merger of icici bank and bom

1 ‘Merger & Acquisition: ICICI Bank & Bank of Madura’ MERGER & ACQUISITION MERGER & ACQUISITION ICICI BANK ICICI BANK & & BANK OF MADURA BANK OF MADURA National Institute of Financial Management

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Page 1: Merger of Icici Bank and Bom


‘Merger & Acquisition: ICICI Bank & Bank of Madura’




National Institute of Financial Management

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‘Merger & Acquisition: ICICI Bank & Bank of Madura’


Mergers and acquisitions have become the most frequently used

methods of growth for companies in the twenty first century. They present

a company with a potentially larger market share and open it up to a more

diversified market. A merger is considered to be successful, if it increases

the acquiring firm’s value; most mergers have actually been known to

benefit both competition and consumers by allowing firms to operate

more efficiently. However, it has to be noted that some mergers and

acquisitions have the capacity to decrease competition in various ways.

The merger between ICICI bank and Bank of Madura presented ICICI

Bank with the opportunity to expand its perspective through having

access to retail banking markets and clientele in the regions where its

previous exposure had been virtually inexistent. The merger gave the firm

that extra growth and competitive edge that it was looking for to compete

with HDFC Bank, SBI and other rivals.

Research has shown, that due to increasing advances in technology

and banking processes, which make transactions, among other aspects of

business, more effective and efficient, mergers and acquisitions have

become more frequent today than ever before.

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1.1 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 merger 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. Merger may take two forms:-

Merger through absorption

Merger through consolidation.

1.2 Absorption. Absorption is a combination of two or more

companies into an existing company. All companies except one loose their

identify in a merger through absorption.

1.3 Consolidation. A consolidation is a combination of two or more

combines into a new company. In this form of merger all companies are

legally dissolved and a new entity is created. In consolidation the acquired

company transfers its assets, liabilities and share of the acquiring

company for cash or exchange of assets.


1.4 A fundamental characteristic of merger is that the acquiring

company takes over the ownership of other companies and combines

their operations with its own operations. An acquisition may be defined as

an act of acquiring effective control by one company over the assets or

management of another company without any combination of companies.


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1.5 Although they are often uttered in the same breath and used as

though they were synonymous, the terms merger and acquisition mean

slightly different things. When one company takes over another and

clearly established itself as the new owner, the purchase is called an

acquisition. From a legal point of view, the target company ceases to

exist, the buyer "swallows" the business and the buyer's stock continues

to be traded.

1.6 In the pure sense of the term, a merger happens when two firms,

often of about the same size, agree to go forward as a single new

company rather than remain separately owned and operated. This kind of

action is more precisely referred to as a "merger of equals." Both

companies' stocks are surrendered and new company stock is issued in its


1.7 In practice, however, actual mergers of equals don't happen very

often. Usually, one company will buy another and, as part of the deal's

terms, simply allow the acquired firm to proclaim that the action is a

merger of equals, even if it's technically an acquisition. Being bought out

often carries negative connotations, therefore, by describing the deal as a

merger, deal makers and top managers try to make the takeover more


1.8 A purchase deal will also be called a merger when both owners

agree that joining together is in the best interest of both of their

companies. But when the deal is unfriendly - that is, when the target

company does not want to be purchased - it is always regarded as an



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1.9 Mergers are of many types. Mergers may be differentiated on the

basis of activities, which are added in the process of the existing product

or service lines. Mergers can be a distinguished into the following four


Horizontal merger. Horizontal merger is a combination of two or

more corporate firms dealing in same lines of business activity.

Horizontal merger is a co centric merger, which involves

combination of two or more business units related to technology,

production process, marketing research and development and


Vertical Merger. Vertical merger is the joining of two or

more firms in different stages of production or distribution that are

usually separate. The vertical Mergers chief gains are identified as

the lower buying cost of material. 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 merger are based on specific

management functions where as 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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1.10 The major benefits from a merger are enumerated in succeeding


1.11 Growth or Diversification. Companies that desire rapid growth in

size or market share or diversification in the range of their products may

find that a merger can be used to fulfil the objective instead of going

through the tome consuming process of internal growth or diversification.

