Mergers & Acquisitions

Mergers & Acquisitions
Chapter 1: Introduction of Mergers & Acquisitions

INTRODUCTION
We have been learning about the companies coming together to from another
company and companies taking over the existing companies to expand their business.
With recession taking toll of many Indian businesses and the feeling of insecurity
surging over our businessmen, it is not surprising when we hear about the immense numbers
of corporate restructurings taking place, especially in the last couple of years. Several
companies have been taken over and several have undergone internal restructuring, whereas
certain companies in the same field of business have found it beneficial to merge together
into one company.
In this context, it would be essential for us to understand what corporate restructuring
and mergers and acquisitions are all about.
All our daily newspapers are filled with cases of mergers, acquisitions, spinoffs,
tender offers, ! other forms of corporate restructuring. "hus important issues both for
business decision and public policy formulation have been raised. #o firm is regarded safe
from a takeover possibility. $n the more positive side %ergers ! Acquisition&s may be
critical for the healthy expansion and growth of the firm. Successful entry into new product
and geographical markets may require %ergers ! Acquisition&s at some stage in the firm's
development. Successful competition in international markets may depend on capabilities
obtained in a timely and efficient fashion through %ergers ! Acquisition's. %any have
argued that mergers increase value and efficiency and move resources to their highest and
best uses, thereby increasing shareholder value. .
(
"o opt for a merger or not is a complex affair, especially in terms of the technicalities
involved. We have discussed almost all factors that the management may have to look into
before going for merger. )onsiderable amount of brainstorming would be required by the
managements to reach a conclusion. e.g. a due diligence report would clearly identify the
status of the company in respect of the financial position along with the net worth and
pending legal matters and details about various contingent liabilities. *ecision has to be
taken after having discussed the pros ! cons of the proposed merger ! the impact of the
same on the business, administrative costs benefits, addition to shareholders' value, tax
implications including stamp duty and last but not the least also on the employees of the
"ransferor or "ransferee )ompany.
WHAT IS MERGER?
%erger is defined as combination of two or more companies into a single company
where one survives and the others lose their corporate existence. "he survivor acquires all the
assets as well as liabilities of the merged company or companies. +enerally, the surviving
company is the buyer, which retains its identity, and the extinguished company is the seller.
%erger is also defined as amalgamation. %erger is the fusion of two or more existing
companies. All assets, liabilities and the stock of one company stand transferred to "ransferee
)ompany in consideration of payment in the form of,
-quity shares in the transferee company,
*ebentures in the transferee company,
)ash, or
A mix of the above modes.
.
WHAT IS ACQUISITION?
Acquisition in general sense is acquiring the ownership in the property. In the context
of business combinations, an acquisition is the purchase by one company of a controlling
interest in the share capital of another existing company.
Methods of Acquisition:
An acquisition may be affected by,
/a0 agreement with the persons holding ma1ority interest in the company management
like members of the board or ma1or shareholders commanding ma1ority of voting
power2
/b0 purchase of shares in open market2
/c0 to make takeover offer to the general body of shareholders2
/d0 purchase of new shares by private treaty2
/e0 Acquisition of share capital through the following forms of considerations vi3. means
of cash, issuance of loan capital, or insurance of share capital.
Taeo!e":
A 4takeover& is acquisition and both the terms are used interchangeably.
"akeover differs from merger in approach to business combinations i.e. the process of
takeover, transaction involved in takeover, determination of share exchange or cash price and
the fulfillment of goals of combination all are different in takeovers than in mergers. 5or
example, process of takeover is unilateral and the offeror company decides about the
maximum price. "ime taken in completion of transaction is less in takeover than in mergers,
top management of the offeree company being more cooperative.
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De#$e"%e" o" co"&o"ate s&'its o" di!ision:
*emerger or split or divisions of a company are the synonymous terms signifying a
movement in the company.
What (i'' it tae to succeed)
5unds are an obvious requirement for wouldbe buyers. 7aising them may not be a
problem for multinationals able to tap resources at home, but for local companies, finance is
likely to be the single biggest obstacle to an acquisition. 5inancial institution in some Asian
markets are banned from leading for takeovers, and debt markets are small and illiquid,
deterring investors who fear that they might not be able to sell their holdings at a later date.
"he credit squee3es and the depressed state of many Asian equity markets have only made an
already difficult situation worse. 5unds apart, a successful %ergers ! Acquisition growth
strategy must be supported by three capabilities, deep local networks, the abilities to manage
uncertainty, and the skill to distinguish worthwhile targets. )ompanies that rush in without
them are likely to be stumble.
Assess ta"%et qua'it*:
"o say that a company should be worth the price a buyer pays is to state the obvious.
8ut assessing companies in Asia can be fraught with problems, and several deals have gone
badly wrong because buyers failed to dig deeply enough. "he attraction of knockdown price
tag may tempt companies to skip crucial checks. )oncealed high debt levels and deferred
contingent liabilities have resulted in large deals destroying value. 8ut in other cases, where
buyers have undertaken detailed due diligence, they have been able to negotiate prices as low
as half of the initial figure.
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*ue diligence can be difficult because disclosure practices are poor and companies
often lack the information buyer need. %oreover, most Asian conglomerates still do not
present consolidated financial statements, leaving the possibilities that the sales and the profit
figures might be bloated by transactions between affiliated companies. "he financial records
that are available are often unreliable, with different pro1ections made by different
departments within the same company, and different pro1ections made for different
audiences. 8anks and investors, naturally, are likely to be shown optimistic forecasts.

