mergers & acquisitions

Mergers And Acquisitions

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INTRODUCTION

We have been learning about the companies coming together tofrom another company and companies taking over the existingcompanies to expand their business.

With recession taking toll of many Indian businesses and the feelingof insecurity surging over our businessmen, it is not surprising when wehear about the immense numbers of corporate restructurings takingplace, especially in the last couple of years. Several companies have beentaken over and several have undergone internal restructuring, whereascertain companies in the same field of business have found it beneficialto merge together into one company.

In this context, it would be essential for us to understand whatcorporate 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 corporaterestructuring. Thus important issues both for business decision andpublic policy formulation have been raised. No firm is regarded safe froma takeover possibility. On the more positive side Mergers & Acquisition’smay be critical for the healthy expansion and growth of the firm.Successful entry into new product and geographical markets may require


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Mergers & Acquisition’s at some stage in the firm's development.Successful competition in international markets may depend oncapabilities obtained in a timely and efficient fashion through Mergers &Acquisition's. Many have argued that mergers increase value andefficiency and move resources to their highest and best uses, therebyincreasing shareholder value. .

To opt for a merger or not is a complex affair, especially in terms ofthe technicalities involved. We have discussed almost all factors that themanagement may have to look intoBefore going for merger. Considerable amount of brainstorming would berequired by the managements to reach a conclusion. E.g. A due diligencereport would clearly identify the status of the company in respect of thefinancial position along with the net worth and pending legal matters anddetails about various contingent liabilities. Decision has to be taken afterhaving discussed the pros & cons of the proposed merger & the impact ofthe same on the business, administrative costs benefits, addition toshareholders' value, tax implications including stamp duty and last butnot the least also on the employees of the Transferor or TransfereeCompany.

WHAT IS MERGER


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Merger is defined as combination of two or more companies into asingle company where one survives and the others lose their corporateexistence. The survivor acquires all the assets as well as liabilities of themerged company or companies. Generally, the surviving company is thebuyer, which retains its identity, and the extinguished company is theseller.

Merger is also defined as amalgamation. Merger is the fusion of twoor more existing companies. All assets, liabilities and the stock of onecompany stand transferred to Transferee Company in consideration ofpayment in the form of:

Equity shares in the transferee company,

Debentures in the transferee company,

Cash, or

A mix of the above modes.

WHAT IS ACQUISITIONAcquisition in general sense is acquiring the ownership in the

property. In the context of business combinations, an acquisition is thepurchase by one company of a controlling interest in the share capital ofanother existing company.

Methods of Acquisition:An acquisition may be affected by


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a) Agreement with the persons holding majority interest in thecompany management like members of the board or majorshareholders 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 ofconsiderations viz. Means of cash, issuance of loan capital, orinsurance of share capital.

Takeover:

A ‘takeover’ is acquisition and both the terms are usedinterchangeably.

Takeover differs from merger in approach to business combinationsi.e. The process of takeover, transaction involved in takeover,determination of share exchange or cash price and the fulfillment ofgoals of combination all are different in takeovers than in mergers. Forexample, process of takeover is unilateral and the offeror companydecides about the maximum price. Time taken in completion oftransaction is less in takeover than in mergers, top management of theofferee company being more co-operative.

De-merger or corporate splits or division:


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

Purpose of Mergers & Acquisitions

The purpose for an offeror company for acquiring another companyshall be reflected in the corporate objectives. It has to decide the specificobjectives to be achieved through acquisition. The basic purpose ofmerger or business combination is to achieve faster growth of thecorporate business. Faster growth may be had through productimprovement and competitive position.

Other possible purposes for acquisition are short listed below: -


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(1) Procurement of supplies:

1. To safeguard the source of supplies of raw materials or intermediaryproduct;

2. To obtain economies of purchase in the form of discount, savings intransportation costs, overhead costs in buying department, etc.;

3. To share the benefits of suppliers economies by standardizing thematerials.

(2) Revamping production facilities:

1. To achieve economies of scale by amalgamating production facilitiesthrough more intensive utilization of plant and resources;

2. To standardize product specifications, improvement of quality ofproduct, expanding

3. Market and aiming at consumers satisfaction through strengtheningafter saleServices;

4. To obtain improved production technology and know-how from theoffered company

5. To reduce cost, improve quality and produce competitive productsto retain and

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 existingproducts and to enhance the product range;

4. Strengthening retain outlets and sale the goods to rationalizedistribution;

5. To reduce advertising cost and improve public image of the offereecompany;

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 combinedenterprise;

3. To enhance gearing capacity, borrow on better strength and thegreater assets backing;

4. To avail tax benefits;5. To improve EPS (Earning Per Share).

(5) General gains:


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1. To improve its own image and attract superior managerial talents tomanage 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 offeror company’s owndevelopmental plans.

