MERGERS AND ACQUISITIONS

YASHDEEP AUTOMOTIVES PVT. LTD

Submitted in partial fulfillment of the requirements

for the award of the degree of

Bachelor of Commerce (Honours)

BCOM (H)
TO
Guru Gobind Singh Indraprastha University, Delhi

Guide

Submitted by:

Dr. Vani Mazumdar

Gourav rohilla

Institute of Innovation in Technology & Management

New Delhi 110058

Certificate
I, Mr. Gourav rohilla,

Roll No. 05013788813 certify that the Project

Report/Dissertation BCOM (H) / Code 309 entitled Mergers and Acquisitions is done
by me and it is an authentic work carried out by me at YASHDEEP AUTOMOTIVES
PVT. LTD.
The matter embodied in this project work has not been submitted earlier for the award of
any degree or diploma to the best of my knowledge and belief.

Signature of the Student

Date:

Certified that the Project Report/Dissertation of BCOM (H) entitled Mergers and
Acquisitions done by Mr Gourav rohilla, Roll No. 05013788813, is completed under
my guidance.

Signature of the Guide:

Name of the Guide:
Designation:
Date:

Countersigned
(Director / Project Coordinator)
2

Contents
S No

Topic

Page No

Certificate

Acknowledgement

Chapter-1 Introduction

Chapter-2 Research Methodology

11

Chapter-3 Data Presentation & Analysis

29

Chapter-4 Conclusion

45

References/Bibliography

46

ACKNOWLEDGEMENT

A project gains a lot of relevance as it on time activity serving a definite object. Practical
experience in undertaking project teaches many things which would otherwise elude
observations.
I am very indebted and obliged to have Dr. Vani project guide and whose scholarly
guidance and sustained interest in the progress of my project have been the major
contributing factor in preparation of this project report.
I am also placed my sincere thanks to all respondents and concerned people to this
project.

CHAPTER-1
Executive summary
The

YASHDEEP

team produces valuable relationships as a result of successful solutions

provided to the esteemed clients. The focus is to visibly improve the performance of the
client by evolving resources, assets (both movable & immovable), strategies & processes
and enhance management systems.

YASHDEEP

works with the clients to fully understand

their business and provide tailor made solution to their Business & Management
challenges

YASHDEEP

and

responding

to

opportunities

that

enhance

performance.

is a purely professional organization run by expert managers who ensure that

the clients business develops and succeeds. It takes care of every aspect from start to
finish and devote the fullest attention to clients best interests.

Corporate Objective
To be a highly professional organization providing superior quality Business &
Management solution service to our clients.
To improve the performance and maximize the growth potential of our client
To create innovative services in an efficient and responsive manner to meet client
satisfaction.
To uphold professionalism ,credibility and confidentiality through honesty and integrity.
To achieve and sustain superior financial returns.

Service Profile
YASHDEEP

YASHDEEP

-Unmatched

Service,

Experience

and

Satisfaction

has gained a distinguished position in the Indian market delivering high-value

solutions; it could assist with all aspects of Real Estate Solutions, Merger and
Acquisition, Alliances & franchises, Hotel Management Contracts (HMC), Feasibility
Studies, Negotiation Consulting, Brainstorming - Generating Ideas.

YASHDEEP

is a

Business & Management Consulting/Advisory Company providing high quality Solution

driven Service & Strategy to clients in various sectors of the economy.

MERGERS & ACQUISITIONS:

Providing intermediary and transaction support services, our services are seller
representation, buyer representation, due diligence, business valuation, legal, strategic
advisory, and many other transaction services. After ascertaining our client's goals we
recommend a specific mergers and acquisition strategy.

Customer Experience Management uses a combination of the following tools:

Customer & Staff Satisfaction (regular independent surveys)
Operation Audits (detailed operational evaluations)
Best Practice Management (tools to share internal knowledge)
Competitive Benchmarking (regular progress tracking)

Ultimately, we fill the gap between customer's experiences and their expectations.
You know how good you want it to be
You know how good you have asked for it to be
But is that quality of service being delivered to your customers?
YASHDEEP

is a tried and tested measurement of the interface between company and

customer. It constitutes virtually the only constructive method of checking that the
standards of service set by you, are being delivered to your customers.

Making the correct decision is vital after all you want to work with a company that
really wants to make a difference.

