icici bor merger

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ASSIGNMENT ON MERGERS &

ACQUISITION

“ICICI-BANK OF RAJASTHAN MERGER”

Kirloskar Institute of Advanced Management Studies,

Harihar, Karnataka.

2012-2014

Submitted to: Prof. Atul Kulkarni

GROUP MEMBER NAME:-

GAURAV SHARMA

MAHESHWAR JULKA

PANKAJ KUMAR BOTHRA

SAKSHI GUPTA

SWAYAMDIP DAS



Overview:

Between 2000 and 2010, the size of the largest bank in the world has grown

near to fourfold by its assets from about US $0.64 trillion to US $2.2 trillion

which is almost double the size of GDP of India. Synergies arising fromgeographical diversification, increased efficiency, cost savings and economies

of scale are the motivation drivers behind bank mergers across the world.

M&As have become a major strategic tool for achieving the same and it is

imperative to avoid the possibilities of small banks from becoming the target

of huge foreign banks which are expected to come to India. Based on the

motives, merger deals are grouped into 3 categories viz, Voluntary Merger,

Compulsory Merger and Universal Banking Model. The merger of ICICI Bank -

Bank of Rajasthan is the seventh voluntary merger and the latest in India after

the merger of HDFC Bank - Centurion Bank of Punjab in the year 2008. Whencompared with other voluntary mergers, this deal has many oddities in the

context and in the background of the merger including various regulatory

interventions of authorities like the Reserve Bank of India (RBI), Securities and

Exchange Board of India (SEBI) and Foreign Investment Promotion Board

(FIPB). This deal also got lots of attention because of poor corporate

governance of the target bank and cancellation of Extra Ordinary General

Meeting (EGM) by the Calcutta District Civil Court. In this case, an attempt has

been made to analyse the probable impact of strategic features of the banks

on post-merger performance.

Brief contours of the deal

• The swap ratio announced is 25 ICICI shares for 118 BoR shares (1: 4.72)—

higher than the market price related swap ratio of 1:9.

• This effectively translates into a ~90% premium to the market price (at the

time of announcement of the deal). In terms of price to book, it works out to

4.8x trailing book (Q3FY10). Adjusting for NPLs, price to book works out to5.3x.

• BoR carries high revaluation reserve of around `4bn (~40% of net worth).

Hence, accounting for the revaluation reserve, the price to book value works

out to 3.1x trailing adj. book (a more reasonable number).

• The proposed swap ratio values BoR at `30.4bn, translating into a per branch

value of only `65.7mn, given its 463 branches. In contrast, HDFC Bank had paid

around `260mn for every branch of Centurion Bank of Punjab when the deal

was sealed in February 2008.



• BoR’s implied price per share comes at `188.38 per share.

• ICICI will issue 34.1 million new shares, which will lead to 3.1% dilution.

Q 1. What is the acquirers acquisition strategy? Identify the reasons why theacquirer considered acquiring the target.

Ans. The acquirers acquisition strategy in this merger was clear cut expansion

In terms of reach out of branch which it was getting in terms of in North

And North-West market it will augment the bank’s geographical presence

By 23% at the cost of ~3% equity dilution in overall. The synergy will

certainly develop over a medium to long term period but this is the best

possible route to expand operation and their by improve size and

profitability.

Reason For Acquisition

BOR was facing many problems because of its Bad Corporate governance.

There was huge pressure from regulatory authorities to restructure the Bank

for a variety of problems from 2009 onwards.

In February 2010, the RBI levied a penalty of `25lakhs for a series of violations

including irregular property deals, actions against money laundering norms,deletion of corporate records from the information systems, irregularities in

the accounts of corporate groups, extension of repayment period over

permissible limits on intra-day overdraft, lack of enough credit committees.

Sings of poor corporate governance.

Because of the above problems the share of BOR was hitting very hard close to

its lowest levels of `61.8. This was undervalued.

Although During Feb 2010 the bank was in bad names but had sound financial

records. Total income received from interest and others income registered agrowth of 25.8% from FY 2008 at `1513.40 crores as on 31st March 2009.

Wide reach with 478 branches and 96 ATMs.40% of reserves among total net

worth. High Return on Loan i.e 16.3% as compared to 12.7% of ICICI Bank.

Q2. Was there any vulnerability in the target that made it a candidate for

acquisition?

Ans. Yes, there was an extreme vulnerability in the target that made it acandidate for acquisition.



Primarily, the condition of Bank of Rajasthan had been seeing in under

pressure after a series of probes continued by RBI. Irregular performance of

the bank gave rise to several investigations along with the order of RBI for a

special audit. The decision of audit had been taken when Bank of Rajasthancorresponded to give prominent intraday overdraft which was beyond the limit

to the Sahara Group, Lucknow based.

