A

COMPREHENSIVE PROJECT REPORTON

PERFORMANCE EVALUATION OF ICICI BANK

AFTER MERGER &ACQUSITION

WITH BANK OF MADURA

Submitted toCHAUDHARY TECHNICAL INSTITUTE

IN PARTIAL FULFILLMENT OF THEREQUIREMENT OF THE AWARD FOR THE

DEGREE OFMASTER OF BUSINESS ASMINISTRATION

InGujarat Technological University

UNDER THE GUIDANCE OFProf. Manish Chaudhari

(Faculty of CTI-MBA)

Submitted by:Geetaba Zala (107080592056)

Sejal Prajapati (107080592058)

(Batch: 2010-12)

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MBA SEMESTER III/IV(CHAUDHARY TECHNICAL INSTITUTE)

MBA PROGRAMMEAffiliated to Gujarat Technological University

Ahmedabad

CONTENTS

Serial no. Topic name Page no.

1. Conceptual Framework

2. Objectives of study

3 Significance of study

4. Literature Review

5. Introduction

6. Meaning of Merger and Acquisition

7 Types of Merger and Acquisition

8 Procedure of Merger and Acquisition

9 Conclusion

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LITRATURE REVIEW:

Mergers and Acquisitions in Indian Industry

In Indian industry, the pace for mergers and acquisitions activity picked up

in response to various economic reforms introduced by the Government of

India since 1991, in its move towards liberalization and globalization.

The Indian economy has undergone a major transformation and structural

change following the economic reforms, and “size and competence" have

become the focus of business enterprises in India.

Indian companies realised the need to grow and expand in businesses

that they understood well, to face growing competition;several leading

corporates have undertaken restructuring exercises to sell off non-core

businesses, and to create stronger presence in their core areas of

business interest.

Mergers and acquisitions emerged as one of the most effective methods

of such corporate restructuring, and became an integral part of the long-

term business strategy of corporates in India.

Over the last decade, mergers and acquisitions in the Indian industry have

continuously increased in terms of number of deals and deal value.

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A survey among Indian corporate managers in 2006 by Grant Thornton 2

found that Mergers & Acquisitions are a significant form of business

strategy today for Indian Corporates.

The three main objectives behind any M&A transaction, for corporates

today were found to be:

Improving Revenues and Profitability

Faster growth in scale and quicker time to market

Acquisition of new technology or competence

A firm can achieve growth both internally and externally. Internal growth

may be achieved if a firm expands its operations or up scales its

capacities by establishing new units or by entering new markets. But

internal growth may be faced by several challenges such as limited size of

the existing market or obsolete product category or various government

restrictions. Again firm may not have specialized knowledge to enter in to

new product market and above all it takes a longer period to establish

own units and yield positive return. In such cases, external mechanism of

growth namely M&As, Takeovers or Joint Ventures may be utilized.

Tambi (2005) attempts to evaluate the impact of such mergers on the

performance of a corporation. Though the theoretical assumption says

that mergers improve the overall performance of the company due to

increased market power and synergy impacts, Tambi uses his paper to

evaluate the same in the scenario of Indian economy. He has tested three

parameters – PBITDA, PAT and ROCE - for any change in their before

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and after values by comparison of means using t-test. The results of his

study indicate that mergers have failed to contribute positively to the set of

companies chosen by him.

Lev and Mandelker (1972) evaluate the reduction is risk of the acquiring

firm. It is argued that unless returns of the parties involved in the merger

are perfectly co-related, the variances of the combined firms‟ returns will

be smaller than the weighted average of the variances of the returns of the

individual firms – Diversification principle of portfolio theory..

Under the financial services sector in India, the banking sector specifically

has seen a lot of M&A right from the early years. Historically, mergers and

acquisitions activity started way back in 1920 when the Imperial Bank of

India was born when three presidency banks (Bank of Bengal, Bank of

Bombay and Bank of Madras) were reorganized to form a single banking

entity, which was subsequently known as State Bank of India.

Ravichandran, Nor & Said (2010), in their paper, have tried to evaluate the

efficiency and performance for selected public and private banks before

and after the merger, as a result of market forces. After doing a factor

analysis, they narrow down the variables for their study to Profit Margin,

Current Ratio, Ratio of Advances to Total Assets, Cost Efficiency (ratio of

cost to total assets) and Interest Cover and thereafter a regression is run

to identify the relationship between these factors and return on

shareholders‟ funds. The results indicate that cost efficiency, advances to

total assets and interest cover are significant during both the pre and

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post-merger phases. Also the returns on shareholders‟ funds is negatively

related to cost efficiency and interest cover but is positively related to ratio

of advances to total assets.