We are absolutely besotted by the service we provide and go to extraordinary lengths to

make sure we give outstanding service and capture business intelligence that will give
you a real advantage in todays competitive world.
We offer our Risk Free Trial

YASHDEEP

is the only company in its field to provide a Full Service Guarantee

Every member of our team of shoppers is trained and accredited by us.

We are recipient of the testimonials by prestigious organizations and FHRAI
(federation of Hotel & Restaurant Association of India)
We offer the customer insight to training solution
We pledge to match any Like for Like
Be assured by our unique, tried and tested Program Development Process which is
designed to support you at every stage
Our 24/7 Web based Reporting System is advanced and proactive reportage system
We use sophisticated research methods to focus on sales growth, customer satisfaction
and advocacy

On all the occasions when an organization and a customer/guest interact, the

customer/guest experiences something about the organization. Depending upon what is
8

experienced from each experience, customers/guests may alter their behavior in ways that
affect their individual profitability SumeshMadan ED

Organization Structure

MWMW
sroio
sVSrs

r.ioks
PAnuke
rmorYe
ardesor
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sytuMe

amn
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OBJECTIVES OF THE STUDY

To find the scope of the mergers and acquisitions in India.
10

To know the mergers and acquisitions process in banking sector

To find out the benefits of mergers

CHAPTER-2

11

WHAT IS MERGER?
Merger is defined as combination of two or more companies into a single company where
one survives and the others lose their corporate existence. The survivor acquires all t h e
assets as well as liabilities of the merged company or companies. G e n e r a l l y, t h e
surviving company is the buyer, which retains its identity, and the extinguished company
is the seller. Merger is also defined as amalgamation. Merger is the fusion of two or more
existing companies . All assets, liabilities and the stock of one company stand transferred
to Transferee Company in consideration of payment in the form of:
Equity shares in the transferee company,
Debentures in the transferee company,
Cash, or
A mix of the above modes.

WHAT IS ACQUISITION?
12

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

a) Agreement with the persons holding majority interest in the company management
like members of the board or major shareholders commanding majority of voting power;
b) Purchase of shares in open market;
c) To make takeover offer to the general body of shareholders;
d) Purchase of new shares by private treaty;
e )Acquisition of share capital through the following forms of considerations viz
Means of cash, issuance of loan capital, or insurance of share capital.

Takeover:
A takeover is acquisition and both the terms are used interchangeably.Takeover 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
13

fulfillment of goals of combination all are different in takeovers than in mergers. For
example, process of takeover is unilateral and the offeror company decides about the
maximum price. Time taken in completion of transaction is less in takeover than in
mergers, top management of the offeree company being more co-operative.

De-merger or corporate splits or division:

De-merger or split or divisions of a company are the synonymous terms signifying a
movement in the company.

Types of Mergers
14

Merger or acquisition depends upon the purpose of the offeror company it wants to
achieve. Based on the offerors objectives profile, combinations could be vertical,
horizontal, circular and conglomeratic as precisely described below with reference to
the purpose in view of the offeror company.

(A) Vertical combination:

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. The 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 objectives and economizes 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. The following main benefits accrue from the vertical combination to the
acquirer company i.e
.1).It gains a strong position because of imperfect market of the intermediary
products ,scarcity of resources and purchased products
2).Has control over products specifications.

(B) Horizontal combination:

15

It is a merger of two competing firms which are at the same stage of industrial process.
The acquiring firm belongs to the same industry as the target company. The
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) Circular combination:

Companies producing distinct products seek amalgamation to share

Common distribution and research facilities to obtain
economies by elimination of cost o n duplication and promoting market enlargement.
The acquiring company obtains benefits in the form of economies of resource sharing and
diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM and

Modi Industries. The basic purpose of such amalgamations remains
utilization of financial resources and enlarges debt capacity through re-organizing their

16

financial structure so as to service the shareholders by increased leveraging and EPS,

lowering average cost of capital and thereby raising present worth of the outstanding
shares.

Merger enhances the overall stability of the acquirer company and creates balance in the
companys total portfolio of diverse products and production processes

Advantages of mergers
17

Mergers and takeovers are permanent form of combinations which vest inmanagement c
omplete control and provide centralized administration which are notavailable in combin
ations 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 boots trapping
earnings.

and acquisitions are caused with the support of shareholders,

manager sad promoters of the combing companies. The 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.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subject to merger should enhance in

value. The sale of shares from one companys 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 viz. From
the gains and achievements of the company i.e.

