merger in banking sector

7/30/2019 Merger in Banking Sector

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Merger in Banking Sector

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C.K.T.Institute of Management, Studies & Research

1: Introduction of Mergers & Acquisitions

INTRODUCTION

We have been learning about the companies coming together to from another company

and companies taking over the existing companies to expand their business.

With recession taking toll of many Indian businesses and the feeling of insecurity surging

over our businessmen, it is not surprising when we hear about the immense numbers of corporate

restructurings taking place, especially in the last couple of years. Several companies have been

taken over and several have undergone internal restructuring, whereas certain companies in the

same field of business have found it beneficial to merge together into one company.

In this context, it would be essential for us to understand what corporate restructuring and

mergers and acquisitions are all about.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender

offers, & other forms of corporate restructuring. Thus important issues both for business decision

and public policy formulation have been raised. No firm is regarded safe from a takeover

possibility. On the more positive side Mergers & Acquisitions may be critical for the healthy

expansion and growth of the firm. Successful entry into new product and geographical markets

may require Mergers & Acquisitions at some stage in the firm's development. Successful

competition in international markets may depend on capabilities obtained in a timely and

efficient fashion through Mergers & Acquisition's. Many have argued that mergers increase

value and efficiency and move resources to their highest and best uses, thereby increasing

shareholder value. .


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To opt for a merger or not is a complex affair, especially in terms of the technicalities

involved. We have discussed almost all factors that the management may have to look into

before going for merger. Considerable amount of brainstorming would be required by the

managements to reach a conclusion. e.g. a due diligence report would clearly identify the status

of the company in respect of the financial position along with the net worth and pending legal

matters and details about various contingent liabilities. Decision has to be taken after having

discussed the pros & cons of the proposed merger & the impact of the same on the business,

administrative costs benefits, addition to shareholders' value, tax implications including stamp

duty and last but not the least also on the employees of the Transferor or Transferee Company.

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 the assets as

well as liabilities of the merged company or companies. Generally, the 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.


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WHAT IS ACQUISITION

Acquisition in general sense is acquiring the ownership in the property. In the context of

business combinations, an acquisition is the purchase by one company of a controlling interest in

the share capital of another existing company.

Methods of Acquisition:

An acquisition may be affected by:

(a)agreement with the persons holding majority interest in the company management likemembers 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

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.


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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.

What will it take to succeed?

Funds are an obvious requirement for would-be buyers. Raising them may not be a

problem for multinationals able to tap resources at home, but for local companies, finance is

likely to be the single biggest obstacle to an acquisition. Financial institution in some Asian

markets are banned from leading for takeovers, and debt markets are small and illiquid, deterring

investors who fear that they might not be able to sell their holdings at a later date. The credit

squeezes and the depressed state of many Asian equity markets have only made an already

difficult situation worse. Funds apart, a successful Mergers & Acquisition growth strategy must

be supported by three capabilities: deep local networks, the abilities to manage uncertainty, and

the skill to distinguish worthwhile targets. Companies that rush in without them are likely to be

stumble.


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2: Purpose of Mergers & Acquisitions

The purpose for an offeror company for acquiring another company shall be reflected in

the corporate objectives. It has to decide the specific objectives to be achieved through

acquisition. The basic purpose of merger or business combination is to achieve faster growth of

the corporate business. Faster growth may be had through product improvement and competitive

position.

Other possible purposes for acquisition are short listed below: -

(1) Procurement of supplies:

1. to safeguard the source of supplies of raw materials or intermediary product;2. to obtain economies of purchase in the form of discount, savings in transportation costs,

overhead costs in buying department, etc.;

3. to share the benefits of suppliers economies by standardizing the materials.

(2) Revamping production facilities:

1. to achieve economies of scale by amalgamating production facilities through moreintensive utilization of plant and resources;

2. to standardize product specifications, improvement of quality of product, expandingmarket and aiming at consumers satisfaction through strengthening after sale

services;

3. to obtain improved production technology and know-how from the offeree company4. to reduce cost, improve quality and produce competitive products to retain and5. Improve market share.


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(3) Market expansion and strategy:

1. to eliminate competition and protect existing market;2. to obtain a new market outlets in possession of the offeree;3. to obtain new product for diversification or substitution of existing products and to

enhance the product range;

4. strengthening retain outlets and sale the goods to rationalize distribution;5. to reduce advertising cost and improve public image of the offeree company;6. Strategic control of patents and copyrights.

(4) Financial strength:

1. to improve liquidity and have direct access to cash resource;2. to dispose of surplus and outdated assets for cash out of combined enterprise;3. to enhance gearing capacity, borrow on better strength and the greater assets backing;4. to avail tax benefits;5. to improve EPS (Earning Per Share).