The firm may achieve the same objective in a short period of time by

merging with an existing firm. In addition such a strategy is often less

costly than the alternative of developing the necessary production

capability and capacity. Moreover when a firm expands or extends its

product line by acquiring another firm, it also removes a potential


1.12 Synergism. The nature of synergism is very simple. Synergism

exists when ever the value of the combination is greater than the sum of

the values of its parts. But identifying synergy on evaluating it may be

difficult, in fact sometimes its implementations may be very subtle. As

broadly defined to include any incremental value resulting from business

combination, synergism in the basic economic justification of merger. The

incremental value may derive from increase in either operational or

financial efficiency.

Operating Synergism. Operating synergism may result

from economies of scale, some degree of monopoly power or

increased managerial efficiency. The value may be achieved by

increasing the sales volume in relation to assts employed increasing

profit margins or decreasing operating risks. Although operating

synergy usually is the result of either vertical/horizontal integration

some synergistic also may result from conglomerate growth. In

addition, some times a firm may acquire another to obtain patents,

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copyrights, technical proficiency, marketing skills, specific fixes

assets, customer relationship or managerial personnel. Operating

synergism occurs when these assets, which are intangible, may be

combined with the existing assets and organization of the acquiring

firm to produce an incremental value.

Financial synergism. Among these are incremental values

resulting from complementary internal funds flows more efficient

use of financial leverage, increase external financial capability and

income tax advantages.

Complementary internal funds flows.Seasonal or cyclical

fluctuations in funds flows sometimes may be reduced or

eliminated by merger. If so, financial synergism results in

reduction of working capital requirements of the combination

compared to those of the firms standing alone.

More efficient use of Financial Leverage. Financial

synergy may result from more efficient use of financial leverage.

The acquisition firm may have little debt and wish to use the high

debt of the acquired firm to lever earning of the combination or

the acquiring firm may borrow to finance and acquisition for cash

of a low debt firm thus providing additional leverage to the

combination. The financial leverage advantage must be weighed

against the increased financial risk.

Increased External Financial Capabilities. Many mergers,

particular those of relatively small firms into large ones, occur

when the acquired firm simply cannot finance its operation.

When a firm has exhausted its bank credit and has virtually no

access to long term debt or equity markets. Sometimes the small

firm has encountered operating difficulty, and the bank has

served notice that its loan will not be renewed? In this type of

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situation a large firms with sufficient cash and credit to finance

the requirements of smaller one probably can obtain a good buy

bee. Making a merger proposal to the small firm. The acquisition

of a cash rich firm whose operations have matured may provide

additional financing to facilitate growth of the acquiring firm. In

some cases, the acquiring may be able to recover all or parts of

the cost of acquiring the cash rich firm when the merger is

consummated and the cash then belongs to it.

The Income Tax Advantages. In some cases, income tax

consideration may provide the financial synergy motivating a

merger, e.g. assume that a firm A has earnings before taxes of

about rupees ten crores per year and firm B now break even,

has a loss carry forward of rupees twenty crores accumulated

from profitable operations of previous years. The merger of A and

B will allow the surviving corporation to utility the loss carries

forward, thereby eliminating income taxes in future periods.

1.13 Counter Synergism. Certain factors may oppose the synergistic

effect contemplating from a merger. Often another layer of overhead cost

and bureaucracy is added. Sometimes the acquiring firm agrees to long

term employments contracts with managers of the acquiring firm. Such

often are beneficial but they may be the opposite. Personality or policy

conflicts may develop that either hamstring operations or acquire buying

out such contracts to remove personal position of authority. Particularly in

conglomerate merger, management of acquiring firm simply may not

have sufficient knowledge of the business to control the acquired firm

adequately. Attempts to maintain control may induce resentment by

personnel of acquired firm. The resulting reduction of the efficiency may

eliminate expected operating synergy or even reduce the post merger

profitability of the acquired firm.

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1.14 Purchase of Assets at Bargain Prices. Mergers may be

explained by opportunity to acquire assets, particularly land mineral

rights, plant and equipment, at lower cost than would be incurred if they

were purchased or constructed at the current market prices. If the market

price of many stocks have been considerably below the replacement cost

of the assets they represent, expanding firm considering construction

plants, developing mines or buying equipments often have found that the

desired assets could be obtained where by heaper by acquiring a firm that

already owned and operated that asset. Risk could be reduced because

the assets were already in place and an organization of people knew how

to operate them and market their products.