Through

18

(a)Realization of monopoly profits;

(b)Economies of scales;
(c)Diversification of product line;
(d)Acquisition of human assets and other resources not available otherwise;
(e)Better investment opportunity in combinations.
One or more features would generally be available in each merger where
shareholders may have attraction and favour merger.

(2)From the standpoint of managers

Managers 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.
Mergers 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

3) Promoters gains

Mergers do offer to company promoters the advantage of increasing the size

of their company and the financial structure and strength. They can convert a

19

closely held and private limited company into a public company without
contributing much wealth and without losing control.

(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of benefits and costs to:
(a)Consumer of the product or services;
(b)Workers of the companies under combination;
(c)General public affected in general having not been user or consumer or the worker in
the companies under merger plan.

(a) Consumers
The economic gains realized 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. The 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.

(b) Workers community

The 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

20

power and other miseries of life. Two sides of the impact as discussed by there
searchers and academicians are:
Firstly,
Mergers with cash payment to shareholders provide opportunities for them to invest this
money in other companies which will generate further employment and growth to uplift
of the economy in general.
Secondly,
Any restrictions placed on such mergers will decrease the growth and investment activity
with corresponding decrease in employment. Both workers and communities will
suffer on lessening job Opportunities, preventing the distribution of benefits resulting
from diversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic 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. These advances result into
economic exploitation. But 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. This

enforces

competition

marketas consumers are free to substitute the alternative products.

21

in the

Therefore, i t i s difficult to generalize that mergers affect the welfare of general public
adversely or favorably. Every 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
Government polices

22

Merger and Acquisition Process

Merger and Acquisition Process is probably the most important thing in a merger or
acquisition deal as it influences the benefits and profitability of the merger or acquisition.
The Merger and Acquisition Process is carried out in some steps which are discussed .
Merger and Acquisition Process is a great concern for all the companies who intend to go
for a merger or an acquisition. This is so because, the process of merger and acquisition
can heavily affect the benefits derived out of the merger or acquisition. So, the Merger
and Acquisition Process should be such that it would maximize the benefits of a merger
or acquisition deal. The Merger and Acquisition Process can be divided in to some steps.
The stepwise implementation of any merger process ensures its profitability.

1)Preliminary Assessment or Business Valuation

In this first step of Merger and Acquisition Process, the market value of the target
company is assessed. In this process of assessment not only the current financial
performance of the company is examined but also the estimated future market value is
considered. The company which intends to acquire the target firm, engages itself in an
thorough analysis of the target firms business history. The products of the firm, its
capital requirement, organizational structure, brand value everything are reviewed
strictly.

2)Phase of Proposal

23

After complete analysis and review of the target firms market performance, in the second
step, the proposal for merger or acquisition is given. Generally, this proposal is given
through issuing an non-binding offer document.

3)Exit Plan
When a company decides to buy out the target firm and the target firm agrees, then the
latter involves in Exit Planning. The target firm plans the right time for exit. It consider
all the alternatives like Full Sale, Partial Sale and others. The firm also does the tax
planning and evaluates the options of reinvestment.

4)Structured Marketing
After finalizing the Exit Plan, the target firm involves in the marketing process and tries
to achieve highest selling price. In this step, the target firm concentrates on structuring
the business deal.

5)Origination of Purchase Agreement or Merger Agreement

In this step, the purchase agreement is made in case of an acquisition deal. In case of
Merger also, the final agreement papers are generated in this stage.

6)Stage of Integration
In this final stage, the two firms are integrated through Merger or Acquisition. In this
stage, it is ensured that the new joint company carries same rules and regulations through
out the organization.

24

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 ensuring compliance with the

statutory procedures for notifying the amalgamation after obtaining the sanction of the
RBI.

Before deciding on the merger, the authorized 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 incorporation
.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 a c c o r d s i t s
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.

25

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 sharecapital,
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 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

Merger feasibility study

In some instances a formal merger may be considered to cement a long term partnership.
However, any type of merger is fraught with the danger of over estimating the upsides
and underestimating the time and resources it will take to complete. The CEO and Senior
Team making the approach may have personal reasons for wanting to merge with a

26

former competitor or peer organization. This may provide the energy required to drive the
initial decision making but it may not end up being the best use of both organizations
time and resources.