On 25th Feb 2010, Reserve Bank of India has imposed a pecuniary penalty of

`25 lakh(Rupees Twenty Five Lakh only) on The Bank of Rajasthan Ltd. in exert

of powers enthroned under the provisions of Section 47A(1)(b) of the Banking

Regulation Act, 1949.

On the following grounds the penalty were imposed:-

i. Acquisition of Immovable properties- Violation the RBI’s

guidelines/directions issued under Section 35A of the Banking Regulation Act,

1949.

ii. Loopholes in the records bank’s IT system

iii. Non-adherence of guidelines related to Know Your Customers and anti-

money laundering in opening and conduct of accounts.

iv. Irregular account’s conduct of a corporate group

v. Misrepresentation of facts- unable to produce documents sought by theReserve Bank of India.

The issue of Corporate Governance Standards was also one of the key areas

which acted as a loophole for the merger. During the annual inspection of BoR,

RBI found out unconventional disclosure of Shareholding patterns of the

promoter group. The shareholding pattern had been declined from 55% to

28.6% between June 2007 and 2009 revealed by Market watchdog, SEBI.

The Tayals, Controllers of the Bank of Rajasthan, themselves started their

search for suitable deal with heading bank in order to enter into merger deal

after the series of probes.

Nevertheless, the potential synergies which the management of ICICI had

foreseen in this deal could be in any flow such as cost optimization through

better negotiation with vendors, economies of scale, eliminating overlaps and

many more.

Secondly, through revenue enhancement this infers new market access (as

ICICI bank will be able to get readymade access to Bank of Rajasthan’s wide

branch network in north and west India). The extensive tentacles of the Bank



of Rajasthan in terms of branches were the biggest factor determining the

investment-worthiness of the said company.

Thirdly, by way of technological leverage and forth could be forward and

backward integration.

Due to lack of capital, Bank of Rajasthan has been facing low credit growth of 4.69% due to lower disbursement and large prepayments by some of its

clients. The credit growth was stable with advances during FY 2010.

But, borrowings at Bank of Rajasthan have shown good sign for the bank as it

has been continuously decreasing since from FY 2006. Currently the bank’s

borrowings stood at `6.5million as on year ended 2010.

Q 3. What was the target’s response to the overtures of the acquirer?

Ans . The target response to the overture of the acquirer was the fact that

since the Bank of Rajasthan had been under pressure after a series of probes

continued by RBI. Irregular performance of the bank gave rise to several

investigations along with the order of RBI for a special audit. The decision of

audit had been taken when Bank of Rajasthan corresponded to give prominent

intraday overdraft which was beyond the limit to the Sahara Group, Lucknow

based. The Central Banking Institution of India had appointed Deloitte Haskin

& Sells to look after the bank’s lending policies and information security

system.The discussions were held with many leading banks named ICICI Bank, HDFC

Bank, Axis Bank etc. The HDFC Bank has not shown any positive concern in this

preposition. The officials of Axis bank have denied the deal as they were not

ready to pay demanded price. Somehow The ICICI bank becomes ready to pay

the price higher than the market valuation of Bank of Rajasthan. However, the

deal would mean little dilution for ICICI, as the market capitalization of ICICI

registered at `1, 00,717 crore whereas, BoR had `1323 crore only.

A non-cash merger deal was approved by the board of directors of the India’s second largest private sector bank. It was estimated that the merger would

further flourish the ICICI’s branch network by 23% approximately.

Q 4. What synergies were identified by the acquirer? How were they

quantified?

Ans.

Identification Of synergies

Reach – The merger enhances ICICI’s branch network by 23% with 463branches and 96 ATMs at one go with a minimal equity dilution of 3%—



book value dilution is limited to 1.8%. It will strengthen its position in the

North and Northwest part of India. Before merger ICICI has a strong

presence in South and West post mergers with Bank of Madura and

Sangli Bank, respectively now it will increase its yield to northern India.

Cost Of Funds – With wider reach the merger will help to improve theCASA Of BOR as ICICI has the requisite expertise in Retail Banking,

Transaction Banking, and third party distribution to as currently BOR’s

branch network is underutilized with CASA per branch at `90 mn against

ICICI’s `421 mn. So ICICI Will leverage BOR’s underutilized branch

network. There is substantial scope of productivity improvement.

Product Line – Merger will help the ICICI to increase its Product line.

Present Products Additions

Finance And Insurance Corporate and Whole

sale banking

Retail Banking Personal Banking

Commercial banking Auxiliary Services

Mortgage Merchant Banking

Credit Card Trust and custodial

services Private Banking Credit Facility To SMEs

Asset Management

Investment Banking

In addition to above BOR is very efficient in Treasury and Banking Operations,

will sink with ICICI well.

