1.

MERGER AND ACQUISITION

Mergers and acquisitions (M&A) refers to the aspect of corporate strategy,

corporate finance and management dealing with the buying, selling and
combining of different companies that can aid, finance, or help a growing
company in a given industry grow rapidly without having to create another
business entity. An acquisition, also known as a takeover or a buyout, is the
buying of one company (the target) by another. The acquisition process
is very complex and various studies shows that only
50% acquisitions are successful. An acquisition may be friendly or hostile.
In a friendly takeover a companys cooperate in negotiations. In the hostile
takeover, the takeover target is unwilling to be bought or the target's board
has no prior knowledge of the offer. Acquisition usually refers to a purchase
of a smaller firm by a larger one. Sometimes, however, a smaller firm will
acquire management control of a larger or longer established company and
keep its name for the combined entity. This is known as a reverse takeover.
Although merger and amalgamation mean the same, there is a small
difference between the two. In a merger one company acquires the other
company and the other company ceases to exist. In an amalgamation, two
or more companies come together and form a new business entity.
Mergers and acquisitions (M&A) and corporate restructuring are a big part
1

of the corporate finance world. Every day, Wall Street investment bankers
arrange M&A transactions, which bring separate companies together to
form larger ones. When they're not creating big companies from smaller
ones, corporate finance deals do the reverse and break up companies
through spinoffs, carve-outs or tracking stocks. Not surprisingly, these
actions often make the news. Deals can be worth hundreds of millions, or
even billions, of dollars. They can dictate the fortunes of the companies
involved for years to come. For a CEO, leading an M&A can represent the
highlight of a whole career. And it is no wonder we hear about so many of
these transactions; they happen all the time. Next time you flip open the
newspapers business section, odds are good that at least one headline will
announce some kind of M&A transaction.
Sure, M&A deals grab headlines, but what does this all mean to investors?
To answer this question, this tutorial discusses the forces that drive
companies to buy or merge with others, or to split-off or sell parts of their
own businesses. Once you know the different ways in which these deals
are executed, you'll have a better idea of whether you should cheer or weep
when a company you own buys another company - or is bought by one. You
will also be aware of the tax consequences for companies and for investors.

MERGERS - A merger is a combination of two companies into one

larger company, which involves stock swap or cash payment to the
target.

ACQUISITION - When one company takes over another and clearly

established itself as the new owner, the purchase is called an
acquisition.

GOVERNING LAW
The Companies Act, 1956 does not define the term 'Merger' or
'Amalgamation'. It deals with schemes of merger/acquisition which are
given in s.390-394 'A', 395, 396 and 396 'A'.

2.CLASSIFICATIONS OF MERGERS
2

Horizontal merger is the merger of two companies which are

in produce of Same products.This can be again classified into
large horizontal merger and Small horizontal merger.Horizontal
merger helps to come over from the competition between two
companies

merging together strengthens the company to compete

with other companies. Horizontal merger between the

small

companies would not effect the industry in large. But between

the larger companies will make an impact on the economy and gives
them the monopoly over the market. Horizontal mergers

between

the two small companies are common in India. When large

companies merging together we need to look into legislations which
prohibit the monopoly.

Vertical merger If a merger between two companies producing

different goods or services for one specific finished product. Vertical
merger takes between the customer and company or a company and a
supplier. IN this a manufacture may merge with the distributor or
supplier of its products. This makes other competitors difficult to access
to an important component of product or to an important channel
of

distribution

"bottleneck"

which

problem.

are

called

Vertical

as

merger

"vertical
helps

foreclosure"
to

avoid

or

sales

taxes and other marketing expenditures.

Market-extension merger - is a merger of two companies that deal in

same products in different markets. Market extension merger helps the
companies to have access to the bigger market and bigger client base.

Product-extension merger takes place between the two or more

3

companies which sells different products but related to the same

category. This type of merger enables the new company to go in for a
pooling in of their products so as to serve a common market, which
was earlier fragmented among them. This merger is between two
companies that sell different, but somewhat related products, in a
common market. This allows the new, larger company to pool their
products and sell them with greater success to the already common
market that the two separate companies shared. The product extension
merger allows the merging companies to group together their products
and get access to a bigger set of consumers. This ensures that they
earn higher profits.