Rani, Yadav and Jain (2008) where they examine the short run abnormal

returns to India based mergers by using event study methodology. The

short term effects are of interest because of the immediate trading

opportunities that they create. They start by discussing the present state

of the Indian Pharmaceutical Industry and go on to explore some specific

cases of acquisitions of foreign companies by Indian pharma majors. The

calculate the abnormal returns and cumulative abnormal returns for

foreign based acquisitions, mergers and Indian based acquisitions

separately and conclude that abnormal returns are highest in case of

foreign based acquisitions and lowest(negative) for India based mergers.

While going for mergers and acquisitions (M&A) management think of

financial synergy and/or operating synergy in different ways. But are they

actually able to generate any such potential synergy or not, is the

important issue.

Kumar &Bansal (2008), in their study, try to find out whether the claims

made by the corporate sector while going for M&As to generate synergy,

are being achieved or not in Indian context. They do so by studying the

impact of M&As on the financial performance of the outcomes in the long

run and compare and contrast the results of merger deals with acquisition

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deals. This empirical study is based on secondary financial data and

tabulation. Ratio analysis and correlation are used for analysis.

The results indicate that in many cases of M&As, the acquiring firms were

able to generate synergy in long run, that may be in the form of higher

cash flow, more business, diversification, cost cuttings etc. A limitation of

their research is that it shows that management cannot take it for granted

that synergy can be generated and profits can be increased simply by

going for mergers and acquisitions. A case study based research parallel

to this study could be initiated to get nearer to reality show.

Horizontal merger, another possible avenue of inorganic growth has also

been a popular option of expansion amongst many companies in the

financial services sector. It basically means a merger occurring between

companies producing similar goods or offering similar services. Eckbo

(1983) tests the hypothesis that horizontal mergers generate positive

abnormal returns to stockholders of the bidder and target firms because

they increase the probability of successful collusion among rival

producers.

Deregulation of the European financial services market during the 1990s

led to an unprecedented wave of mergers and acquisitions (M&As) in the

insurance industry. From 1990-2002 there were about 2,595 M&As

involving European insurers of which 1,669 resulted in a change in control.

Bhaumik and Selarka (2008) discuss the impact of concentration of

ownership on firm performance. On the one hand, concentration of

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ownership that, in turn, concentrates management control in the hands of

a strategic investor, eliminates agency problems associated with

dispersed ownership. On the other hand, it may lead to entrenchment of

upper management which may be inconsistent with the objective of profit

(or value) maximization. Their paper examines the impact of M&A on

profitability of firms in India, where the corporate landscape is dominated

by family-owned and group-affiliated businesses, such that alignment of

management and ownership coexists with management entrenchment,

and draws conclusions about the impact of concentrated ownership and

entrenchment of owner managers on firm performance. Their results

indicate that, during the 1995-2002 period, M&A in India led to

deterioration in firm performance. They also found that neither the

investors in the equity market nor the debt holders can be relied upon to

discipline errant (and entrenched) management. In other words, on

balance, negative effects of entrenchment of owner manager strumps the

positive effects of reduction in owner-vs.-manager agency problems. Their

findings are consistent with bulk of the existing literature on family-owned

and group affiliated firms in India.

In today‟s globalized economy, mergers and acquisitions (M&A) are being

increasingly used the world over, for improving competitiveness of

companies through gaining greater market share, broadening the portfolio

to reduce business risk, for entering new markets and geographies, and

capitalizing on economies of scale etc.

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In particular, mergers seem to have had a slightly positive impact on

profitability of firms in the banking and finance industry, the

pharmaceuticals, textiles and lectrical equipment sectors saw a marginal

negative impact on operating performance (in erms of profitability and

returns on investment). For the Chemicals and Agri- products sectors,

mergers had caused a significant decline, both in terms of Profitability

margins and returns on investment and assets.

The beginning of an M&A process increases the odds for an individual

bank to become an acquisition target. The wave of M&A is rising without

there being any reasons of economic performance to justify such action.

Most bank employees regard M&A as a threat to their jobs, since

shareholders often demand limitations in the number of employed staff.