Asset Base – The Asset Base of ICICI bank is on decreasing trend. It has

been decreased by 34% percent during 2006-07 and reduced by 17%

during 2009-2010 from `2,183.11 billion at year-end FY 2009 to `

1,812.06 billion at year-end FY 2010. So Merger will straight away

increase the Asset base by `17235.09 crores, increased by 9% from last

year.

Customer Base – BOR has strong customer base of 3 million



Business - The total business amounted to `233918 million and the

business per branch is `47 crore.

Quantification Of synergies

With the help of above synergies the ICICI help will be able to improve its

NIMs. ICICIs Efficient working will help to make the operations of BOR sound

and reduce the operational cost. Now because of wider reach ICICI will have

access to cheaper Funds and can generate its assets base.

Income Statement

Particular 2009 2010 2011E 2012E 2013E

Interest income 310925 257069 277547 322873 387447.6

Interest expanded 227259 175926 185893 214586 253211.5

Net interest income 83666 81143 91654 108287 134236.1

Non interest income 76037 74780 76575 89639 109359.6

Net Revenue 159703 155923 168229 197926 243595.7

Opex 70457 58598 65661 75793 88677.81

Growth Rate 2011 2012 2013

Interest income 8.0 16.3 20.0

Interest expanded 6 15 18

Net interest income 13.0 18.1 24.0

Non interest income 2 17 22

Net Revenue 8 18 23

Opex 12 15 17

Strategic Variables ICICI Bank (in %) Bank of Rajasthan (in %) Index Value

Diversity of Earnings 2.25 8.70 6.50

Return on Loan 12.72 16.30 3.58

Liquidity Ratio 49.86 48.14 1.72

Financial Leverage 14.20 5.41 8.79

Cost to Income Ratio 87.87 106.87 19.00Efficiency Ratio 34.86 38.08 3.22



Source: Annual reports of the banks, Calculations are based on secondary data.

Q 5. How was the price of the target decided?

Ans. Who says Financial Valuation is always sacrosanct and hence its result

should be treated as the Rule of Thumb? It’s correct that valuation in monetary

terms have far-reaching impact on the feasibility of an acquisition. But, still

Synergies should not be overlooked by the management of the Acquirer.

The Bank of Rajasthan was an entity which used to flaunt about its 463

branches catering to more than 3 million customers. Besides the stigmamentioned in Ques.2, if ICICI didn’t take this factor into consideration, then the

deal might have turned into a colossal failure.

The deal was based on the internal analysis of the proposed amalgamation

which certainly be calculated considering the followings:-

i. Strategic value of the deal

ii. Market capitalization per branch of the former private sector banks

iii. And comparison of deal with the relevant precedent transactions.

First of all, a non-cash merger deal was approved by the board of directors of

the India’s second largest private sector bank. It was estimated that the

merger would further flourish the ICICI‟s branch network by 25 percent

approximately.

It was decided that the report will be presented to Board of Directors after the

approval of independent assessor and further to Shareholders & Reserve Bank

of India. The deal in its intermediation decided that the swapping ration will be

at 1:4.72 which will inferred as The ICICI Bank would allot 25 shares for every118 shares of Bank of Rajasthan.

On May 18th 2010, Bank of Rajasthan’s closing price mounted 52-weeks high

at `99.50 while the benchmark SENSEX grew only by 0.24 percent whereas ICICI

Bank closed at 1.45 percent lower at `889.35.

After consideration of share prices the swap deal indicated that 89.5 percent

premium has been given by ICICI bank to Bank of Rajasthan. The Bank of

Loan to Deposit

Ratio

89.70 55.30 34.40

CRAR 19.40 7.74 11.66

NPA 1.87 1.6 .27



Rajasthan cost to ICICI bank at nearly `3041 crore on the basis of internal

valuation. In elaborated form, ICICI bank have to pay about `6.6 crore* for each

of the BoR Branch.

*Valuation= `3041/ 463 branches (`6.6 crore at an average rate)

At least, the ICICI expected to earn synergy of more than 89.5%, the proportion

of BoR’s Market Price which ICICI paid as a Premium to the said bank.

Q 6. How were the shares of the target acquired? (Tender??)

The shares of target were acquired by entering into an agreement by the

acquirer with certain shareholders of Bank of Rajasthan agreeing to effect theamalgamation of Bank of Rajasthan with ICICI Bank with a share exchange ratio

of 25 shares of ICICI Bank for 118 shares of Bank of Rajasthan. ICICI Bank said

that it is willing to pay more than BoR’s present market valuation. Thus

basically they acquired all the shares of BoR and in lieu issued them shares of

ICICI against it, which resulted in dilution of 3% equity stake for ICICI Bank.