1.15 Increased Managerial Skills or Technology. Occasionally a

firm will have good potential that is finds it unable to develop fully

because of deficiencies in certain areas of management or an absence of

needed product or production technology. If the firm cannot hire the

management or the technology it needs, it might combine with a

compatible firm that has needed managerial, personnel or technical

expertise. Of course, any merger, regardless of specific motive for it,

should contribute to the maximization of owner’s wealth.

1.16 Acquiring new technology. To stay competitive,

companies need to stay on top of technological developments and their

business applications. By buying a smaller company with unique

technologies, a large company can maintain or develop a competitive


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2.1 In the 1950s and 1960s there were instances of private sector

banks, which had to be rescued or closed down because they had very

low capital and were mostly operating with other people’s money. In

1961, the Banking Companies (Amendment) Act empowered RBI to

formulate and carry out a scheme for the reconstitution and compulsory

amalgamation of sub-standard banks with well-managed ones.

2.2 In India, mergers have been used to bail out weak banks till the

Narasimham Committee-II discouraged this practice. With economic

reforms and opening up of the economy, like other sectors, banking sector

also saw a lot of changes. Two major changes are worth mentioning. They


Increased competition

Falling interest rates.

2.3 There has been a decline in the interest rates in the last decade

world wide. As a result of this profitability of the banks has been under

tremendous pressure. The interest rates both on the deposits and on the

loans have come down drastically. The ‘spread’ which was available to the

banks thinned down and banks have started searching for cost reduction

and market enhancing strategies. Use of technology in their operations

has come up as an immediate strategy and banks have started using

technology in a big way. This has resulted in saving of salary expenses,

which used to be a major part of the banks’ expenditure. In addition to

this, banks have started looking for strategies which allow the banks to

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grow faster. One of the options before the banks was to merge their

counterparts in it and become not only big but also gain entry into the

new markets.


2.4 As a result of these mergers, banks are able to use their full

capacities and avoid unnecessary duplication of efforts. Some of the

reasons of Banking merger are:-

Growth with External Efforts: With the economic liberalization

the competition in the banking sector has increased and hence

there is a need for mega banks, which will be intensely competing

for market share. In order to increase their market share and the

market presence some of the powerful banks have started looking

for banks which could be merged into the acquiring bank. They

realized that they need to grow fast to capture the opportunities in

the market. Since the internal growth is a time taking process, they

started looking for target banks.

Deregulation: With the liberalisation of entry barriers, many

private banks came into existence. As a result of this there has been

intense competition and banks have started looking for target banks

which have market presence and branch network.

Technology: The new banks which entered as a result of lifting of

entry barriers have started many value added services with the help

of their technological superiority. The older banks which can not

compete in this area may decide to go for mergers with these high-

tech banks.

New Products/Services: New generation private sector banks

which have developed innovative products/services with the help of

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their technology may attract some old generation banks for merger

due to their incapacity to face these challenges.

Over Capacity: The new generation private sector banks have

began their operation with huge capacities. With the presence of

many players in the market, these banks may not be able to capture

the expected market share on its own. Therefore, in order to fully

utilise their capacities these banks may look for target banks which

may not have modern day facilities.

Customer Base: In order to utilise the capacity of the new

generation private sector banks, they need huge customer base.

Creating huge customer base takes time. Therefore, these banks

have started looking for target banks with good customer bases.

Once there is a good customer base, the banks can sell other

banking products like car loans, Housing loans, consumer loans,

etc., to these customers as well.

Merger of Weak Banks: There has been a practice of merging

weak banks with a healthy bank in order to save the interest of

customers of the weak Bank. Narasimham Committee–II

discouraged this practice. Khan Group suggested that weak

Developmental Financial Institutions (DFIs) may be allowed to

merge with the healthy banks.


2.5 Let us now see how the Takeover Code evolved over a period of

time in India:

1990. The Government amends clause 40 of the listing

agreement according to which, threshold acquisition level reduced

from 25% to 10% ; change in management control to trigger public

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offer’; minimum mandatory public offer of 20% disclosure

requirement through mandatory public announcement.

November 1994. SEBI notifies Substantial Acquisition of

Shares and Takeover, 1994. New provisions introduced to enable

both negotiated and open market acquisitions and competitive bids


November 1995. SEBI sets up committee under former Chief

Justice of India P.N. Bhagwati to review the 1994 takeover

Regulations in order to frame comprehensive regulations.

January 1997. The Bhagwati Committee submits its report on

the takeover code to SEBI.