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Chapter 2: Purpose of Mergers & Acquisitions
"he purpose for an offeror company for acquiring another company shall be reflected
in the corporate ob1ectives. It has to decide the specific ob1ectives to be achieved through
acquisition. "he basic purpose of merger or business combination is to achieve faster growth
of the corporate business. 5aster growth may be had through product improvement and
competitive position.
$ther possible purposes for acquisition are short listed below,
+,- ."ocu"e$ent of su&&'ies:
(. to safeguard the source of supplies of raw materials or intermediary product2
.. to obtain economies of purchase in the form of discount, savings in transportation
costs, overhead costs in buying department, etc.2
6. to share the benefits of suppliers economies by standardi3ing the materials.
+/- Re!a$&in% &"oduction faci'ities:
(. to achieve economies of scale by amalgamating production facilities through
more intensive utili3ation of plant and resources2
.. to standardi3e product specifications, improvement of quality of product,
expanding
6. market and aiming at consumers satisfaction through strengthening after sale
9. services2
:. to obtain improved production technology and knowhow from the offeree
company
;. to reduce cost, improve quality and produce competitive products to retain and
;
<. Improve market share.
+0- Ma"et e1&ansion and st"ate%*:
(. to eliminate competition and protect existing market2
.. to obtain a new market outlets in possession of the offeree2
6. to obtain new product for diversification or substitution of existing products and to
enhance the product range2
9. strengthening retain outlets and sale the goods to rationali3e distribution2
:. to reduce advertising cost and improve public image of the offeree company2
;. Strategic control of patents and copyrights.
+2- 3inancia' st"en%th:
(. to improve liquidity and have direct access to cash resource2
.. to dispose of surplus and outdated assets for cash out of combined enterprise2
6. to enhance gearing capacity, borrow on better strength and the greater assets
backing2
9. to avail tax benefits2
:. to improve -=S /-arning =er Share0.
+4- Gene"a' %ains:
(. to improve its own image and attract superior managerial talents to manage its affairs2
.. "o offer better satisfaction to consumers or users of the product.
<
+5- O(n de!e'o&$enta' &'ans:
"he purpose of acquisition is backed by the offeror company&s own developmental
plans.
A company thinks in terms of acquiring the other company only when it has arrived at
its own development plan to expand its operation having examined its own internal strength
where it might not have any problem of taxation, accounting, valuation, etc. but might feel
resource constraints with limitations of funds and lack of skill managerial personnel&s. It has
to aim at suitable combination where it could have opportunities to supplement its funds by
issuance of securities, secure additional financial facilities, eliminate competition and
strengthen its market position.
+6- St"ate%ic &u"&ose:
"he Acquirer )ompany view the merger to achieve strategic ob1ectives through
alternative type of combinations which may be hori3ontal, vertical, product expansion,
market extensional or other specified unrelated ob1ectives depending upon the corporate
strategies. "hus, various types of combinations distinct with each other in nature are adopted
to pursue this ob1ective like vertical or hori3ontal combination.
+7- Co"&o"ate f"iend'iness:
Although it is rare but it is true that business houses exhibit degrees of cooperative
spirit despite competitiveness in providing rescues to each other from hostile takeovers and
cultivate situations of collaborations sharing goodwill of each other to achieve performance
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heights through business combinations. "he combining corporate aim at circular
combinations by pursuing this ob1ective.
+8- Desi"ed 'e!e' of inte%"ation:
%ergers and acquisition are pursued to obtain the desired level of integration between
the two combining business houses. Such integration could be operational or financial. "his
gives birth to conglomerate combinations. "he purpose and the requirements of the offeror
company go a long way in selecting a suitable partner for merger or acquisition in business
combinations.
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Chapter 3: Types of Mergers
%erger or acquisition depends upon the purpose of the offeror company it wants to
achieve. 8ased on the offerors& ob1ectives profile, combinations could be vertical, hori3ontal,
circular and conglomeratic as precisely described below with reference to the purpose in
view of the offeror company.
+A- 9e"tica' co$:ination:
A company would like to takeover another company or seek its merger with that
company to expand espousing backward integration to assimilate the resources of supply and
forward integration towards market outlets. "he acquiring company through merger of
another unit attempts on reduction of inventories of raw material and finished goods,
implements its production plans as per the ob1ectives and economi3es on working capital
investments. In other words, in vertical combinations, the merging undertaking would be
either a supplier or a buyer using its product as intermediary material for final production.
"he following main benefits accrue from the vertical combination to the acquirer
company i.e.
/(0 it gains a strong position because of imperfect market of the intermediary products,
scarcity of resources and purchased products2
/.0 @as control over products specifications.
(A
+;- Ho"i<onta' co$:ination:
It is a merger of two competing firms which are at the same stage of industrial
process. "he acquiring firm belongs to the same industry as the target company. "he mail
purpose of such mergers is to obtain economies of scale in production by eliminating
duplication of facilities and the operations and broadening the product line, reduction in
investment in working capital, elimination in competition concentration in product, reduction
in advertising costs, increase in market segments and exercise better control on market.
+C- Ci"cu'a" co$:ination:
)ompanies producing distinct products seek amalgamation to share common
distribution and research facilities to obtain economies by elimination of cost on duplication
and promoting market enlargement. "he acquiring company obtains benefits in the form of
economies of resource sharing and diversification.
+D- Con%'o$e"ate co$:ination:
It is amalgamation of two companies engaged in unrelated industries like *)% and
%odi Industries. "he basic purpose of such amalgamations remains utili3ation of financial
resources and enlarges debt capacity through reorgani3ing their financial structure so as to
service the shareholders by increased leveraging and -=S, lowering average cost of capital
and thereby raising present worth of the outstanding shares. %erger enhances the overall
stability of the acquirer company and creates balance in the company&s total portfolio of
diverse products and production processes.
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Chapter 4: Advantages of Mergers
%ergers and takeovers are permanent form of combinations which vest in
management complete control and provide centrali3ed administration which are not available
in combinations of holding company and its partly owned subsidiary. Shareholders in the
selling company gain from the merger and takeovers as the premium offered to induce
acceptance of the merger or takeover offers much more price than the book value of shares.
Shareholders in the buying company gain in the long run with the growth of the company not
only due to synergy but also due to Bboots trapping earningsC.
Motivations for mergers and acquisitions
%ergers and acquisitions are caused with the support of shareholders, manager&s ad
promoters of the combing companies. "he factors, which motivate the shareholders and
managers to lend support to these combinations and the resultant consequences they have to
bear, are briefly noted below based on the research work by various scholars globally.
+,- 3"o$ the stand&oint of sha"eho'de"s
Investment made by shareholders in the companies sub1ect to merger should enhance
in value. "he sale of shares from one company&s shareholders to another and holding
investment in shares should give rise to greater values i.e. the opportunity gains in
(.
alternative investments. Shareholders may gain from merger in different ways vi3. from
the gains and achievements of the company i.e. through
/a0 reali3ation of monopoly profits2
/b0 economies of scales2
/c0 diversification of product line2
/d0 acquisition of human assets and other resources not available otherwise2
/e0 8etter investment opportunity in combinations.
$ne or more features would generally be available in each merger where shareholders
may have attraction and favour merger.
+/- 3"o$ the stand&oint of $ana%e"s
%anagers are concerned with improving operations of the company, managing the
affairs of the company effectively for all round gains and growth of the company which will
provide them better deals in raising their status, perks and fringe benefits. %ergers where all
these things are the guaranteed outcome get support from the managers. At the same time,
where managers have fear of displacement at the hands of new management in amalgamated
company and also resultant depreciation from the merger then support from them becomes
difficult.
+0- ."o$ote"=s %ains
%ergers do offer to company promoters the advantage of increasing the si3e of their
company and the financial structure and strength. "hey can convert a closely held and private
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limited company into a public company without contributing much wealth and without losing
control.
+2- ;enefits to %ene"a' &u:'ic
Impact of mergers on general public could be viewed as aspect of benefits and costs to,
/a0 )onsumer of the product or services2
/b0 Workers of the companies under combination2
/c0 +eneral public affected in general having not been user or consumer or the worker in
the companies under merger plan.
+a- Consu$e"s
"he economic gains reali3ed from mergers are passed on to consumers in the form of
lower prices and better quality of the product which directly raise their standard of living and
quality of life. "he balance of benefits in favour of consumers will depend upon the fact
whether or not the mergers increase or decrease competitive economic and productive
activity which directly affects the degree of welfare of the consumers through changes in
price level, quality of products, after sales service, etc.
+:- Wo"e"s co$$unit*
"he merger or acquisition of a company by a conglomerate or other acquiring
