INTRODUCTION TO MERGER AND ACQUISITION

MERGERS
A merger occurs when two or more companies combines and the resulting firm maintains the
identity of one of the firms. One or more companies may merger with an existing company or
they may merge to form a new company.
Usually the assets and liabilities of the smaller firms are merged into those of larger firms.
Merger may take two forms-
1. Merger through absorption
2. Merger through consolidation.

ABSORPTION
Absorption is a combination of two or more companies into an existing company. All companies
except one lose their identity in a merger through absorption.

CONSOLIDATION
A consolidation is a combination if two or more combines into a new company. In this form of
merger all companies are legally dissolved and a new entity is created. In consolidation the
acquired company transfers its assets, liabilities and share of the acquiring company for cash or
exchange of assets.

ACQUISITION
A fundamental characteristic of merger is that the acquiring company takes over the ownership
of other companies and combines their operations with its own operations.
An acquisition may be defined as an act of acquiring effective control by one company over the
assets or management of another company without any combination of companies.

TAKEOVER
A takeover may also be defined as obtaining control over management of a company by another
company.
DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

Although they are often uttered in the same breath and used as though they were synonymous,
the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner, the
purchase is called an acquisition. From a legal point of view, the target company ceases to exist,
the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size,
agree to go forward as a single new company rather than remain separately owned and operated.
This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks
are surrendered and new company stock is issued in its place. For example, both Daimler-Benz
and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler,
was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one company
will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that
the action is a merger of equals, even if it's technically an acquisition. Being bought out often
carries negative connotations, therefore, by describing the deal as a merger, deal makers and top
managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the
best interest of both of their companies. But when the deal is unfriendly - that is, when the target
company does not want to be purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether the

purchase is friendly or hostile and how it is announced. In other words, the real difference lies in
how the purchase is communicated to and received by the target company's board of directors,
employees and shareholders.
TYPES OF MERGERS

Mergers are of many types. Mergers may be differentiated on the basis of activities, which are
added in the process of the existing product or service lines. Mergers can be a distinguished
into the following four types:-
1. Horizontal Merger
2. vertical Merger
3. Conglomerate Merger
4. Concentric Merger

Horizontal merger
Horizontal merger is a combination of two or more corporate firms dealing in same lines of
business activity. Horizontal merger is a co centric merger, which involves combination of two
or more business units related to technology, production process, marketing research and
development and management.

Vertical Merger
Vertical merger is the joining of two or more firms in different stages of production or
distribution that are usually separate. The vertical Mergers chief gains are identified as the
lower buying cost of material. Minimization of distribution costs, assured supplies and market
increasing or creating barriers to entry for potential competition or placing them at a cost
disadvantage.

Conglomerate Merger
Conglomerate merger is the combination of two or more unrelated business units in respect of
technology, production process or market and management. In other words, firms engaged in the
different or unrelated activities are combined together. Diversification of risk constitutes the
rational for such merger moves.

Concentric Merger
Concentric merger are based on specific management functions where as the conglomerate
mergers are based on general management functions. If the activities of the segments brought
together are so related that there is carry over on specific management functions such as
marketing research, Marketing, financing, manufacturing and personnel.
Advantages of Merger and Acquisitions

1. Maintaining or accelerating a company’s growth.

2. Enhancing profitability, through cost reduction resulting from economies of scale.
3. Diversifying the risk of company, particularly when it acquires those businesses whose
income streams are not correlated.
4. Reducing tax liability because of the provision of setting-off accumulated losses and
unabsorbed depreciation of one company against the profits of another.
5. Limiting the severity of competition by increasing the company’s market power.

Motives behind the Merger

Motives of merger can be broadly discussed as follows:

1. Growth: One of the fundamental motives that entice mergers is impulsive growth.
Organizations that intend to expand need to choose between organic growth and
acquisitions driven growth. Since the former is very slow, steady and relatively consumes
more time the latter is preferred by firms which are dynamic and ready to capitalize on
opportunities.
2. Synergy: Synergy is a phenomenon where 2 + 2 => 5. This translates into the ability of
a business combination to be more profitable than the sum of the profits of the individual
firms that were combined. It may be in the form of revenue enhancement or cost
reduction.
3. Managerial Efficiency: Some acquisitions are motivated by the belief that acquires
management can better manage the target’s resources. In such cases, the value of the
target firm will rise under the management control of the acquirer.
4. Strategic: The strategic reasons could differ on a case-to-case basis and a deal to the
other. At times, if the two firms have complimentary business interests, mergers may
result in consolidating their position in the market.
5. Market entry: Firms that are cash rich use acquisition as a strategy to enter into new
market or new territory on which they can build their platform.
6. Tax shields: This plays a significant role in acquisition if the distressed firm has
accumulated losses and unclaimed depreciation benefits on their books. Such acquisitions
can eliminate the acquiring firm’s liability by benefiting from a merger with these firms.
Benefits of Mergers

1. Limit competition

2. Utilise & under-utilised market power

3. Overcome the problem of slow growth and profitability in one’s own industry

4. Achieve diversification

5. Gain economies of scale and increase income with proportionately less investment

6. Establish a transnational bridgehead without excessive start-up costs to gain access to a

foreign market.

7. Utilized & under-utilized resources- human and physical and managerial skills.

8. Displace existing management.

9. Circum government regulations.

10. Reap speculative gains attendant upon new security issue or change in P/E ratio.

11. Create an image of aggressiveness and strategic opportunism, empire building and to

amass vast economic power of the company.