Conglomeration - Two companies that have no common business

areas. A conglomeration is the merger of two companies that have no
related products or markets. In short, they have no common business
ties. Conglomerate merger in which merging firms are not competitors,
but use common or related production processes and/or marketing and
distribution channels. Co generic merger: Merger between firms in the
same general industry but having no Mutual buyer-seller relationship,
such as a merger between a bank and a leasing company.

Purchase mergers - this kind of merger occurs when one company

purchases another. The purchase is made with cash or through the
issue of some kind of debt instrument; the sale is taxable. Acquiring
companies often prefer this type of merger because it can provide them
with a tax benefit. Acquired assets can be written-up to the actual
purchase price, and the difference between the book value and the
purchase price of the assets can depreciate annually, reducing taxes
payable by the acquiring company.

Consolidation mergers - With this merger, a brand new company is

4

formed and both companies are bought and combined under the new
entity. The tax terms are the same as those of a purchase merger. A
unique type of merger called a reverse merger is used as a way of
going public without the expense and time required by an IPO.
Accretive mergers are those in which an acquiring company's earnings
per share (EPS) increase. An alternative way of calculating this is if a
company with a high price to earnings ratio (P/E) acquires one with a
low P/E

3.REVIEW OF LITERATURE
1. AN EXAMINATION OF BANK SECTOR
This article helps to discuss various regulations which are faced by
banks in order to enter the merger and acquisition phase. In the banking
sector, market entry is generally governed by a specific banking
regulator .Actual mergers of equals don't happen very often. Usually,
one company will buy another and, as part of the deal's terms, simply
5

allow the acquired firm to proclaim that the action is a merger of equals,
even if it is technically an acquisition.
2. CHALLENGES THE INDIAN BANKS FACE
This article is about the various challenges faced by Indian banking
sector. It discussed the position of banks after merger and acquisition. It
discusses the challenges such as: interest rates risk, credit risk by
private banks. The first mega merger in the Indian banking sector that of
the HDFC Bank with Times Bank, has created an entity which is the
largest private sector bank in the country.

3. MOTIVES FOR MERGERS AND ACQUISITIONS IN THE INDIAN

BANKING SECTOR - A NOTE ON OPPORTUNITIES & IMPERATIVES
Recent reports on banking sector often indicate that India is slowly but
surely moving from a regime of 'large number of small banks' to 'small
number of large banks'. The aim of this paper is to probe into the various
motivations for mergers and acquisitions in the Indian Banking sector.
Thus, literature is reviewed to look into the various motivations behind a
banks' merger/ acquisition event. Given the increasing role of the
economic power in the turf war of nations, the paper looks at the
significant role of the state and the central bank in protecting customer's
interests vis--vis creating players of international size. While, gazing at
the mergers & acquisitions in the Indian Banking Sector both from an
opportunity and as imperative perspectives, the paper also glances at
the large implications for the nation.

4. MERGERS AND ACQUISITIONS - THE INDIAN BANKING SCENARIO

This article studies M&A activities in the Indian banking sector and says
that even though the objective of present bank mergers is to place the
weak banks in safe hands, the future mergers will focus more on
strategic issues like increasing geographical reach and improving
product mix.
6

5. M&AS IN THE INDIAN BANKING SECTOR - STRATEGIC AND

FINANCIAL IMPLICATIONS
Like all business entities, banks want to safeguard against risks, as well
as exploit available opportunities indicated by existing and expected
trends. M&As in the banking sector have been on the rise in the recent
past, both globally and in India. In this backdrop of emerging global and
Indian trends in the banking sector, this article illuminates the key issues
surrounding M&As in this sector with the focus on India. It seeks to
explain the motives behind some M&As that have occurred in India post2000, analyse the benefits and costs to both parties involved and the
consequences for the merged entity. A look at the future of the Indian
banking sector, and some key recommendations for banks, follow from
this analysis.