company may have the effect on both the sides of increasing the welfare in the form of
purchasing power and other miseries of life. "wo sides of the impact as discussed by the
researchers and academicians are, fi"st'*> mergers with cash payment to shareholders provide
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opportunities for them to invest this money in other companies which will generate further
employment and growth to uplift of the economy in general. Second'*> any restrictions
placed on such mergers will decrease the growth and investment activity with corresponding
decrease in employment. 8oth workers and communities will suffer on lessening 1ob
opportunities, preventing the distribution of benefits resulting from diversification of
production activity.
+c- Gene"a' &u:'ic
%ergers result into centrali3ed concentration of power. -conomic power is to be
understood as the ability to control prices and industries output as monopolists. Such
monopolists affect social and political environment to tilt everything in their favour to
maintain their power ad expand their business empire. "hese advances result into economic
exploitation. 8ut in a free economy a monopolist does not stay for a longer period as other
companies enter into the field to reap the benefits of higher prices set in by the monopolist.
"his enforces competition in the market as consumers are free to substitute the alternative
products. "herefore, it is difficult to generali3e that mergers affect the welfare of general
public adversely or favorably. -very merger of two or more companies has to be viewed
from different angles in the business practices which protects the interest of the shareholders
in the merging company and also serves the national purpose to add to the welfare of the
employees, consumers and does not create hindrance in administration of the +overnment
polices.
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Chapter : Procedure of Mergers & Acquisitions
Public announcement:
"o make a public announcement an acquirer shall follow the following procedure,
,? A&&oint$ent of $e"chant :ane":
"he acquirer shall appoint a merchant banker registered as category D I with S-8I to
advise him on the acquisition and to make a public announcement of offer on his behalf.
/? Use of $edia fo" announce$ent:
=ublic announcement shall be made at least in one national -nglish daily one @indi
daily and one regional language daily newspaper of that place where the shares of that
company are listed and traded.
0? Ti$in%s of announce$ent:
=ublic announcement should be made within four days of finali3ation of negotiations
or entering into any agreement or memorandum of understanding to acquire the shares or the
voting rights.
(;
2? Contents of announce$ent:
=ublic announcement of offer is mandatory as required under the S-8I 7egulations.
"herefore, it is required that it should be prepared showing therein the following
information,
/(0 =aid up share capital of the target company, the number of fully paid up and partially
paid up shares.
/.0 "otal number and percentage of shares proposed to be acquired from public sub1ect to
minimum as specified in the subregulation /(0 of 7egulation .( that is,
a0 "he public offer of minimum .AE of voting capital of the company to the
shareholders2
b0 "he public offer by a raider shall not be less than (AE but more than :(E of shares of
voting rights. Additional shares can be had F .E of voting rights in any year.
/60 "he minimum offer price for each fully paid up or partly paid up share2
/90 %ode of payment of consideration2
/:0 "he identity of the acquirer and in case the acquirer is a company, the identity of the
promoters and, or the persons having control over such company and the group, if
any, to which the company belong2
(<
/;0 "he existing holding, if any, of the acquirer in the shares of the target company,
including holding of persons acting in concert with him2
/<0 Salient features of the agreement, if any, such as the date, the name of the seller, the
price at which the shares are being acquired, the manner of payment of the
consideration and the number and percentage of shares in respect of which the
acquirer has entered into the agreement to acquirer the shares or the consideration,
monetary or otherwise, for the acquisition of control over the target company, as the
case may be2
/>0 "he highest and the average paid by the acquirer or persons acting in concert with
him for acquisition, if any, of shares of the target company made by him during the
twelve month period prior to the date of the public announcement2
/?0 $b1ects and purpose of the acquisition of the shares and the future plans of the
acquirer for the target company, including disclosers whether the acquirer proposes to
dispose of or otherwise encumber any assets of the target company,
=rovided that where the future plans are set out, the public announcement shall also
set out how the acquirers propose to implement such future plans2
/(A0 "he 4specified date& as mentioned in regulation (?2
/((0 "he date by which individual letters of offer would be posted to each of the
shareholders2
(>
/(.0 "he date of opening and closure of the offer and the manner in which and the date
by which the acceptance or re1ection of the offer would be communicated to the
share holders2
/(60 "he date by which the payment of consideration would be made for the shares in
respect of which the offer has been accepted2
/(90 *isclosure to the effect that firm arrangement for financial resources required to
implement the offer is already in place, including the details regarding the sources
of the funds whether domestic i.e. from banks, financial institutions, or otherwise or
foreign i.e. from #onresident Indians or otherwise2
/(:0 =rovision for acceptance of the offer by person who own the shares but are not the
registered holders of such shares2
/(;0 Statutory approvals required to obtained for the purpose of acquiring the shares
under the )ompanies Act, (?:;, the %onopolies and 7estrictive "rade =ractices
Act, (?<6, andGor any other applicable laws2
/(<0 Approvals of banks or financial institutions required, if any2
/(>0 Whether the offer is sub1ect to a minimum level of acceptances from the
shareholders2 and
/(?0 Such other information as is essential fort the shareholders to make an informed
design in regard to the offer.
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Chapter !: Mergers in the "an#ing $ector
ICICI ;an
INTRODUCTION
ICICI ;an /formerly Indust"ia' C"edit and In!est$ent Co"&o"ation of India0 is
India's largest private bank. I)I)I 8ank has total assets of about 7s..A.A:bn /end%ar .AA:0,
a network of over ::A branches and offices, and about (?AA A"%s. I)I)I 8ank offers a wide
range of banking products and financial services to corporate and retail customers through a
variety of delivery channels and through its speciali3ed subsidiaries and affiliates in the areas
of investment banking, life and nonlife insurance, venture capital and asset management.
I)I)I 8ank's equity shares are listed in India on stock exchanges at Holkata and Iadodara,
the Stock -xchange, %umbai and the #ational Stock -xchange of India Jimited and its
A*7s are listed on the #ew Kork Stock -xchange /#KS-0. *uring the year .AA: I)I)I bank
was involved as a defendant in cases of alleged criminal practices in its debt collection
operations and alleged fraudulent tactics to sell its products.
"he industrial )redit and Investment )orporation of India Jimited now known as I)I)I
Jtd. was founded b the World bank, the +overnment of India and representatives of private
industry on Lanuary :, (?::. "he ob1ective was to encourage and assist industrial
development and investment in India. $ver the years, I)I)I has evolved into a diversified
financial institution. I)I)I&s principal business activities include,
=ro1ect 5inance
Infrastructure 5inance
)orporate 5inance
.A
Securiti3ation
Jeasing
*eferred )redit
)onsultancy services
)ustodial services
"he I)I)I +roups draws its strength from the core competencies of its
individual companies. "oday, top Indian )orporate look towers I)I)I as a business partner
for providing solutions to their varied financial requirements. "he +roup also offers a gamut
of personal finance solutions to individuals. "o lead the financial services into the new
millennium, the +roup is now truly positioned as a Iirtual Mniversal 8ank. "he liberali3ation
of the Indian economy in the (??As offered I)I)I an opportunity to provide a wide range of
financial services. 5or regulatory and strategic reasons, I)I)I set up speciali3ed subsidiaries
in the areas of commercial banking, investment banking, non banking finance, investor
servicing brooking, venture capital financing and state level infrastructure financing.
I)I)I plans to focus on its retail finance business and expect the same to
contribute upto (:.A E of its turnover in the next five years. It is trying to change the
perception that it is a corporate oriented bank. "he bank hard selling its image as a retail
segment bank has for the first time come up with an advertisement that addresses its products
at the individual. "his is to drive home the point that the bank has product and services
catering to all individuals. 5or this purpose the network of I)I)I 8ank shall come into use.
"he parent plants to sell its products and also raise retail funds through the banking
subsidiary.
.(
"@- I)I)I +7$M= )$%=7IS-S $5,
ICICI ;an @i$ited> a commercial bank that provides both retail and wholesale
products
ICICI Secu"ities and 3inance Co$&an* @i$ited /I)I)I Securities0,
An investment bank that offers a wide range of fee based services with the support of I)I)I
8rokerage services Jimited /I)I)I 8rokerage0
ICICI C"edit Co"&o"ation @i$ited / I)I)I )redit0, a non banking finance company
that provides a retail distribution channel for the group&s retail products, supported by
I)I)I )apital Services Jimited /I)I)I )apital0
ICICI In!esto"s Se"!ices @i$ited /I)I)I Services0, offering quality investor servicing
ICICI 9entu"e 3unds Mana%e$ent @i$ited /I)I)I Ienture0, a venture capital
company
ICICI inte"nationa' @i$ited> an off shore investment management company
ICICI #AIN3RA @i$ited /IHI#0, A )ompany that offers infrastructure financing
and development assistance in Herala.
"hese are general observations for the about three categories and may not hold
true for some banks. 5or e.g. among public sector banks, )orporation 8ank has automated as
much as <A E of its business.
..
"he above table reflects the high performance of the private sector banks in the
banking sector compared to other banks in the industry. In modern banking, the productivity
level of branches matter more than the number of branches and the staff strength.
)onsidering the abovementioned point an attempt has been made to envisage a