Steps of Merger and Acquisitions

There are three important steps involved in the analysis of merger and acquisitions can be
explained as follows:
1. Planning: The most important step in merger and acquisition is planning. The planning
of acquisition will require the analysis of industry specific and the firm specific
information. The acquiring firm will need industry data on market growth, nature of
competition, capital and labour intensity, degree of regulation etc. About the target firm
the information needed will include the quality of management, market share, size,
capital structure, profit ability, production and marketing capabilities etc.
 2. Search and Screening: Search focuses on how and where to look for suitable candidates
for acquisition. By screening process few candidates are short listed from many available.
Detailed information about each of these candidates is obtained.

Merger objectives may include attaining faster growth, improving profitability, improving
managerial effectiveness, gaining market power and leadership, achieving cost reduction etc.
These objectives can be achieved in various ways rather than through merger alone. The
alternatives to merger include joint venture, strategic alliances, elimination of inefficient
operations, cost reduction and productivity improvement, hiring capable manager etc. If merger
is considered as the best alternative, the acquiring firm must satisfy itself that it is the best
available option in terms of its own screening criteria and economically most attractive.

3. Financial Evaluation: Financial evaluation of a merger is needed to determine the

earnings and cash flows, area of risk, the maximum price payable to the target company
and the best way to finance the merger. The acquiring firm must pay a fair consideration
to the target firm for acquiring its business. In a competitive market situation with capital
market efficiency, the current market value is the current market value of its share of the
target firm. The target firm will not accept any offer below the current market value of its
share. The target firm in fact, expects that merger benefits will accrue to the acquiring
firm.

A merger is said to be at a premium when the offer price is higher than the target firm’s pre
merger market price. The acquiring firm may pay the premium if it thinks that it can increase the
target firm’s after merger by improving its operations and due to synergy. It may have to pay
premium as an incentive to the target firm’s shareholders to induce them to sell their shares so
that the acquiring firm is enabled to obtain the control of the target firm.
Reasons for Merger

The reason of merger can be broadly explain as follows:

1. Accelerated Growth: Growth is essential for sustaining the viability, dynamism and
value enhancing capability of a firm. Growing operations provide challenges and
excitement to the executives as well as opportunities for their job enrichment and rapid
career development. This help to increase managerial efficiency. Other things being the
same, growth leads to higher profits and increase in the shareholders value. It can be
achieve growth in two ways:

• Expanding its existing markets

• Enhancing in new market

A firm may expand and diversify its markets internally or externally. If company cannot
grow internally due to lack of physical and managerial resources, it can grow externally
by combining its operations with other companies through mergers and acquisitions.

2. Enhanced Profitability: The combination of two or more firm may result in more than
the average profitability due to cost reduction and efficient utilization of resources. This
may happen because of the following reasons:

a) Economies of Scale: When two or more firm combine, certain economies are
realized due to the larger volume of operations of the combined entity. These
economies arise because of more intensive utilization of production capacities,
distribution networks, engineering services, research and development facilities, and
data processing systems and so on.
b) Operating Economies: In addition to economies of scale, a combination of two or
more firm may result into cost reduction due to operating economies. A combined
firm may avoid or reduce functions and facilities. It can consolidate its management
functions such as manufacturing, R & D and reduce operating costs. For example, a
combined firm may eliminate duplicate channels of distribution or create a
centralized training center or introduce an integrated planning and control system.
c) Strategic Benefits: If a firm has decided to enter or expand in a particular industry,
acquisition of a firm engaged in that industry rather than dependence on internal
expansion may offer strategic advantages such as less risk and less cost.
d) Complementary Resources: If two firms have complementary resources it may
make sense for them to merge. For example, a small firm with an innovative product
may need the engineering capability and marketing reach of a big firm. With the
merger of the two firms it may be possible to successfully manufacture and market
 the innovative product. Thus, the two firms, thanks to their complementary resources,
are worth more together than they are separately.
e) Tax Shields: When a firm with accumulated losses and unabsorbed tax shelters
merges with a profit making firm, tax shields are utilized better. The firm with
accumulated losses and unabsorbed tax shelters may not be able to derive tax
advantages for a long time. However, when it merges with a profit making firm, its
accumulated losses and unabsorbed tax shelters can be set off against the profits of
the profit making firm and tax benefits can be quickly realized.

3. Utilization of surplus funds: A firm in a mature industry may generate a lot of cash but
may not have opportunities for profitable investment. Most management has a tendency
to make further investments, even though they may not be profitable. In such a situation a
merger with another firm involving cash compensation often represents a more efficient
utilization of surplus fund.

4. Managerial Effectiveness: One of the potential gains of merger is an increase in

managerial effectiveness. This may occur if the existing management team, which is
performing poorly, is replaced by a more effective management team. Another allied
benefit of a merger may be in the form of greater congruence between the interests of
managers and the shareholders. A common argument for creating a favourable
environment for mergers is that it imposes a certain discipline on the management.

5. Diversification of Risk: A commonly stated motive for mergers is to achieve risk

reduction through diversification. The extent, to which risk is reduced, of course, depends
on the correlation between the earnings of the merging entities. While negative
correlation brings greater reduction in risk. The positive correlation brings lesser
reduction in risk.