Successful mergers require enhanced and enduring value creation for customers. To
determine this from the outset a detailed feasibility study should be undertaken which:
Assesses the potential value created for customers
Examines the cultural fit of both organizations
Reviews system integration issues
Drills down into the potential economies of scale
Realistically appraises the change management process and its impact on staffing
Reviews the market dynamics and compares the potential merged entity with its likely
competitors.
Identifies the barriers to successful merger
Explores other ways of achieving the identified upsides of the merger
Undertakes initial due diligence about the financial capabilities of both organizations
Provides independent advice to both Boards about the pros and cons of a full merger.
The aim of the feasibility study is to ensure that both organizations understand the full
ramifications of creating a merged entity.

27

RBI Guidelines on Mergers & Acquisitions of Banks

With a view to facilitating consolidation and emergence of strong entities

and providing an avenue for non disruptive exit of weak/unviable entities in the banking
sector, it has been decided to frame guidelines to encourage merger /amalgamation in the
sector.

Although the Banking Regulation Act, 1949 (AACS) does not empower Reserve Bank to
formulate

scheme

with

regard

to

merger

and

amalgamation

of

banks,

theState Governments have incorporated in their respective Acts a provision for obtainin
g prior sanction in writing, of RBI for an order, inter alia, for sanctioning a scheme of
amalgamation or reconstruction.

The request for merger can emanate from banks registered under the same State Act or
from banks registered under the Multi State Co-operative Societies Act(Central Act) for
takeover

of

bank/s

registered

under

State

Act.

While

the

StateActs specifically provide for merger of co-operative societies registered under them,
the position with regard to take over of a co-operative bank registered under the State Act
by a co-operative bank registered under the CENTRAL

Although there are no specific provisions in the State Acts or the Central Act for the
merger of a co-operative society under the State Acts with that under the
Central Act, it is felt that, if all concerned including administrators of theconcerned Acts

28

are agreeable to order merger/ amalgamation, RBI may consider proposals on merits
leaving the question of compliance with relevant statutes to the

administrators of

the Acts. In other words, Reserve Bank 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

29

CHAPTER-3

Mergers in the Banking Sector of ICICI Bank and Bank of Madura

ICICI Bank
(Industrial Credit and Investment Corporation of India) is
India's

largest private bank. ICICI Bank has total assets of aboutRs.20.05bn (end-Mar

2005), a network of over 550 branches and offices, and about1900atms.

ICICI Bank offers a wide range of banking products and financial services to corporate
and retail customers through a variety of delivery channels and through its specialized
subsidiaries and affiliates in the areas of investment banking, life and non-life insurance,
venture

capital

and asset

ICICIBank's equity shares are listed in India on stock exchanges at

management.
Kolkata

and

Vadodara, the Stock Exchange,Mumbai and the National Stock Exchange of

India Limited and its shares are listed on the New York Stock Exchange(NYSE). During
the year 2005 ICICI 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.
The industrial Credit and Investment Corporation of India Limited now known as ICICI
Ltd. Was founded b the World bank, the Government of India and representatives of
private industry on January 5, 1955. The objective was to encourage and
assist industrial development and investment in India. Over the years, ICICI has evolved
into a diversified financial institution. ICICIs principal business activities include:
30

Project Finance

Infrastructure Finance

Corporate Finance

Securitization

Leasing

Deferred Credit

Consultancy services

Custodial services

The ICICI Groups draws its strength from the core competencies of itsindividual
companies. Today, top Indian Corporate look towers ICICI as a business partner for
providing solutions to their varied financial requirements. The Group also offers a gamut
of personal finance solutions to individuals.

To lead the financial services into the new millennium, the Group is now truly positioned
as a Virtual Universal Bank. The liberalization of the Indian economy in the 1990s
offered ICICI an opportunity to provide a wide range of financial services. For regulatory
and strategic reasons, ICICI setup specialized subsidiaries in the areas of commercial
banking, investment banking, non- banking finance, investor servicing brooking, venture
capital financing and state level infrastructure financing.