4.DISTINCTION BETWEEN MERGER AND ACQUISITION

Although they are often uttered in the same breath and used as though
they were synonymous, the terms merger and acquisition mean slightly
different things. When one company takes over another and clearly
established itself as the new owner, the purchase is called an acquisition.
From a legal point of view, the target company ceases to exist,the buyer
"swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms,
often of about the same size, agree to go forward as a single new
7

company rather than remain separately owned and operated. This kind of
action is more precisely referred to as a "merger of equals." Both
companies' stocks are surrendered and new company stock is issued in
its place. For example, both Daimler-Benz and Chrysler ceased to exist
when the two firms merged, and a new company, DaimlerChrysler, was
created. In practice, however, actual mergers of equals don't happen very
often. Usually, one company will buy another and, as part of the deal's
terms, simply allow the acquired firm to proclaim that the action is a
merger of equals, even if it's technically an acquisition. Being bought out
often carries negative connotations, therefore, by describing the deal as a
merger, deal makers and top managers try to make the takeover more
palatable. A purchase deal will also be called a merger when both CEOs
agree that joining together is in the best interest of both of their
companies. But when the deal is unfriendly - that is, when the target
company does not want to be purchased - it is always regarded as an
acquisition. Whether a purchase is considered a merger or an acquisition
really depends on whether the purchase is friendly or hostile and how it is
announced. In other words, the real difference lies in how the purchase is
communicated to and received by the target company's

board of

directors, employees and shareholders.

5.MERGERS AND ACQUISITIONS IN INDIA

Merger and acquisitions are on the rise. Volume of mergers and
acquisitions in India in 2007 are expected to grow two fold from 2006 and
four times compared to 2005. India has emerged as one of the top
countries with respect to merger and acquisition deals. In 2007, the first
two months alone accounted for merger and acquisition deals worth $40
billion in India. The estimated figures for the entire year projected a total
of more than $ 100 billion worth of mergers and acquisitions in India. This
is twofold growth from 2006 and a growth of almost four times from 2005.

MERGERS AND ACQUISITIONS IN DIFFERENT SECTORS IN INDIA

Sector wise, large volumes of mergers and mergers and acquisitions in
India have occurred in finance, telecom, FMCG, construction materials,
automotives and metals. In 2005 finance topped the list with 20% of total
value of mergers and acquisitions in India taking place in this sector.
Telecom accounted for 16%, while FMCG and construction materials
accounted for 13% and 10% respectively. In the

banking sector,

important mergers and acquisitions in India in recent years include the

merger between IDBI (Industrial Development bank of India) and its own
subsidiary IDBI Bank. The deal was worth $ 174.6 million (Rs. 7.6 billion
in Indian currency). Another important merger was that between
Centurion Bank and Bank of Punjab. Worth $82.1 million (Rs. 3.6 billion
in Indian currency), this merger led to the creation of the Centurion Bank
of Punjab with 235 branches in different regions of India.
In the telecom sector, an increase of stakes by SingTel from 26.96 % to 32.8
% in Bharti Telecom was worth $252 million (Rs. 10.9 billion in Indian
currency). In the Foods and FMCG sector a controlling stake of Shaw
Wallace and Company was acquired by United Breweries Group owned by
Vijay Mallya. This deal was worth $371.6 million (Rs. 16.2 billion in Indian
currency). Another important one in this sector, worth $48.2 million (Rs 2.1
billion in Indian currency) was the acquisition of 90% stake in Williamson Tea
Assam by McLeod Russell India In construction materials 67 % stake in
Ambuja Cement India Ltd was acquired by Holmic, a Swiss company for
$634.9 million (Rs 27.3 billion in Indian currency).

6.HDFC BANK OVERVIEW

HDFC Bank acquired Centurion Bank of

Punjab

10

HDFC Bank Ltd is a major Indian financial services company based in India,
incorporated in August 1994, after the Reserve Bank of India allowed
11

establishing private sector banks. The Bank was promoted by the Housing
Development Finance Corporation, a premier housing finance company (set
up in 1977) of India. HDFC Bank has 1,725 branches and over 4,232 ATMs, in
779 cities in India, and all branches of the bank are linked on an online realtime basis. As of 30 September 2008 the bank had total assets of Rs.1006.82
billion. For the fiscal year 2008-09, the bank has reported net profit of 2,244.9
crore (US$ 509.59 million), up 41% from the previous fiscal. Total annual
earnings of the bank increased by 58% reaching at 19,622.8 crore (US$ 4.45
billion) in 2008-09.