6. Lower Financing Costs: The consequence of large size and greater earnings stability, is
to reduce the cost of borrowing for the merged firm. The reason for this is that the
creditors of the merged firm enjoy better protection than the creditor of the merging firms
independently.
 Valuations of Merger

• Valuations: Any understanding on M&A is incomplete without a discussion on

valuation. During the course of a merger procedure, normally a Chartered Accountant or a
category-I Merchant Banker is appointed to work out the value of shares of companies
involved in the merger. Based on the values so computed the exchange ratio is worked out. It
is the value at which a buyer and seller would make a deal. There are certain basic factors,
which determine the value of a company's share. As these are very subjective factors,
valuations generally vary from case to case depending on assumptions and future projections.
The following steps are involved in the valuation of a merger which can be broadly discussed
as follows:
• Identify growth and profitability assumptions and scenarios

• Project cash flows

• Estimate the cost of capital

• Compute NPV (Net Present Value) for each scenario

• Decide if the acquisition is attractive on the basis of NPV

• Decide if the acquisition should be financed through cash or exchange of shares

• Evaluate the impact of the merger on EPS (Earning per Share) and PE (Price-earning)

ratio.

1. Cash Flow approach:

In a merger or acquisition the acquiring firm is buying the business of the target firm rather
than a specific asset. Thus merger is a special type of capital budgeting decision. This should
include the effect of operating efficiencies and synergy. The acquiring firm should appraise
merger as a capital budgeting decision. The acquiring firm incurs a cost (in buying the
business of the target firm) in the expectation of a stream of benefits (in the form of cash
flows) in the future. The merger will be advantageous to the acquiring firm if the present
value of the target merger is greater than the cost of acquisition.

Mergers and acquisitions involve complex set of managerial problems than the purchase of
an asset. Discounted Cash Flow (DCF) approach is an important tool in analyzing mergers
and acquisitions. Earnings are basis for estimating cash flows. Cash flows include
adjustments for depreciation, capital expenditure and working capital.

Cash Flow = EBIT (1-T) + Depreciation – Changes in Working Capital – Changes in

Capital Expenditure

2. Earnings Per Share (EPS) and P/E (Price Earning) ratio:

In practice, investor attaches a lot of importance to the earning per share (EPS) and the price
earning (P/E) ratio. The EPS and P/E ratio is the market price per share. In the efficient
market, the market price of a share should be equal to the value arrived by the discounted
cash flow technique. Thus, in addition to the market price and the discount value of share the
merger and acquisitions decisions are also evaluated in terms of EPS, P/E ratio, book value
etc.

3. Exchange Ratio:

The current market value of the acquiring and the acquired firms may be taken as the basis
for exchange of shares.

Exchange Ratio = Share price of the acquired firm/Share price of the acquiring firm
(Pb/Pa).

The exchange ratio in terms of the market value of shares will keep the position of the
shareholders in value terms unchanged after the merger since proportionate wealth would
remain at the pre merger level. There is no incentive for the shareholders of the acquired
firm, and they would require a premium to be paid by the acquiring company.

In the absence of net economic gain, the shareholders of the acquiring firm would become
worse off unless the price earnings ratio of the acquiring firm remain the same before the
merger. The shareholders of the acquiring firm to be better off after the merger without any
net economic gain either the price earnings ratio will have to increase sufficiently higher or
the share exchange ratio is low, the price earnings ratio remaining the same.
MERGERS AND
INDIAN
BANKING
SECTOR
MERGER AND INDIAN BANKING SECTOR

Mergers and acquisitions encourage banks to gain global reach and better synergy and allow
large banks to acquire the stressed assets of weaker banks. Merger in India between
weak/unviable banks should grow faster so that the weak banks could be rehabilitated providing
continuity of employment with the working force, utilization of the assets blocked up in the
weak/unviable banks and adding constructively to the prosperity of the nation through increased
flow of funds.
The process of merger and acquisition is not a new happening in case of Indian Banking, Grind
lay Bank merged standard chartered Bank, Times Bank with HDFC Bank, bank of Madura with
ICICI Bank, Nedungadi Bank Ltd. With Punjab National Bank and most recently Global Trust
Bank merged with Oriental Bank of Commerce.
The small and medium sized banks are working under threats from economic environment which
is full of problem for them, viz. inadequacies of resources, outdated technology, on systemized
management pattern, faltering marketing efforts and weak financial structure. Their existence
remains under challenge in the absence of keeping pace with growing automation and techniques
obsolescence and lack of product innovations. These banks remain, at times, under threat from
large banks. Their reorganization through consolidation/merger could offer succor to re-establish
them in viable banks of optimal size with global presence.
Merger and amalgamation in Indian banking so far has been to provide the safeguard and
hedging to weak bank against their failure and too at the initiative of RBI, rather than to pay the
way to initiate the banks to come forward on their own record for merger and amalgamation
purely with a commercial view and economic consideration.
As the entire Indian banking industry is witnessing a paradigm shift in systems, processes,
strategies, it would warrant creation of new competencies and capabilities on an on going basis
for which an environment of continuous learning would have to be created so as to enhance
knowledge and skills.
There is every reason to welcome the process of creating globally strong and competitive banks
and let big Indian banks create big thunders internationally in the days to come.