February 1997. SEBI accepts Bhagwati committee report and the

Substantial Acquisition of Shares and Takeovers Regulations, 1997,


February 1998. SEBI proposes to revise the takeover code make it

mandatory for acquirers to make a minimum open offer for 20%

(and not 10% as earlier) of the target company’s equity, even if the

holding goes beyond 51% as a result of the offer.

June 1998.SEBI asks justice Bhagwati to conduct a complete review

of the takeover code. Issues likely to be taken up are, the extent of

disclosure in an open offer and if any change in the objective of the

offer needs to be spelt out in the revised offer.

June 1998.SEBI proposes to raise the creeping acquisition limit

under its Takeover Code from 2% to 5%. It also proposes to increase

the share acquisition limit for triggering the takeover code from 10%

to 15%.’

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November 1998. Takeover panel amends the takeover code

to incorporate buyback offers by companies. The committee decides

to allow takeover offers to be made when a buyback offer is open

and vice versa.

December 1998. Justice P.N. Bhagwati criticizes SEBI for

unilaterally increasing the trigger limit for making a public offer from

10% to 15%. The Bhagwati Committee also recommends that once

an acquirer acquires 75% of shares or voting rights in a company,

he should be outside the purview of the Takeover Regulations.

January 2000. SEBI again proposes that all open offers made by

promoters for consolidating their holding in a company will have to

be for a minimum of 20% of equity. Exemption to the minimum 20%

requirement should be given only in the case of such companies in

which promoters hold over 75%.

February 2000. SEBI finalizes the recommendations of takeover

panel and review the takeover norms. However, the crucial decision

on issue relating to ‘change in management control of professionally

managed companies’ left unresolved.

June 2000.SEBI plans to bring public financial institutions under the

ambit of its takeover code, both as acquirers and as pledgees.

October 2000. Confederation of Indian Industry, FICCI and

ASSOCHAM seek amendments in the takeover code, especially in

the case of creeping acquisitions, to provide the promoters a level-

playing field against corporate raiders who may disrupt existing

managements. Under the current takeover code, corporate raiders

can pick up 15% of the paid-up equity of the target company over a

12 month period without triggering off the takeover code.

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November 2000. SEBI takeover panel decides to make it

mandatory for an ‘acquirer’ to disclose his holdings in the target

company to the company as well to the exchanges, at three levels;

5 %, 10% and 14%, instead of the existing stipulation of only 5%.

December 2000. SEBI promises a new draft on the takeover

code in place by the end of March 2001 with ‘investor protection’ as

its pivot. The main objective of the new code would be to ensure

that acquiring companies are prompt in informing the stock

exchanges when they cross the prescribed limits of holding a

company’s stake, make public announcements and allow companies

to make counter offers.


2.6 Sec. 44A of the Banking Regulation Act,1949, deals with the

procedure for amalgamation of banking companies. This procedure is

discussed hereunder:

No banking company shall be amalgamated with another banking

company, unless the shareholders of both the banking companies

approve merger scheme in a meeting called for the purpose by a

majority in number representing two-thirds in value of the

shareholders of each of the said company.

The approved scheme of amalgamation shall be sent to RBI for its


Any shareholder who has voted against the scheme of merger or

has given notice in writing at or prior to the meeting shall be

entitled to claim from banking company the value of the shares held

by him as determined by the RBI while approving the scheme.

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Once the scheme of amalgamation is sanctioned by the RBI, the

property and the liabilities of the amalgamated company shall

become the property and the liabilities of the acquiring company.

After sanctioning the scheme of amalgamation by the RBI, the RBI

may further order the closure of acquired bank and the acquired

bank stands dissolved from such a data as may be specified.

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3.1 Bank of Madura (BOM) was a profitable, well-capitalized, Indian

private sector commercial bank operating for over 57 years. The bank had

an extensive network of 263 branches, with a significant presence in the

southern states of India. The bank had total assets of Rs. 39.88 billion and

deposits of Rs.33.95 billion as on September 30,2000. The bank had a

capital adequacy ratio of 15.8% as on March 31,2000.

3.2 The Bank’s equity shares were listed on the Stock Exchanges at

Mumbai and Chennai and National Stock Exchange of India before its

merger. ICICI Bank then was one of the leading private sector banks in the

country. ICICI Bank had total assets of Rs. 120.63 billion and deposits of

Rs. 97.28 billion as on September 30, 2000. The bank’s capital adequacy

ratio stood at 17.59% as on September 30, 2000. ICICI Bank was India’s

largest ATM provider with 546 ATMs as on June 30, 2001. The equity

shares of the bank were listed on the Stock Exchanges at Mumbai,

Calcutta, Delhi, Chennai, Vadodara and National Stock Exchange of India.

