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Executive Summary
Merger - It's the most talked about term today creating lot of excitement and

speculative activity in the markets. But before Mergers & Acquisitions (M&A)

activity speeds up, it has to actually pass through a long chain of procedures (both

legal and financial), which at times delays the deal.

With the liberalization of the Indian economy in 1991, restrictions on

Mergers and Acquisitions have been lowered. The numbers of Mergers and

Acquisitions have increased many times in the last decade compared to the slack

period of 1970-80s when legal hurdles trimmed the M&A growth. To put things in

perspective, from 15 mergers in 1998, the number crossed to over 280 in FY01. With

a downturn in the capital markets, valuations have come down to historic lows. It's

high time that the consolidation game speeds up.

In simple terms, a merger means blending of two or more existing

undertakings into one, consequent to which each undertaking would lose their

separate identity. The most common reasons for mergers are, operating synergies,

market expansion, diversification, growth, consolidation of production capacities and

tax savings. However, these are just some of the illustrations and not the exhaustive


However, before the idea of Merger and Acquisition crystallizes, the

firm needs to understand its own capabilities and industry position. It also needs to

know the same about the other firms it seeks to tie up with, to get a real benefit from a


Globalization has increased the competitive pressure in the markets. In a

highly challenging environment a strong reason for merger and acquisition is a desire

to survive. Thus apart from growth, the survival factor has off late, spurred the

merger and acquisition activity worldwide.

Take retail finance for instance. With corporate banking becoming an

unprofitable business for banks due to high risk of asset quality, banks including

financial institutions are tapping the retail finance segment. ICICI's acquisition of

Anagram Finance from Lalbhai group, HDFC Bank's merger with Times Bank and

ICICI Bank's merger with Bank of Madura are some of the latest examples of

consolidation in the banking sector. We could see the similar trend perking up in

other sectors.

The present study gives some insight as to why the banks are going foe

merger and acquisition and what are the legal, tax and financial aspects governing

them. The study also deals with other aspects such as types of merger, motives,

reasons, bank too much on merger, and successful consolidation in merger, recent

trend in merger and acquisition activity. Lastly a case study involving the merger of

ICICI with ICICI Bank has been taken.

Objective of study:

• To discuss the form of mergers and acquisitions.

• To highlight the real motives of merger and acquisitions.

• To focus on the considerations that are important in the mergers and

acquisitions negotiations.

• To find out reason for merger in the banking sector.

• To understand the implications and evaluation.

2. Mergers and Acquisition


Business combinations which may take forms of merger, acquisitions,

amalgamation and takeovers are important features of corporate structural changes.

They have played an important role in the financial and economic growth of a firm.

Merger is a combination of two or more companies into one company.

One or more companies may merge with an existing company or they may merge to

form a new company. Laws in India use the term amalgamation for merger. For

example, Section 2(1A) of the Income Tax Act, 1961 defines amalgamation as the

merger of one or more companies with another company or the merger of two or

more companies (called amalgamating company or companies) to form a new

company (called amalgamated company) in such a way that all assets and liabilities

of the amalgamated company and shareholders holding not less than nine-tenths in

value of the shares in the amalgamating company or companies become shareholders

of the amalgamated company.

Merger or amalgamation may take two forms:

• Merger through absorption

• Merger through consolidation


In absorption, one company acquires another company. All companies

except one lose their identity in merger through absorption.


In a consolidation, two or more companies combine to form 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 asset,

liabilities and shares to the acquiring company for cash or exchange of shares.


A fundamental charectaristic of merger (either through absorption or

consolidation) is that the acquiring company (existing or new) takes over the

ownership of other companies and combine their operations with its own

operations. In an acquisition two or more companies may remain independent,

separate legal entity, but there may be change in control of companies.


A takeover may also define as obtaining of control over management of a

company by another. Under the Monopolies and Restrictive Trade Practices Act,

takeover means acquisition of not less than 25% of the voting power in a

company. If a company wants to invest in more than 10% of the subscribe capital

of another company, it has to be approved in the shareholders general meeting and

also by the central government. The investment in shares of another companies in

excess of 10% of the subscribed capital can result into their takeover.

Types of Merger

There are three major types of mergers they can be explain as follows:

1 Horizontal Merger :

This is a combination of two or more firms in similar type of production,

distribution or area of business.

2 Vertical Merger :

This is a combination of two or more firms involved in different stages of

production or distribution. Vertical merger may take the form of forward or backward


Backward merger: When a company combines with the supplier of material, it is

called backward merger.

Forward merger: When it combines with the customer, it is known as forward merger.

3 Conglomerate Merger :

This is a combination of firms engaged in unrelated lines of business activity.

Example is merging of different business like manufacturing of cement products,

fertilizers products, electronic products, insurance investment and advertising


Advantages of Merger and Acquisitions

1 Maintaining or accelerating a company’s growth.

2 Enhancing profitability, through cost reduction resulting from economies of


3 Diversifying the risk of company, particularly when it acquires those business

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


5 Limiting the severity of competition by increasing the company’s market


3. 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 or

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 the 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 utilize 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.

4. 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. Screening process short lists a few candidates 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, expect 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.

5. 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, 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 fuctions and facilities. It can consolidate its management

functions such as manufacturing, R & D and reduce operating costs. Foe 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 Utilisation of surplus funds:

A firm in a mature industry may generate a lot of cash but may not have

opportunities for profitable investment. Most managements have 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


6 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.

7 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


6. Legal, Tax and Financial aspects of Merger

Legal Procedures for Merger and Acquisition

The following is the procedures for merger or acquisition is fairly long dawn.

Normally it involves the following steps:

1 Permission for merger:

Two or more firm can amalgamate only when amalgamation is permitted under

their memorandum of association. Also, the acquiring firm should have the

permission in its object clause to carry on the business of the acquired company. In

the absence of these provisions in the memorandum of association, it is necessary to

seek the permission of the shareholders, board of directors and the Company Law

Board before affecting the merger.

2 Information to the stock exchange:

The acquiring and the acquired companies should inform the stock exchange

where they are listed about the merger.

3 Approval of board of directors:

The boards of the directors of the individual firm should approve the draft

proposal for amalgamation and authorize the managements of companies to further

pursue the proposal.

4 Application in the High Court:

An application for approving the draft amalgamation proposal duly approved

by the board of directors of the individual firm should be made to the High Court.

The High Court would convene a meeting of the shareholders and creditors to

approve the amalgamation proposal. The notice of meeting should be sent to them at

least 21 days in advance.

5 Shareholders and Creditors meetings:

The individual firm should hold separate meetings of their shareholders and

creditors for approving the amalgamation scheme. At least 75% of shareholders and

creditors in separate meeting, voting in person or by proxy, must accord their

approval to the scheme.