In order to achieve the INDIAN VISION 2020 as envisaged by Hon’ble president of India Sh.
A.P.J. Abdul Kalam much requires to be done by banking industry in this regard. It is expected
that the Indian banking and finance system will be globally competitive. For this the market
players will have to be financially strong and operationally efficient. Capital would be key factor
in the building a successful institution. The Banking and finance system will improve
competitiveness through a process of consolidation either through mergers and acquisitions or
through strategic alliances. There is need to restructure the banking sector in India through
merger and amalgamation in order top makes them more capitalized, automated and technology
oriented so as to provide environment more competitive and customer friendly
RISKS ASSOCIATED WITH MERGER

There are several risks associated with consolidation and few of them are as follows: -

1) When two banks merge into one then there is an inevitable increase in the size of the
organization. Big size may not always be better. The size may get too widely and go
beyond the control of the management. The increased size may become a drug rather than
an asset.
2) Consolidation does not lead to instant results and there is an incubation period before the
results arrive. Mergers and acquisitions are sometimes followed by losses and tough
intervening periods before the eventual profits pour in. Patience, forbearance and
resilience are required in ample measure to make any merger a success story. All may not
be up to the plan, which explains why there are high rate of failures in mergers.
3) Consolidation mainly comes due to the decision taken at the top. It is a top-heavy
decision and willingness of the rank and file of both entities may not be forthcoming.
This leads to problems of industrial relations, deprivation, depression and demotivation
among the employees. Such a work force can never churn out good results. Therefore,
personal management at the highest order with humane touch alone can pave the way.
4) The structure, systems and the procedures followed in two banks may be vastly different,
for example, a PSU bank or an old generation bank and that of a technologically superior
foreign bank. The erstwhile structures, systems and procedures may not be conducive in
the new milieu. A thorough overhauling and systems analysis has to be done to assimilate
both the organizations. This is a time consuming process and requires lot of cautions
approaches to reduce the frictions.
5) There is a problem of valuation associated with all mergers. The shareholder of existing
entities has to be given new shares. Till now a foolproof valuation system for transfer and
compensation is yet to emerge.
6) Further, there is also a problem of brand projection. This becomes more complicated
when existing brands themselves have a good appeal. Question arises whether the earlier
brands should continue to be projected or should they be submerged in favour of a new
comprehensive identity. Goodwill is often towards a brand and its sub-merger is usually
not taken kindly.
Structure of Organized Banking Sector in India. Number Of Banks Are In Brackets.
 Table I: Banks Merged In India since Nationalization of Banks
S. Name Of Transferor Name Of Transferee Date Of
No. Bank/Institution Bank/Institution Amalgamation
1 Bank Of Bihar Ltd. State Bank Of India November 8, 1969
2 National Bank Of Lahore Ltd. State Bank Of India February 20, 1970
3 Miraj State Bank Ltd Union Bank Of India July 29, 1985
4 Lakshmi Commercial Bank Ltd Canara Bank August 24, 1985
5 Bank Of Cochin Ltd. State Bank Of India August 26, 1985
6 Hindustan Commercial Bank Ltd. Punjab National Bank December 19, 1988
7 Traders Bank Ltd. Bank Of Baroda May 13, 1988
8 United Industrial Bank Ltd. Allahabad Bank October 31, 1989
9 Bank Of Tamilnadu Ltd. Indian Overseas Bank February 20, 1990
10 Bank Of Thanjavur Ltd. Indian Bank February 20, 1990
11 Parur Central Bank Ltd. Bank Of India February 20, 1990
12 Purbanchal Bank Ltd. Central Bank Of India August 29, 1990
13 New Bank Of India Punjab National Bank September 4, 1993
14 Kashi Nath Seth Bank Ltd. State Bank Of India January 1, 1996
15 Bari Doab Bank Ltd. Oriental Bank Of Commerce April 8, 1997
16 Punjab Co-Operative Bank Ltd. Oriental Bank Of Commerce April 8, 1997
17 Bareily Corporation Bank Ltd. Bank Of Baroda June 3, 1999
18 Sikkim Bank Ltd. Union Bank Of India December 22, 1999
19 Times Bank Ltd. HDFC Bank Ltd. February 26, 2000
20 Bank Of Madura Ltd. ICICI Bank Ltd. March 10, 2001
21 Icici Ltd. Icici Bank Ltd. May 3, 2002
22 Benares State Bank Ltd. Bank Of Baroda June 20, 2002
23 Nedungadi Bank Ltd. Punjab National Bank February 1, 2003
24 South Gujarat Local Area Bank Ltd. Bank Of Baroda June 25, 2004
25 Global Trust Bank Ltd. Oriental Bank Of Commerce August 14, 2004
26 IDBI Bank Ltd. IDBI Ltd. April 2, 2005
27 Bank Of Punjab Ltd. Centurion Bank Ltd. October 1, 2005
28 Ganesh Bank Of Kurundwad Ltd. Federal Bank Ltd. September 2, 2006
29 United Western Bank Ltd. IDBI Ltd. October 3, 2006
30 Bharat Overseas Bank Ltd. Indian Overseas Bank March 31, 2007
31 Sangli Bank Ltd. ICICI Bank Ltd. April 19, 2007
32 Lord Krishna Bank Ltd. Centurion Bank Of Punjab Ltd August 29, 2007
33 Centurion Bank Of Punjab Ltd HDFC Bank Ltd. May 23, 2008
Source: Report on Trend and Progress, RBI, Various Issues

NEED OF THE STUDY

Today financial service sector is currently undergoing a period of major restructuring, which
started in Northern Europe in early 1990s and slowly moved southwards, only reaching the
southern European countries more recently. It brought with it a greater diversification of
activities and the use of new working methods in order to make savings in efficiency in the light
of increasing competition.
It is clear that the global restructuring of the economy and resulting increasing competitive
pressures are among the causative factors for the current merger mania in the financial services
sector. In the early 1990s mergers primarily took place at the national level, as companies strive
to achieve competitive advantage over other national or European rivals’ mergers and
acquisitions are a means of corporate expansion and growth. They are not only means of
corporate growth, but an alternative to growth by internal or organic investment.
This focus needs to be laid down on the identification of the fact that whether these mergers and
acquisitions improve the position and performance of banks or not.