(5) General gains:

1. To improve its own image and attract superior managerial talents to manage its affairs;2. To offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offer or companys own developmental

plans.

A company thinks in terms of acquiring the other company only when it has arrived at its

own development plan to expand its operation having examined its own internal strength where

it might not have any problem of taxation, accounting, valuation, etc. but might feel resource


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constraints with limitations of funds and lack of skill managerial personnels. It has to aim at

suitable combination where it could have opportunities to supplement its funds by issuance of

securities, secure additional financial facilities, eliminate competition and strengthen its market

position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through

alternative type of combinations which may be horizontal, vertical, product expansion, market

extensional or other specified unrelated objectives depending upon the corporate strategies.

Thus, various types of combinations distinct with each other in nature are adopted to pursue this

objective like vertical or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of cooperative spirit

despite competitiveness in providing rescues to each other from hostile takeovers and cultivate

situations of collaborations sharing goodwill of each other to achieve performance heights

through business combinations. The combining corporate aim at circular combinations by

pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between the

two combining business houses. Such integration could be operational or financial. This givesbirth to conglomerate combinations. The purpose and the requirements of the offeror company

go a long way in selecting a suitable partner for merger or acquisition in business combinations.


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3: Types of Mergers

Merger or acquisition depends upon the purpose of the offeror company it wants toachieve. 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 thatcompany 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, scarcityof resources and purchased products;

(2)Has control over products specifications.

(B) Horizontal combination:


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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 on 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 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.


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4: Advantages of Mergers

Mergers and takeovers are permanent form of combinations which vest in management

complete control and provide centralized administration which are not available in combinations

of holding company and its partly owned subsidiary. Shareholders in the selling company gain

from the merger and takeovers as the premium offered to induce acceptance of the merger or

takeover offers much more price than the book value of shares. Shareholders in the buying

company gain in the long run with the growth of the company not only due to synergy but also

due to boots trapping earnings.

Motivations for mergers and acquisitions

Mergers and acquisitions are caused with the support of shareholders, managers ad

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 invalue. 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


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(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 closely held and private

limited company into a public company without contributing much wealth and without losing

control.

(4) Benefits to general public


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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)

(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 power

and other miseries of life. Two sides of the impact as discussed by the researchers 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.


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5: Procedure of Mergers & Acquisitions

Public announcement:

To make a public announcement an acquirer shall follow the following procedure:

1. Appointment of merchant banker:

The acquirer shall appoint a merchant banker registered as categoryI with SEBI to advise

him on the acquisition and to make a public announcement of offer on his behalf.

2. Use of media for announcement:

Public announcement shall be made at least in one national English daily one Hindi daily

and one regional language daily newspaper of that place where the shares of that company are

listed and traded.

3. Timings of announcement:

Public announcement should be made within four days of finalization of negotiations or

entering into any agreement or memorandum of understanding to acquire the shares or the voting

rights.

4. Contents of announcement:

Public announcement of offer is mandatory as required under the SEBI Regulations.

Therefore, it is required that it should be prepared showing therein the following information:


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(1) Paid up share capital of the target company, the number of fully paid up and partiallypaid up shares.

(2)Total number and percentage of shares proposed to be acquired from public subject tominimum as specified in the sub-regulation (1) of Regulation 21 that is:

a) The public offer of minimum 20% of voting capital of the company to the shareholders;b) The public offer by a raider shall not be less than 10% but more than 51% of shares of

voting rights. Additional shares can be had @ 2% of voting rights in any year.

(3)The minimum offer price for each fully paid up or partly paid up share;

(4)Mode of payment of consideration;

(5)The identity of the acquirer and in case the acquirer is a company, the identity of thepromoters and, or the persons having control over such company and the group, if any, to

which the company belong;

(6)The existing holding, if any, of the acquirer in the shares of the target company, includingholding of persons acting in concert with him;

(7)Salient features of the agreement, if any, such as the date, the name of the seller, the priceat which the shares are being acquired, the manner of payment of the consideration and

the number and percentage of shares in respect of which the acquirer has entered into the

agreement to acquirer the shares or the consideration, monetary or otherwise, for the

acquisition of control over the target company, as the case may be;


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(8)The highest and the average paid by the acquirer or persons acting in concert with him foracquisition, if any, of shares of the target company made by him during the twelve month

period prior to the date of the public announcement;

(9)Objects and purpose of the acquisition of the shares and the future plans of the acquirerfor the target company, including disclosers whether the acquirer proposes to dispose of

or otherwise encumber any assets of the target company:

Provided that where the future plans are set out, the public announcement shall also set

out how the acquirers propose to implement such future plans;

