it
is downsizing permanent job reductions driven mostly by corporate restructuring which
has received most attention. The process differs significantly from lay-offs during earlier
periods that were caused by recessions and were largely temporary. Job insecurity in the
globalized economy affects people in the traditionally most stable jobs in sectors previously
offering secure, high-paid jobs and career advancement opportunities.

M&As imply immediate and direct job losses

As for employment, the largest volume of cost reductions was generally associated
with staff reductions and data processing systems and operations. Payroll reductions often
accounted for over 50 per cent of the total cost reduction and in at least one case the reduction
in staff costs accounted for nearly two-thirds of the total. In all cases, the savings achieved
were of the order of 30 to 40 per cent of the non-interest expenses of the target. All of the
merged firms indicated that the actual savings either met or exceeded expectations. Most of
the firms projected that the cost savings would be fully achieved within three years after the
merger, with the majority of the savings being achieved after two years.
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... but generate other jobs
As might be expected, job growth in investment banks and firms specializing in M&As
has been inversely proportional to losses elsewhere in the financial services sector, although
the increase can in no way compensate for overall reductions. Another sector that has seen
employment growth is services to finance and insurance, including stock broking, share
registry, mortgage broking, credit card administration and insurance broking and dealing.
Even in restructuring financial service organizations, jobs in IT and marketing
functions as well as in call centers have increased as a result of the shift in strategies.
Lay-offs as an anti-takeover tool
Some times lay offs acts as an anti-takeover tool for increasing the profitability through
cost savings. Thus organization decides to reduce the jobs or retrenchment in the organization
in order to increase its defences against takeovers. The rationale behind such retrenchments is
usually that the financial markets appreciate them as concrete signals of organizational focus
on reducing costs and increasing shareholder value
.
Training and reskilling associated with M&A-related change
Professional competence and interpersonal skills are a decisive competitive factor in
any service industry, and nowhere more so than in the financial services. In addition, the
situation of a service company markedly differs from that of a manufacturer in that the front-
line staff of a service organization constitute the tangible view of the product.
Twenty years ago, commercial and savings banks were highly bureaucratic
organizations whose prevalent business activities were to take deposits, give credits, and
organize the payment system within highly protected and compartmentalized national markets.
Today banks, and other financial organizations in general, are becoming more flexible
organizations that offer a wide range of products, including deposits, credits, payment
systems, insurance, credit cards, cash management, and pension and mutual funds. In addition,
they are increasingly exposed to greater levels of competition within deregulated international
and national markets.
As a result of these developments, banks have shifted from a transaction-based
organizational model toward a sales and service orientation, implying the corresponding

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changes in work organization and skills requirements. Changes in enterprise structures in
which front and back office work is separated as a result of greater product standardization
involves greater specialization and a degree of deskilling. In some cases, the demise of the
traditional branch employee with a full range of banking skills means that jobs are narrower
and more routine and require less skill. In others, however, branch staff are expected to be able
to perform any front office task apart from the provision of substantial loans and more
complex financial products.

IMPACT OF M&AS ON WORKING AND EMPLOYMENT

CONDITIONS

Most importantly, integrating differing company systems and procedures requires

harmonization of various aspects of terms and conditions of employment: pay scales, job
titles, entitlements and other benefits, job descriptions, reporting and supervisory lines are all
subject to revision to ensure common practice in the newly combined organization.
M&As, remuneration and other compensation issues
Two conflicting aims appear to characterize current practices in
financial sector remuneration: the need to reduce labour costs within a context of
increasing competition and decreasing profitability and the necessity to compensate
and adequately reward employee performance and commitment within an environment
of continuous and challenging change.
M&As and working time

The link between financial sector concentration and patterns in regular working time is
difficult to identify because working-time agreements depend upon the national
context and are not limited to the sector under consideration.