Thus, it was tender offer for exchange of shares.

Q 7. What was the consideration for the acquired shares (cash or stock).

Ans. The consideration for the acquired shares was the stock of ICICI Bank

shares. It resulted in 3% equity dilution in entirety for the ICICI Bank to acquire

BoR 100% stake at a valuation of `30.4Billion.

Q 8. How did the share price of the two companies move during the pre-

acquisition period

Ans. Pre-merger analysis of ICICI Bank and Bank of RajasthanAfter the announcement of ICICI Bank's plan to acquire Bank of Rajasthan,

the stock prices of both companies surged. The stock price of ICICI Bank gained

around 22% between the date of announcement (May 19, 2010) and August

23,2010.

The stock price of Bank of Rajasthan surged around 78% in the same period

from `119 to `212 on August 23, 2010. "ICICI Bank was active immediately after

the deal due to the arbitrage opportunity between ICICI Bank and Bank of



Rajasthan as it was a share swap deal between two listed entities," points out

Samar Vijay of Invest Care.

In case of ICICI the net profit margin is 10.51 in the year 2008 and it went

down in the year 2009 and again it went up in the 2010. In case of BOR the Net

profit margin was 9.75 in the year 2008 and it went down in the year 2009 itbecomes negative in 2010.

Return on Net Worth(%) 2008 2009 2010

ICICI Bank 8.94 7.58 7.79

BOR 21.75 18.29 -18.86

In case of ICICI banks the return on net worth is decreasing in the year 2009and increasing in the year 2010. But in case of BOR it is decreasing in the year

2009 and it went negative in the year 2010. In case of ICICI banks the EPS is

decreasing in the year 2009 and increased in the year 2010. But in case of BOR

it is decreasing in the year 2009 and it went negative in the year 2010

EPS 2008 2009 2010

ICICI Bank 37.37 33.76 36.10

BOR 8.57 7.30 -6.33

Q 9. Was the acquisition successful?

Ans. Post-merger results are satisfactory. Merger has increased the liquidity

and profitability position of ICICI bank. HR ISSUES has always being a major

concern for the merging firms because the major impact of this merger is on

the employment position of employees of BOR. The merger has increased no.

of branches and no. of ATM’s.

The deal is seen benefiting ICICI Bank in terms of an addition of about a quarter

of its existing branch network, which will in turn enhance its earning potentials,

return on assets (RoA) and return on equity (RoE). RoA tells us what earnings

were generated from invested capital (assets), while RoE measures a

company’s profitability by revealing how much profit it generated with the

money shareholders invested.

ICICI Bank posted a net profit of `4,025 crore for FY10 and its RoE stood at

7.80%. As on December 31, BoR had a network of 463 branches. ICICI Bank’s

network has 2,000 branches.



The present deal appears more favourable to BoR since their shareholders

gained almost 90% between 07.05.2010 (the start of merger negotiations) and

23.05.2010 (Board Meeting approval).

Hence, the merger is beneficial for both the banks.

References:

Particulars ICICI Bank Bank of Rajasthan

Price before a day of merger announcement 901.10 82.85

Price on the day of merger announcement 809.20 99.45Price after a day of merger announcement 824.45 119.35

Swap Ratio 1:4.72 (25:118)

Parameter ICICI Bank BOR Exchange

Ratio

Acquisition

Price (`)

Deal Value

(`/ Million)

Balance SheetSize

(`/ Million)

3633997.20 1730000.60 0.51 467.00 753.50

No. of

Branches

1709 466 1.87 1681.20 2712.61

Owners

Equity

(`/ Million)

516183.70 936.51 .12 112.08 180.84

Deposits 2020166.00 150623.10 0.32 288.35 465.25



(`/ Million)

Advances

(`/ Million)

1812056.00 83294.70 0.51 459.57 741.51

NPAT(`/ Million)

40249.83 -1021.30 NA NA NA

Minimum

Average

Maximum

Actual

0.12

0.69

1.87

0.21

112.08

622.67

1681.20

190.90

18084

100467

271261

30801

Note: Acquisition price is calculated by multiplying exchange ratios with the

market price of the acquiring bank and Deal value= Acquisition price× number

of shares of the target bank.

Particulars ICICI BANK@ 2010 ICICI BANK + BOR @ 2010

No. of Shares (Mn) 1115 1149

Price (INR) 832 832

NETWORTH CALCULATIONFY10 Networth (INR Mn) 516184 522521

FY10 NPA (INR Mn) 38411 39255

Adj. Book Value (INR Mn) 489296 495042

BVPS (INR) 439 431

BVPS Dilution (%) (1.8%)

P/BV 1.9 1.9

icici bor merger

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