HISTORY OF HDFC BANK

HDFC Bank was incorporated in 1994 by Housing Development Finance

Corporation Limited (HDFC), India's largest housing finance company. It was
among the first companies to receive an 'in principle' approval from
the Reserve Bank of India (RBI) to set up a bank in the private sector. The
Bank started operations as a scheduled commercial bank in January 1995
under the RBI's liberalisation policies.
Times Bank Limited (owned by Bennett, Coleman & Co. / Times Group) was
merged with HDFC Bank Ltd., in 2000. This was the first merger of two private
banks in India. Shareholders of Times Bank received 1 share of HDFC Bank
for every 5.75 shares of Times Bank.
In 2008 HDFC Bank acquired Centurion Bank of Punjab taking its total
branches to more than 1,000. The amalgamated bank emerged with a base of

12

about Rs. 1,22,000 crore and net advances of about Rs.89,000 crore. The
balance sheet size of the combined entity is more than Rs. 1,63,000 crore.

BUSINESS FOCUS

HDFC Bank deals with three key business segments - Wholesale Banking
Services, Retail Banking Services, Treasury. It has entered the banking
consortia of over 50 corporates for providing working capital finance, trade
services, corporate finance and merchant banking. It is also providing
sophisticated product structures in areas of foreign exchange and derivatives,
money markets and debt trading and equity research.
WHOLESALE BANKING SERVICES
The Bank's target market ranges from large, blue-chip manufacturing
companies in the Indian corp to small & mid-sized corporates and agri-based
businesses. For these customers, the Bank provides a wide range of
commercial and transactional banking services, including working capital
finance, trade services, transactional services, cash management, etc. The
bank is also a leading provider of structured solutions, which combine cash
management services with vendor and distributor finance for facilitating
superior supply chain management for its corporate customers. HDFC Bank
has made significant inroads into the banking consortia of a number of leading
Indian corporates including multinationals, companies from the domestic
business houses and prime public sector companies. It is recognized as a
leading provider of cash management and transactional banking solutions to
corporate customers, mutual funds, stock exchange members and banks.

RETAIL BANKING SERVICES

13

The objective of the Retail Bank is to provide its target market customers a full
range of financial products and banking services, giving the customer a onestop window for all his/her banking requirements. The products are backed by
world-class service and delivered to customers through the growing branch
network, as well as through alternative delivery channels like ATMs, Phone
Banking, NetBanking and Mobile Banking.]] [[HDFC Bank was the first bank in
India to launch an International Debit Card in association with VISA (VISA
Electron) and issues the Mastercard Maestro debit card as well. The Bank
launched its credit card business in late 2001. By March 2009, the bank had a
total card base (debit and credit cards) of over 13 million. The Bank is also
one of the leading players in the merchant acquiring business with over
70,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at
merchant establishments.]] The Bank is well positioned as a leader in various
net based B2C opportunities including a wide range of internet banking
services for Fixed Deposits, Loans, Bill Payments, etc.

TREASURY

Within this business, the bank has three main product areas - Foreign
Exchange and Derivatives, Local Currency Money Market & Debt Securities,
and Equities. These services are provided through the bank's Treasury team.
To comply with statutory reserve requirements, the bank is required to hold
25% of its deposits in government securities. The Treasury business is
responsible for managing the returns and market risk on this investment
portfolio.

14

MERGER AND ACQUISITION OF HDFC AND CBOP

CENTURION BANK OF PUNJAB

The Centurion Bank of Punjab (formerly Centurion Bank) was

an Indian private-sector bank that provided retail and corporate banking
services. It operated on a strong nationwide franchise of 403 branches and
had over 5,000 employees. The Bank's shares were listed on the major Indian
stock exchangesand on the Luxembourg Stock Exchange.
On 23 May 2008 HDFC Bank acquired Centurion Bank of Punjab.