merger of I)I)I Jimited with I)I)I Jimited.
%r. H.I. Hamath, )-$ of I)I)I Jimited, has recently voiced the intentions of I)I)I
Jimited towards banking and I)I)I 8ank. I)I)I Jimited is endeavoring to forge a closer
relationship with I)I)I bank. %r. H I Hamath recently quoted in a leading daily B8anking is
dead. Mniversal banking is in offering with a whole range of financial products and services.
the basic idea is for banks to do business along with BbankingC. 8ankers will have to emerge
as businessmen.C
I)I)I 8ank is a focused banking company coping with the changing times of the
banking industry. So it can be a lucrative target for other player in the same line of
operations. @owever, when merged with I)I)I Jimited the attraction is reduced manifold
considering the magnitude of operations of the I)I)I limited.
$f course, one would still need a bank to open letters of credit, offer guarantees,
handle documentation, and maintain current account facilities etc. so banks will not
superfluous. 8ut nobody needs so many of them any more.
Secondly, besides credit, a customer may also want from a bank efficient cash
management, advisory services and market research on his product. "hus the importance of
fee based is increasing in comparison with the fundbased income.
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"he following table shows a general comparison of three main classes of banks.
Particulars PSU Banks Pvt. Banks
+o'd-
Pvt. Banks
+o'd-
)ost of funds
Low Moderate
@igh
8ranch network
ide S!read Re%iona'
Jow
@e!e' of Auto$ation
Low
%oderate @igh
#=As @igh Jow Jow
)apital Adequacy %oderate Jow @igh
"m!lo#ee Productivit#
Jow %oderate @igh
3ocus on Non#
inte"est Inco$e
Jow @igh @igh
In the present era of economic liberali3ation and free market policy, the
mergers, acquisitions and takeovers have become regular phenomenon. %ergers and
acquisitions normally take place between week and strong or by mutual understanding. While
deciding upon the mergers, the financial implications and prospectus of future business
growth is taken into consideration.
I)I)I 8ank is arguably the most aggressive bank in the country and can rightfully claim
credit for the spread of retail financing in the country. 5ormed by the reverse merger of
former I)I)I with its banking subsidiary, the bank has been highly focused on expanding its
retail portfolio which it believes would be the ma1or growth driver in future.
"he bank had to overcome several legacy issues after the merger with I)I)I. "he
erstwhile financial institution had stockpile of bad loans in its books, a result of liberal
financing to large industrial pro1ects like steel units in the '?As. "o its credit, the bank has
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successfully cleaned its balance sheet and net bad loans as a percentage of advances have
gone down significantly.
8esides the well established corporate banking division, I)I)I 8ank has the largest
market share among all banks in retail or consumer financing. Its growth rate in home loans
exceeds more established @*5) and its total home loan portfolio would go past @*5) in a
few years at current growth rates.
I)I)I 8ank is the largest issuer of credit cards in the country. It was the first bank to offer
a wide network of A"%'s and had the largest network of A"%'s till recently, before S8I
caught up with it.
"he bank is expanding rapidly in overseas markets. It has operations in the MH, @ong
Hong and )anada. It acquired a small bank in 7ussia recently. It has tieups with ma1or banks
in the MS and )hina. "he bank is aggressively targeting the #7I /#on 7esident Indian0
population for expanding its business. It already offers money transfer facilities to India from
most ma1or countries across the globe.
5or the overseas markets, I)I)I has a unique strategy. "he bank has successfully reduced
operating costs by doing all processing and back office work in India. It maintains only a
front office customer interface in overseas locations. "hese cost savings help the bank to
offer higher rates on deposits.
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ICICI ;an 3inancia's
ICICI DEMAT SERVICES
About I)I)I 8ank *emat Services I)I)I 8ank *emat Services is arguably the most
aggressive demat services bank in the country and can rightfully claim credit for the spread
of its online trading services in the country.
."oducts and Se"!ices
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you to invest in Shares, %utual funds, *erivatives /5utures and $ptions0 and other financial
products. Simply put we offer you a product for every investment need of yours.
,? T"adin% in sha"es: I)I)Idirect.com offers you various options while trading in shares.
)ash "rading, "his is a delivery based trading system, which is generally done with the
intention of taking delivery of shares or monies.
%argin "rading, Kou can also do an intrasettlement trading upto 6 to 9 times your
available funds, wherein you take long buyG short sell positions in stocks with the intention of
squaring off the position within the same day settlement cycle.
%argin =JMS "rading, "hrough %argin =JMS you can do an intrasettlement trading unto
.: times your available funds, wherein you take long buyG short sell positions in stocks with
the intention of squaring off the position within the same day settlement cycle. %argin=JMS
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Spot "rading, "his facility can be used only for selling your demat stocks which are
already existing in your demat account. When you are looking at an immediate liquidity
option, ')ash on Spot' may work the best for you, $n selling shares through Ncash on spotN,
.;
money is credited to your bank aGc the same evening ! not on the exchange payout date. "his
money can then be withdrawn from any of the I)I)I 8ank A"%s.
8"S" , 8uy "oday Sell "omorrow /8"S"0 is a facility that allows you to sell shares
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)all "radeO, )all "radeO allows you to call on a local number in your city ! trade
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8S-.%arket $rder, Kou could trade by placing market orders during market hours that
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order.
"he premerger status of I)I)I 8ank is as follows, it had liabilities of 7s.(.,A<6 crore,
equity market capitali3ation of 7s..,9;; crore and equity volatility of A.<9>. Working
through options reasoning, we find that this share price and volatility are consistent with
assets worth 7s.(6,.9? crore with volatility A.(:. "hus, I)I)I bank had assets which are
?.<E ahead of liabilities, which is roughly consistent with the spirit of the 8asle Accord, and
has leverage of :.6< times.
.<
Histo"* of ICICI ;an
"he Wo"'d ;an, the Go!e"n$ent of India and representatives of Indian industry form
I)I)I Jimited as a development finance institution to provide mediumterm and longterm
pro1ect financing to Indian businesses in ,844.
(??9 I)I)I establishes I)I)I 8ank as a subsidiary.
(??? I)I)I becomes the first Indian company and the first bank or financial
institution from nonLapan Asia to list on the #KS-.
.AA( I)I)I acquired 8ank of %adura /est. (?960. 8ank of %adura was a )hettiar
bank, and had acquired )hettinad %ercantile 8ank /est. (?660 and Illan1i 8ank
/established (?A90 in the (?;As.
.AA. "he 8oards of *irectors of I)I)I and I)I)I 8ank approve the merger of I)I)I,
I)I)I =ersonal 5inancial Services Jimited and I)I)I )apital Services Jimited, with
I)I)I 8ank. After receiving all necessary regulatory approvals, I)I)I integrates the
group's financing and banking operations, both wholesale and retail, into a single.
.>
;an of Madu"a
INTRODUCTION
"he premerger status of 8ank of %adura is as follows, it had liabilities of 7s.9,999
crore, equity market capitali3ation of 7s.(AA crore and equity volatility of A.;?. Working
through options reasoning, we may say that the stock market thinks that its assets are worth
7s.9, A?: crore with a volatility of A.A.. @ence, 8o% is bankrupt /with assets which are
7s.6:A crore behind liabilities0 and has a leverage of 9( times. If we needed to bring 8o% up
to a point where its assets were (AE ahead of liabilities, which is broadly consistent with the
8asle Accord, this would require an infusion of 7s.>AA crore of equity capital.
@ow do we combine these to think of the merged entityP Assets and liabilities are additive, so
the total assets of the merged entity would prove to be roughly 7s.(<,69: crore and the
liabilities would prove to be 7s.(;,:(< crore. "he merged entity would hence need roughly
7s.>AA crore of fresh equity capital in order to come up to a point where assets were atleast
(AE ahead of liabilities.
@ow can we estimate the market capitali3ation of the merged entityP "he value of
equity is the value of a call option on the assets of the merged entity. =ricing the call requires
an estimate of the volatility of the merged assets, i.e. it requires knowledge of the extent to
which the assets of the two banks are uncorrelated. We find that using values of the
correlation coefficient ranging from >AE to ?:E, the volatility of assets of the merged entity
proves to be around A.(.. In this case, the valuation of the call option, i.e. an estimate of the
market capitali3ation of the merged entity, proves to be roughly 7s..,:AA crore.
"his number is not far from the premerger market capitalisation of I)I)I 8ank,
which was 7s..,9;; crore. @ence, we can say that on purely financial arguments, the merger
is roughly neutral to I)I)I 8ank shareholders if 8o% was merged into I)I)I 8ank for free.
.?
Indeed, if banking regulators took their 1obs more seriously, they would force the
shareholders of 8o% to walk into such a merger at a 3ero share price as a way of reducing
the number of bankrupt banks in India by one. Such a forcedmerger would be a politically
easier alternative for the 78I when compared with closing down 8o%.
"he shareholders of I)I)I 8ank have paid a non3ero fee for 8o%. "his reflects a
hope that the products and processes of I)I)I 8ank will rapidly improve the value of assets
of 8o% in order to compensate. In addition, the merged entity will have to rapidly raise
roughly 7s.>AA crore of equity capital to obtain a (AE buffer between assets and liabilities.
@ence, this proposed merger is a godsend for 8o%, which was otherwise a bankrupt
entity which was headed for closure given the low probability that it would manage to raise
7s.>AA crore of equity on a base of 7s.(AA crore of market capitalisation. It is useful to
observe that 8o% probably did not see things in this way, given the willingness of India's
banking regulators to interminably tolerate the existence of bankrupt banks. )losure of 8o%
would normally involve pain for 8o%'s shareholders and workers2 instead both groups will