Banks adoption of the retailing model is encouraging them to adjust their hours to
customer requirements, extending opening hours on at least one day a week and even
opening some branches on traditionally closed days such as Sundays a trend which

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 has aroused strong trade union reactions in a number of countries. It goes without
saying that M&As can provide an opportunity for management to opt for more
customer-friendly working hours like ICICI Bank from 8am to 8pm.

M&As as factors of stress and demotivation

M&As generate high levels of staff anxiety and stress as their working world is turned
upside down, their jobs come under threat and their career prospects and professional
competence are called into question. Trade unions may themselves be at loggerheads
as the merger may involve companies recognizing different negotiating partners. Not
surprisingly, it is much easier for managers to convince shareholders about the merits
of proposed mergers than it is to persuade their own staff.

M&As and job security

Not surprisingly, empirical evidence shows that workers everywhere are feeling
increasing insecurity in their employment. Companies are restructuring and
downsizing more often, increasingly replacing full-time jobs with part time, casual or
temporary jobs and outsourcing. Call centers are proliferating, replacing traditional
finance jobs.

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 IMPACT OF M & As ON CONSUMERS

New technology and the increased ability of financial institutions to offer a wider range
of products and services have benefited those with the means to access them. Consumers with
a regular income and a good credit history are able to borrow money more readily and cheaply
than ever before, although this has often lead to widespread debt encumbrance. Consumers of
retail services with more restricted incomes, with poor credit histories or unstable social
backgrounds, are finding it more difficult to get access to the mainstream financial services
sector traditional banking services.
A process that has run in parallel to that of merger and acquisition activity within the
financial services sector has been that of 'demutualization'. Insurance companies and building
societies have been prominent mutual organizations, which are effectively 'owned' by their
members, that is, by consumers who held policies or debt products and who have the right to
vote on policy and other matters at Annual General Meetings.

Reactions by consumers to mergers

Again, it is virtually impossible to determine the exact impacts of specific mergers and
acquisitions on levels of customer loyalty from the available evidence. This kind of
information is highly sensitive, and is not easily released by firms. However, it is generally
known that the industry sees declining levels of customer loyalty as a problem, although levels
of customer mobility vary markedly between sectors. Levels of mobility are relatively high in
price-sensitive sectors such as car and household insurance, whereas it is lower for more
complex products such mortgages and lower still for banking services.

In all product areas a growing number of consumers are prepared to move their
business from one firm to another. Although on the whole financial service customers tend to
be highly conservative, it tends to be the more affluent and financially literate customers that
are most prepared to shop around for products and to relocate their financial activities if
necessary.
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 HYPOTHESIS

There are various assumptions that we make before research, these are: -
1. Financial services are dynamic in nature.
2. There is more rapid expansion in customer base.
3. Competition is increasing day by day.
4. Any individual bank cant provide services up to the mark.
5. India needs big banks.
6. Small banks cant work efficiently.
7. Mergers and acquisitions provide complementary services.

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 OBJECTIVES OF THE STUDY

Main objective: -
The emerging scenario of Mergers and Acquisitions in banking sector.

Sub objective: -
Understand the Merger procedure in banks

The reasons of Mergers and Acquisitions of banks in India and

Also to find the effects of Mergers and Acquisitions of banks.

To know the impact of mergers and acquisitions on working and employment

conditions.
To know the impact of mergers and acquisitions on consumers.

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 RESEARCH METHODOLOGY

Research Methodology is a way to systematically solve the research problem. It may

be understood as a science of studying how research is done systematically. We study the
various steps that are generally taken by the researcher in studying the research problem along
with the logic behind it. The research methodology include over all research design, the
sampling procedure, the data collection method and analysis procedure.
Steps of Methodology :
Collection of data

Organization of data

Presentation of data

Analysis of data

Interpretation of data

Research Design

Research design helps in proper collection and analysis of data. It makes research
relevant to the objective of research and sees the proper process carried out
The present study was mainly descriptive study, which was concerned with finding the
characteristics of a particular individual, group, and institution of findings

1. Collection of Data:

It include only secondary data.