7.MERGER & ACQUISITION OF HDFC AND CBOP

1994 Centurion Bank was incorporated on 30 June 1994 and received

its certificate of Commencement of Business on 20 July. It was a joint
venture between 20th Century Finance Corporation and its associates and
Keppel Group of Singapore through Kephinance Investment (Mauritius).
Centurion had a network of ten branches, which grew to 29 branches the
next year.

1995 Centurion Bank amalgamated 20th Century Finance Corporation.

15

2005 On 29 June 2005, the Boards of Directors of Centurion Bank and

Bank of Punjab agreed to a merger of the two banks. The combined bank
took as its name Centurion Bank of Punjab. Bank of Punjab had been
founded in 1995.

2006 Centurion Bank of Punjab acquired Kochi-based Lord Krishna

Bank. Lord Krishna Bank had been established at Kodungallur in Thrissur
District,Kerala in 1940. During the 1960's, Lord Krishna acquired three
commercial banks: Thiyya Bank, Josna Bank and Kerala Union Bank.

2008 HDFC Bank acquired Centurion Bank of Punjab.

The swap ratio is expected to be around 1:25-30, said a banking source. The
merger will make HDFC Bank the countrys seventh largest bank after Bank of
India (BoI) and ahead of IDBI Bank, from the current 10th position. The
merger talks between the two banks began in January 2008 after the principal
shareholders

of

CBoP

Bank

Muscat

with

14.02

per

cent

stake, Sabre Capital with 3.48 per cent stake and Kephinance Investment
(Mauritius) with 6.13 per cent decided to exit.

8.Procedure of Bank Merger

The procedure for merger either voluntary or otherwise is outlined in

the respective state statutes/ the Banking regulation Act. The Registrars,
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 RBI. They would also be
16

ensuring compliance with the statutory procedures for notifying the

amalgamation after obtaining the sanction of the RBI.

bank

Before deciding on the merger, the authorized officials of the acquiring

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.

Once the scheme is finalized, it is tabled in the meeting of Board of

directors of respective banks. The 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 Board 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. The 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 respective banks.

Once the valuation is accepted by the respective banks , they send the

proposal along with all relevant documents such as Board approval,

shareholders approval, valuation report etc to Reserve Bank of India and
other regulatory bodies such Security & exchange board of India SEBI for
their approval.

After obtaining approvals from all the concerned institutions, authorized

17

officials of both the banks sit together and discuss and finalize share
allocation proportion by the acquiring bank to the shareholders of the merging
bank SWAP ratio

After completion of the above procedures , a merger and acquisition

agreement is signed by the bank.

HR Issues in Mergers & Acquisitions

People issues like staffing decision, organizational design, etc., are most
sensitive issues in case of M&A negotiations, but it has been found that these
issues are often being overlooked.

18

 Before the new organization is formed, goals are established,

efficiencies projected and opportunities appraised as staff, technology,
products, services and know-how are combined.
But what happens to the employees of the two companies? How will
they adjust to the new corporate environment? Will some choose to
leave?
When a merger is announced, company employees become
concerned about job security and rumors start flying creating an
atmosphere of confusion, and uncertainty about change.
Roles, behaviors and attitudes of managers affect employees'
adjustment to M&A.
Multiple waves of anxiety and culture clashes are most common
causes of merger failure.
HR plays an important role in anticipating and reducing the impact of
these cultural clashes.
Lack of communication leads to suspicion, demoralization, loss of key
personnel and business even before the contract has been signed.
Gaining emotional and intellectual buy-in from the staff is not easy, and
so the employees need to know why merger is happening so that they
can work out options for themselves.
Major stress on the accompany merger activity are: * Power status and prestige changes
* Loss of identity
* Uncertainty
Unequal compensation may become issue of contention among new
co-workers.

19

HIGHLIGHT
THE MERGER- HDFC AND CENTURION BANK OF PUNJAB
1) HDFC bank is merged with Centurion Bank of punjab
2) New entity is named as HDFC bank itself.
3) The merger will strengthen HDFC Bank's distribution network in the
northern and the southern regions.
4) HDFC Bank Board on 25th February 2008 approved the acquisition of
Centurion Bank of Punjab (CBoP) for Rs 9,510 crore.
BENEFITS FROM THIS DEAL

The corporate world is a place where only the vigilant, the sharp and
the spontaneous can explore their way up the ladder, while the
remaining admire or envy the success of the former . Here, every
second tests the mental acumen of the professionals by putting them
into various odd situations which demand spontaneous, impromptu
decisions to be crafted, keeping a long-term perspective in sight.