6 Sanction by the High Court:

After the approval of shareholders and creditors on the petitions of the

companies, the High Court will pass order sanctioning the amalgamation scheme after

it is satisfied that the scheme is fair and reasonable. If it deems so, it can modify the

scheme. The date of the court’s hearing will be published in two newspapers and also

the Regional Director of the Law Board will be intimated.

7 Filing of the Court order:

After the Court order its certified true copies will be filed with the

Registrar of Companies.

8 Transfer of asset and liabilities:

The asset and liabilities of the acquired firm will be transferred to the

acquiring firm in accordance with the approved scheme, with effect from the

specified date.

9 Payment by cash or securities:

As per the proposal, the acquiring firm will exchange shares and

debentures and pay cash for the shares and debentures of the acquired firm. These

securities will be listed on the stock exchange.

Tax Aspects of merger and acquisition

The important tax provisions relating to merger and acquisition can be broadly

discussed as follows:

1 Depreciation:

For tax purposes the depreciation chargeable by the amalgamated firm

has to be based on the written down value of the asset before amalgamation. For

accounting purposes however the depreciation charge may be based on the

consideration paid for the

2 Unabsorbed depreciation and Past losses of amalgamating firm:

Unabsorbed depreciation and past losses of the amalgamating firm

cannot be carried forward by the amalgamated firm except as provided in section

72A (1) of the Income Tax Act. However enables the amalgamated firm to carry

forward accumulated losses and unabsorbed depreciation of the amalgamating

firm in certain special cases of amalgamation. The benefit is available when the

Central Government is satisfied, on the recommendation of the specified authority

that the following conditions are fulfilled.

• The amalgamating firm should not be financially viable.

• The amalgamation should be in public interest.

• The amalgamation should facilitate the rehabilitation or revival of the

business of the amalgamating company.

• The amalgamated firm should get a certificate from the specified authority

that adequate steps have been taken for the rehabilitation or revival of the

business of the amalgamating firm.

In view of the benefit that accrues under section 72A(1) the

concerned firm should check with the specified authority fairly early in the

amalgamation process whether the benefit is likely occur.

Since the benefit under section 72A(1) is often not easily forthcoming

merging firm generally resort to a reverse merger. In a reverse merger, a loss

making firm acquires a profit making firm.

3 Amortisation of capital expenses:

The amalgamated firm can amortise the expenditure on scientific

research the expenditure on acquisition of patent rights or copyrights, preliminary

expenses and capital expenditure on promotion of family planning.

4 Investment Allowance, Development Rebate and Development Allowance:

Investment allowance, development rebate and development

allowance remaining unabsorbed in the hands of the amalgamating firm can be

carried forward by the amalgamated firm provided various requirements

regarding sale or transfer of asset and creation and utilization of reserves are

satisfied by the amalgamated firm.

5 Capital Gain Tax:

No capital gain tax is applicable to the amalgamating firm or its

shareholders if they get share in the amalgamated firm.

Financial Aspects of Merger

There are many ways in which a merger can result into financial synergy. A

merger may help in:

• eliminating the financial constraint

• deploying surplus cash

• enhancing debt capacity

• lowering the financial cost.

It can be broadly explain as follows:

1 Financial Constraint:

A firm may be constrained to grow through internal development due

to shortage of fund. The firm can grow externally by acquiring another firm by

the exchange of shares and thus, release the financial constraints.

2 Surplus Cash:

A firm may be faced by a cash rich firm. It may not have enough

internal opportunities to invest its surplus cash. It may either distribute its surplus

cash to its shareholders or use it to acquire some other firm. The shareholders may

not really benefit much if surplus cash is returned to them since they would have

to pay tax at ordinary income tax rate. Their wealth may increase through an

increase in the market value of their shares if surplus cash is used to acquire

another firm. If they sell their shares they would pay tax at a lower, capital gain

tax rate. The company would also be enabled to keep surplus funds and grow

through acquisition.

3 Debt capacity:

A merger of two firms, with fluctuating, but negatively correlated, cash

flows, can bring stability of cash flows of the combined firm. The stability of cash

flows reduces the risk of insolvency and enhances the capacity of the new entity

to service a larger amount of debt. The increased borrowing allows a higher

interest tax shield which adds to the shareholders wealth.

4 Financing cost:

Does the enhanced debt capacity of the merged firm reduce its cost of

capital? Since the probability of insolvency is reduced due to financial stability

and increased protection to lenders, the merged firm should be able to borrow at a

lower rate of interest. This advantage may, however be taken off partially or

completely by increase in the shareholders risk on account of providing better

protection to lenders.

Another aspect of the financing costs is issue costs. A merged firm is able

to realize economies of scale in flotation and transaction costs related to an issue

of capital. Issue costs are saved when the merged firm makes a larger security


7. 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


• 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


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


• 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 Earning Per Share (EPS) and P/E (Price Earning) ratio:

In practice, investor attach 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 earning 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 earning ratio remaining the same.

8. Banking too much on Mergers

Mergers and acquisitions (M&A) can help banks restructure in a way

that gives them superior organizational capabilities, resulting in a sustainable

competitive advantage. However, it will be too simplistic to consider merger and

acquisition as a recipe for all, or even a majority, of banking sector ills. Generally

the merger and acquisition route is contemplated to take advantage of scale of

operations. But the problem does not always relate to scale. There are many

examples where commendable results have been achieved by breaking profit

centers into smaller units. The ability of a bank to meet competition will therefore

depend upon the speed, quality and efficiency of its delivery system through a

conducive work climate and a responsive workforce. Unless both the management

and employees collectively strive for this goal.

Banking experts believe that a merger with a ‘right’ bank can help a

bank increase its net worth and hence its capital adequacy. This is particularly

relevant in the context of the proposed revised rules of the Basle Committee on

Banking Supervision aimed at keeping bank capital standards with the increased

sophistication in the financial services industry.

In the case of private sector banks, where the promoters are required

compulsorily to dilute their stake to the stipulated 40%. Merger can be quite

useful to take care of the mandatory requirement. This apart, mergers would also

expand the business opportunities for both the banks.

Shareholder Value:

There is no doubt that bankers in India need to be sensitive to the fast changing

economic environment and must constantly and consciously seek to strive to

increase shareholders value. To achieve this, the focus must be on ensuring that

funds mobilized by banks generate adequate returns in excess of the cost of

capital. Also they should on an on-going basis, endeavour to invest in technology

that increases their reach and enhances customer satisfaction.

2 Integrated HR system:

Banks the most, apart from lack of professionalism and adequate

technology upgradation is the lack of a centralized human resources (HR)

strategy. Banks must therefore, urgently evolve an integrated HR system, wherein

the trust should be growth with people.

Banks will have to build around this concept a performance

measurement system a career development path and a remuneration policy. In this

policy has to be the realization that:

• In the day to come, there is bound to be greater staff mobility between banks.