(10) The specified date as mentioned in regulation 19;

(11) The date by which individual letters of offer would be posted to each of theshareholders;

(12) The date of opening and closure of the offer and the manner in which and the date bywhich the acceptance or rejection of the offer would be communicated to the share

holders;

(13) The date by which the payment of consideration would be made for the shares inrespect of which the offer has been accepted;

(14) Disclosure to the effect that firm arrangement for financial resources required toimplement the offer is already in place, including the details regarding the sources of

the funds whether domestic i.e. from banks, financial institutions, or otherwise or

foreign i.e. from Non-resident Indians or otherwise;

(15) Provision for acceptance of the offer by person who own the shares but are not theregistered holders of such shares.


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6: Mergers in the Banking Sector

ICICI Bank

INTRODUCTION

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

India's largest private bank. ICICI Bank has total assets of about Rs.20.05bn (end-Mar 2007), a

network of over 550 branches and offices, and about 2000 ATMs. 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 management. ICICI

Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara, the Stock

Exchange, Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on

the New York Stock Exchange (NYSE).

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:

Project Finance Infrastructure Finance Corporate Finance Securitization
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Leasing

Deferred Credit

Consultancy services

Custodial services

The ICICI Groups draws its strength from the core competencies of its individual

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 set up specialized subsidiaries in the areas of

commercial banking, investment banking, non- banking finance, investor servicing brooking,

venture capital financing and state level infrastructure financing.

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.


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THE ICICI GROUP COMPRISES OF:

ICICI Bank Limited, a commercial bank that provides both retail and wholesale products

ICICI Securities and Finance Company Limited (ICICI Securities),An investment bank that offers a wide range of fee based services with the support of ICICI

Brokerage services Limited (ICICI Brokerage)

ICICI Credit Corporation Limited ( ICICI Credit), a non- banking finance company thatprovides a retail distribution channel for the groups retail products, supported by ICICI

Capital Services Limited (ICICI Capital)

ICICI Investors Services Limited (ICICI Services), offering quality investor servicing

ICICI Venture Funds Management Limited (ICICI Venture), a venture capital company

ICICI international Limited, an off shore investment management company

.


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Considering the above-mentioned point an attempt has been made to envisage a

merger of ICICI Limited with ICICI Limited.

Mr. K.V. Kamath, CEO of ICICI Limited, has recently voiced the intentions of ICICI

Limited towards banking and ICICI Bank. ICICI Limited is endeavoring to forge a closer

relationship with ICICI bank. Mr. K V Kamath recently quoted in a leading daily Banking is

dead. Universal banking is in offering with a whole range of financial products and services. the

basic idea is for banks to do business along with banking. Bankers will have to emerge as

businessmen.

ICICI Bank is a focused banking company coping with the changing times of the banking

industry. So it can be a lucrative target for other player in the same line of operations. However,

when merged with ICICI Limited the attraction is reduced manifold considering the magnitude

of operations of the ICICI limited.

Of course, one would still need a bank to open letters of credit, offer guarantees, handle

documentation, and maintain current account facilities etc. so banks will not superfluous. But

nobody needs so many of them any more.

Secondly, besides credit, a customer may also want from a bank efficient cash

management, advisory services and market research on his product. Thus the importance of fee

based is increasing in comparison with the fund-based income.


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The following table shows a general comparison of three main classes of banks.

Particulars PSU Banks Pvt. Banks(old)

Pvt. Banks(old)

Cost of fundsLow Moderate

High

Branch networkWide Spread Regional

Low

Level of AutomationLow

Moderate High

NPAs High Low Low

Capital Adequacy Moderate Low High

Employee ProductivityLow Moderate High

Focus on Non-

interest Income

Low High High

In the present era of economic liberalization and free market policy, the mergers,

acquisitions and takeovers have become regular phenomenon. Mergers and acquisitions normally

take place between week and strong or by mutual understanding. While deciding upon the

mergers, the financial implications and prospectus of future business growth is taken into

consideration.

ICICI Bank is arguably the most aggressive bank in the country and can rightfully claim

credit for the spread of retail financing in the country. Formed by the reverse merger of former

ICICI with its banking subsidiary, the bank has been highly focused on expanding its retail

portfolio which it believes would be the major growth driver in future.

The bank had to overcome several legacy issues after the merger with ICICI. The erstwhile

financial institution had stockpile of bad loans in its books, a result of liberal financing to large

industrial projects like steel units in the '90s. To its credit, the bank has


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successfully cleaned its balance sheet and net bad loans as a percentage of advances have gone

down significantly.