OBJECTIVES OF THE PROJECT

The objectives of this project are as follows:-
 To make analysis of the merger of Banks.
 To analyze the performance of banks before merger and after merger.
 To understand the impact of mergers and acquisitions in Indian banking sector on the
services provided by these banks.

RESEARCH METHODOLGY
The methodology or course of action adopted to fulfill first objective was Exploratory Research.
The data is mainly collected from secondary sources like Published reports, websites, journals.
To fulfill 2nd & 3rd objective primary research technique is used. Random and Convenient
sampling method has been used to take out results. Sample size of 50 is taken for the customers
of each bank. Research is carried out in Delhi.

SOURCES OF DATA

For this project both primary and secondary sources of data were used.
Primary data are that which is generated when a particular problem at hand is investigated by
the researcher employing questionnaires, telephone surveys, personal interviews, observations
and experiments. In this project primary data was collected from

• Questionnaires

Secondary data include that data which are collected from some earlier research work and are
applicable in the study the researcher has presently undertaken, manuals, magazines and other
such publications. In this project secondary data was gathered extensively from

• Internet

• Journals

• Published reports
 MERGER OF
IDBI LTD.
AND
IDBI BANK LTD.
MERGER OF IDBI BANK LTD. AND IDBI

MERGER POSITION

On April 2, 2005, the merger of IDBI Bank Ltd. (IDBI Bank), the banking subsidiary of
Industrial Development Bank of India (IDBI) with its parent company (IDBI held 57% stake in
IDBI Bank) was announced. However, the merger was to be effective retrospectively from
October 1, 2004. The swap ratio was established at 1:1.42, that is, IDBI issued 100 equity shares
for every 142 equity shares held by the shareholders in IDBI Bank. The merged entity was to be
called IDBI Ltd...

IDBI, one of India's leading Development Financial Institutions (DFI), merged with IDBI bank,
its banking subsidiary, in a move aimed at consolidating businesses across the value chain and
realizing economies of scale.

M. Damodaran, IDBI chairman, has confirmed that the merger would benefit both IDBI and
IDBI Bank. “The rationale of the merger is extremely compelling because the bank needs capital
to grow and gets to use a name that has great brand value. They can start operations as a full-
fledged bank without incurring expenditure on setting up branches, inducting technology, or
bringing in new people,” Damodaran said.

A new entity, IDBI Ltd, will become the holding company with two strategic business units —
IDBI, which will function as a development finance company, and IDBI Bank, which will be the
retail arm. IDBI Home Finance, which was acquired from the Tata’s, would also be merged into
IDBI.
 MERGER OF
BANK OF PUNJAB
AND
CENTURION BANK
MERGERS OF CENTURIAN BANK AND BANK OF PUNJAB

Share holding pattern of Centurion Bank of Punjab

After the merger shareholding of Bank of Punjab (BOP) promotes will shrink to 5%. The family
of Darshanjit Singh which promoted Bop currently holds 15.62% while associates hold another
11.40% the promoter stake will now fall down to around 5% ad for associate that would be 7-
8%.
The major shareholder of the centurion bank, bank of Muscat’s stake will fall to 20.5% from
25.91%, Keppel’s stake will be at 9% from current level of 11.33% and Rana Talwar’s capital
will have a stake of 4.4% as against 5.61%.
The promoters of BoP and major stakeholders of centurion bank will have a combine stake of
around 42% in the merged entity- centurion bank of Punjab.
The costs of deposit of Bop were lower than Centurion; While Centurion had a net interest
margin of around 5.8%. The net interest margin of the merged entity will be at 4.8%.
The combined entity will have adequate capital of 16.1% to provide for its growth plans.
Centurion banks capital adequacy on a standalone basis stood at 23.1% while Bank of Punjab
figure stood at 9.21%.
The performance net worth of combined entity as at march 2005 stood at Rs. 696 crores with
centurion’s net worth at Rs. 511 crore and Bank of Punjab’s net worth at Rs. 181 crore, and
combine entity( centurion Bank of Punjab) will have total asset 9395 crore, deposit 7837 crore
and operating profit 43 crore.
The merged entity will have a paid up share capital of Rs. 130 cr and a net worth of Rs. 696 cr.
The merged entity will have 235 Branches and extension counters, 382 ATMs and 2.2 million
customers.

MERGER POSITION

Private Banks is taking to the consolidation route in a big way. Bank of Punjab (BOP) and
Centurion Banks (CB) have been merged to form Centurion Bank of Punjab (CBP). RBI
approved merger of Centurion Bank and Bank of Punjab effective from October 1, 2005. The
merger is at swap ratio 9:4 and the combined bank is 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% in the private sector, nearly 30 banks are operating.
The top five control nearly 65% of the assets. Most of these private sector banks are profitable
and have adequate capital and have the technology edge. 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.
The merger of Centurion bank and Bank of Punjab, both of which had strong retail franchises in
their respective markets, formed centurion bank of Punjab. Centurion bank had a well managed
and growing retail assets business, including leadership positions in 2 wheeler loans and
commercial vehicle loans, and a strong capital base. Bank of Punjab brings with it a strong retail
deposit customer base in North India in addition to a sizeable SME and agricultural portfolio.
The shares of the bank are listed on the major stock exchanges in India and also on the
Luxembourg stock exchange. Bank of Punjab has net non- performing assets of around Rs
110.45 crore as on March 2004, which will be carried to Centurion Banks books after merger.
Both the brands are strong in their respective geographers and business hence the merged entity
will have the elements of both, he added. Centurion Bank has a presence in south and west and
Bank of Punjab has a strong presence in the north. “The merger will give us scale geographical
reach and entry into new products segments” said the official.
Bank of Punjab is strong in small and medium enterprises (ME) business in the north, with good
retail assets and an agriculture portfolio as well as deposit franchisee Centurion Bank has a
capital, ability to generate retail assets, risk management systems and good treasury division.
Market players except the swap ratio 2:1, said sources. For very two stocks of Centurion bank, a
shareholder will get one stock of Bank of Punjab. The merged entity will have a asset base of
Rs.10, 000 crore, said a senior bank official. The depository base of entity will be around Rs.
7165.67 crore and advances will be around Rs. 3909.87 crore.
HIGHLIGHTS OF THE MERGER- CENTURION BANK AND BANK OF

PUNJAB

 Bank of Punjab is merged into Centurion Bank.