• Staff remuneration has to be based partly on market trends and partly on job

requirements and individual banks needs rather than standardized uniform

scales for all banks. Complete autonomy needs to be given to banks in this


• Promotions must be decided primarily on merit and requirements of the banks

concerned, ensuring at the same time that the promotion policy is objective

and transparent and does not give rise to widespread frustration.

Based on these considerations, banks should evolve a personnel and HRD policy


• A comprehensive system of recruitment and training

• A conscious programme for development of different categories of


• New horizons for employees to grow within the organization itself

• Greater coordination amongst banks with regard to recruitment, particularly at

senior levels to prevent poaching as for as possible.

Growth with people:

In this area of knowledge and information, people will inevitably be an

organizations most important asset. This calls for a new paradigm business

growth through people’s growth. Growth is created not by the entity of the

organization but by its talented and knowledge people. The growth of the banking

sector in India leading to sustained shareholder value can thus be ensured only

through its vast workforce. Banks can respond to the challenge of change and

growth only if the potential of their employees is harnessed.

Customer Orientation:

Another trusts area for banks in their quest for growth and creating

shareholder value is customer service. Research has shown that a customers

decision to stay loyal to a particular bank is most often based on how he has been

treated by a teller or a staff. Banks must therefore focus on improving the

capabilities of such staff to consistently deliver services of expected quality level.

This is in turn directly linked to how their organisation has resolved and

integrated marketing, operations, finance and HR objectives into a unifying

service strategy that is delivered by frontline staff.

Mergers generally pose another ticklish problem for the new organisation

that is bringing about harmony and a sense of identity when two banks with

starkly contrasting corporate cultures are sought to be merged. In such a situation

there is bound to be problems of diversity of corporate culture, value and

approach. Integrating workforces is always a tough task and any incompatibility

could result in gross inefficiencies, defeating thereby the very objective of the


Merger and acquisition is therefore no substitute for poor asset

quality, lax management, indifference to technology upgradation and lack of an

integrated HR strategy. Ti must be remembered that merger is only one of the

alternatives in corporate restructuring there could be better and more

advantageous to leverage optimum utilization of corporate resources.

M&As: New mantra in banking sector

Corporation Bank is the latest to join the bandwagon of mergers and

acquisitions. Following a statement by Finance Minister P Chidambaram last

month, calling for a consolidation of the Indian banking industry, there has been a

spate of announcements from banks, with M&A on their mind.

The board of the directors of Corporation Bank has given in-principal

approval for the bank to go forward with its plan to acquire another bank. Earlier,

Indian Bank, which has barely wiped out its Rs 1,600 crore loss, also announced

its intentions to acquire another bank. The Chennai-based bank feels its will

acquire a wider reach through an acquisition.

Bank of Baroda has also joined the fray, basically because being a

bank with a strong presence in western India, it requires to spread its wings in the

rest of the country. Ditto goes for Vijaya Bank, Central Bank of India, United

Bank of India, Punjab & Sind Bank and Punjab National Bank. Union Bank of

India, on the other hand, already has a national level presence, but wants to

become a global entity and therefore is looking at the acquisition route.

The Government’s recent announcements have also created a positive

atmosphere for these developments. Minister Prithviraj Chavan recently said,

"The Indian Government will soon unveil a policy guideline to encourage mergers

and acquisitions in the Indian banking sector."

The policy is expected to provide the impetus for growth in the wake

of the Government’s decision to retain the public sector character by capping the

public holding of capital. Further, he said, the rapid technological advances in the

sector also spelt the need for a new breed of regulators and inspectors to keep

amateur hackers and professional techno-thieves at bay.

The move to formulate such guidelines has been fuelled by the fact

that present day banking required a smaller number of very large banks rather

than a pack of small banks. There are about 90 scheduled commercial banks, four

non-scheduled commercial banks and 196 regional rural banks (RRBs). The State

Bank and its seven associates have about 14,000 branches; 19 nationalised banks

34,000 branches; the RRBs 14,700 branches; and foreign banks around 225


However, only State Bank of India is among the top 200 banks in the

world. This fact has probably triggered off the entire process.

It is also felt that consolidation of the industry will better help banks raise

capital for growth from the financial market without further liquidating the public

sector character in ownership and management.

On the down side, the sector will have to be prepared for issues arising

out of compatibility of technology and human resources.

Consolidation and creation of mega banks will also require a clear focus

on lending operations and more intensive retail banking. Public sector banks need

to catch up on these issues.

9. Benefits of Bank Mergers

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


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 gain in economies of scale.

Economies of scale refers to the lower operating cost (per unit) arising from

spreading the fixed costs over a wider scale of production and economies of scale

refers to the utilization of skill assets employed in the production in order to

produce similar production or services. In a combined entity, the skill used to

produce results on a wider scale. Additionally financial synergies refers to the

effect of a merger on the financial activities of the resulting company.

The cash flows arising from the merger are expected to present

opportunities in respect of the cost of financing and investment. The argument is

that combining two banks give rise to savings in cost, maximization in the use of

resources and increase in revenues.

Similarly mergers and takeovers also plays a crucial role in efficient

allocation of resources. When a bank is not performing as expected others will

notice that the assets of the bank are not being put to their most efficient use. This

bank will then become a potential target for a takeover for a bank which believes

that under its management the asset can be fully utilized to produce better results.

To that extent merger and takeovers play a crucial economic role of moving

resources from zones of under utilization to zones of better utilization. Poorly run

companies are more prone to bring taken over by the powerful and managers

have an incentive to ensure that their company is governed properly and resources

are used to produce maximum value. Takeovers in the banking sector will ensure

that the boards and management of institutions will improve corporate governance

to avoid being target in future.

10. Successful Consolidation in the Banking Merger

The concern of bank supervisors that market participants might

systematically overestimate the advantages of mergers and acquisitions and

underestimates the downside risks associated with the process of restructuring is

based on a large body of empirical studies by academic economists and business

consultants. These studies attempt to measure either the potential benefit of

mergers in general (mainly to identify the prospective economies of scale and

scope) or the “success” of a specific merger at some point in time after the deal

was completed. In this latter category, various yardsticks are used, including the

repositioning of the merged entity in terms of cost and profit efficiency or the

development of simple balance sheet ratios or the valuation of the new company

in the stock market.

In general the result of these studies lead to the conclusion that most

mergers fail to add value either in the form of superior stock price performance or

in the form of cost and profit advantages of the combined institution. Moreover,

especially in the US, most large scale mergers and acquisitions in banking have

been resulted in the destruction of shareholder value, as defined in terms of

market capitalization. Also it is claimed that economies of scale can be clearly

identified on any small and medium size banks only and that there is no numerical

evidence on any economies of scale. In sum the empirical results for mergers and

acquisitions in the financial industry seem both to contradict the (theoretical)

arguments in favor of a restructuring and motivations given by practitioners.