Besides the well established corporate banking division, ICICI Bank has the largest market

share among all banks in retail or consumer financing. Its growth rate in home loans exceeds

more established HDFC and its total home loan portfolio would go past HDFC in a few years at

current growth rates.

ICICI Bank is the largest issuer of credit cards in the country. It was the first bank to offer a

wide network of ATM's and had the largest network of ATM's till recently, before SBI caught up

with it.

The bank is expanding rapidly in overseas markets. It has operations in the UK, Hong Kong

and Canada. It acquired a small bank in Russia recently. It has tie-ups with major banks in the

US and China. The bank is aggressively targeting the NRI (Non Resident Indian) population for

expanding its business. It already offers money transfer facilities to India from most major

countries across the globe.

For the overseas markets, ICICI has a unique strategy. The bank has successfully reduced

operating costs by doing all processing and back office work in India. It maintains only a front

office customer interface in overseas locations. These cost savings help the bank to offer higher

rates on deposits.


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ICICI Bank Financials

ICICI DEMAT SERVICES

About ICICI Bank Demat Services ICICI Bank Demat Services is arguably the most aggressive

demat services bank in the country and can rightfully claim credit for the spread of its online

trading services in the country.

Products and Services

A product for every need: ICICIdirect.com is the most comprehensive website, which allows youto invest in Shares, Mutual funds, Derivatives (Futures and Options) and other financial

products. Simply put we offer you a product for every investment need of yours.

1. Trading in shares: ICICIdirect.com offers you various options while trading in shares.

Cash Trading: This is a delivery based trading system, which is generally done with the intention

of taking delivery of shares or monies.

Margin Trading: You can also do an intra-settlement trading upto 3 to 4 times your

available funds, wherein you take long buy/ short sell positions in stocks with the intention of

squaring off the position within the same day settlement cycle.

Margin PLUS Trading: Through Margin PLUS you can do an intra-settlement trading unto 25

times your available funds, wherein you take long buy/ short sell positions in stocks with the

intention of squaring off the position within the same day settlement cycle. MarginPLUS will

give a much higher leverage in your account against your limits.

Spot Trading: This facility can be used only for selling your demat stocks which are

already existing in your demat account. When you are looking at an immediate liquidity option,

'Cash on Spot' may work the best for you, On selling shares through "cash on spot",


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money is credited to your bank a/c the same evening & not on the exchange payout date. This

money can then be withdrawn from any of the ICICI Bank ATMs.

BTST : Buy Today Sell Tomorrow (BTST) is a facility that allows you to sell shares even

on 1st and 2nd day after the buy order date, without you having to wait for the receipt of shares

into your demat account.

Call Trade: Call Trade allows you to call on a local number in your city & trade on

the telephone through our Customer Service Executives. This facility is currently available in

over 11 major states across India.

Trading on NSE/BSE: Through ICICIdirect.com, you can trade on NSE as well as

BSE.Market Order: You could trade by placing market orders during market hours that allows

you to trade at the best obtainable price in the market at the time of execution of the order.

The pre--merger status of ICICI Bank is as follows: it had liabilities of Rs.12,073 crore, equity

market capitalization of Rs.2,466 crore and equity volatility of 0.748. Working through options

reasoning, we find that this share price and volatility are consistent with assets worth Rs.13,249

crore with volatility 0.15. Thus, ICICI bank had assets which are 9.7% ahead of liabilities, which

is roughly consistent with the spirit of the Basle Accord, and has leverage of 5.37 times.


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History of ICICI Bank

The World Bank, the Government of India and representatives of Indian industry form ICICI

Limited as a development finance institution to provide medium-term and long-term project

financing to Indian businesses in 1955.

1994 ICICI establishes ICICI Bank as a subsidiary.

1999 ICICI becomes the first Indian company and the first bank or financial institutionfrom non-Japan Asia to list on the NYSE.

2001 ICICI acquired Bank of Madura (est. 1943). Bank of Madura was a Chettiarbank,and had acquired Chettinad Mercantile Bank (est. 1933) and Illanji Bank (established

1904) in the 1960s.