Mylonakis (2006) is to examine the impact of this phenomenon on

employment and on the efficiency of human resources. For the banks

selected in this study, all strategies followed within the Hellenic banking

sector are included: development through consecutive M&A (Eurobank,

Piraeus Bank) development through selective acquisitions (Alpha Credit

Bank), decreasing company size by selling of bank institutions (Emporiki

Bank) and self-sustainable growth (National Bank of Greece). For the

above five banks, data taken from published balance sheets for the 1998-

2003 accounting periods have been used. Based on these data, indicators

evaluating personnel efficiency have been calculated. M&A results in the

Hellenic bank market have been negative in terms of employment, since

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3,627 jobs have been cancelled during the 1998-2003 period. These jobs

belonged to banks that were either merged or acquired. Regarding a more

efficient distribution of staff in the merged banks, data confirm that the

large Greek banks that chose to grow through mergers have so far been

justified in their choice.

Merging or acquiring has been a tactical practice for companies in order to

penetrate markets. As a means of foreign direct investment, it provides

plenty of comparative advantages against competitors.

Ottaviani(2007) is analyses competition and mergers among risk averse

banks. He shows that the correlation between the shocks to the demand

for loans and the shocks to the supply of deposits induces a strategic

interdependence between the two sides of the market. We characterize

the role of diversification as a motive for bank mergers and analyze the

consequences of mergers on loan and deposit rates. When the value of

diversification is sufficiently strong, bank mergers generate an increase in

the welfare of borrowers and depositors. If depositors have more

correlated shocks than borrowers, bank mergers are relatively worse for

depositors than for borrowers.

Examining the operating performance around commercial bank mergers,

Cornett, McNutt and Tehranian (2006) conduct a study to evaluate the

same. They find that industry-adjusted operating performance of merged

banks increases significantly after the merger, large bank mergers

produce greater performance gains than small bank mergers, activity

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focusing mergers produce greater performance gains than activity

diversifying mergers, geographically focusing mergers produce greater

performance gains than geographically diversifying mergers, and

performance gains are larger after the implementation of nationwide

banking in 1997. Further, they find

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OBJECTIVES OF STUDY

PRIMARY OBJECTIVE:

The main objective is to study about post evaluation performance of

merger and acquisition.

SECONDARY OBJECTIVE:

To study about the procedure of merger and acquisition.

To study about due dilligence of merger and acquisition.

To strategically evaluate the impact on shareholders wealth post merger

and acquisition.

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SIGNIFICANCE OF STUDY

This project helps in understanding regarding how merger and acquisition

takes place.

This project helps in understanding impact of merger & acquisition on

different companies.

To study the financial condition of merged banks before and after merger.

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Introduction of Merger and Acquisition

Mergers and Acquisition play a crucial economic role of moving resources from

zones of under-utilization to zones of better utilization. Poorly run companies are

more prone to being taken over by the powerful and managers have an incentive

to ensure that their company is governed properly and resources are used to

produce maximum value. Acquisition in the banking sector will ensure that the

boards and management of institutions will improve corporate governance to

avoid being targets in future. The abbreviation of merger is as follow:-

M= Mixing

E= Entities

R= Resources

G= Growth Enrichment and

R= Renovation

A merger occurs when two or more companies combines and the resulting firm

maintains the identity of one of the firms. One or more companies may merge

with an existing company or they may merge to form a new company. Usually the

assets and liabilities of the smaller firms are merged into those of larger firms.

Regulations regarding the Mergers in Indian Banking Sector Mergers and

Acquisition in India:

Before liberalization: In India the Companies Act 1956 and the Monopolies and

Restrictive Trade Practices Act, 1969 are states governing mergers among

companies. In the Companies Act, a procedure has been laid down, in terms of

which the merger can effectuate. Sanction of the Company Court is essential

prerequisite for the effectiveness of and for effectuating a schemeof merger. The

other statue regulating mergers was the hit hero Monopolies and Restrictive

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Trade Practices Act. After the amendments the statue does not regulate

mergers.

Post Liberalization period: Narsimham Committee (1998) : The Report of the

Narsimham Committee on the banking sector reforms on the structural issues

made recommendations that “Mergers between banks and between banks and

DFI’s and NBFC’s need to be based on synergies and vocational and business

specific complimentary of the concerned institutions and must obviously make

sound commercial sense. Mergers of public sector banks should emanate from

the managements of banks with the govt. as the common shareholder playing a

supportive role. Such mergers however can be worthwhile if they lead to

rationalization of workforce and branch network otherwise the mergers of public

sector banks would tie down the management with operational issues and

distract attention from the real issue. Mergers should not be seen as a means of

bailing out weak banks. Mergers between strong banks would make for greater

economic and commercial sense and would greater than the sum of its parts and

have a force multiplier effect. It can hence be seen from the recommendations of

the Narsimham Committee that mergers of the public sector banks were

expected to emanate from the managements of the banks with the Government

as common shareholder playing a supportive role.