get an extremely pleasant ride if the merger goes through.
"he proposed merger is a daunting problem for I)I)I 8ank. It will need to rapidly
find roughly 7s.>AA crore in equity. If India's banking regulators were serious about capital
adequacy, I)I)I 8ank should have to pay roughly 3ero to merge with 8o% /it is doing a
favour to 8o% and to India's banking system02 instead I)I)I 8ank has paid a positive price
for 8o%. "he key question that will be answered in the next twoGthree years is, Will I)I)I
8ank's superior knowledge of products and processes revitali3e the assets and employees of
8o%, and generate shareholder value in the merged entityP I)I)I's top management clearly
thinks so, and it would be a very happy outcome if this did indeed happen
.
"he proposed merger is a good thing for India's economy, since the headcount of
bankrupt banks will go down by one, and there is a possibility of obtaining higher value
added out of the poorly utili3ed assets and employees of 8o%. If the merger goes through,
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then it will reduce the say of the management team of 8o% in India's resource allocation,
which is a good thing.
Chapter %: Procedure of "an# Merger
"he procedure for merger either voluntary or otherwise is outlined in the respective
state statutesG the 8anking regulation Act. "he 7egistrars, being the authorities vested with
the responsibility of administering the Acts, will be ensuring that the due process prescribed
in the Statutes has been complied with before they seek the approval of the 78I. "hey would
also be ensuring compliance with the statutory procedures for notifying the amalgamation
after obtaining the sanction of the 78I.
8efore deciding on the merger, the authori3ed officials of the acquiring bank and the
merging bank sit together and discuss the procedural modalities and financial terms. After the
conclusion of the discussions, a scheme is prepared incorporating therein the all the details of
both the banks and the area terms and conditions.
$nce the scheme is finali3ed, it is tabled in the meeting of 8oard of directors of
respective banks. "he board discusses the scheme thread bare and accords its approval if the
proposal is found to be financially viable and beneficial in long run.
After the 8oard approval of the merger proposal, an extra ordinary general meeting of
the shareholders of the respective banks is convened to discuss the proposal and seek their
approval.
After the board approval of the merger proposal, a registered valuer is appointed to
valuate both the banks. "he valuer valuates the banks on the basis of its share capital,market
capital, assets and liabilities, its reach and anticipated growth and sends its report to the
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respective banks.
$nce the valuation is accepted by the respective banks , they send the proposal along
with all relevant documents such as 8oard approval, shareholders approval, valuation report
etc to 7eserve 8ank of India and other regulatory bodies such Security ! exchange board of
India (S-8I) for their approval.
After obtaining approvals from all the concerned institutions, authori3ed officials of
both the banks sit together and discuss and finali3e share allocation proportion by the
acquiring bank to the shareholders of the merging bank (SWA= ratio)
After completion of the above procedures , a merger and acquisition agreement is
signed by the bank
6.
Chapter &: 'uide(ines for Mergers & Acquisitions
)f "an#s
,? 7eserve 8ank of India may consider proposals for merger and amalgamation in the
following circumstances,
+i- When the net worth of the acquired bank is positive and the acquirer bank assures
to protect entire deposits of all the depositors of the acquired bank.
+ii- When the net worth of acquired bank is negative and the acquirer bank on its own
assures to protect deposits of all the depositors of the acquired bank.
+iii- When the net worth of the acquired bank is negative and the acquirer bank
assures to protect the deposits of all the depositors of the acquired bank with financial
support from the State +overnment extended upfront as part of the process of merger.
/? In all cases of mergerG amalgamation the financial parameters of the acquirer bank post
merger should conform to the prescribed minimum prudential and regulatory requirement for
banks.
0? "he reali3able value of assets has to be assessed through a process of due
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Chapter *: +"I 'uide(ines on Mergers &
Acquisitions of "an#s
With a view to facilitating consolidation and emergence of strong entities and
providing an avenue for non disruptive exit of weakGunviable entities in the banking sector, it
has been decided to frame guidelines to encourage mergerGamalgamation in the sector.
Although the 8anking 7egulation Act, (?9? /AA)S0 does not empower 7eserve
8ank to formulate a scheme with regard to merger and amalgamation of banks, the State
+overnments have incorporated in their respective Acts a provision for obtaining prior
sanction in writing, of 78I for an order, inter alia, for sanctioning a scheme of amalgamation
or reconstruction.
"he request for merger can emanate from banks registered under the same State Act
or from banks registered under the %ulti State )ooperative Societies Act /)entral Act0 for
takeover of a bankGs registered under State Act. While the State Acts specifically provide for
merger of cooperative societies registered under them, the position with regard to take over
of a cooperative bank registered under the State Act by a cooperative bank registered under
the )-#"7AJ
Although there are no specific provisions in the State Acts or the )entral Act for the
merger of a cooperative society under the State Acts with that under the )entral Act, it is felt
that, if all concerned including administrators of the concerned Acts are agreeable to order
mergerG amalgamation, 78I may consider proposals on merits leaving the question of
compliance with relevant statutes to the administrators of the Acts. In other words, 7eserve
69
8ank will confine its examination only to financial aspects and to the interests of depositors
as well as the stability of the financial system while considering such proposals.
Chapter 1,: A-a(ga-ation of .r/an "an#s
6:
Chapter 11: Infor-ation & 0ocu-ents to /e
furnished /y "1 T23 AC4.I+3+ )5 "A67$
,? *raft scheme of amalgamation as approved by the 8oard of *irectors of the acquirer bank.
/? )opies of the reports of the valuers appointed for the determination of reali3able value of
assets +net of a$ount &a*a:'e to c"edito"s ha!in% &"ecedence o!e" de&osito"s- of the
acquired bank.
0? Information which is considered relevant for the consideration of the scheme of merger
including in particular,
a? Annual reports of each of the 8anks for each of the three completed financial years
immediately preceding the proposed date for merger.
:? 5inancial results, if any, published by each of the 8anks for any period subsequent
to the financial statements prepared for the financial year immediately preceding the
proposed date of merger.
c? =roforma combined balance sheet of the acquiring bank as it will appear
consequent on the merger.
d? )omputation based on such proforma balance sheet of the following,
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i? "ier I )apital
ii? "ier II )apital
iii. 7iskweighted Assets
i!? +ross and #et #=As
!? 7atio of "ier I )apital to 7iskweighted Assets
!i. 7atio of "ier II )apital to 7iskweighted Assets
!ii? 7atio of "otal )apital to 7iskweighted Assets
9iii. "ier I )apital to "otal Assets
i1? +ross and #et #=As to Advances
1? )ash 7eserve 7atio
1i? Statutory Jiquidity 7atio
2? Information certified by the values as is considered relevant to understand the net
reali3able value of assets of the acquired bank including in particular,
a? "he method of valuation used by the values
:? "he information and documents on which the values have relied and the extent of
the verification, if any, made by the values to test the accuracy of such information
c? If the values have relied upon pro1ected information, the names and designations
of the persons who have provided such information and the extent of verification, if any,
made by the values in relation to such information
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d? *etails of the pro1ected information on which the values have relied
e? *etailed computation of the reali3able value of assets of the acquired bank.
4? Such other information and explanations as the 7eserve 8ank may require.
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Chapter 12: Change in scenario of "an#ing $ector
(. "he first mega merger in the Indian banking sector that of the @*5) 8ank with "imes
8ank, has created an entity which is the largest private sector bank in the country.
.. "he merger of the city bank with "ravelers +roup and the merger of 8ank of America
with #ation 8ank have triggered the mergers and acquisition market in the banking sector
world wide.
6. -urope and Lapan are also on their way to restructure their financial sector thought
merger and acquisitions. %erger will help banks with added money power, extended
geographical reach with diversified branch #etwork, improved product mix, and
economies of scale of operations. %erger will also help banks to reduced them borrowing
cost and to spread total risk associated with the individual banks over the combined
entity. 7evenues of the combine entity are likely to shoot up due to more effective
allocation of bank funds. I)I)I 8ank has initiated merger talks with )enturian 8ank but
due to difference arising over swap ration the merger didn&t materiali3ed. #ow M"I 8ank
is egeing )enturian 8ank. "he proposed merger of M"I 8ank and )enturian 8ank will
make them third largest private banks in terms of si3e and market )apitali3ation State
8ank of India has also planned to merge seven of its associates or part of its longterm
policies to regroup and consolidate its position. Some of the Indian 5inancial Sector
players are already on their way for mergers to strengthen their existing base.
9. In India mergers especially of the =S8S may be sub1ect to technology and trade union
related problem. "he strong trade union may prove to be big obstacle for the =S8S
mergers. "echnology of the merging banks to should complement each other #=A
management. %anagement of efficiency, cost reduction, tough competition from the
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market players and strengthing of the capital base of the banks are some of the problem
which can be faced by the merge entities. %ergers for private sector banks will be much
smoother and easier as again that of =S8S.
THE ;ANAING SCENARIO HAS ;EEN CHANGING AT 3AST .@ACE?