2002 The Boards of Directors of ICICI and ICICI Bank approve the merger of ICICI,ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with

ICICI Bank. After receiving all necessary regulatory approvals, ICICI integrates the

group's financing and banking operations, both wholesale and retail, into a single.
http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/World_Bankhttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/Government_of_Indiahttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1955http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1994http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1999http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/NYSEhttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/2001http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/Bank_of_Madurahttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1943http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/Chettiarhttp://localhost/var/www/apps/conversion/tmp/scratch_7/w/index.php?title=Chettinad_Mercantile_Bank&action=edithttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1933http://localhost/var/www/apps/conversion/tmp/scratch_7/w/index.php?title=Illanji_Bank&action=edithttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1904http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1960shttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/2002http://localhost/var/www/apps/conversion/tmp/scratch_7/w/index.php?title=ICICI_Personal_Financial_Services_Limited&action=edithttp://localhost/var/www/apps/conversion/tmp/scratch_7/w/index.php?title=ICICI_Capital_Services_Limited&action=edithttp://localhost/var/www/apps/conversion/tmp/scratch_7/w/index.php?title=ICICI_Capital_Services_Limited&action=edithttp://localhost/var/www/apps/conversion/tmp/scratch_7/w/index.php?title=ICICI_Personal_Financial_Services_Limited&action=edithttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/2002http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1960shttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1904http://localhost/var/www/apps/conversion/tmp/scratch_7/w/index.php?title=Illanji_Bank&action=edithttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1933http://localhost/var/www/apps/conversion/tmp/scratch_7/w/index.php?title=Chettinad_Mercantile_Bank&action=edithttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/Chettiarhttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1943http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/Bank_of_Madurahttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/2001http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/NYSEhttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1999http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1994http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/1955http://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/Government_of_Indiahttp://localhost/var/www/apps/conversion/tmp/scratch_7/wiki/World_Bank


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Bank of Madura

INTRODUCTION

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, thiswould 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 at least 10% ahead of

liabilities.

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 roughly Rs.2,500 crore.

This number is not far from the pre--merger market capitalization of ICICI Bank, which

was Rs.2,466 crore. Hence, we can say that on purely financial arguments, the merger is roughly

neutral to ICICI Bank shareholders if BoM was merged into ICICI Bank for free. Indeed, if


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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 forced-merger 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.

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 capitalization. It is useful to observe

that BoM probably did not see things in this way, given the willingness of India's banking

regulators to interminably tolerate the existence of bankrupt 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 rapidly find

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 possibility of obtaining higher value added

out of the poorly utilized assets and employees of BoM. If the merger goes through, then it will


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reduce the say of the management team of BoM in India's resource allocation, which is a good

thing.


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7: Procedure of Bank Merger

The procedure for merger either voluntary or otherwise is outlined in the respective statestatutes/ 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 themerging bank sit together and discuss the procedural modalities and financial terms. After the

conclusion of the discussions, a scheme is prepared incorporating therein the all the details of

both the banks and the area terms and conditions.

Once the scheme is finalized, it is tabled in the meeting of Board of directors ofrespective banks. The board discusses the scheme thread bare and accords its approval if the

proposal is found to be financially viable and beneficial in long run.

After the Board approval of the merger proposal, an extra ordinary general meeting of theshareholders of the respective banks is convened to discuss the proposal and seek their approval.

After the board approval of the merger proposal, a registered valuer is appointed tovaluate both the banks. The valuer valuates the banks on the basis of its share capital, market

capital, assets and liabilities, its reach and anticipated growth and sends its report to the

respective banks.

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


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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 boththe banks sit together and discuss and finalize share allocation proportion by the acquiring bank

to the shareholders of the merging bankSWAP ratio

After completion of the above procedures , a merger and acquisition agreement is signedby the bank


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8: RBI Guidelines for Mergers 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.

1. Reserve Bank of India may consider proposals for merger and amalgamation in the following

circumstances:

(i) When the net worth of the acquired bank is positive and the acquirer bank assures to

protect entire deposits of all the depositors of the acquired bank.

(ii) When the net worth of acquired bank is negative and the acquirer bank on its own

assures to protect deposits of all the depositors of the acquired bank.

(iii) When the net worth of the acquired bank is negative and the acquirer bank assures

to protect the deposits of all the depositors of the acquired bank with financial support from the

State Government extended upfront as part of the process of merger.

2. In all cases of merger/ amalgamation the financial parameters of the acquirer bank post merger

should conform to the prescribed minimum prudential and regulatory requirement for banks.

3. The realizable value of assets has to be assessed through a process of due.


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Although the Banking Regulation Act, 1949 (AACS) does not empower Reserve Bank toformulate a scheme with regard to merger and amalgamation of banks, the State Governments

have incorporated in their respective Acts a provision for obtaining 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 orfrom banks registered under the Multi State Co-operative Societies Act (Central Act) for

takeover of a bank/s registered under State Act. While the State Acts 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 themerger 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 the concerned Acts 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.


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9: Information & Documents to be furnished by THEACQUIRER OF BANKS

1. Draft scheme of amalgamation as approved by the Board of Directors of the acquirer bank.

2. Copies of the reports of the valuers appointed for the determination of realizable value of

assets (net of amount payable to creditors having precedence over depositors) of the

acquired bank.