31

ICICI plans to focus on its retail finance business and expect the same to contribute upto
15-20 % of its turnover in the next five years. It is trying to change the perception that it
is a corporate oriented bank. The 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. This is to drive home the point that the bank has product and services catering
to all individuals. For this purpose the network of ICICI Bank shall come into use. The
parent plants to sell its products and also raise retail funds through the banking subsidiary

INTRODUCTION OF BANK OF MADURA

The pre-merger status of Bank of Madura is as follows: it had liabilities of Rs.4,444

crore, equity market capitalization of Rs.100 crore and equity volatility of 0.69.Working
through options reasoning, we may say that the stock market thinks that its assets are
worth Rs.4, 095 crore with a volatility of 0.02. Hence, bom is bankrupt (with assets
which are Rs.350 crore behind liabilities) and has a leverage of 41 times. If we needed to
bring bom up to a point where its assets were 10% ahead of liabilities, which is broadly
consistent with the Basle Accord, this would require an infusion of Rs.800 crore of equity
capital. How do we combine these to think of the merged entity? Assets and liabilities are
additive, so the total assets of the merged entity would prove to be roughly Rs.17,345
crore and the liabilities would prove to be Rs.16,517 crore. The merged entity would
hence need roughly Rs.800 crore of fresh equity capital in order to come up to a point
where assets were atleast 10% ahead of liabilities.

32

How can we estimate the market capitalization of the merged entity? The value of equity
is the value of a call option on the assets of the merged entity. Pricing 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 80% to 95%, the

volatility of assets of the

merged entity proves to be around 0.12. In this case, the valuation of the call option, i.e.
An estimate of the market capitalization of the merged entity, proves to be
roughlyRs.2,500crore.This number is not far from the pre--merger market capitalisation
of ICICI Bank,which was Rs.2,466crore. Hence, we can say that on purely financial
arguments, the merger is roughly neutral to ICICI Bank shareholders if bom was merged
into ICICIBank for free. Indeed, if banking regulators took their jobs more seriously,

They would force the shareholders of bom to walk into such a merger at a zero 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 RBI when compared with
closing down bom.The shareholders of ICICI Bank have paid a

non-zero fee for bom. This reflects a hope that the products and processes of
ICICI Bank will rapidly improve the value of assets of bom in order to
compensate. In addition, the merged entity will have to rapidly raise roughly Rs.800
crore of equity capital to obtain a 10% buffer between assets and liabilities.

33

Hence, this proposed merger is a godsend for bom, which was otherwise a bankrupt
entity which was headed for closure given the low probability that it would manage to
raise Rs.800 crore of equity on a base of Rs.100 crore of market capitalisation.It is useful
to

observe

that

bom

probably

did

not

see

things

in

this

way,

given

thewillingness of India's banking regulators to interminably tolerate the existence of ban

krupt banks. Closure of bom would normally involve pain for bom's shareholders and
workers; instead both groups will get an extremely pleasant ride if the merger goes
through.

The proposed merger is a daunting problem for ICICI Bank. It will need to rapidlyfind
roughly Rs.800 crore in equity. If India's banking regulators were serious about capital
adequacy, ICICI Bank should have to pay roughly zero to merge with bom (it is doing a
favour to bom and to India's banking system); instead ICICI Bank has paid a positive
price for bom. The key question that will be answered in the next two/three years is: Will
ICICI Bank's superior knowledge of products and processes revitalize the assets and
employees of bom, and generate shareholder value in the merged entity? ICICI's top
management clearly thinks so, and it would be a very happy outcome if this did indeed
happen.

The 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

34

possibility of obtaining higher valueadded out of the poorly utilized assets and employees
of bom. If the merger goes through, then it will reduce the say of the management team of
bom in India's resource allocation ,which is a good thing

35

Merger of ICICI Bank with Bank of Madura

The proposed merger between ICICI Bank and Bank of Madura (bom) is are
markable one. The pre-mergermarket capitalization of ICICI Bank was roughlyRs.2500
crore while bom was at roughly Rs.100 crore. Bom is known to have a poor asset
portfolio. What will the merged entity be worth?

The key rationale underlying every merger is the question of synergy. Can ICICIBank's
products and technology bring new life to the 263 branches of bom? Will ICICIBank
(which has 1,700 employees) be able to overcome the 2,600 employees that
bomcarries, given that Indian labour law makes it troublesome and expensive to sack wor
kers?