8ank traditionally 1ust borrower and lenders, has started providing complete
corporate and retail financial services to its customers
(. "echnology drive has benefited the customers in terms of faster improve convenient
banking services and Iarity of financial products to suit their requirement. A"%s, =hone
8anking, #et banking, Any time and Any where banking are the services which bank
have started offering following the changing trend in sectors. In plastic money segment
customer have also got a new option of debits cards against the earlier popular credit
card. -arlier customers had to conduct their banking transaction within the restricted time
frame of banking hours. #ow banking hours are extended.
.. A"%s ,=hone banking and #et banking had enable the customer to transact as per their
convince customer can now without money at any time and from any branch across
country as certain their account transaction, order statements of their account and give
instruction using the tally banking or on online banking services.
6. 8ank traditionally involve working capital financing have started offering consumer
loans and housing loans. Some of the banks have started offering travel loans, as well as
many banks have started capitali3ing on recent capital market boom by providing I=$
finance to the investors.
9. I=$ finance has received a positive response from the investor and is becoming popular
among the masses. 7etail financing is the other area where the banks have started to
concentrate. "he loan formalities to have been relaxed to a great extent and sanctioning
time.
9A
Chapter 13: Merger of ICICI "an# 8ith "an# of
Madura

ICICI "A67

9(
Merger
Merger of ICICI "an# 8ith "an# of Madura
"he proposed merger between I)I)I 8ank and 8ank of %adura /8o%0 is a
remarkable one. "he premerger market capitali3ation of I)I)I 8ank was roughly 7s..:AA
crore while 8o% was at roughly 7s.(AA crore. 8o% is known to have a poor asset portfolio.
What will the merged entity be worthP
"he key rationale underlying every merger is the question of synergy. )an I)I)I
8ank's products and technology bring new life to the .;6 branches of 8o%P Will I)I)I 8ank
/which has (,<AA employees0 be able to overcome the .,;AA employees that 8o% carries,
given that Indian labour law makes it troublesome and expensive to sack workersP
In applying these ideas to I)I)I 8ank and to 8o%, we need to believe that the stock
market effectively processes information to produce estimates of the price and volatility of
the shares of both these banks. "his assumption is suspect, because both securities have poor
stock market liquidity. @ence, we should be cautious in interpreting the numbers shown here.
"here are many other aspects in which this reasoning leans on models, which are innately
imperfect depictions of reality. @owever, these models are powerful tools for understanding
the basic factors at work, and they probably convey the broad picture quite effectively.
"he stock of I)I)I 8ank may be in the limelight on the back of the proposed
acquisition of 8ank of %adura.
"hough the stock has gained sharply in the last two months after hitting a recent low
of 7s ((A, some upside may be left as the bank could get rerated on account of the merger.
-xisting shareholders could hold their exposures in I)I)I 8ank while investors with an
appetite for risk could contemplate exposures despite the impressive gains of the past few
9.
months. I)I)I 8ank continues to be one of the better options in the banking sector at the
moment and the possible merger with I)I)I may well be on the backburner.
"he merger would pitchfork I)I)I 8ank as the leading private sector bank. "he
merger may be viewed favorably since 8ank of %adura has focused strengths and a
reasonably good quality balance sheet. "he board of directors is to meet on *ecember (( to
consider the merger.
It is quite likely that the swap ratio may be fixed in a manner that holds out a good
deal for the shareholders of 8ank of %adura. "his may also be influenced by the fact that the
8ank of %adura stock has gained sharply by around <A per cent in the past fortnight in the
homestretch to the deal.
As the acquisition is to be financed by issuance of stock, the rise in the market
capitali3ation of 8ank of %adura may mean a higher degree of equity issuance by I)I)I
8ank. 8ut the price may well be worth paying as this is the only way that I)I)I 8ank may be
able to get control over banks with reasonable quality balance sheets that could make a
difference in the medium to longterm.
8ank of %adura has assets of 7s 6,?>> crore and deposits of 7s 6,6?: crore as of
%arch .AAA. "he fact that the bank has a capital adequacy of (:.> per cent with shareholder
funds of 7s .;6 crore may mean that I)I)I 8ank /postmerger phase0 will have more leeway
to pursue growth without expanding the equity base /other than paying for the acquisition0.
Strong capital adequacy, a strong beachhead on the Internet arena, a revamped I"
architecture, a growing retail client base through a brickandclick strategy, and improving
asset quality and earnings growth are positive features as far as I)I)I 8ank is concerned.
*espite these factors, the share had been on a downtrend from after touching a high
of 7s .<(, eight months ago. "he uptrend then was on the back of the announcement of its
A*7 issue and new technology initiatives. "he subsequent downtrend was triggered by the
possibility of the merger with its parent. "here is continuing concern on asset quality of
96
I)I)I. It has been a stated goal of the I)I)I group to go in for universal banking. It is clear
that once regulatory hurdles are removed, such a possibility becomes distinctly feasible. 8ut
given the battering that bank stock took, I)I)I may now hesitate to pursue this path. Also
I)I)I 8ank is the most visible investorfriendly face for the group in terms of returns to
shareholders and it may well be maintained as a separate entity. In this backdrop, the stock
may hold scope for improvement in the valuation of the stock.
Co$$on :ases on (hich the e1chan%e "atio is dete"$ined a"e:
Ea"nin% &e" sha"e: # "he exchange ratio may be based on the -=S of both the acquiring
banks, and target banks. -arning per share /-=S0 are the earning attribute able to
shareholders, which it reflected in the market price of share. "his /=G-0 relationship is
known as price -arnings 7atio.
=G- 7atio is calculated by dividing current price of shares /=0 by -=S or =G-=S. A higher
=G- 7atio indicates that the company&s earning in the future will grow were as a low =G-
7atio indicates stagnancy in the earning in the future.
Share price /=0 can be determined as
= Q -=S R =G- 7atio.
;oo 9a'ue &e" sha"e: # "he relative book value per share is used to determine the
exchange rate.
Ma"et ."ice &e" sha"e: # "he exchange ratio may be based on the relative market
prices of two banks i.e. acquiring bank and target bank. When the shares of the two banks
are actively traded the market prices will have a considerable hold. "he market price is a
reflection of bank current earning growth prospects and risk characteristics.
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Ca&ita' adequac* "atio: # "his indicates the risk exposure of the bank, the quality of
assets and the capacity of the banks capital to sustain the risk level. "he sustenance of
bank is directly proportional to this ratio. @owever beyond a point, the higher the ratio
would be may mean opportunities foregone.
3inancia' standin% of ICICI ;an B ;an of Madu"a
.a"a$ete"s ICICI ;an ;an of Madu"a
,887#,888 ,888#/CCC ,887#,888 ,888#/CCC
#et worth 6A>.66 ((.?.?A .((.6. .9<.>6
"otal *eposit ;A<..?9 ?>;;.A. 6A(6.AA 6;6(.AA
Advances 66<<.;A :A6A.?; (6?6.?. (;;:.9.
#et =rofit ;6.<: (A:.96 6A.(6 9:.:>
Share )apital (;:.A< (?;.>( ((.A> ((.A>
)apital Adequacy
7atio
((.A;E (?.;9E (>.>6E (9..:E
+ross Advances G
+ross #=&s
9.<.E ..:9E >.(6E ((.A?E
#et Advances G
#et #=&s
..>>E (.:6E 9.;;E ;..6E
Source: Co$&'ied f"o$ Annua' Re&o"t +Ma"ch /CCC- of ICICI ;an B
;an of Madu"a?
9:
The Gene"ation Ga&:# the merger of :< year old 8$% sooth bared old generation bank
with a fast growing technology say new +eneration bank will help the latter and the start
merger is likely to bring cheer to shareholder and bank employees of 8$% and some
amount of discomfort and anxiety to those of I)I)I bank.
"he scheme of amalgamation will increase the equity bank of I)I)I 8ank to 7S
..A.6; )7. I)I)I 8ank will issue .6:.9lakh share of 7S (A each to the shareholder of
8$%. "he merger entity will have an increase of a net base over 7S (;A bn and deposit
base of 7S (6( bn.
"he merged entity will have 6;A branches and a similar number of A"%&s across the
country and also enable the I)I)I to serve a large customer bone of (.. million customers
of 8$% through a wider network, adding to the antoma bare to ..< million.
Mana%in% "u"a' :"anches:
I)I)I ma1or branches are in ma1or and cities, where as 8$% spreads its wings
mostly in semi urban and city segments of south India. "here in a task ahead lying for the
merged entity to increase dramatically the business mix of rural branches of 8$%. $n
the other hand due to +eographical location of its branches and level of competition.
I)I)I 8ank will have a tough time to cope with.
Mana%in% soft(a"e:
Another task which stand on the way is technology while I)I)I bank which is fully
automatic.
Qua'it* of assets:# the nature of assets a bank is holding would signify its operational
efficiency. Msually the level of #on D performing Assets / #=AS0 1udges the quality of
assets. "he lower the #A=S to total advances or total assets the better the quality is and
vice versa.
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Staff &"oducti!it*: # $ne of the key area where banks can develop competition
advantage. "he measurement of staff productivity becomes one of the essential factors
while measuring the performance of the banks.
@iquidit*:# While assessing the liquidity of a bank the most sought ratio is net loans to
total assets. A rise in the net loans to total assets may be considered as a fall in the
liquidity of the bank.
;oo 9a'ue &e" sha"e:# It is simply the net worth of the company /which is equal to the
paid up equity capital plus resource and surplus0 divided by the number of outstanding
equity shares.
Ea"nin% &e" sha"e:# specific valuation per unit of investment given by #et income after
income taxes and after dividends on preferred stock of the company.
Net (o":# 8ook value of a company is common stock, surplus, resources and retained
earnings.
."ofita:i'it*: # the most crucial ratio in measuring the profitability is net profit of the
bank. "he ratio such as #et Interest Income /#IJ0 and #et Interest %argin /#I%0
measure sustenance ability of the bank based on the spread. -ntity is using the package,
8anks .AAA, 8$% computeri3ed ?A percent of its business and was converted with IS8S
software.
"he 8$% branches are supposed to switch over to 8anks .AAA. "hough it is not a
difficult task, with >AE computer literate staff would need effective retraining which
involves a cost. "he I)I)I 8ank need to invest 7S :A core for upgrading 8$%&s .;6
branches.
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Mana%in% Hu$an Resou"ces:

$ne of the greatest challenges before I)I)I 8anks is managing human resources.
When the head count of I)I)I 8ank is taken it in less than (:AA employees on the other hand
8$% has over .:AA.
"he merged entity will have bout 9AAA employees which will make it one of the largest
banks among the new generation private sector banks. "h staff of I)I)I 8anks are drawn
from <: various banks mostly young qualified professionals with computer background and
prefer to work in metro or by either with good remuneration packages.
While under the influence of tread unions most of the 8$% employees have low career
aspiration. "he announcement by @.#. signor, )-$ and %* of I)I)I, that three would be no
I7S or retrenchment, creates a new hope amongst the 8$% employees. It is a tough task
ahead to manage. $n the other hand their pay would be revised up wards. It is not a
@erevlean task to integrate two work weltersP
C"ucia' .a"a$ete"s: # Ho( the* stand
#ame of the 8ank of I)I)I
8ank %adura 8ank
8ook value of bank on the
day of merger
announcement

(>6.A :>.A
%arket price on the day
announcement of merger

(>6.A

(;?.?A
-arning per share *ividend
paid /inE0 =G- 7atio
6>E
::E
(.<6
:.9
(:E
<>6
Managing $lient Base:%
9>
"he clients base of I)I)I 8ank after merger, will be as ..< %illion from it past A.:
%illion, as accumulation of ... %illion from 8$%. "he nature and quality of clients is not
of uniform quality.
"he 8$% had built up it client base for a long time, in a hard way, on the basis of
personali3ed services. in order to deal with the 8$% clientele, the I)I)I 8ank needs to
redefine its strategies to suit to the new clientele. "he sentiments or a relationship of small
and medium borrower is hurt it may be difficult for them to reestablish the relationship which
could also hamper the image of the bank.
+iven the situation, we need to wait and view, as to how the I)I)I will face this challenge.
The 6arasi-ha- Co--ittee on /an#ing sector
refor-s:9
9?
"he #arasimham )ommittee on banking sector reforms suggested that 4%erger&
should not be viewed as a means of bailing out weak banks. "hey could be a solution to the
problem of weak banks but only after cleaning up their balance sheet.
"he +overnment has tried to find a solution on similar lines, and passed an ordinance
on September 9, (??6 and took the initiative to merge. #ew bank of India /#8I0 with =un1ab
#ational 8ank /=#80. Mltimately, this turned out to be an unhappy event. 5ollowing this
there was along silent in the market till @*5) 8ank successfully took aver "imes 8ank.
%arket gained confidence and subsequently, we witnence, one more mega merger. "he
merger of 8ank of %adera with I)I)I 8ank.
An overview of bank merger in the recent past is presented in this case study. While
the private sector banks are on the threshold of improvement the =ublic sector 8ank /=S8s0
are slowly contemplating automation to accelerate and cover the lost ground.
"o contend with new challenges posed by pricey sector 8ank, =S8s are pooping hogs
amounts to update their I". 8ut still, it look like, public sector bank, need to shiest the gears,
accelerate their movement, in the right direction by automating their branches and providing.
Internet banking services.
Although large =S8, are slowly venturing into new areas, a few old bigsi3ed bank
are still encovnteny problems of unioni3ed staff though in the milder way, and the employees
are still finding their feet in new technologies.
"he privet sector banks, in order to compete with large and well established public
sector banks, are not only foraying into I", but also shaking hands with peer banks to
establish the mselver in the market.
While one of the fine initiative was taken in #ovember, (???, when *eepak =walch
of @*5) and S.%. *atta of "imes bank shook hands, created history. It is the first merger
:A
event in the history of Indian banking signaling that wagon. =rior to this private bank merger
there have been quite a few attempts made by the government to resale weak banks and
synergies the operations to achieve scale economic /but, on fortunately0.
=resently, 4Si3e& of the bank, is recogni3ed as one of the %a1or strengths in the
industry. And %ergers amongst strong banks can be both a means to strengthen the base and
of course to face the cut throat competition.
$n the other hand, if the merger turns out to be %ere arithmetical number crunching
of two balance sheets without a proper strategic out look and reorienting goals, it %ight
result in disharmonious human resole problems.
A few years ago any talk of bank merger would have been something abnormal and
1oggation on bank merger would have been regarded as nothing short of irreverence. 5or
many years twenty public sector banks and S8I group monopoli3ed the Indian banking
sector.
With the removal of entry barriers, in (??:, the emergence of nine private sector
banks has given a new glamorous out look for the banking industry. "he technological savvy,
customer oriented service, innovative products have become the day&s meal.
In retrospection the Indian banking industry took all clues from #arasimham
)ommittee conclusions and is marching ahead to big banks scenario.
"he two successful %erger in the recent past, raise hopes that the trend would
continue, for the survival of the biggest.
Reco$$endation of Na"asi$ha$ Co$$ittee on :anin% secto"
"efo"$s
:(
+lobally, the banking and financial systems have adopted information and
communications technology. "his phenomenon has largely by passed the Indian banking
system, and the committee feels that requisite success needs to be achieved in the
following areas:-
- 8anking automation
- =lanning, Standardi3ation of electronic payment systems
- "elecom infrastructure
- *ata were
%erger between banks and *5Js and #85)s need to be based on synergies and should
make a sound commercial sense. )ommittee also opines that merger between strong
banks G 5Js would make for greater economic and commercial sense and would be a case
where the whole is greater than the sum of its party and have a 4force multiplier effectC. It
also have merger should not be seen as a means of bailing out weak banks.
A weak bank could be nurtured into healthy units. %erger could also be a solution to a
after cleaning up their balances sheets it only say if these is no Ioltaire response to a
takeover of such bank, a restructuring commission for such =S8, can consider other
options such as restructuring , merger and amalgamations to it not closure.
"he committee also options that while licensing new private sector banks, the initial
capital requirement need to be review. It also emphasi3ed on a transparent mechanism for
:.
deciding the ability of promoter to professionally manage the bank. "he committee also
feels that a minimum threshold capital for old private banks also deserved threshold
capitals. "he committee also opined that a promoter group couldn't hold more that 9A
percent of the equity of a bank.
"he #arasimham )ommittee also suggested that the merger could be a solution to 4Weak
banks& )oney after clearing up the balance sheets0 with a strong public sector bank.
Source: Na"asi$ha$ Co$$ittee "e&o"t on :anin% secto" "efo"$s?
"he suggestion was tested, and ultimately it was not a winwin merger.
:6
"hus disastrous the merger syndrome, there could be a possibility that the following
permutations and combination, of merger in banking industry may take place in near further,
When si3e only matters, the =S8s that will shortly be loosing their public sector native by
their increased capital /as the government is planning recluse its stake from (AA present to 66
present0 are strong contenders to take overall old generation private sector banks. 5oreign
8ank will not study behind in overall point financial services concept in the takeover bids.
#ow the bank %erger will not be a new phenomenon since synergies are derived from the
alliances in the recent merger. "hanks to the financial sector reforms, ultimately it is the
customerG shareholder who is going to benefit.
Changes after the merger:-
While, 8$% had an attractive business per employee figure of 7s..A. lakh, a better
technological edge and had a vast base in southern India when compared to 5ederal bank.
While all these factors sound good, a cultural integration would be a tough task ahead for
I)I)I 8ank.
I)I)I 8ank has announced a merger with :<yearold 8ank of %adure, with .;6
branches, out of which >. of them are in rural areas, with most of them in southern India. As
on the day of announcement of merger0 A?(.AA0, Hotak mahindra group was holding about
(. percent stake in 8$%, the )hairman 8$%, %r.H.%. "haiagara1an, along with his
associates was holding about .; percent stake, Spic groups has about 9.< percent, while JI)
and M"I were having marginal holdings. "he merger will give I)I)I 8ank a hold on South
India market, which has high rate of economic development.
"he board of *irector at I)I)I has contemplated the following synergies emerging from the
merger,
:9
&inancial $a!abilit#: "he amalgamation will enable them to have a stronger financial and
operational structure, which is supposed to be capable of greater resourgerGdeposit