3. Information which is considered relevant for the consideration of the scheme of merger

including in particular:-

a. Annual reports of each of the Banks for each of the three completed financial years

immediately preceding the proposed date for merger.

b. Financial results, if any, published by each of the Banks for any period subsequent tothe financial statements prepared for the financial year immediately preceding the proposed

date of merger.

c. Pro-forma combined balance sheet of the acquiring bank as it will appear consequent

on the merger.

d. Computation based on such pro-forma balance sheet of the following:-

i. Tier I Capital

ii. Tier II Capital


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iii. Risk-weighted Assets

iv. Gross and Net NPAs

v. Ratio of Tier I Capital to Risk-weighted Assets

vi. Ratio of Tier II Capital to Risk-weighted Assets

vii. Ratio of Total Capital to Risk-weighted Assets

Viii. Tier I Capital to Total Assets

ix. Gross and Net NPAs to Advances

x. Cash Reserve Ratio

xi. Statutory Liquidity Ratio

4. Information certified by the values as is considered relevant to understand the net realizable

value of assets of the acquired bank including in particular:-

a. The method of valuation used by the values

b. The information and documents on which the values have relied and the extent of the

verification, if any, made by the values to test the accuracy of such information

c. If the values have relied upon projected information, the names and designations of

the persons who have provided such information and the extent of verification, if any, made

by the values in relation to such information


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10: Change in scenario of Banking Sector

1. The first mega merger in the Indian banking sector that of the HDFC Bank with Times Bank,has created an entity which is the largest private sector bank in the country.

2. The merger of the city bank with Travelers Group and the merger of Bank of America withNation Bank have triggered the mergers and acquisition market in the banking sector world

wide.

3. Europe and Japan are also on their way to restructure their financial sector thought mergerand acquisitions. Merger will help banks with added money power, extended geographicalreach with diversified branch Network, improved product mix, and economies of scale of

operations. Merger will also help banks to reduced them borrowing cost and to spread total

risk associated with the individual banks over the combined entity. Revenues of the combine

entity are likely to shoot up due to more effective allocation of bank funds. ICICI Bank has

initiated merger talks with Centurian Bank but due to difference arising over swap ration the

merger didnt materialized. Now UTI Bank is egeing Centurian Bank. The proposed merger

of UTI Bank and Centurian Bank will make them third largest private banks in terms of size

and market Capitalization State Bank of India has also planned to merge seven of its

associates or part of its long-term policies to regroup and consolidate its position. Some of

the Indian Financial Sector players are already on their way for mergers to strengthen their

existing base.

4. In India mergers especially of the PSBS may be subject to technology and trade union relatedproblem. The strong trade union may prove to be big obstacle for the PSBS mergers.

Technology of the merging banks to should complement each other NPA management.

Management of efficiency, cost reduction, tough competition from the market players and

strengthing of the capital base of the banks are some of the problem which can be faced by

the merge entities. Mergers for private sector banks will be much smoother and easier as

again that of PSBS.


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THE BANKING SCENARIO HAS BEEN CHANGING AT FAST PLACE.

Bank traditionally just borrower and lenders, has started providing complete corporate

and retail financial services to its customers

1. Technology drive has benefited the customers in terms of faster improve convenient bankingservices and Varity of financial products to suit their requirement. ATMs, Phone Banking,

Net banking, Any time and Any where banking are the services which bank have started

offering following the changing trend in sectors. In plastic money segment customer have

also got a new option of debits cards against the earlier popular credit card. Earlier customers

had to conduct their banking transaction within the restricted time frame of banking hours.

Now banking hours are extended.

2. ATMs ,Phone banking and Net banking had enable the customer to transact as per theirconvince customer can now without money at any time and from any branch across country

as certain their account transaction, order statements of their account and give instruction

using the tally banking or on online banking services.

3. Bank traditionally involve working capital financing have started offering consumer loansand housing loans. Some of the banks have started offering travel loans, as well as many

banks have started capitalizing on recent capital market boom by providing IPO finance to

the investors.

4. IPO finance has received a positive response from the investor and is becoming popularamong the masses. Retail financing is the other area where the banks have started to

concentrate. The loan formalities to have been relaxed to a great extent and sanctioning time.


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11: Merger of ICICI Bank with Bank of Madura

ICICI BANK

Merger


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Merger of ICICI Bank with Bank of Madura

The proposed merger between ICICI Bank and Bank of Madura (BoM) is a remarkable

one. The pre--merger market capitalization of ICICI Bank was roughly Rs.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 ICICI Bank's

products and technology bring new life to the 263 branches of BoM? Will ICICI Bank (which

has 1,700 employees) be able to overcome the 2,600 employees that BoM carries, given that

Indian labour law makes it troublesome and expensive to sack workers?