Reserve Bank of India is required as stipulated under section 44A of the Banking

Regulation Act, 1949 and the role of the RBI is limited. No merger is allowed

unless the scheme of amalgamation draft has been placed before the

shareholders of the banking company and approved by a resolution passed by

the majority representing two-third value of the shareholders

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Meaning of Merger and Acquisition

Merger:

Merger is said to occur when two or more companies combine in to one

company. Merger is defined transactation involving two or more companies in the

exchange of securities and only company one company to survives. When share

holder of more than one company, usually two decides to pool the resources of

the company under a common entity it is called merger.

Acquisition:

Acquisition is defined ‘’a purchase oa a company or a part of it so that

the acquired company is completely by the Acquiring company and thereby no

longer exists as a business entity.

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INTRODUCTION OF ICICI Bank merged with

Bank of Madura

ICICI Bank merged with Bank of Madura in 2001: ICICI one of the largest

financial institution was formed in 1955 at the initiative of the World Bank,

the Government of India and representatives of Indian Industry.

 

The principal objective was to create a development financial institution

for providing medium term and long term project financing to Indian

Business.

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

institution offering only project finance to a diversified financial services

group offering a wide variety of products and services both directly and

through a number of subsidiaries and affiliates like ICICI Bank

In 2001,the ICICI merged with the Bank of Madura to expand

its customer base and branch network.

ICICI Bank Ltd wanted to spread its network, without acquiring RBI's

permission for branch expansion.

BoM was a plausible target since its cash management business was

among the top five in terms of volumes

BoM wanted a (financially and technologically) strong private sector bank

to add shareholder value, enhance career opportunities for its employees

and provide first rate, technology-based, modern banking services to its

customers.

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TYPES OF MERGER & ACQUISITIONHorizontal Merger: Horizontal

merger is a combination of two or more corporate firms dealing in same lines of business

activity. Horizontal Merger is Co-centric Merger, which involves combination of two or

more business units related by technology, production process, marketing research and

development and management.

Vertical Merger: Vertical Merger is the joining of two or more firms

involved in different stages of production or distribution that are usually

separate. The Vertical Mergers chief gains are identified as the lower

buying cost of materials, minimization of distribution costs, assured

supplies and market increasing or creating barriers to entry for potential

competition or placing them at a cost disadvantage.

Conglomerate Merger: Conglomerate Merger is the combination of two

or more unrelated business units in respect of technology, production

process or market and management. In other words, firms engaged in the

different or unrelated activities are combined together. Diversification of

risk constitutes the rational for such merger moves.

Concentric Merger: Concentric Mergers are based on the Specific

Management functions whereas the Conglomerate Mergers are based on

General Management functions. If the activities of the segments brought

together are so related that there is carry over on Specific Management

functions. Such as marketing research, marketing, financing,

manufacturing and personnel.

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Benefits of Mergers & Acquisitions:

1) Increase in the Growth & Expansion: Growth is the need of survival. A

corporate that shows growth and dynamism is very much able to attract and

retain talented executives. At the same time, it enriches the job perspectives of

the working executives by posing ever increasing challenges and hence has a

proportional effect on managerial efficiency.

2) Increase in Profit Margins: Profits increase due to the fact that a combination

of two or more banks may result into cost reduction due to operating

economies. This can happen as a combined entity, May avoid or at least reduce

overlapping functions and facilities. At the same time economies of scale may

also enhance profitability.

3) Strategic Benefit: This can be explained owing to the fact that in a saturated

market like that of India, simultaneous expansion and replacement (through

merger) may help the banks to reap profits rather than creation of additional

capacity through internal expansion.

4) Product Innovation: With the merger of two banks, it may be easier for them

to successfully bring about product innovations as their resources are more so

complementary.

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Limitations of M & As:

1) Dysynergy Effect: It is very important that before merging the two banks

should take into Consideration the nature and extent of synergy which they have.

Generally it is seen that if the two combining entities differ in their work cultures

then the synergy might go negative and this brings about dysyergy.

2) Striving for Bigness: It is the matter of fact that size is taken to be the most

important yardstick for the measurement of success. But beyond a particular

size, the economies of scale turn into diseconomies of scale. . Thus while

evaluating a merger or acquisition proposal, the focus should be on to create or

maximize the shareholders’ wealth rather than increasing the size

3) Failure to Integrate Well: It is said that –“Sometimes even a best strategy

can be ruined by poor implementation.” A post merger or post acquisition

integration of the two banks is a must. Although this is an extremely complex task

– just like grinding east and west together

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Procedure of Merger & Acquisition

The Merger & Acquisition Process can be broken down into five phases:

Phase 1 - Pre Acquisition Review : The first step is to assess your own situation

and determine if a merger and acquisition strategy should be implemented. If a

company expects difficulty in the future when it comes to maintaining core

competencies, market share, return on capital, or other key performance drivers,

then a merger and acquisition (M & A) program may be necessary.