ICICI Bank’s American Depository Shares were listed on the New York

Stock Exchange.


3.3 In February 2000, ICICI Bank was one of the first few Indian banks to

raise its capital through American Depository Shares in the international

market, and received an overwhelming response for its issue of $ 175

million, with a total order of USD 2.2 billion. At the time of filling the

prospectus, with the US Securities and Exchange Commission, the Bank

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had mentioned that the proceeds of the issue would be used to acquire a


3.4 As on March 31, 2000, bank had a network of 81 branches, 16

extension counters and 175 ATMs. The capital adequacy ratio was at

19.64% of risk-weighted assets, a significant excess of 9 % over RBI


3.5 ICICI Bank was scouting for private banks for merger, with a view to

expand its assets and client base and geographical coverage. Though it

had 21% of stake, the choice of Federal bank, was not lucrative due to

employee size (6600), per employee business was as low as Rs. 161 lakh

and a snail pace of technical upgradation. While, BOM had an attractive

business per employee figure of Rs. 202 lakh, a better technological edge

and a vast base in southern India as compared to Federal Bank. While all

these factors sound good, a cultural integration was a tough task ahead

for ICICI Bank.


3.6 ICICI Bank had then announced a merger with the 57 year old BOM,

with 263 branches, out of which 82 of them were in rural areas, with most

of them in southern India. As on the day of announcement of merger (09-

12-2000), Kotak Mahindra group was holding about 12% stake in BOM, the

Chairman BOM, Mr. K.M. Thaigarajan, along with his associates was

holding about 26% stake, Spic group had about 4.7%, while LIC and UTI

were having marginal holding. The merger was supposed to enhance ICICI

Bank’s hold on the south Indian market. The swap ratio was approved in

the ratio of 1:2- two shares of ICICI Bank for normal every one share of

BOM. The deal with BOM was likely to dilute the current equity capital by

around 2%. And the merger was expected to bring 20% gains in EPS of

ICICI Bank and a decline in the bank’s comfortable Capital Adequacy Ratio

from 19.64% 17.6%.

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3.7 Financials of ICICI Bank and Bank of Madura. The financial

parameters of ICICI Bank and Bank of Madura is tabulated below:-

Parameters ICICI Bank ICICI Bank Bank of Madura

Bank of Madura

(Rs. In Crores) 1999-2000 1998-1999 1999-2000 1998-1999

Net worth 1129.90 308.33 247.83 211.32

Total deposits 9866.02 6072.94 3631.00 3013.00

Advances 5030.96 3377.60 1665.42 1393.92

Net Profit 105.43 63.75 45.58 30.13

Share capital 196.81 165.07 11.08 11.08

Capital adequacy ratio 19.64% 11.06% 14.25% 15.83%

Gross less NPAs/gross adv 2.54% 4.72% 11.09% 8.13%

Net NPAs/net advances 1.53% 2.88% 6.23% 4.66%

3.8 The scheme of amalgamation was expected to increase the equity

base of ICICI Bank to Rs. 220.36 crore. ICICI Bank was to issue 235.4 lakh

shares of Rs. 10 each to the shareholders of BOM. The merged entity will

have an increase of asset base over Rs. 160 billion and a deposit base of

Rs. 131 billion. The merged entity will have 360 branches across the

country and also enable ICICI Bank to serve a large customer base of 1.2

million customers of BOM through a wider network, adding to the

customer base to 2.7 million.

3.9 On the Day of Merger Announcement. The financial

standing of both the banks drew a great degree of attention nationwide on

the day of merger announcement. There were number of issues on the

financial concerns for both the banks. The details financial standing of

both the banks on the day of announcement of merger is tabulated


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Name of the Bank

Book value of Bank on the day of merger announcement

Market price on the day of announcement of merger

Earnings per share

Dividend paid (in %)