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Secondary Data

Secondary data is the data already available. In this project some secondary data is
used like company profile & other information.

It is collected through: -

a. Books
b. Articles in newspapers & magazines.
c. Websites

2. Organisation of data

In the next step after collection of data, the data is organized in the form according to
my topic of the project.

3. Presentation of data

After collecting & organization of data, the data is presented by using tables & graphs.

4. Analysis of data

After organizing & presenting the data, the researchers then has to proceed towards
conclusions by logical inferences .The whole data is then analysed by :

By bringing raw data to measured data.

Summarizing the data
Applying analytical method to manipulate the data so that their interrelationship &
quantitative meaning become evident.

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5. Interpretation of data

Interpretation means to bring out meaning of data or to convert it into information. From
the data various conclusions are found out on the basis of logical inferences.

Research Methodology for the Project

Research Design : Descriptive

Collection of Data

Secondary Data :
Internet etc.
Magazine
Books.

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 ANALYSIS

Mergers and Acquisitions increase the value when the value of combined firm is
greater than their sum of the independent entities

NAV = VBT ( VB + VT )

Where NAV=Net Value Increase

VBT = Value of Firms Combined

VB = Value of Bidder Alone

VT = Value of Target Alone

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 FINDINGS AND CONCLUSIONS

A combination of factors - increased global competition, regulatory changes, fast

changing technology, need for faster growth and industry excess capacity - have fuelled
mergers and acquisitions (M&A) in recent times.

The M & A phenomenon has been noticeable not only in developed markets like the
US, Europe and Japan but also in emerging markets like India.

Major acquisitions have strategic implications because they leave little scope for trial
and error and are difficult to reverse.

Moreover, the risks involved are much more than financial in scope. A failed merger
can disrupt work processes, diminish customer confidence, damage the companys reputation,
cause employees to leave and result in poor employee motivation levels. So the old saying,
discretion is the better part of valour, is well and truly applicable here.

A comprehensive assessment of the various risks involved is a must before striking an

M&A deal. Circumstances under which the acquisition may fail including the worst case
scenarios should be carefully considered.

Even if the probability of a failure is very low but the consequences of the failure are
significant, one should think carefully before rushing to complete the deal.

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 SUGGESTIONS

Nothing can guarantee that the shiny new company will bring with it untold riches, nor
can you assure yourself that you won't be exposing your most sensitive information assets to
risk by coupling your network infrastructures. What you can do is mitigate the risk of a costly
and embarrassing security breach. Link it to your financial due diligence and make it happen.
Assess the Business Risk
Analyze the external perimeters
Pay attention to attitude
Review the company's security program
Review critical applications
Pay attention to antiviral efforts
Learn how security intelligence is gathered and systems are monitored
Look at emergency response processes

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 LIMITATIONS

1. Mergers & Acquisitions are hard to occur, so the information about them is
very less.
2. It was not possible to cover every aspect .This poses to be a serious limitation.
3. The information was collected from secondary data, so the limitation occurred
in the exact interpretation.
4. Also the information was collected from secondary data, so sometimes the
results may be related to some specific area/aspect.
5. As the process of mergers and acquisitions of banks is kept secrete with the
general public, so the exact procedure and the reasons behind them are difficult
to find.
6. As the data has been taken form the books and various websites, the data
available is not recent.
7. Various financial terms related to mergers and acquisitions are the difficult to
understand.
8. It is difficult to explain specific impacts made on consumers from merger and
acquisition activity within the financial services sector.

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 BIBLIOGRAPHY

Websites: -

www.google.com
www.yahoo.com
www.icici.com
www.obc.com
www.pnb.com

Books: -

Mergers & Acquisitions- J. Fred Weston & Samwel C. Weaver

Financial Services M. Y. Khan
Marketing of Financial Services- V. A. Avadhani

Newspapers & Magazines

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