A company thinks in terms of acquiring the other company onlywhen it has arrived at its own development plan to expand its operationhaving examined its own internal strength where it might not have anyproblem of taxation, accounting, valuation, etc. But might feel resourceconstraints with limitations of funds and lack of skill managerialpersonnel’s. It has to aim at suitable combination where it could haveopportunities to supplement its funds by issuance of securities, secureadditional financial facilities, eliminate competition and strengthen itsmarket position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategicobjectives through alternative type of combinations which may behorizontal, vertical, product expansion, market extensional or otherspecified unrelated objectives depending upon the corporate strategies.


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Thus, various types of combinations distinct with each other in nature areadopted to pursue this objective like vertical or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibitdegrees of cooperative spirit despite competitiveness in providingrescues to each other from hostile takeovers and cultivate situations ofcollaborations sharing goodwill of each other to achieve performanceheights through business combinations. The combining corporate aim atcircular combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level ofintegration between the two combining business houses. Such integrationcould be operational or financial. This gives birth to conglomeratecombinations. The purpose and the requirements of the offeror companygo a long way in selecting a suitable partner for merger or acquisition inbusiness combinations.


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Types of MergersMerger or acquisition depends upon the purpose of the offeror

company it wants to achieve. Based on the offerors’ objectives profile,combinations could be vertical, horizontal, circular and conglomeratic asprecisely described below with reference to the purpose in view of theofferor company.

(A) Vertical combination:

A company would like to takeover another company or seek itsmerger with that company to expand espousing backward integration toassimilate the resources of supply and forward integration towardsmarket outlets. The acquiring company through merger of another unitattempts on reduction of inventories of raw material and finished goods,implements its production plans as per the objectives and economizes onworking capital investments. In other words, in vertical combinations, themerging undertaking would be either a supplier or a buyer using itsproduct as intermediary material for final production.

The following main benefits accrue from the vertical combination tothe acquirer company i.e.


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1. It gains a strong position because of imperfect market of theintermediary products, scarcity of resources and purchasedproducts;

2. Has control over products specifications.

(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage ofindustrial process. The acquiring firm belongs to the same industry as thetarget company. The mail purpose of such mergers is to obtaineconomies of scale in production by eliminating duplication of facilitiesand the operations and broadening the product line, reduction ininvestment in working capital, elimination in competition concentration inproduct, reduction in advertising costs, increase in market segments andexercise better control on market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to sharecommon distribution and research facilities to obtain economies byelimination of cost on duplication and promoting market enlargement.The acquiring company obtains benefits in the form of economies ofresource sharing and diversification.


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(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelatedindustries like DCM and Modi Industries. The basic purpose of suchamalgamations remains utilization of financial resources and enlargesdebt capacity through re-organizing their financial structure so as toservice the shareholders by increased leveraging and EPS, loweringaverage cost of capital and thereby raising present worth of theoutstanding shares. Merger enhances the overall stability of the acquirercompany and creates balance in the company’s total portfolio of diverseproducts and production processes.


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[4]Advantages of Mergers

Mergers and takeovers are permanent form of combinations whichvest in management complete control and provide centralizedadministration which are not available in combinations of holdingcompany and its partly owned subsidiary. Shareholders in the sellingcompany gain from the merger and takeovers as the premium offered toinduce acceptance of the merger or takeover offers much more price thanthe book value of shares. Shareholders in the buying company gain in thelong run with the growth of the company not only due to synergy but alsodue to “boots trapping earnings”.

Mergers and acquisitions are caused with the support ofshareholders, manager’s ad promoters of the combing companies. Thefactors, which motivate the shareholders and managers to lend support


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to these combinations and the resultant consequences they have to bear,are briefly noted below based on the research work by various scholarsglobally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companiessubject to merger should enhance in value. The sale of shares from onecompany’s shareholders to another and holding investment in sharesshould give rise to greater values i.e. The opportunity gains in alternativeinvestments. Shareholders may gain from merger in different ways viz.From the gains and achievements of the company i.e. Through

(a) Realization of monopoly profits;(b) Economies of scales;(c) Diversification of product line;(d) Acquisition of human assets and other resources not availableotherwise;(e) Better investment opportunity in combinations.