P/E ratio

Profit per employee 

(in lakh) 1999-2000

Bank of Madura

183.0 131.60 38.7 55% 3% 1.73


58.0 169.90 5.4 15% - 7.83

3.10 Key Ratios. The key ratios between the two banks are

tabulated below:-

Particulars ICICI Bank Bank of Madura

CAR 17.6% 15.8%

NPAs as a % of net advances 1.5% 4.8%

ROA 0.9% 1.1%

Interest spread as a % of total assets 1.5% 2.3%

3.11 Comparative Valuations. The comparative valuation of both the

banks are tabulated below:-


3.12 The Board of Directors at ICICI Bank had contemplated the following

synergies emerging from the merger:

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Particulars ICICI Bank Bank of Madura

Market Price (Rs) 170 132

PER (x) 22.7 3.0

Dividend yield 0.9% 4.2%

Price/Book value (x) 2.7 0.6

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Financial Capability: The amalgamation will enable them to have

a stronger financial and operational structure, which is supposed to

be capable of grater resource/deposit mobilization. In addition to

this, ICICI will emerge as one of the largest private sector banks in

the country.

Branch Network: The ICICI’s branch network would not only

increase by 263. But also increase its geographic coverage as well

as convenience to its customers.

Customer Base: The emerged largest customer base will enable

the ICICI Bank to offer other banking and financial services and

products to the erstwhile customers of BOM and also facilitate cross

selling of products and services of the ICICI group to their


Tech Edge: The merger will enable ICICI Bank to provide ATM,

phone and the Internet banking and such other technology based

financial services and products to a large customer base, with

expected savings in costs and operating expenses.

Focus on Priority Sector: The enhanced branch network will

enable the bank to focus on micro finance activities through self-

help groups, in its priority sector initiatives through its acquired 87

rural and 88 semi-urban branches.

Managing Rural Branches: Most of the branches of ICICI were in

metros and major cities, whereas BOM had its branches mostly in

semi urban and city segments of south India. The task ahead lying

for the merged entity was to increase dramatically the business mix

of rural branches of BOM. On the other hand, due to geographic

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location of its branches and level of competition, ICICI Bank will

have a tough time to cope with.

Managing Software: Another task, which stands on the way, is

technology. While ICICI Bank, which is a fully automated entity was

using the package, banks 2000, BOM has computerized 90% of its

businesses and was conversant with ISBS software. The BOM

branches were supposed to switch over to banks 2000. Thought it is

not a difficult task, 80% computer literate staff would need effective

retraining which involves a cost. The ICICI Bank needs to invest

Rs.50 crores, for upgrading BOM’s 263 branches.

Managing Human Resources: One of the greatest challenges

before ICICI Bank was managing the human resources. When the

head count of ICICI Bank is taken, it was less than 1500 employees;

on the other hand, BOM had over 2,500. The merged entity will have

about 4000 employees which will make it one of the largest banks

among the new generation private sector banks. The staff of ICICI

Bank was drawn from 75 various banks, mostly young qualified

professionals with computer background and prefer to work in

metros or big cities with good remuneration packages.

Managing Client Base: The client base of ICICI Bank, after merger, will be as big as 2.7 million from its past 0.5 million, an accumulation of 2.2 million from BOM. The nature and quality of clients is not uniform. The BOM has built up its client base over a long time, in a hard way, on the basis of personalized services. In order to deal with the BOM’s clientele, the ICICI Bank needs to redefine its strategies to suit to the new clientele. If the sentiments or a relationship of small and medium borrowers 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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3.13 Since BoM had comparatively more NPAs than IBL, the Capital Adequacy Ratio of the merged entity was lower (from 19% to about 17%). The two banks also had a cultural misfit with BoM having a trade-union system and IBL workers being young and upwardly mobile, unlike those for BoM. There were technological issues as well as IBL used Banks 2000 software, which was very different from BoM's ISBS software. With the manual interpretations and procedures and the lack of awareness of the technology utilisation in BoM, there were hindrances in the merged entity.

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4.1 In 2010, further opening up of the Indian banking sector is forecast to occur due to the changing regulatory environment (proposal for upto 74% 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.

4.2 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.

4.3 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: 2-3 large 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. 11

4.4 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 that could take shape latest by 2009 end with minimisation 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 outsourcing, strategic alliances, etc. can be considered. Banks need to take advantage of this fast changing environment, where product life cycles are short, time to market is critical and first mover advantage could be a decisive factor in

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deciding who wins in future. Post-M&A, the resulting larger size should not affect agility. The aim should be to create a nimble giant, rather than a clumsy dinosaur. At the same time, lack of size should not be taken to imply irrelevance as specialised players can still seek to provide niche and boutique services.

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