During the last few years the Indian Banking system has witnessed

some very high profile mergers, such as the merger of ICICI Limited 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 government’s 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 bank’s 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 in May 2003 these 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 there by 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.

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 process and to

identify the authority that will be responsible for conducting the merger review


Besides, for an outside observer it might also be somewhat

surprising that bank supervisors are concerned with the “success” or to what

extent business leaders in the financial services industry are taking the right

decision when they initiate an merger and acquisition at least as long as other

concerns relating to the core mission of the supervisory authorities do not come

in. Bank supervisors should be concerned whether the current merger and

acquisition activity might pose a threat to efficient risk management and

supervision and whether ultimately the stability of the financial system itself

might be at risk. It might, however be more appropriate to proceed directly to

discussing the implications of the current process of financial sector consolidation

for risk management and financial sector stability. While the arguments of bank

supervisors in this realm cannot be dismissed entirely, they seem however greatly

exaggerated and should not provide a valid argument against a further

restructuring of the financial industry.

11. Domestic Bank Merger and Acquisition and

International Bank Merger and Acquisitions

I) Domestic Bank Merger and Acquisitions:

Domestic Bank Merger and Acquisitions can be broadly discussed

as follows:

• Domestic merger and acquisition mainly occur between smaller Institutions,

indicating a mop-up of excess capacity.

• Consolidation of smaller institutions has been a phenomenon during the whole


• Merger and acquisitions of large institutions are increasing both in absolute

and relative terms, thereby affecting the market structures in some Member


• The number of merger and acquisitions was clearly higher in compare with

the three previous years and upward shifts in values of Merger and

Acquisitions have been observed in a number of countries, indicating a wave

of mergers among larger institutions.

Information about the value of merger and acquisitions is available

to a limited extent only. The possible effect of merger and acquisitions on

domestic market structures has been estimated by relating the asset of the new

institution to the total asset of the banking system. A large domestic players,

which, when they are involved, will have a large influence on the market structure

than small institutions. The effect on regional retail clients may be equally

important in case of merger and acquisitions between small regionally specialized

institutions but the overall competitive effect on the market will be larger when

the size of the institution increases.

For domestic merger and acquisitions large values tended to be

involved during the period indicating that it is not only the very small institutions

that are involved in mergers and acquisitions at least on an aggregate basis. A

development of increased values may, therefore have taken place. There are,

however large differences among Member States, both at the level of banking

assets involved in merger and acquisitions and in the trends towards either

increases or declines.

Around 30% of banking assets were involved in domestic bank

merger and acquisitions in 1998, whereas 20% in 1999 and then percentages were

range between 20 percent to 60 percent in French mergers. Lately, all these

markets have, thus undergone quite some changes. Clear downward movements

in relation to values or numbers have occurred. More than 40% of Swedish

banking assets were involved in domestic merger and acquisitions.

II) International Banks Merger and Acquisitions:

• Far fewer international bank merger and acquisitions have taken place than

domestic bank merger and acquisitions.

• Measured by number, international bank merger and acquisitions were mainly

outside the European Union area.

When comparing the direction of foreign acquisitions, third countries

have, often in the search for markets offering higher margins, been more common

targets for European banks over recent years than other countries. European banks

have expanded into Latin America, South-East Asia and Central and Eastern

Europe. In some cases, they have also expanded into developed markets such as

the US.

Development of Financial Conglomerates:

Merger and acquisitions leading to the establish of a financial

conglomerate are qualitatively different from pure banking merger and

acquisitions, since they lead to the creation of a group which is active in different

sectors of the financial industry. The largest and leading firm in a conglomerate

may be a credit institution, an insurance company a holding company or another

financial institution. Financial conglomerates may be created by way of merger

and acquisitions or by a financial institution setting up a company in another

sector. The creation of a financial conglomerate is not the only way of offering

financial services of different character in a jointly organized way. Co-operation

agreements between, for instance a bank and an insurance company may achieve

similar results. Such co-operation agreements are common in many Member

States. They are often found to be precursors for integration involving ownership


Akin to but different from conglomeration is the establishment of

jointly owned enterprises offering specialized financial services. In some Member

States savings banks and co-operative banks have set up such jointly owned

enterprises that provide asset management, stock broking and settlement activities

as well as insurance, all of which are sold to or distributed by the member

institutions of the sector. An example would be the jointly owned investment

management firm of the savings bank sector in a country. In economic terms such

jointly owned enterprises provide equal opportunities of marketing and servicing

as financial conglomerates. The development of such enterprises as well as co-

operation agreements is common.

III) Domestic Conglomeration:

Domestic conglomeration can be broadly discussed as follows:

• Throughout the observation period domestic conglomeration was driven by

credit institutions.

• Credit distributions are mainly expanding into asset management and the

business of investment services in general. Furthermore, such conglomerates

seem to be the most widespread from of conglomerates. In most countries

credit institutions provide most of the asset management and investment

services activities.

• Conglomeration led by credit institutions (credit institutions acquiring an

enterprise or setting one up in another sector) had a share of around 60

transactions per year in 1997, failing to 56 in 1998 and then rising to 81 in

1999. In the first half of 2000 the number was 67 out of 70 transactions.

During the period, expansion into another financial services by way of

acquisition increased in importance.

• Although these general observations can be made in relation to domestic

conglomeration there are significant national differences. These differences

are both in terms of the number of transactions and the method used (merger

and acquisition or setting up) for conglomeration. A total of 438 transactions

were carried out in the observation period.

IV) International Conglomeration:

International conglomeration can be broadly discussed as follows:

• It seems credit institutions expanding outside the EEA into in particular, the

business areas of other financial institutions, initiate that international


• The International expansion has occurred by way of setting up new enterprises

and through merger and acquisitions in a rather balanced way.

• Looking more closely at the breakdown of mergers and acquisitions,

acquisitions outnumber mergers.

• There is a little international conglomeration activity involving insurance


Banks have also been more actively expanding into other sectors on a

cross border basis than other financial service providers have been into banking.

The expansion has been mainly into the business area of other investment services

and the management of UCITS, as was found also for domestic conglomeration.

Mergers and acquisitions have recently gained slightly in importance with

acquisitions being chosen as the legal form. It should be noted, however that a

number of countries have few transactions to report. In other countries, figures

were not available at all.

It seems that international conglomeration is carried out equally by way

of setting up a new enterprise and through mergers and acquisitions. Credit

institutions have tended only to set up other financial institutions abroad, and it is

the other foreign financial companies that are setting up domestic credit


12. Existing Mergers and Acquisitions in Banking Sector

Banking the world over has been experiencing large scale mergers and

acquisitions, either between banks or between banks and financial institutions or

between banks and major IT companies. All these mergers and acquisitions are

driven by motivations like efficiency gains through synergies, economies, cost

effectiveness etc. Some times, non economic factors like prestige, market power

or market dominance have also influenced merger and acquisition activity. Trade

liberation the concepts of international and global banking, pervasive effect of

technology have also influenced bank mergers and acquisitions.