In applying these ideas to ICICI Bank and to bom, 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. This assumption is suspect, because both
securitieshave poor stock market liquidity. Hence, we should be cautious in interpreting t
henumbers shown here. There are many other aspects in which this reasoning leans on
models, which are innately imperfect depictions of reality. However, these models are
powerful tools for understanding the basic
factors at work, and they probably convey the broad picture quite effectively.

36

The stock of ICICI Bank may be in the limelight on the back of the proposed acquisition
of Bank of Madura.

Though the stock has gained sharply in the last two months after hitting a
recentlow of Rs 110, some upside may be left as the bank could get re-rated
on account of the merger. Existing shareholders could hold their exposures in ICICI
Bank while investors with an appetite for risk could contemplate exposures despite the
impressive gains of the past few months. ICICI Bank continues to be one of the
better options in the banking sector at the moment and the possible merger with
ICICI may well be on the backburner.

The merger would pitchfork ICICI Bank as the leading private sector bank. The merger
may be viewed favorably since Bank of Madura has focused strengths and a reasonably
good quality balance sheet. The board of directors is to meet on December 11to 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 Bank of Madura. This may also be influenced by the fact that the
Bank of Madura stock has gained sharply by around 70 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 capitalization of Bank of Madura may mean a higher degree of equity issuance

37

by ICICI Bank. But the price may well be worth paying as this is the only way that ICICI
Bank may be able to get control over banks with reasonable quality balance sheets that
could make a difference in the medium to long-term.

Bank of Madura has assets of Rs 3,988 crore and deposits of Rs 3,395 crore as of
March 2000. The fact that the bank has a capital adequacy of 15.8 per cent with
shareholder funds of Rs 263 crore may mean that ICICI Bank (post-merger phase) will
have more leeway to pursue growth without expanding the equity base (other than paying
for the acquisition).

Strong capital adequacy, a strong beachhead on the Internet arena,

a revamped ITarchitecture, a growing retail client base through a brickand-click strategy, and improving asset quality and earnings growth are positive features
as far as ICICI Bank is concerned.

Despite these factors, the share had been on a downtrend from after touching a highof Rs
271, eight months ago. The uptrend then was on the back of the announcement of its
ADR issue and new technology initiatives. The subsequent downtrend was triggered by
the possibility of the merger with its parent. There is continuing concern on asset
quality of ICICI. It has been a stated goal of the ICICI group to go in for
universal banking. It is clear that once regulatory hurdles are removed, such a possibility
becomes distinctly feasible.

38

But, Given the battering that bank stock took, ICICI may now hesitate to
pursue this path. Also ICICI Bank is the most visible investor-friendly 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.

39

Financial standing of ICICI Bank & Bank of Madura

Parameters

ICICI Bank
1998-1999
Net worth
308.33
Total Deposit
6072.94
Advances
3377.60
Net Profit
63.75
Share Capital
165.07
Capital
Adequacy 11.06%

1999-2000
1129.90
9866.02
5030.96
105.43
196.81
19.64%

Bank of Madura
1998-1999
211.32
3013.00
1393.92
30.13
11.08
18.83%

1999-2000
247.83
3631.00
1665.42
45.58
11.08
14.25%

Ratio
Gross

Advances 4.72%

2.54%

8.13%

11.09%

/Gross NPs
Net Advances / Net 2.88%

1.53%

4.66%

6.23%

NPs
Source :Complied from Annual Report (March 2000) of ICICI Bank & Bank of Madura.

Crucial Parameters: - How they stand

Name of the Bank

Bank of Madura
Book value of bank on the day 183.0

40

ICICI Bank
58.0

of merger announcement
Market price on the

day 183.0

169.90

announcement of merger
Earning per share

38%

5.41%

Dividend paid (in%)

55%

15%

P/E Ratio

1.73

7.83

Problems faced by ICICI Bank in merger

Managing rural branches:

ICICI major branches are in major and cities, where as BOM spreads its wingsmostly in
semi urban and city segments of south India. There in a task ahead lying for the merged
entity to increase dramatically the business mix of rural branches of BOM. On

41

the other hand due to Geographical location of its branches and level of competition.
ICICI Bank will have a tough time to cope with.