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 securities have poor stock

market liquidity. Hence, we should be cautious in interpreting the numbers 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.

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 recent low 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.


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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 11 to consider the merger.

It is quite likely that the swap ratio may be fixed in a manner that holds out a good deal

for the shareholders of 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 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 IT architecture, a

growing retail client base through a brick-and-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 high of 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. But


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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.

Common bases on which the exchange ratio is determined are:

Earnings per share: - The exchange ratio may be based on the EPS of both the acquiringbanks, and target banks. Earnings per share (EPS) are the earning attribute able to

shareholders, which it reflected in the market price of share. This (P/E) relationship is known

as price Earnings Ratio.

P/E Ratio is calculated by dividing current price of shares (P) by EPS or P/EPS. A higher P/E

Ratio indicates that the companys earnings in the future will grow were as a low P/E Ratio

indicates stagnancy in the earning in the future.

Share price (P) can be determined as

P = EPS X P/E Ratio.

Book Value per share: - The relative book value per share is used to determine theexchange rate.

Market Price per share: - The exchange ratio may be based on the relative marketprices of two banks i.e. acquiring bank and target bank. When the shares of the two banks

are actively traded the market prices will have a considerable hold. The market price is a

reflection of bank current earning growth prospects and risk characteristics.


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Capital adequacy ratio: - This indicates the risk exposure of the bank, the quality ofassets and the capacity of the banks capital to sustain the risk level. The sustenance of

bank is directly proportional to this ratio. However beyond a point, the higher the ratio

would be may mean opportunities foregone.

Financial standing of ICICI Bank & Bank of Madura

Parameters ICICI Bank Bank of Madura

1998-1999 1999-2000 1998-1999 1999-2000

Net worth 308.33 1129.90 211.32 247.83

Total Deposit 6072.94 9866.02 3013.00 3631.00

Advances 3377.60 5030.96 1393.92 1665.42

Net Profit 63.75 105.43 30.13 45.58

Share Capital 165.07 196.81 11.08 11.08

Capital Adequacy Ratio 11.06% 19.64% 18.83% 14.25%

Gross Advances / Gross

NPs

4.72% 2.54% 8.13% 11.09%

Net Advances /

Net NPs

2.88% 1.53% 4.66% 6.23%

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

of Madura.


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The Generation Gap:- The merger of 57 year old BOM sooth bared old generation bankwith a fast growing technology say new Generation bank will help the latter and the start

merger is likely to bring cheer to shareholder and bank employees of BOM and some amount

of discomfort and anxiety to those of ICICI bank.

The scheme of amalgamation will increase the equity bank of ICICI Bank to RS 220.36

CR. ICICI Bank will issue 235.4-lakh share of RS 10 each to the shareholder of BOM. The

merger entity will have an increase of a net base over RS 160 bn and deposit base of RS 131

bn.

The merged entity will have 360 branches and a similar number of ATMs across the

country and also enable the ICICI to serve a large customer bone of 1.2 million customers of

BOM through a wider network, adding to the antoma bare to 2.7 million.

Managing rural branches:

ICICI major branches are in major and cities, where as BOM spreads its wings mostly 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 the other hand

due to Geographical location of its branches and level of competition, it was said that ICICI

Bank will have a tough time to cope with.

Managing software:

Another task which stand on the way is technology while ICICI bank which is fully

automatic.

Quality of assets:- the nature of assets a bank is holding would signify its operationalefficiency. Usually the level of Non performing Assets ( NPAS) judges the quality of

assets. The lower the NAPS to total advances or total assets the better the quality is and vice

versa.


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Staff productivity: - One of the key area where banks can develop competition advantage.The measurement of staff productivity becomes one of the essential factors while measuring

the performance of the banks.

Liquidity:- While assessing the liquidity of a bank the most sought ratio is net loans to totalassets. A rise in the net loans to total assets may be considered as a fall in the liquidity of the

bank.

Book Value per share:- It is simply the net worth of the company (which is equal to the paidup equity capital plus resource and surplus) divided by the number of outstanding equity

shares.

Earnings per share:- specific valuation per unit of investment given by Net income afterincome taxes and after dividends on preferred stock of the company.

Net work:- Book value of a company is common stock, surplus, resources and retainedearnings.

Profitability: - the most crucial ratio in measuring the profitability is net profit of the bank.The ratio such as Net Interest Income (NIL) and Net Interest Margin (NIM) measure

sustenance ability of the bank based on the spread. Entity is using the package, Banks 2000,

BOM computerized 90 percent of its business and was converted with ISBS software.