This section deals with the merger of Times Bank with HDFC Bank,

Bank of Madura with ICICI Bank, besides the aborted merger of Global Trust

Bank with UTI Bank. Other cases discussed are the possible consequences of the

proposed reverse merger of IDBI and IDBI Bank (which no longer look like a

possibility), the proposed merger of ICICI and ICICI Bank. In the international

scene, mergers in the European Union (EU) Banking Industry and the concerns

for the bank supervisors have been dealt with.

Times Bank Merges with HDFC Bank:

This merger signaled the willingness of the new private banks (the

offshoots of new economic reforms and financial sector deregulation) to quickly

respond to the imperatives of competition, expansion and product diversification.

The merger is between two near equal entities and is driven by the

factors like superiority of HDFC Bank technology, its compatibility, the need for

higher CAR ratio, cross selling opportunities for the products of HDFC Bank etc.

Post merger, HDFC Bank becomes the largest private sector bank. As both the

banks have ambitious and young professionally oriented employees, cultural

integration did not pose any challenge. While HDFC Bank has its predominant

presence in metro areas, Times Bank has its root in urban centres. This way the

merger enlarges the reach of the new entity without significant branch overlap.

This merger also forces the government to seriously consider the vital

question of consolidation among the public sector banks, for survival.

Marriage between the old and the new:

While the merger of Times Bank with HDFC Bank is a Marriage

between two young and tech savvy bankers we have a marriage between the old

and the new when Bank of Madura merged with ICICI Bank. This all stock

merger brought cheer to the shareholders and employees of Bank of Madura and

discomfort and anxiety to those of ICICI Bank.

ICICI bank was able to meet its goal of expanding access base,

enhance geographical coverage and client base through the merger. While ICICI

Bank has its branches in metros and urban centres, BOM has its 263 enters,

mostly in the south. So the merger indeed increased the geographical coverage

without branch overlap of significance. While ICICI Bank has superior

technology, BOM has low marks on this score. However, analysts say that the two

software models have a high degree of compatibility. The greatest challenge this

merger faces is the cultural integration between the Tech savvy young employees

of ICICI Bank and Traditional and rather aged employees of BOM.

While the clientele of the new entity dramatically goes up, their

profiles are dissimilar, raising questions about the success of cross selling

opportunities. The real benefits of this merger to the economy is a big question


Global Trust Bank and UTI Bank:

The merger that did not eventually take place between Global Trust

Bank and UTI Bank presents a good study of the disastrous consequences of

unprofessional valuation standards, over exposure of banks to equity markets,

besides the dangers of banker broker nexus and above all the tragedy of near

absence of sound corporate governance in banks.

In the first place, the swap ratio of 2.25:1 in favor of GTB has been

questioned by analysts on the grounds of due diligence. Ketan Parekh and his

associates appeared to have been involved in manipulating the share prices of

GTB, which has also generously lent to this group, not necessarily under the name

of equity finance. In fact, GTB itself had exposure to stock market, much beyond

the prudential levels at the time of the failed merger, in the year 2001. Ramesh

Gelli, Chairman, GTB was asked to vacate his seat by RBI. Obviously, the much

publicized corporate governance practices in GTB are only hallow claims. D G

Prasuna unmasks these starting irregularities and unethical practices in the deal in

her article ‘UTI Bank GTB Merger: Whither Due Diligence’. Incidentally the

recent report (year 2002) of joint parliamentary committee on the stock scam of

2001, has indicted both UTI Bank and Global Trust Bank for their actions relating

to the failed merger.

Merger of ICICI and ICICI Bank: The Big Picture

While the aborted merger between GTB and UTI Bank remains a scar

on the face of the Indian banking sector, the proposed merger between ICICI and

ICICI Bank unravels very interesting possibilities. This merger creates the first

universal bank in India and the new entity becomes a dominant player in the

Indian banking scenario. The recent economic slowdown, sluggish progresses in

infrastructure development, languishing project finance activities and high cost of

funds were the factors that drove ICICI into the merger of statutory pre-emptions

and 49% priority sector lending. Parthasarathi Swami and Aloka Majumdar, tells

the story of the merger in their article.

IDBI: Merger is not a Universal Truth

While the birth of the first universal bank in the form of the merger of

ICICI with ICICI Bank is a foregone conclusion, IDBI has no such luck. IDBI is

one of the oldest development financial institutions of India, with assets over

Rs.70000 cror and advances over rs.50000 crore. It is plagued with high level of

NPAs, very low profits, slow growth, inadequate net worth and insufficient


IDBI Bank on the other hand is growing, at a slower pace and has

adequate provisions for its NPAs. It is presently concentrating on ‘A’ rated

customers for lending.

IDBI wishes to solve its problems of high cost funds through universal

bank route by merging with IDBI Bank. It also has ambitions to diversify into

retail lending segment in a big way. This proposed merger is a non starter as the

compliance with statutory pre-emptions (SLR and CRR) implies raising of vary

huge funds by IDBI Bank, in a short period a giagantic task, beyond its means.

Also the burden of NPAs of IDBI cannot be borne by IDBI cannot be borne by

IDBI Bank. Hence the merger is not in the interest of either parties.

Merger and acquisition activity among banks and financial institutions

has sharply increased world wide, recently, some of the mergers have been

perceived as failures. Bank regulators express the following concerns about the

mergers. The process of consolidation might have a negative impact on the

stability of banking and financial system liquidity in the interbank markets might

shrink with less number of participants and ever more netting. Most mergers fail

to add value either in the form of superior stock price performance or in the form

of cost and profit advantages. Economies of scale are available only for small and

medium size banks and economies of scope simply do not exist. Some market

participants might be tempted to engage in excessive risk taking (in order to make

up for declining profits). “Too big to fail institutions” might cause moral hazard


Mergers and acquisitions in the financial industry is a matter of concern

for bank supervisors, critically addresses all these concerns of the supervisors

( also called regulators) and concedes that most of them do have some element of

truth. However he observes that Mergers and acquisitions have long term

perspectives and long term advantages. He adds that large institutions will be able

to maintain a superior level of risk management. The perceived reduction in

market liquidity is attributable to other reasons and not to Mergers and

Acquisitions among financial firms market discipline (the control of credit of

markets over the financial soundness of borrowers) has to be enhanced through

qualitative improvements in transparency and disclosures. He also notes that the

supervisory structures need upgradation, consequent to the consolidation process.

The central point of his article is that financial regulation should not frustrate the

ability of firms to capture the benefits of consolidation.