Managing Human Resources:

One of the greatest challenges before ICICI Banks is managing human resources.When
the head count of ICICI Bank is taken it in less than 1500 employees on the other hand
BOM has over 2500.The merged entity will have about 4000 employees which will make
it one of the largest banks among the new generation private sector banks. The staff of
from 75 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 BOM employees have low career aspiration.
The announcement by H.N. signor, CEO and MD of ICICI, that three would be no VRS
or retrenchment, creates a new hope amongst the BOM employees. It is a tough task
ahead to manage. On the other hand their pay would be revised up wards. It is not a
Herevlean task to integrate two work welters?

Managing Client Base:

The clients base of ICICI Bank after merger, will be as 2.7 Million from it past
0.5Million, as accumulation of 2.2 Million from BOM. The nature and quality
of clients is not of uniform quality. The BOM had built up it client base for a long time,
in a hard way, on the basis of personalized services. In order to deal with the BOM

42

clientele, the ICICI Bank needs to redefine its strategies to suit to the new clientele. The
sentiments

or

relationship

of small and medium borrower is hurt it may be difficult for them to reestablish therelatio
nship which could also hamper the image of the bank. Given the situation, we need to
wait and view, as to how the ICICI will face this challenge.

Changes after the merger:-

While, BOM had an attractive business per employee figure of Rs.202 lakh, a better
technological edge and had a vast base in southern India when compared to Federal bank.
While all these factors sound good, a cultural integration would be a tough task ahead for
ICICI Bank.ICICI Bank has announced a merger with 57-year-old Bank of Madura, with
263 branches, out of which 82 of them are in rural areas, with most of them in southern
India.As on the day of announcement of merger) 09-12-00), Kotak mahindra group was
holding about 12 percent stake in BOM, the Chairman BOM, Mr.K.M. Thaiagarajan,
along
with his associates was holding about 26 percent stake, Spic groups has about
4.7 percent, while LIC and UTI were having marginal holdings. The merger will give
ICICI Bank a hold on South India market, which has high rate of economic
development.The board of Director at ICICI has contemplated the following synergies
emerging from the merger:

Financial Capability:

43

The amalgamation will enable them to have a stronger financial and operational structure,
which is supposed to be capable of greater resourger/deposit mobilization. And ICICI
will emerge a one of the largest private sector banks in the country.

Branch network:
The ICICIs branch network would not only 264, but also increases geographic coverage
as well as convenience to its customers.

Customer base:
The emerged largest customer base will enable the ICICI bank to offer banking financial
services and products and also facilitate cross-selling of products and services of the
ICICI groups.
Tech edge:
The merger will enable ICICI to provide atms, Phone and the Internet banking and finical
services and products and also facilitate cross-selling of products and services of the
ICICI group.
Focus on Priority Sector:
The enhanced branch network will enable the Bank to focus on micro-finance activities
through self-help groups, in its priority sector initiatives through its acquired 87 rural and
88 semi-urban branches.
Source: Report submitted at EGM on January 19, 2001.

THE SWAP RATIO:

44

The swap ratio has been approved in the ratio of 1:2 two shares of ICICI Bank for
everyone share of Bank of Madera.The deal with Bank of Madera is likely to dilute
the current equity capital by around 12 percent. And the merger is expected to bring 20
percent gains in EPS of bank.And also the banks comfortable capital Adequacy Ratio
(CAR) of 19.64 percent hasdeclined to 17.6 percent.

CHAPTER-4
Conclusions and summery

Post-liberalization,most Indian business houses are undergoing major structural

changes ,the level of restructuring activity is increasing rapidly
And the consolidations through M&A have reached every corporate boardroom

45

Most of the mergers that took place in India during the last decade seemed to have
followed the consequence of mergers in India corroborate the conclusions of research
work in U.S. with most of the M&A are taking place in India to improve the size to
withstand international competition which has been exposed to in the post-liberalization
regime.

The M&A activity is undertaken with the objective of financial restructuring and to avail
of the benefits of financial restructuring.
Nowadays , before financial restructuring ,it has become a pre-requisite that companies
need to merge or acquire. Moreover, financial restructuring becomes easier because of
M&A .The small companies cannot approach international markets without becoming big
i.e.without merging or acquiring.

Market capitalization of a company sometimes is found to be going up or down without

any corresponding change in EVA and MVA since the stock may be strong because of
general bullish scenario in the market ,this is observed in most of the cases in our study

46

REFERENCES

Websites

www.wikipedia.in/mergers-and-acquisitions/
www.investopedia.in/case-study-on-mergers/
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Documents
Training report of working in YASHDEEP.

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