One or more features would generally be available in eachmerger where shareholders may have attraction and favour merger.

(2) From the standpoint of managers


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Managers are concerned with improving operations of the company,managing the affairs of the company effectively for all round gains andgrowth of the company which will provide them better deals in raisingtheir status, perks and fringe benefits. Mergers where all these things arethe guaranteed outcome get support from the managers. At the sametime, where managers have fear of displacement at the hands of newmanagement in amalgamated company and also resultant depreciationfrom the merger then support from them becomes difficult.

(3) Promoter’s gains

Mergers do offer to company promoters the advantage of increasingthe size of their company and the financial structure and strength. Theycan convert a closely held and private limited company into a publiccompany without contributing much wealth and without losing control.

(4) Benefits to general public

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


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(a) Consumers

The economic gains realized from mergers are passed on toconsumers in the form of lower prices and better quality of the productwhich directly raise their standard of living and quality of life. The balanceof benefits in favour of consumers will depend upon the fact whether ornot the mergers increase or decrease competitive economic andproductive activity which directly affects the degree of welfare of theconsumers through changes in price level, quality of products, after salesservice, etc.

(b) Workers community

The merger or acquisition of a company by a conglomerate or otheracquiring company may have the effect on both the sides of increasingthe welfare in the form of purchasing power and other miseries of life.Two sides of the impact as discussed by the researchers andacademicians are: firstly, mergers with cash payment to shareholdersprovide opportunities for them to invest this money in other companieswhich will generate further employment and growth to uplift of theeconomy in general. Secondly, any restrictions placed on such mergerswill decrease the growth and investment activity with correspondingdecrease in employment. Both workers and communities will suffer onlessening job


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Opportunities, preventing the distribution of benefits resulting fromdiversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic power is to beunderstood as the ability to control prices and industries output as monopolists. Suchmonopolists affect social and political environment to tilt everything in their favour to

maintain their power ad expand their business empire. These advances result intoeconomic exploitation. But in a free economy a monopolist does not stay for a longerperiod as other companies enter into the field to reap the benefits of higher prices set

in by the monopolist. This enforces competition in the market as consumers are freeto substitute the alternative products. Therefore, it is difficult to generalize that

mergers affect the welfare of general public adversely or favorably. Every merger oftwo or more companies has to be viewed from different angles in the businesspractices which protects the interest of the shareholders in the merging company and

also serves the national purpose to add to the welfare of the employees, consumersand does not create hindrance in administration of the Government polices.

Chapter 12: Change in scenario of Banking Sector


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

2. The merger of the city bank with Travelers Group and the merger ofBank of America with Nation Bank have triggered the mergers andacquisition market in the banking sector world wide.

3. Europe and Japan are also on their way to restructure their financialsector thought merger and acquisitions. Merger will help banks withadded money power, extended geographical reach with diversifiedbranch Network, improved product mix, and economies of scale ofoperations. Merger will also help banks to reduced them borrowingcost and to spread total risk associated with the individual banks overthe combined entity. Revenues of the combine entity are likely to shootup due to more effective allocation of bank funds. ICICI Bank hasinitiated merger talks with Centurian Bank but due to difference arisingover swap ration the merger didn’t materialized. Now UTI Bank isegeing Centurian Bank. The proposed merger of UTI Bank andCenturian Bank will make them third largest private banks in terms ofsize and market Capitalization State Bank of India has also planned tomerge seven of its associates or part of its long-term policies toregroup and consolidate its position. Some of the Indian FinancialSector players are already on their way for mergers to strengthen theirexisting base.


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4. In India mergers especially of the PSBS may be subject to technologyand trade union related problem. The strong trade union may prove tobe big obstacle for the PSBS mergers. Technology of the mergingbanks to should complement each other NPA management.Management of efficiency, cost reduction, tough competition from themarket players and strengthing of the capital base of the banks aresome of the problem which can be faced by the merge entities.Mergers for private sector banks will be much smoother and easier asagain that of PSBS.


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THE BANKING SCENARIO HAS BEEN CHANGING AT FAST PLACE.

Bank traditionally just borrower and lenders, has started providingcomplete corporate and retail financial services to its customers

1. Technology drive has benefited the customers in terms of fasterimprove convenient banking services and Varity of financial productsto suit their requirement. Atms, Phone Banking, Net banking, Any timeand Any where banking are the services which bank have startedoffering following the changing trend in sectors. In plastic moneysegment customer have also got a new option of debits cards againstthe earlier popular credit card. Earlier customers had to conduct theirbanking 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 totransact as per their convince customer can now without money at anytime and from any branch across country as certain their accounttransaction, order statements of their account and give instructionusing the tally banking or on online banking services.