Banks has made very vital observations on Merger and Acquisition

activity, in the last article such as ‘Mergers and Acquisitions involving the

European union banking industry. The article studies for different types of

mergers and acquisitions domestic and international banks, mergers and

acquisitions leading to domestic and international conglomeration. The driving

forces include information technology, disintermediation and the international

capital markets. Regulators face new challenges for instance when an insurance

company and bank merge together forcing them to work together to find co-

operative solutions. Financial conglomerates could cause the risk of contagion.

Finally mergers and acquisitions are more common than hostile

takeovers in the financial services sector. The traditional challenges of cultural

differences are very much present. The values involved in mergers and

acquisitions are increasing and international bank mergers and acquisitions are

more often carried outside the European Economic area. While small bank

mergers and acquisitions are mostly carried out for cost efficiency, large bank

merger and acquisitions often have an element of strategic re-positioning.

13. Case ICICI and ICICI Bank

ICICI Bank is India’s second largest bank with total assets of over Rs.1 tn

and a network of about %40 branches and offices and over 1000 ATMs. ICICI

Bank offers a wide range of banking products and financial services to corporate

and retail customers through a variety of delivery channels and through its

specialized subsidiaries and affiliates in the areas of investment banking life and

non life insurance, venture capital, asset management and information technology.

ICICI Bank’s equity shares are listed in major stock exchange in India, national

Stock Exchange of India Limited and its American Depositary Receipts (ADRs)

are listed on the New York stock Exchange (NYSE).

ICICI Bank was originally promoted in 1994 by ICICI Limited, an an Indian

Financial institutions, and was its wholly owned subsidiary. ICICI’s shareholding

in ICICI Bank was reduced to 46% through a public offering of shares in India in

fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal

2000, ICICI Banks acquisition of Bank of Madura Limited in an all stock

amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional

investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1995 at the initiative

of the World Bank, the Government of India and representatives of Indian

industry. The principal objective was to create a development financial institution

for providing medium term and long term project financing to Indian businesses.

In the 1990s, ICICI transformed its business from a development financial

institution, offering only project finance to a diversified financial services group,

offering a wide variety of products and services, both directly and through a

number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the

first Indian company and the first bank or financial institution from non Japan

Asia to be listed on the NYSE.

After consideration of various corporate structuring alternatives in the

context of the emerging competitive scenario in the Indian banking industry, and

the more towards universal banking, the managements of ICICI and ICICU Bank

formed the view that the merger of ICICI with ICICI Bank would be the optimal

strategic alternative for both entities, and would create the optimal legal structure

for the ICICI group’s universal banking strategy. The merger would enhance

value for ICICI shareholders through the merged entity’s access to low cost

deposits, greater opportunities for earning fee based income and the ability to

participate in the payments system and provide transaction banking services. The

merger would enhance value for ICICI Bank shareholders through a large capital

base and scale of operations, seamless access to ICICI’s strong corporate

relationship built up over five decades, entry into new business segments, higher

market share in various business segments, Particularly fee based services and

access to the vast talent pool of ICICI and its subsidiaries. In October 2001, the

Board of Directors of ICICI and ICICI Bank approved the merger of ICICI and

two of its wholly owned retail finance subsidiaries, ICICI Personal Financial

Services Limited and ICICI Capital Services Limited, with ICICI Bank. The

merger was approved by shareholders of ICICI and ICICI Bank in January 2002,

by the High Court of Gujrat at Ahmedabad in March 2002, and by the High Court

of judicature at Bombay and the Reserve Bank of India in April 2002. Consequent

to the merger, the ICICI group’s financing and banking operations both wholesale

and retail, have been integrated in a single entity.

Performance of the Bank:


The merger has led to an increase in the number of branches to 355,

extension counters to 34 call centres to 17 and ATM centres to 510 all over the

country and thus providing convenience to the customer.

Products and Services:

‘Business Multiplier’, ‘ICICI select’ and ‘I-fund’ were the new and

innovative products introduced during the year. ICICI bank in tie up with

Munshikaka.com has extended their services for online filing and advisory of

income tax returns. Also, ICICI bank has launched and implemented a new web

based portal which provides real tome exchange rates for corporate customers and

also puts their forex transactions online.

Cards – Credit, Debit and Smart:

Bank has a credit card base of 273000 which puts it in the top third slot.

All global VISA cards can use any of the bank’s ATMs for their transactions.

They have their credit card, debit card and smart card. The debit card is called

‘ICICI Ncash’. Smart cards have been introduced with pilot launches at Infosys

Limited in Banglore and in Manipal Higher Education, Manipal. Together, all

these three cards strengthen the financial armoury.

In all these initiatives, the bank along with the ICICI group, made full

use of business application provided by the modern technology to offer its

customer facilities of e-commerce. Increasingly systems were web enabled to

provide ease of access and operations to customers.

Customer Services:

It has seen implementation of six sigma exercise in order to improve

customer service and bring down the transactions cost.

Employees Stock Option Plan:

The bank has granted 15,80,200 stocks to its employees and the

managing director and the chief executive officer. Of these, 6 senior managers of

the bank were granted 25000 stock options each.

Corporate Governance:

The audit risk committee nomination committee and compensation

committee work hand in hand to follow the tenets of good corporate governance.

Performance Review – Year ended March 31, 2002:

The combined entity has emerged as the largest private sector bank in

the country marking a new era in Indian Banking, adding considerable strength to

the Indian financial system. The significant features of the combined entity are:

• A highly diversified asset base- with a balance sheet size of over Rs. 104000

crore, it has 34% in cash and government of India securities, short term corporate

finance loans of 23%, retail loans of 8% (including operations of ICICI Home

Finance Company Limited) and long term project finance loans of 23%. The

balance asset consists of investments of 5% and other miscellaneous assets.

• By adopting the purchase method of accounting, based on the fair valuation of

the loan portfolio by Deloitte Haskins and Sells and marking to market of the

equity and related investment portfolio, ICICI Bank has written down assets of

ICICI to the extent of Rs.3780 crore. This amount has been utilized as follows:

1 Marking to market ICICI’s equity and related investments by Rs.925 crore;

2 Creating additional provisions in respect of ICICI’s non performing loans to the

extent of Rs.902 crore, increasing the coverage (Provisions and write-off against

NPLs as a percentage of gross NPLs) to 63 percent on ICICI’s NPLs, and reducing

the NPL ratio to below 5.0% at 4.7% for the merged entity and

3 Creating additional provisions to the extent of Rs.1953 crore to provide for any

future impairment of ICICI’s legacy assets. As a result of this additional cushioning,

the general provision against ICICI’s performing loans stands increased to 4.5%

against the regulatory requirement of 0.25%.