The expected merger of the HDFC Bank with the Centurion Bank of
Punjab (CBoP) is believed to broaden the scope and reach of HDFC by
crediting to its already well-distributed network. The HDFC Bank, which
currently spans India with its chain of 746 branches, will add to itself
394 branches of the CBoP to itself, to make its network bigger and
stronger. The merger talks between the two banks began in January
2008, after the principal shareholders of CBoP Bank Muscat with
14.02 per cent stake, Sabre Capital with 3.48 per cent stake and the
Kephinance Investment (Mauritius) with 6.13 per cent stake decided to
move away from this partnership.

The HDFC Bank is further expected to pay Rs 100 billion to Rs 120

billion in shares for acquiring the CBoP. In what claims to be the largest
ever private bank merger, the share swap ratio stands at 1:29, that is
every shareholder of CBoP will get one share of HDFC Bank for every
20

29 shares of CBoP owned. Though this ratio is believed to have been

worked out after rigorous discussions among the Board of Directors of
both the banks, it has failed to receive a positive reaction from the
CBoP shareholders. It has come as a yet another setback for them
after a volatile period witnessing a decline in CBoP shares and an
unstable management.

The HDFC Bank which presently enjoys the 10th position in the list of
largest banks in India on the basis of assets, and with this merger, will
now witness a jump to the 7th position. At the same time, the current
stake of HDFC in the CBoP, which is 23.38% is projected to fall to
about 19% on completion of the deal.Another important concern that
rises with such mergers is the question of blending the two distinct and
diverse styles of functioning and ensuring a smooth transition to a new
work culture, absorbing the strengths of both the merging companies. It
is a meticulous task to ensure that the fundamental ways of working
and the ideology of the two companies supplement the growth of each
other rather than leaving any one of the potential organizations
obsolete.

This merger has come after a series of activities marking an eventful

past for CBoP, which include acquiring the Lord Krishna Bank and the
Bank of Punjab. As the CBoP stands at a new dawn, we wish it brings
some reason to rejoice for the shareholders that have stood through its
history of highs and lows.

21

EFFECT OF MERGER AND ACQUISITION OF HDFC AND CBOP

HDFC Bank's ability to grow at over 30 per cent annually in the last
nine years, along with superior credit risk management practices, which
have helped it maintain asset quality, would ensure that it will be
among the least affected in a slowdown.
The bank's focus on technology and superior margins with support
from low-cost deposits will ensure profitable growth in the future.
The merger of retail focused-Centurion Bank of Punjab (CBOP) with

HDFC Bank [Get Quote] effective May 23, 2008, will shore up revenues
in the medium-term. However, the synergies from the merger with start
reflecting over 12-24 months, and boost profitability. Put together, the
gains from organic and inorganic initiatives will help the bank sustain
growth rates in excess of its historical average of 29-30 per cent, and in
a profitable manner.

POST-MERGER
The inherent synergies of HDFC Bank and CBOP in their retail focus
was the driver for the merger, which added around 400 branches to
HDFC Banks' branch strength of 760 (as on March 2008) along with a
15-20 per cent increase in the asset base to more than Rs 1.7 lakh
crore. While the merger has helped increase the size of HDFC Bank, it
has also led to some pressure on key ratios (see Merger Effects) for
the combined entity; CBoP ratios were lower than that of HDFC Bank.
The next pertinent question is the pace of integration, and how fast
HDFC Bank can ramp up efficiency levels of CBOP to its own
benchmarks.
The integration plan is on schedule. The re-branding of CBOP was
completed in May itself; training processes to assign all the employees
of CBOP in their new roles is marching ahead with almost 90 per cent
22

of the people retrained. With regards the systems, treasury, wholesale

banking and retail loan segments, they have already been integrated
with HDFC's platform, while the overall retail banking is expected to be
completed in the next two months.
MERGER EFFECTS
Rs crore