 New entity is named as “Centurion Bank of Punjab”.

 Centurion Bank’s chairman Rana Talwar has taken over as the chairman of the merged

entity.

 Centurion bank’s MD Shailendra Bhandari is the MD of the merged entity.

 KPMG India pvt ltd and NM Raiji & Co are the independent values and ambit corporate

finance was the sole investment banker to the transaction.

 Swap ratio has been fixed at 4:9 that is for every four shares of Rs 10 of Bank of Punjab,

its shareholders would receive 9 shares of Centurion Bank.

 There has been no cash transaction in the course of the merger; it has been settled through

the swap of shares.

 There is no downsizing via the voluntary retirement scheme.

 MERGER OF
IDBI LTD.
AND
UNITED WESTERN BANK
LTD.
MERGER OF IDBI LTD. AND UNITED WESTERN BANK

Key challenges

On the face of it, an outflow of Rs 150crore may appear inexpensive. But if one were to consider
the hidden costs in the form of bad loans and the likely slippages in the quality of existing assets,
the effective cost is likely to go up by Rs 100crore.

Considering IDBI's size, this may still be a small sum. Post-merger, its level of net non-
performing assets is likely to increase to 1.4 per cent from about one per cent now. As such,
managing and containing the level of bad loans remain a challenge for IDBI.

In the short term, the IDBI stock is unlikely to deliver significant value. Its management has said
that UWB would be kept as a strategic business unit in the near term.

While this may make the balance-sheet look attractive in the short term, the impact of the
synergies that will flow from the merger will be visible only over the long term.

Integration of UWB with itself is likely to be a key challenge for IDBI. UWB has an employee
base of over 3,200, which is about 70 per cent of IDBI's.

Going by the draft amalgamation scheme, IDBI is required to absorb the entire workforce, a
move that is likely to push up its wage cost and make integration a tricky exercise.

The boards of the two banks have been given time till September 27 by the RBI to discuss the
amalgamation scheme and place their objections/suggestions before the central bank.

As such, the possibility of another bank/institution presenting a better offer to take over UWB
cannot be ruled out, though the chances appear slim at the moment.

Despite the concerns, the downside risks associated with the merger appear minimum, making
the IDBI stock attractive as a long term proposition.

Attractive bailout for UWB

The UWB shareholders can accept the offer, priced at Rs 28 per share. That the shareholders of
the transferor bank are being compensated is in itself a big improvement over the previous such
cases.

Poor asset quality and deteriorating financials had cast a gloomy picture of UWB's future. IDBI,
with enough capital at its disposal to absorb the business of UWB, is confident enough to lend
succor to the ailing bank.
The draft scheme for merger, placed in the public domain for comments, provides for IDBI
making an upfront payment in cash of Rs 28 for every fully paid-up share held in UWB, costing
a total of Rs 150crore.

With the UWB scrip closing today at Rs 21.45 on the BSE, the IDBI offer seems an attractive
bailout for shareholders. On Tuesday, the IDBI scrip closed at Rs 62.25, up 0.16 per cent.

Analysts said that this is probably the first time that the Central bank has taken into account the
interest of shareholders.

SICOM, with a stake of around 10 per cent in UWB, plans to call a board meeting this week to
weigh the buyout offer of IDBI.

The Maharashtra Government-owned body had picked up UWB shares at a price higher than Rs
28, according to Mr. R.M. Premkumar, Chairman of SICOM.

He refused to disclose the purchase price. "We will try to negotiate a higher price with IDBI, if
possible," he added, while ruling out time-consuming court appeals.

Low net NPAs and high capital adequacy ratio "seem to have made us favourites," said a senior
IDBI official.

However, the moratorium has not been lifted.

• As of June 30, 2006 IDBI's net NPAs stood at 1.02 per cent, while the capital adequacy
ratio was 14 per cent.
• In 2005-06, UWB posted net loss of Rs 106.48crore and Rs 6.08crore for the quarter
ended June 30, 2006.
• The capital adequacy ratio was minus 0.3 per cent against the prescribed minimum of
nine per cent.
• As on July 31, 2006 the gross NPAs stood at Rs 493crore (13.84 per cent), while net
NPAs amounted to Rs 201crore (6.16 per cent).
• In August, the RBI levied a penalty of Rs 5lakh on IDBI for violation of know your
customer (KYC) norms and guidelines relating to IPO financing.
 MERGER OF
ICICI BANK LTD.
AND
SANGLI BANK LTD.
MERGER OF ICICI BANK LTD. AND SANGLI BANK LTD.

The merger between ICICI Bank and SANGLI Bank was announced on APRIL 18, 2007. All
branches of Sangli Bank functions as branches of ICICI Bank from April 19 said the Reserve
Bank of India.