• The Bank has a network of over 400 branches and the largest connected ATM

network of over 1000 ATMs in the country offering anytime, anywhere

banking. In addition, it has over 120 retail centers across more than 75

geographic locations.

• The Bank has deposit customer accounts of 5.0 million bondholder accounts.

• The bank continues to enjoy a capital adequacy ratio of 11.44% (Tier-! Of

7.47%) as against the regulatory requirement of 9%.

Since October 2001, when the merger decision was taken, the Bank

has added about Rs.15000 crore of deposits, which accounts for a market share of

20% in incremental deposits in the banking system, creating a sound base for the

future growth of the Bank. As a part of the merger exercise, ICICI Bank initiated

the process of selling down its asset, which created a new market for securitized

paper in the country.


ICICI Bank’s profit after tax as per the audited unconsolidated Indian

GAAP increased by 60.2% to Rs.258 crore in FY2002 from Rs.161 crore in the

previous year. As the merger has come into effect only on March 30,2002, ICICI

Bank’s profit of Rs.258 crore for Fy2002 includes only two days profit of ICICI

and its merging subsidiaries, amounting to about Rs.8 crore. The profit of FY2002

for the Bank is therefore largely comparable to FY2001. Net interest income

increased 46.7% to Rs.593 crore from Rs.404 crore, and core fee income

increased 65.5% to Rs.283 crore from Rs.171 crore. The average cost of deposits

declined to 7.3% in FY2002 from 7.8% in FY2001.

Future Plans:

ICICI Bank will convert itself into a universal bank with a reverse merger

of its parent ICICI. The combined entity will be the second largest player in the

Indian banking sector after public sector behemoth State Bank of India.

Analysis of case:

The proposed merger between ICICI and ICICI Bank unravels very

interesting possibilities. This merger creates the first universal bank in India and

the new entity becomes a dominant player in the Indian banking scenario. When

the board of ICICI and ICICI bank met to approve the merger of the financial

institution with the bank at a share exchange ratio of one domestic equity share of

ICICI Bank for two shares of ICICI. The recent economic slowdown, sluggish

progresses in infrastructure development, languishing project finance activities

and high cost of funds were the factors that drove ICICI into the merger.

The amalgamation will enable them to have a strong financial and

operational structure, which is suppose to be capable of greater resources

mobilization and ICICI will emerge as one of the largest private sector banks in

the country. The ICICI emerged largest customer base will enable the ICICI Bank

to offer banking and financial services and products and also facilitates cross

selling of products and services of the ICICI group.

The merger will enable ICICI to provide ATMs, credit card, debit card and

smart cars and financial services and products to a large customer base, with

expected savings in cost and operating expenses.

The bank network over 400 branches and the largest The Bank has a

network of over 400 branches and the largest connected ATM network of over

1000 ATMs in the country offering anytime, anywhere banking. In addition, it has

over 120 retail centers across more than 75 geographic locations.

Over the past years ICICI has been talking about a migration path to

universal banking. The logic of this gradual transformation was understandable: it

wanted to take one step at a time both in terms of creating banking assets and

liabilities as well as fulfilling the twin reserve requirements of cash reserve ratio

(CRR) and statutory liquidity requirements (SLR).

ICICI Bank is buying out the assets of ICICI under the purchase

method which allows the purchase ( in this case, ICICI Bank) the opportunity to

revalue the purchased asset at fair market value. This accounting practice is a god-

sent opportunity for ICICI Bank to bring down the level of non performing assets

(NPAs) without resorting to write offs. While revaluating assets (i.e. loans) of

ICICI, the bank will writedown the NPAs and drastically pare the level of stricky

assets in the combined book of the new entity. This is the biggest achievement of

the merger of ICICI with ICICI Bank.

14. Recent Mergers and Acquisitions in Banking Sector

HDFC Bank-Centurion Becomes Third Largest Bank; Second

Largest In Branches

This is the largest merger in the Indian banking industry, a

precursor to the opening up of the sector for foreign banks in 2009. The merger of

HDFC Bank with Centurion Bank of Punjab (which will now renamed as HDFC

Bank) is worth Rs 9,526 crore ($2.38 billion). The sector has till now seen only

smaller Mergers&Acquisitions like Centurion Bank buying up Lord Krishna Bank

and Bank of Punjab; or Punjab National Bank snapping up Nedungadi Bank, but

this one is a big one. HDFC Bank will give one share for every 29 shares of

Centurion held by its sharehloder, and that would have an economic value of

close to $2.4 billion.

The merged entity will also have the largest physical presence

after State Bank of India, with 1,148 branches across the country. India’s second

largest bank ICICI Bank will have only 955 branches. In terms of assets, HDFC

Bank-Centurion will have about roughly Rs 150,000 crore, and the third largest.

This is less than half of ICICI Bank (Rs 3,76, 700 crore) and State Bank Group

(Rs 566,565 crore). The deposits of HDFC Bank reaches Rs 120,000 crore, while

advances to Rs 85,000 crore.

Rana Talwar, the chief promoter of Sabre Capital which owns a controlling stake

in CBoP, said that they decided to merge with HDFC Bank since a merged entity

is in a better position to capitalise on the high growth Indian market. “I am not

cashing out. I am becoming the shareholder of a much bigger HDFC Bank,”

Talwar told media after the merger announcement in a press conference in

Mumbai. Rana Talwar, who is currently CBOP chairman, will a non-executive

director on the Board of the merged entity. CBOP’s Managing Director and CEO

Shailendra Bhandari would be an executive director.

Analysts negative

However, not everyone is gungho about the HDFC Bank’s expensive

buy. “I think this is just a merger for the sake of a merger. I don’t see any

immediate value addition to HDFC Bank because of this,” Sejal Doshi, CEO at

Finquest Securities, has been quoted as saying.

Another analyst echoes his view. “I couldn’t really understand why they

bought a bank like Centurion, spending a substantial amount of $2.4 billion.

There is some concern on that front…Maybe they want to grow bigger before

April 2009 so there’s less possibility of becoming a takeover target when foreign

banks come in,” according to R K Gupta, Managing Director at Taurus Mutual


Meanwhile, Morgan Stanley said the deal would not significantly alter

market share in lending, retail loans and deposits and so it did not see HDFC

Bank worth more than Rs 1,565. Merrill Lynch saw HDFC Bank rising up to Rs

1,800, while Credit Suisse gave a price target of Rs 1,675.

HDFC bank acquire Centurian bank of panjabin all stock deal

HDFC Bank Ltd., India’s third-biggest by market capitalistaion, has

agreed to buy another smaller private bank Centurion Bank of Punjab Ltd, in an

all stock deal. This is India’s biggest banking deal yet. The boards of both banks

will meet on Monday(February 25) to decide the share-swap ratio.