The BOM branches are supposed to switch over to Banks 2000. Though it is not a difficult

task, with 80% computer literate staff would need effective retraining which involves a cost.

The ICICI Bank need to invest RS 50 core for upgrading BOMs 263 branches.


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Managing Human Resources:One of the greatest challenges before ICICI Banks was managing human resources.

When the head count of ICICI Bank was taken it in less than 1500 employees on the other hand

BOM has over 2500.

The merged entity will have bout 4000 employees which will make it one of the largest

banks among the new generation private sector banks. Th staff of ICICI Banks are drawn 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 clientele, the ICICI Bank needs to redefine

its strategies to suit to the new clientele. The sentiments or a relationship of small and medium

borrower is hurt it may be difficult for them to reestablish the relationship which could also

hamper the image of the bank.


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Crucial Parameters: -

Financial details of both the banks on the day of announcement are given below:

Name of the Bank Bank of Madura ICICI Bank

Book value of bank on the

day of merger announcement 183.0 58.0

Market price on the day

announcement of merger 183.0 169.90

Earnings per share

Dividend paid (in%)

P/E Ratio

38%

55%

1.73

5.4

15%

783


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Post Merger Issues:

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. Whileall 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: The amalgamation will enable them to have a stronger financial and

operational structure, which is supposed to be capable of greater resource/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.


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12. CONCLUSION

FUTURE OF M&A IN INDIAN BANKING

In Future, further opening up of the Indian banking sector is forecast to occur due to the

changing regulatory environment (proposal for upto74% ownership by foreign banks in Indian

banks). This will be an opportunity for foreign banks to enter the Indian market as with their

huge capital reserves, cutting-edge technology, best international practices and skilled

personnel they have a clear competitive advantage over Indian banks. However, excessive

valuations may act as a deterrent, especially in the post-sub-prime era.

Persistent growth in Indian corporate sector and other segments provide further motives for

M&As. Banks need to keep pace with the growing industrial and agricultural sectors to serve

them effectively. A bigger player can afford to invest in required technology. Consolidation

with global players can give the benefit of global opportunities in funds' mobilisation, credit

disbursal, investments and rendering of financial services. Consolidation can also lower

intermediation cost and increase reach to underserved segments.

The Narasimhan Committee (II) recommendations are also an important indicator of the future

shape of the sector. There would be a movement towards a 3-tier structure in the Indian

banking industry: 2-3large international banks; 8-10 national banks; and a few large local area

banks. In addition, M&As in the future are likely to be more market -driven, instead of

government-driven.

Based on the trends in the banking sector and the insights from the cases highlighted in this

study, one can list some steps for the future which banks should consider, both in terms of

consolidation and general business. Firstly, banks can work towards a synergy-based merger

plan with minimization of technology-related expenditure as a goal. There is also a need to

note that merger or large size is just a facilitator, but no guarantee for improved profitability on

a sustained basis. Hence, the thrust should be on improving risk management capabilities,

corporate governance and strategic business planning. In the short run, attempt options like


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outsourcing, strategic alliances, etc. can be considered. Banks need to take advantage of this

f a s t c h a n g i n g e n v i r o n m e n t , w h e r e p r o d u c t l i f e c y c l e s a r e

s h o r t , t i m e t o m a r k e t i s c r i t i c a l a n d f i r s t m o v e r a d v a n t a g e

c o u l d b e a d e c i s i v e f a c t o r i n d e c i d i n g w h o w i n s i n f u t u r e .

P o s t - M & A , t h e r e s u l t i n g l a r g e r s i z e s h o u l d n o t a f f e c t a g i l i t y .

T h e a i m s h o u l d b e t o c r e a t e a n i m b l e g i a n t , r a t h e r t h a n a

c l u m s y d i n o s a u r . A t t h e s a m e t i m e , l a c k o f s i z e s h o u l d n o t b e

t a k e n t o i m p l y i r r e l e v a n c e a s s p e c i a l i z e d p l a y e r s c a n s t i l l s e e k

t o p r o v i d e n i c h e a n d b o u t i q u e s e r v i c e s


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REFERENCES

Webliography

www.economictimes.indiatimes.com

www.smfi.org

www.moneycontrol.com

www.icicibank.com

www.karvy.com

Article:

Narasimham Committee report on banking sector reforms
http://www.economictimes.indiatimes.com/http://www.economictimes.indiatimes.com/http://www.smfi.org/http://www.smfi.org/http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.icicibank.com/http://www.icicibank.com/http://www.karvy.com/http://www.karvy.com/http://www.karvy.com/http://www.icicibank.com/http://www.moneycontrol.com/http://www.smfi.org/http://www.economictimes.indiatimes.com/