3. Bank traditionally involve working capital financing have startedoffering consumer loans and housing loans. Some of the banks have


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started offering travel loans, as well as many banks have startedcapitalizing on recent capital market boom by providing IPO finance tothe investors.

Chapter 5: Procedure of Mergers & Acquisitions

Public announcement:

To make a public announcement an acquirer shall follow the followingprocedure:

1. Appointment of merchant banker:

The acquirer shall appoint a merchant banker registered as category – Iwith SEBI to advise him on the acquisition and to make a publicannouncement of offer on his behalf.

2. Use of media for announcement:


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Public announcement shall be made at least in one national Englishdaily one Hindi daily and one regional language daily newspaper of thatplace where the shares of that company are listed and traded.

3. Timings of announcement:

Public announcement should be made within four days offinalization of negotiations or entering into any agreement ormemorandum 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.

Procedure of Bank Merger

The procedure for merger either voluntary or otherwise is outlinedin the respective state statutes/ the Banking regulation Act. TheRegistrars, being the authorities vested with the responsibility of


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administering the Acts, will be ensuring that the due process prescribedin the Statutes has been complied with before they seek the approval ofthe RBI. They would also be ensuring compliance with the statutoryprocedures for notifying the amalgamation after obtaining the sanction ofthe RBI.

Before deciding on the merger, the authorized officials of theacquiring bank and the merging bank sit together and discuss theprocedural modalities and financial terms. After the conclusion of thediscussions, a scheme is prepared incorporating therein the all the detailsof both the banks and the area terms and conditions.

Once the scheme is finalized, it is tabled in the meeting of Board ofdirectors of respective banks. The board discusses the scheme threadbare and accords its approval if the proposal is found to be financiallyviable and beneficial in long run.

After the Board approval of the merger proposal, an extra ordinarygeneral meeting of the shareholders of the respective banks is convenedto discuss the proposal and seek their approval.

After the board approval of the merger proposal, a registered valueris appointed to valuate both the banks. The valuer valuates the banks on


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the basis of its share capital,market capital, assets and liabilities, itsreach and anticipated growth and sends its report to the respective banks.

Once the valuation is accepted by the respective banks , they sendthe proposal along with all relevant documents such as Board approval,shareholders approval, valuation report etc to Reserve Bank of India andother regulatory bodies such Security & exchange board of India SEBIfor their approval.

After obtaining approvals from all the concerned institutions,authorized officials of both the banks sit together and discuss andfinalize share allocation proportion by the acquiring bank to theshareholders of the merging bank SWAP ratio

After completion of the above procedures , a merger and acquisitionagreement is signed by the bank

Chapter 9: RBI Guidelines on Mergers & Acquisitions ofBanks

With a view to facilitating consolidation and emergence of strong


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

Although the Banking Regulation Act, 1949 (AACS) does notempower Reserve Bank to formulate a scheme with regard to merger andamalgamation of banks, the State Governments have incorporated in theirrespective Acts a provision for obtaining prior sanction in writing, of RBIfor an order, inter alia, for sanctioning a scheme of amalgamation orreconstruction.

The request for merger can emanate from banks registered underthe same State Act or from banks registered under the Multi StateCo-operative Societies Act (Central Act) for takeover of a bank/sregistered under State Act. While the State Acts specifically provide formerger of co-operative societies registered under them, the position withregard to take over of a co-operative bank registered under the State Actby a co-operative bank registered under the CENTRAL

Although there are no specific provisions in the State Acts or theCentral Act for the merger of a co-operative society under the State Actswith that under the Central Act, it is felt that, if all concerned includingadministrators of the concerned Acts are agreeable to order merger/amalgamation, RBI may consider proposals on merits leaving the question


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of compliance with relevant statutes to the administrators of the Acts. Inother words, Reserve Bank will confine its examination only to financialaspects and to the interests of depositors as well as the stability of thefinancial system while considering such proposals.

Chapter 10: Amalgamation of Urban Banks


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Chapter 11: Information & Documents to be furnished by BY THEACQUIRER OF BANKS

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

2. Copies of the reports of the valuers appointed for the determination ofrealizable value of assets (net of amount payable to creditors havingprecedence over depositors) of the acquired bank.