Net Int. Income

Other Income
Net Profit
Cost/income (%)
NIM (%)
CASA (%)
Net NPA (%)
CAR (%)

CBOP **

HDFC

Standalone

Post-merger

9 Mths

Bank**

FY 08

H1 FY09

505
459
123
63.0
3.6
24.5
1.7
11.5

9 Mths
3,586
1,734
1,119
49.7
4.3
50.9
0.4
13.8

5,228
2,283
1,590
49.9
4.4
55
0.5
13.6

3,590
1,237
992
55.4
4.2
44.0
0.6
11.4

The actual benefits will start to filter in the next 12-24 months, with improved
productivity in terms of net revenue (net interest income and other income)
and CASA (the ratio of low cost deposits to total deposits) growth of CBoP
branches on par with HDFC outlets. But before that to happen, HDFC bank
will have to shoulder the pressure in the medium-term.
For instance, on the efficiency front, the cost to income ratio has also
increased from 50 per cent in March, 2008 to around 55 per cent in Q2 FY09
on the back of higher employee costs and integration costs, post the merger.
The integration of the two banks' technology-based platforms is expected to
be completed by the end of this fiscal, and will improve the cost efficiencies
going forward.
Likewise, the capital adequacy ratio (CAR) dropped to 11.4 per cent in Q2
FY09; this can partially be attributed to the merger blues and also organic
growth of loan book. However, it is comfortably above the regulatory
requirement of 9 per cent. Notably, CAR will improve and provide capital for
23

future growth, if the promoters exercise their right to convert warrants and
infuse Rs 3,500 crore (warrants already issued, conversion price of Rs 1,500
per share, deadline is December 2009).

24

9.ACTUAL EFFECT MERGER & ACQUISITION

BANKS

Branch in Metros

Branch in Non metros TOTAL

ATMs

CBoP

127

267

394

452

HDFC

287

467

754

11,088

414

734

1148

11540

Bank

MERGED

Total branched 1148

25

Total ATMs pan India 11540

Deposit base was around Rs. 1,200 billion

Net advances of around Rs. 850 billion.

The balance sheet size of the combined entity was Rs. 1,500
billion

Positive impact:

Increased geographical presence

Recorded growth figures as follows: [by march-2013]

Net profit by 44.6% to Rs. 4.6 billion

Net Interest Income by 74.9% to Rs.17.2 billion
Advances grew by 79.8% & deposits by 60.4%
Negative impact:

High level of write-offs due to bad asset quality of CBoP in

personal loan and 2 wheeler loans

1.NOPAT and Cost of debt of HDFC bank:

26

The cost of debt is showing a continues increase because of the

monetary policies of the Reserve Bank of India.

The NOPAT of the bank was increasing at a higher rate before merger.

2.The Beta and cost of equity of HDFC bank:

27

The 4 years average Beta of HDFC bank before merger was 0.63
which is increase to 0.72 after merger.

The 4year average cost of equity before merger was 24% which is
decreased by 2.14% in past four year after merger (4year average after
merger is 21.86%)

3.Share price of HDFC Bank:

- Before merger (jan-2008) Rs.180
- After merger (May-2013)

Rs.718 [increased by 298.89%]

- Current position (sep-2013)Rs.621 [increased by 245%]

4. Net sales and Net profit chart:

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10.CONCLUSION
Merger result are satisfactory but merger is took in long term prospective,
following are few more benefit to HDFC
Acess to 394 branches of CBoP and an increased presence in
southern and northern states.
Greater acess to the North (Punjab and Haryana) as well as the south
(particulary kerala), thereby strenghtening its presence in those region.
CboPs strong SME relationships will complement HDFC bias towards
highly rated corporates thus expanding HDFCs base.
The creation of indias 7th largest bank, just behind public giants like
bank of baroda, bank of india.
Induction of a strong and capable management team with extensive
industry experience and proven capabilities.
Due to an influx of 3945 branches from CboP, there will be a
significvant increase in the number of branches for HDFC.

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BIBLIOGRAPHY
The Economics times
www.wikipedia/acquisition.com
www.smartmanagementonline.com/Magazines/Articles/Mergers
%20and%20Acquisitions/IPMA0025.htm

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