mobili3ation. And I)I)I will emerge a one of the largest private sector banks in the country.
Branc' network: "he I)I)I&s branch network would not only .;9, but also increases
geographic coverage as well as convenience to its customers.
$ustomer base: "he emerged largest customer base will enable the I)I)I bank to offer
banking financial services and products and also facilitate crossselling of products and
services of the I)I)I groups.
(ec' edge: "he merger will enable I)I)I to provide A"%s, =hone and the Internet banking
and finical services and products and also facilitate crossselling of products and services of
the I)I)I group.
&ocus on Priorit# Sector: "he enhanced branch network will enable the 8ank to focus on
microfinance activities through selfhelp groups, in its priority sector initiatives through its
acquired >< rural and >> semiurban branches.
Source, 7eport submitted at -+% on Lanuary (?, .AA(.
THE SWA. RATIO:
"he swap ratio has been approved in the ratio of (,. D two shares of I)I)I 8ank for every
one share of 8ank of %adera.
"he deal with 8ank of %adera is likely to dilute the current equity capital by around (.
percent. And the merger is expected to bring .A percent gains in -=S of bank.
::
And also the bank&s comfortable capital Adequacy 7atio /)A70 of (?.;9 percent has
declined to (<.; percent.
Chapter 14: +easons /ehind the recent trend of
-erger in "an#ing $ector
:;
The question on to& e!e"*:od*=s $ind is
Are banks and bankers on the road to redundancy
5irst consider the reasons who one does not need banks in large numbers any more
A depositor today can open a cheque account with a money market mutual fund and
obtain both higher returns and greater and greater flexibility. Indian mutual funds are
queuing up to offer this facility.
After can be drawn or a telephone bill paid easily through credit cards.
-ven if a bank is 1ust a safe place to put away your savings, you need not go to it. "here
is always an A"% you can do business with.
If you are solvent and want to borrow money, you can do so on your credit card with far
fewer hassles.
A 4AAA& corporate can directly borrow from the market through commercial papers and
get better rates in the bargain. In fact the banks may indeed be left with dad credit risk or
those that cannot access the capital market. "his once again makes a shift to nonfund
based the activities all the more important.
Chapter 1: Case $tudies
:<
Case stud* I
Deutsche D D"esdne" ;an + Merger &ailure -
"he merger that was announced on march <, .AAA between *eutsche 8ank and
*resdner 8ank, +ermany&s largest and the third largest bank respectively was considered as
+ermany&s response to increasingly tough competition markets.
"he merger was to create the most powerful banking group in the world with the
balance sheet total of nearly ..: trillion marks and a stock market value around (:A billion
marks. "his would put the merged bank for ahead of the second largest banking group, M.S.
based citigroup, with a balance sheet total amounting to (.. trillion marks and also in front of
the planned Lapanese book mergers of Sumitomo and Sukura 8ank with (.< trillion marks as
the balance sheet total.
"he new banking group intended to spin off its retail banking which was not making
much profit in both the banks and costly, extensive network of bank branches associated with
it.
"he merged bank was to retain the name *eutsche 8ank but adopted the *resdner
8ank&s green corporate color in its logo. "he future core business lines of the new merged
8ank included investment 8anking, asset management, where the new banking group was
hoped to outside the traditionally dominant Swiss 8ank, Security and loan banking and
finally financially corporate clients ranging from ma1or industrial corporation to the mid
scale companies.
With this kind of merger, the new bank would have reached the no.( position of the
MS and create new dimensions of aggressiveness in the international mergers.
:>
8ut barely . months after announcing their agreement to form the largest bank in the world,
had negotiations for a merger between *eutsche and *resdner 8ank failed on April :, .AAA.
"he main issue of the failure was *resdner 8ank&s investment arm, Hleinwort
8enson, which the executive committee of the bank did not want to relinquish under any
circumstances.
In the preliminary negotiations it had been agreed that Hleinwort 8enson would be
integrated into the merged bank. 8ut from the outset these considerations encountered
resistance from the asset management division, which was *eutsche 8ank&s investment arm.
*eutsche 8ank&s asset management had only integrated with Jondon&s investment
group %organ +renfell and the American 8anker&s trust. "his division alone contributed over
;AE of *eutsche 8ank&s profit. "he top people at the asset management were not ready to
undertake a new process of integration with Hleinwort 8enson. So there was only one option
left with the *resdner 8ank i.e. to sell Hleinwort 8enson completely. @owever Walter, the
chairman of the *resdner 8ank was not prepared for this. "his led to the withdrawal of the
*resdner 8ank from the merger negotiations.
In economic and political circles, the planned merger was celebrated as +ermany&s
advance into the premier league of the international financial markets. 8ut the failure of
the merger led to the disaster of +ermany as the financial center.
:?
Case stud* II
Standa"d Cha"te"ed G"ind'a*=s + Acquisition Success -
It has been a hectic year at Jondonbased Standard )hartered 8ank, going by its
acquisition spree across the Asia=acific region. At the helm of affairs, globally, is 7ana
"alwar, group )-$. "he quintessential general, he knew what he was up against when
he propounded his 'emerging stronger' strategy of growth through consolidation of
emerging markets for the turn of the %illennium, loads of scepticism. "he central issue,
Stan )hart&s August .AAA acquisition of A#S +rind lays 8ank, for T(.6 billion.
-veryone knows that acquisition is the easy part, merging operations is not. And recent
history has shown that banking mergers and acquisitions /%-7+-7S ! Acquisition&s0, in
particular, are not as simple to execute as unifying balance sheets. )an Stan )hart&s proposed
merger with A#S +rind lays be any differentP
"he '(' refers to the new entity, which will be India's #o ( foreign bank once the
integration is completed. "his should take around (> months2 till then, A#S +rind lays will
exist separately as Standard )hartered +rind lays /S)+0. "he '.' and '6' are )itibank and
@ong Hong and Shanghai 8anking )orp /@S8)0, India's second and third largest foreign
banks, respectively.
"hat makes the new entity the world's biggest 'emerging markets' bank. 8y way of
strengths, it will have treasury operations that will probably go unchallenged as the country's
most sophisticated. 8est of all, it will be a dynamic bank. "hanks to premerger initiatives
taken by both banks, it could per haps boast of the country's fastest growing retailbanking
business.

Stan)hart is rated highly on other parameters too. It is currently targeting global cost
;A
savings of T(A> million in .AA(, having reported a profitbeforetax of T;:A million in the
first half of .AAA, up 6( per cent from the same period last year. #et revenue increased ; per
cent to T. billion for the same period. )onsumer banking, a typically lowprofit business
which accounted for less than 9A per cent of its global operating profits till four years ago,
now brings in :: per cent of profits. So the company's global report card looks fairly good.
up with A#S +rind lays, which had the same colonial 8ritish antecedents.

8ut this plan was abandoned when it became evident that all decisionmaking would
vacillate between %elbourne and Jondon, where the two are headquartered. 8y *ecember,
A#S had expressed a willingness to sell out, and Stan)hart initiated the duediligence
proceedings. It wasn't until %arch that a few senior Indian bank executives were let into the
secret. #ow, it's time to get going. A new vehicle, navigators in place, engines revving and
map charted, the road ahead is challenging and full of promise. "o steer clear of trouble is the
only caution advised by industry analysts, as the two banks integrate their businesses.
Skeptics don't see how Stan)hart can really be greater than the sum of its parts.

"he aggression, though, is not as raw as it sounds. 8ehind it all is a strategy that
everyone at Stan)hart seems to be in synchrony with. And behind that strategy is "alwar,
very much the originator of the oftrepeated phrase uttered by every executive Ngetting the
right footprintN. "he other key words that tend to find their way into every discussion are
'focus' and 'growth'.

Stan)hart India's net nonperforming loans, as a percentage of net total advances, is
reported at 1ust . per cent for (???.AAA. In terms of capital adequacy too, the banks are
doing fine. Stan)hart has a capital base of ?.: per cent of its riskweighted assets, while S)+
has (A.? per cent. So, with or without a safety net provided by the global group, the Indian
operations are on firm ground.
;(
;.

Mergers & Acquisitions

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