“The two Boards have resolved to pursue the merger subject to

satisfactory due diligence, a fair share-swap ratio and all the requisite statutory,

regulatory and corporate approvals,” a joint statement said. Ernst & Young and

Dalal & Shah have been appointed to determine the share swap ratio.

Centurion Bank, controlled by Rana Talwar’s Sabre Capital, has a

market capitalisation of Rs 10,600 crore ($2.6 billion). What the deal means is

that HDFC Bank will become even stronger bank as it will gain 2.5 million

customers, mainly in Kerala and Punjab. The merged company will have 1,148

branches (Centurion had 394 branches and HDFC Bank 754 branches), which is

more than ICICI Bank’s 955. But in terms of assets, HDFC-Centurion combine

would be less than half of ICICI’s, says a Bloomberg report.

Ernst & Young and Dalal & Shah have been appointed to determine

the share swap ratio, HDFC Bank said in a statement to the stock exchange.

Interestingly, both HDFC Bank and Centurion Bank have grown

through M&A in some way. HDFC Bank bought Times Bank from the media

group Bennett Coleman & Co in 2000. Centurion has bought Bank of Punjab and

Lord Krishna Bank.

ICICI Bank board to take up Sangli Bank merger today

ICICI Bank Ltd, the country's largest private sector bank, is looking to

take over ailing Maharashtra based Sangli Bank

The board of directors of ICICI Bank will meet on December 9 to

consider the proposal for amalgamation of Sangli Bank with itself, said a release

from ICICI Bank.

Sangli Bank has been in trouble for quite sometime. The bank's capital

adequacy ratio plummeted to 1.64 per cent as on March 31, 2006, against 9.30 per

cent in the previous year. The minimum requirement mandated by the RBI is 9

per cent.

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 29.27 crore (loss of Rs 31.31 crore) as on March 31, 2006. Net

non-performing assets of Sangli Bank were at Rs 20.79 crore (Rs 34.82 crore).

Sangli Bank, set up by the Raja of Sangli State in 1916, has 192

branches. The bank has a major presence in Maharashtra and thin outfits in

Karnataka, Gujarat, Andhra Pradesh, Tamil Nadu, Delhi and Goa.

The proposed merger comes close on the heels of the merger of

United Western Bank with IDBI Ltd. ICICI Bank was the first among several

suitors to express its intent to acquire United Western Bank.

For ICICI Bank, the merger will provide the much-needed

expansion in branch network and boost in rural lending. The acquisition of weak

banks seems to be the way to getting round the RBI restrictions on opening new


ICICI Bank and HDFC Bank and other private sector banks allegedly involved in

the IPO scam have found it difficult to secure licences from the RBI, said a

banking analyst. With the proposed acquisition, the branch network of ICICI

Bank will jump from the current 630 branches to 822 branches.

It recently received the RBI's nod for opening new branches and

additional off-site ATMs.

The bank is also keen on expanding its rural portfolio, which grew by

about 70 per cent on a year-on-year basis. It can also expand its priority sector

lending, said the analyst.

Sangli Bank's deposits stand at Rs 2,004.23 crore (Rs 1,984.90 crore)

and advances were Rs 888.29 crore (Rs 811.92 crore) 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. ICICI Bank's scrip

closed at Rs 876.70 on Friday, down from the previous close of Rs 878.20.

Merger of State Bank of Saurashtra with State Bank of

State Bank of India, the country’s largest commercial bank, has kicked off the

consolidation process with its associate banks. SBI has decided to merge State Bank

of Saurashtra, a wholly owned associate bank, with itself. The boards of both SBI and

State Bank of Saurashtra have given an in-principle approval to the merger proposal.

SBI will now have to get approvals from both the Government, the majority owner of

the bank holding 59.73 per cent stake, and the Reserve Bank of India. The boards of

SBI and SBS met in Mumbai and passed resolutions to merge, a step that could be the

beginning of the process of consolidation among public sector banks. The merger of

SBI’s associate banks with itself was being considered for the past several years, but

could not get through because of political opposition to mergers among public sector


The reason to merge State Bank of Saurashtra first is because it offers common

advantages. Firstly, it is the smallest of the associate banks, which would mean the

merger would be very smooth. Secondly, it is 100 per cent owned by SBI, so no

outside shareholders' approval is required. Third, the bank is operating mostly in

Saurashtra, where (SBI’s) network is not large, which means the new branches will

be complementary and not competitive to SBI's.

After the merger of all the seven subsidiary banks, SBI’s net worth would rise to

about Rs 43,000 crore. ICICI Bank's net worth has doubled to over Rs 40,000 crore

after its follow-on public offer, SBI and SBS would now have to complete the

formality of seeking approvals from the government and the Reserve Bank of India

(RBI). The merger would benefit over 7,000 employees of SBS as their pay scales

would rise and they would also be entitled to the third retirement benefit of pension,

in addition to provident fund and gratuity overtaking SBI’s over Rs 31,000 crore.

State Bank of Indore could be the next bank on the radar in the consolidation

process as it is the smallest bank after State Bank of Saurashtra.

15. Conclusion

Merger and acquisition the most talked about term today creating lot

of excitement and speculative activity in the markets. However, before the idea of

M&A crystallizes, the firm needs to understand its own capabilities and industry

position. It also needs to know the same about the other firms it seeks to tie up

with, to get a real benefit from a merger. A mergers and Acquisitions activity is

that the divesting firm moves from diversifying strategy to concentrate on core

activities in order to improve and increase competitiveness. Globalization has

increased the competitive pressure in the markets. In a highly challenging

environment a strong reason for M&A is a desire to survive. Thus apart from

growth, the survival factor has off late, spurred the M&A activity worldwide.

Some such factors are listed below:

• The company's business prospects and nature of its business

• The prospects for industry in which the company operates

• Management reputation

• Goodwill and brand value

• Marketing network

• Technology level

• Efficiency level in terms of employees

• Financial performance

• Future earnings

• The legal implications

• Government policy in general and in particular for that industry

• Current valuations of shares in stock markets

The M&A game in the Indian context has already made a healthy start.

However, the structural and legal problems are adversely affecting the growth

rates. Although, the government has realized this fact, it is yet to become

proactive. With the entry of multinationals into the Indian markets, consolidation

would be the best way to survive and to gain market share.

Finally mergers and acquisitions are more common than hostile

takeovers in the financial services sector. The traditional challenges of cultural

differences are very much present. The values involved in mergers and

acquisitions are increasing and international bank mergers and acquisitions are

more often carried outside the European Economic area. While small bank

mergers and acquisitions are mostly carried out for cost efficiency, large bank

merger and acquisitions often have an element of strategic re-positioning.


Books :

Mergers and Acquisitions : ICFAI Book

Banking Strategy : ICFAI Book

Banking : ICFAI Book

Financial Management : Prasanna Chandra

Financial Management : I.M.Pandey


The Economic Times

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