It is also useful to ascertain if the company is undervalued. If a company fails to

protect its valuation, it may find itself the target of a merger. Therefore, the pre-

acquisition phase will often include a valuation of the company - Are we

undervalued? Would an M & A Program improve our valuations?

The primary focus within the Pre Acquisition Review is to determine if growth targets

(such as 10% market growth over the next 3 years) can be achieved internally. If not,

an M & A Team should be formed to establish a set of criteria whereby the company

can grow through acquisition. A complete rough plan should be developed on how

growth will occur through M & A, including responsibilities within the company, how

information will be gathered, etc.

Phase 2 - Search & Screen Targets: The second phase within the M & A Process

is to search for possible takeover candidates. Target companies must fulfill a set of

criteria so that the Target Company is a good strategic fit with the acquiring

company. For example, the target's drivers of performance should compliment the

acquiring company. Compatibility and fit should be assessed across a range of

criteria - relative size, type of business, capital structure, organizational strengths,

core competencies, market channels, etc.

It is worth noting that the search and screening process is performed in-house by the

Acquiring Company. Reliance on outside investment firms is kept to a minimum since

the preliminary stages of M & A must be highly guarded and independent.

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Phase 3 - Investigate & Value the Target: The third phase of M & A is to perform a

more detail analysis of the target company. You want to confirm that the Target

Company is truly a good fit with the acquiring company. This will require a more

thorough review of operations, strategies, financials, and other aspects of the Target

Company. This detail review is called "due diligence." Specifically, Phase I Due

Diligence is initiated once a target company has been selected. The main objective is

to identify various synergy values that can be realized through an M & A of the Target

Company. Investment Bankers now enter into the M & A process to assist with this

evaluation.

A key part of due diligence is the valuation of the target company. In the preliminary

phases of M & A, we will calculate a total value for the combined company. We have

already calculated a value for our company (acquiring company). We now want to

calculate a value for the target as well as all other costs associated with the M & A.

The calculation can be

Phase 4 - Acquire through Negotiation: Now that we have selected our target

company, it's time to start the process of negotiating a M & A.

The most common approach to acquiring another company is for both companies to

reach agreement concerning the M & A; i.e. a negotiated merger will take place. This

negotiated arrangement is sometimes called a "bear hug." The negotiated merger or

bear hug is the preferred approach to a M & A since having both sides agree to the

deal will go a long way to making the M & A work. In cases where resistance is

expected from the target, the acquiring firm will acquire a partial interest in the target;

sometimes referred to as a "toehold position." This toehold position puts pressure on

the target to negotiate without sending the target into panic mode.

In cases where the target is expected to strongly fight a takeover attempt, the

acquiring company will make a tender offer directly to the shareholders of the

target, bypassing the target's management. Tender offers are characterized by the

following:

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The price offered is above the target's prevailing market price.

The offer applies to a substantial, if not all, outstanding shares of stock.

The offer is open for a limited period of time.

The offer is made to the public shareholders of the target.

A few important points worth noting:

Generally, tender offers are more expensive than negotiated M & A's due to the

resistance of target management and the fact that the target is now "in play" and

may attract other bidders.

Partial offers as well as toehold positions are not as effective as a 100%

acquisition of "any and all" outstanding shares. When an acquiring firm makes a

100% offer for the outstanding stock of the target, it is very difficult to turn this

type of offer down.

Another important element when two companies merge is Phase II Due Diligence.

As you may recall, Phase I Due Diligence started when we selected our target

company. Once we start the negotiation process with the target company, a much

more intense level of due diligence (Phase II) will begin. Both companies, assuming

we have a negotiated merger, will launch a very detail review to determine if the

proposed merger will work. This requires a very detail review of the target company -

financials, operations, corporate culture, strategic issues, etc.

Phase 5 - Post Merger Integration: If all goes well, the two companies will

announce an agreement to merge the two companies. The deal is finalized in a

formal merger and acquisition agreement. This leads us to the fifth and final phase

within the M & A Process, the integration of the two companies.

Every company is different - differences in culture, differences in information

systems, differences in strategies, etc. As a result, the Post Merger Integration Phase

is the most difficult phase within the M & A Process. Now all of a sudden we have to

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bring these two companies together and make the whole thing work. This requires

extensive planning and design throughout the entire organization. The integration

process can take place at three levels:

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