Sangli Bank is an unlisted private bank headquartered at Sangli in Maharashtra. As on March 31,
2006, Sangli Bank had deposits of Rs. 2,004crore, advances of Rs. 888crore, net NPA (non-
performing assets) ratio of 2.3 per cent and capital adequacy of 1.6 per cent. Its loss at the end of
2005-06 amounted to Rs. 29crore. The Tier-I capital of the bank shrunk to 0.82 per cent (6.44
per cent), while Tier-II dived to 0.82 per cent (2.86 per cent) over the same period. It posted a net
loss of Rs 29.27crore (loss of Rs 31.31crore) as on March 31, 2006.

The bank has a capital base of Rs 23.56 crore (Rs 22.30 crore). The staff strength stood at 1,923
employees as of end March 2005.

It has 198 branches and extension counters, including 158 branches in Maharashtra and 31
branches in Karnataka.

About 50 per cent of the total branches are located in rural and semi-urban areas and 50 per cent
in metropolitan and urban centre. The bank has about 1,850 employees. ICICI Bank is the second
largest bank in India and the biggest in terms of market capitalization.

As on September 30, 2006, ICICI Bank had total assets of Rs. 282,373crore. In the six months
ended September 30, 2006, it made a net profit of Rs. 1,375crore.

It had 632 branches and extension counters and 2,336 ATMs as on that date, and is in the process
of setting up additional branches and ATMs pursuant to authorisations granted by the RBI. It has
about 31,500 employees.

ICICI Bank offers a wide range of financial products and services directly and through
subsidiaries in the areas of life and general insurance, asset management and investment
banking.

Its shares are listed on the Bombay Stock Exchange Limited and the National Stock Exchange of
India Limited and its American Depositary Shares are listed on the New York Stock Exchange.
For ICICI Bank, the merger would give it an immediate access to 198 branches of Sangli Bank,
apart from strengthening its rural portfolio. However, unlike in some of the recent takeover deals
in banking sector, it is difficult to figure out as to what synergies the merger is likely to result in.

In terms of size, the takeover of Sangli Bank is likely to be insignificant for ICICI Bank. ICICI
Bank has a deposit base of about Rs 1,90,000crore, which is about 95 times that of Sangli. Its
advances at about Rs 155,000 crore are close to 170 times that of Sangli. Sangli Bank has bad
loans of about Rs 40crore and Rs 60crore in accumulated losses, which again is miniscule for a
bank such as ICICI Bank.

According to the merger scheme, the share exchange ratio has been fixed for the shareholders
of the Maharashtra based Sangli Bank. The shareholders of Sangli Bank with every 925 equity
shares will get 100 equity shares of the ICICI Bank.

Further, the ICICI Bank is expected to issue 3.46 million equity shares with the face value of
Rs 10 each against Sangli Bank Limited’s 31.96 million equity shares of the face value of Rs
10 each.

As soon as the new shares would be issued, it would be listed at both the share trading market the
BSE as well as NSE.

When the RBI would give its approval to the merger, the Board of Directors would set a date for
the exchange of the shares. The shareholders of SBL would get the shares of the ICICI Bank in
exchange of their shares of SBL on that date.
 MERGER OF
HDFC BANK
AND
CENTURIAN BANK OF
PUNJAB
MERGERS OF HDFC BANK AND CENTURIAN BANK OF PUNJAB

Amalgamations

In 2002, HDFC Bank witnessed its merger with Times Bank Limited (a private sector bank
promoted by Bennett, Coleman & Co. / Times Group). With this, HDFC and Times became the
first two private banks in the New Generation Private Sector Banks to have gone through a
merger.

MERGER POSITION
HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab
(CBoP) for Rs 9,510crore in one of the largest merger in the financial sector in India. CBoP
shareholders will get one share of HDFC Bank for every 29 shares held by them.

HDFC Bank and Centurion Bank of Punjab have agreed to the biggest merger in Indian banking
history, valued at about $2.4 billion. It is likely the beginning of a wave of M&A deals in the
financial services industry, as India prepares to ease restrictions on bank ownership in 2009.

This will be HDFC Bank’s second acquisition after Times Bank. HDFC Bank will jump to the
7th position among commercial banks from 10th after the merger. However, the merged entity
would become second largest private sector bank.

The merger will strengthen HDFC Bank's distribution network in the northern and the southern
regions. CBoP has close to 170 branches in the north and around 140 branches in the south.
CBoP has a concentrated presence in the in the Indian states of Punjab and Kerala. The
combined entity will have a network of 1148 branches. HDFC will also acquire a strong SME
(small and medium enterprises) portfolio from CBoP. There is not much of overlapping of
HDFC Bank and CBoP customers.

The entire process of the merger had taken about four months for completion. The merged entity
will be known as HDFC Bank. Rana Talwar's Sabre Capital would hold less than 1 per cent stake
in the merged entity from 3.48 in CBoP, while Bank Muscat's holding will decline to less than 4
per cent from over 14 per cent in CBoP. HDFC shareholding falls to will fall from 23.28 per cent
to around 19 per cent in the merged entity.
Rana Talwar, chairman of Centurion Bank of Punjab, says, “I believe that the merger with
HDFC Bank will create a world-class bank in quality and scale and will set the stage to compete
with banks both locally as well as on a global level.”
According to HDFC Bank Managing Director and Chief Executive Officer Aditya Puri,
Integration will be smooth as there is no overlap. In an interview, he mentioned that at 40%
growth rate there will be no lay-offs. The integration of the second rung officials should be
smooth as there is hardly any overlap.

The boards of the two banks had meet on February 28 to consider the draft scheme of
amalgamation, which will be subject to regulatory approvals. HDFC Bank will consider making
a preferential offer to its parent Housing Development Finance Corp Ltd (HDFC). The move
would allow HDFC to maintain the same level of shareholding in the bank.

(Rs bn) HDFC Bank COBP

Advances 713.9 150.8
Deposits 993.9 207.1
CASA(%) 51 25
Branches 754.0 394.0
ATMs 1906
Assets size 1314.4 254
Networth 113.6 19.0
NIMs(%) 4.30 3.60
ROE(%) 17.54 9.86
ROA(%) 1.43 0.80
CAR(%) 13.80 11.51
Net NPA(%) 0.40 1.69

HIGHLIGHTS OF THE MERGER- HDFC AND

CENTURION BANK OF PUNJAB

1) HDFC bank is merged with Centurion Bank of punjab

2) New entity is named as “HDFC bank itself”.
3) The merger will strengthen HDFC Bank's distribution network in the northern and the
southern regions.
4) HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of
Punjab (CBoP) for Rs 9,510 crore.
5) The swap ratio of 1:29 for HDFC-CBOP merger turned out to be more favourable for
HDFC Bank than expected by the market

6) The swap ratio was based on the recommendations made by joint valuers Dalal & Shah, a
chartered accounting firm, and Ernst & Young, a consulting firm.

7) HDFC held 23.28 per cent in HDFC Bank at the end of December 31, 2007. HDFC will
need about Rs 3,900 crore to raise its shareholding after it falls to around 19 per cent after
the merger.
8) The acquisition of Centurion Bank of Punjab (CBoP) - Rs 9,510 crore in the financial
sector in India. However, the merged entity would still be two-fifth the size of the
country’s second largest lender, ICICI Bank.

9) The market cap to branch ratio of HDFC Bank is Rs.721m where the same for CBOP is
Rs. 238m. Hence, HDFC Bank has been able to buy the franchisee of CBOP at almost
one-third of what the market is currently giving to its own franchisee.

10) If HDFC Bank manages to improve the productivity of these branches to even half the
levels of HDFC Bank branches, the merger will become positive in longer term.

11) The merger was EPS dilutive for HDFC Bank in the interim

12) The profitability ratios of CBoP are quite low, this looked an expensive proposition for
HDFC in the short run

13) Access to 394 branches of CBoP and an increased presence in southern and northern
states

14) 170 of CBoP’s branches lie in the North, concentrated in the National Capital Region
(NCR, 55), Punjab (78), Haryana (28); 150 of its branches are situated in the South,
mainly in Kerala (91).

15) Greater access to the North (Punjab and Haryana) as well as the South (particularly
Kerala), thereby strengthening its presence in those regions.

16) CBoP’s strong SME relationships will complement HDFC bias towards highly rated
corporate thus expanding HDFC’s base.

17) The creation of India’s 7th largest bank, just behind public giants like Bank of Baroda,
Bank of India.

18) Induction of a strong and capable management team with extensive industry experience
and proven capabilities.

19) Due to an influx of 394 branches from CBoP, there will be a significant increase in the
number of branches for HDFC

20) CBoP currently has a weaker asset profile with net NPAs of 1.6% as against 0.4% for
HDFC Bank. Going forward, HDFC Bank (combined entity) would aim to maintain its
NPA profile at these levels, which would require a charge of ~Rs2bn

21) Bring down cost to income ratio to 52-13& from current 56%.
 FINDINGS
The variation of the impact of mergers in Indian banking sector, on the services of banks w.r.t.
gender wise classification was analyzed by using SPSS. One Way Anova technique was applied
to analyze the data.

This gender wise variation of impact of mergers on the services of banks was compared and
tested using following hypothesis:
H1: The services of banks have not improved significantly.

AGE

AGE 15-25yrs 26-35yrs 36-45yrs 46-55yrs >56yrs

No. Of 23 42 45 28 12
Respondents
INCOME

INCOME (in 0-1lakh 1-3lakh 3-5lakh 5-10lakh >10lakh

Rs)
No. Of 19 45 48 21 17
Respondents
EDUCATION

EDUCATION <10th 12th Graduation Post Graduation

No. Of 9 22 7 43
Respondents
1. Do you know about mergers?

Do you know about YES NO

mergers?
No. Of Respondents 131 19
2. Do you know about the merger of the bank?

Do you know about the YES NO

merger of the bank?
No. Of Respondents 110 21
3. For how long have you been associated with this bank?

Association with <1yrs 1-2yrs 2-5yrs >5yrs

bank
No. Of 18 37 32 23
Respondents
4. Have the following services of Bank improved after the merger or not?

a) Working Hours

Working Hours Highly Improved Improved Neutral Worsen

No. Of 14 55 34 7
Respondents
 b) ATM facilities

ATM facilities Highly Improved Improved Neutral Worsen

No. Of 24 49 21 16
Respondents
 c) Online banking

Online Banking Highly Improved Improved Neutral Worsen

No. Of 26 60 19 5
Respondents
 d) Credit cards

Credit Cards Highly Improved Improved Neutral Worsen

No. Of 19 47 23 21
Respondents
 e) Mobile banking

Mobile banking Highly Improved Improved Neutral Worsen

No. Of 42 37 18 13
Respondents
 f) Loans Facilities

Loan Facilities Highly Improved Improved Neutral Worsen

No. Of 19 43 25 23
Respondents
5. Is there any change in hierarchy of the organization after merger?

Is there any change Yes No Can’t Say

in hierarchy of the
organization after
merger?
No. Of Respondents 52 41 17
6. Is merger in favour of bank?

Is merger in favour of bank? YES NO

No. Of Respondents 94 16