3. Information which is considered relevant for the consideration of thescheme of merger including in particular:-

A. Annual reports of each of the Banks for each of the threecompleted financial years immediately preceding the proposed date formerger.

B. Financial results, if any, published by each of the Banks for anyperiod subsequent to the financial statements prepared for the

financial year immediately preceding the proposed date of merger.


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C. Pro-forma combined balance sheet of the acquiring bank as itwill appear consequent on the merger.

D. Computation based on such pro-forma balance sheet of thefollowing:-

I. Tier I Capital

Ii. Tier II Capital

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


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understand the net realizable value of assets of the acquired bankincluding in particular:-

A. The method of valuation used by the values

B. The information and documents on which the values have reliedand 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 namesand designations of the persons who have provided such

information and the extent of verification, if any, made by the valuesin relation to such information

D. Details of the projected information on which the values haverelied

E. Detailed computation of the realizable value of assets of theacquired bank.

5. Such other information and explanations as the Reserve Bank may


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require.

Chapter 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-Mar2005), a network of over 550 branches and offices, and about 1900 atms. ICICI Bankoffers a wide range of banking products and financial services to corporate and retailcustomers through a variety of delivery channels and through its specialized

subsidiaries and affiliates in the areas of investment banking, life and non-lifeinsurance, 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 arelisted on the New York Stock Exchange (NYSE). During the year 2005 ICICI bank


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was involved as a defendant in cases of alleged criminal practices in its debt collectionoperations and alleged fraudulent tactics to sell its products.

The industrial Credit and Investment Corporation of India Limited nowknown as ICICI Ltd. Was founded b the World bank, the Government ofIndia and representatives of private industry on January 5, 1955. Theobjective was to encourage and assist industrial development andinvestment in India. Over the years, ICICI has evolved into a diversifiedfinancial institution. ICICI’s principal business activities include:

Project Finance

Infrastructure Finance

Corporate Finance

Securitization

Leasing

Deferred Credit

Consultancy services

Custodial services

The ICICI Groups draws its strength from the core competenciesof its individual companies. Today, top Indian Corporate look towers ICICIas a business partner for providing solutions to their varied financialrequirements. The Group also offers a gamut of personal financesolutions to individuals. To lead the financial services into the new


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millennium, the Group is now truly positioned as a Virtual Universal Bank.The liberalization of the Indian economy in the 1990s offered ICICI anopportunity to provide a wide range of financial services. For regulatoryand strategic reasons, ICICI set up specialized subsidiaries in the areas ofcommercial banking, investment banking, non- banking finance, investorservicing brooking, venture capital financing and state level infrastructurefinancing.

ICICI plans to focus on its retail finance business and expect thesame to contribute upto 15-20 % of its turnover in the next five years. Itis 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 firsttime come up with an advertisement that addresses its products at theindividual. This is to drive home the point that the bank has product andservices catering to all individuals. For this purpose the network of ICICIBank shall come into use. The parent plants to sell its products and alsoraise retail funds through the banking subsidiary.

THE ICICI GROUP COMPRISES OF:

ICICI Bank Limited,ICICI Securities and Finance Company Limited (ICICI Securities),

ICICI Credit Corporation Limited ( ICICI Credit),

ICICI Investors Services Limited (ICICI Services),

ICICI Venture Funds Management Limited (ICICI Venture),

ICICI international Limited,


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ICICI -KINFRA Limited (I-KIN),

Mr. K.V. Kamath, CEO of ICICI Limited, has recently voiced theintentions of ICICI Limited towards banking and ICICI Bank. ICICI Limitedis endeavoring to forge a closer relationship with ICICI bank. Mr. K VKamath recently quoted in a leading daily “Banking is dead. Universalbanking is in offering with a whole range of financial products andservices. 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 changingtimes of the banking industry. So it can be a lucrative target for otherplayer in the same line of operations. However, when merged with ICICILimited the attraction is reduced manifold considering the magnitude ofoperations of the ICICI limited.

Of course, one would still need a bank to open letters of credit, offerguarantees, handle documentation, and maintain current accountfacilities etc. So banks will not superfluous. But nobody needs so many ofthem any more.

Secondly, besides credit, a customer may also want from a bankefficient cash management, advisory services and market research on his


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product. Thus the importance of fee based is increasing in comparisonwith the fund-based income.

The pre--merger status of ICICI Bank is as follows: it had liabilities ofRs.12,073 crore, equity market capitalization of Rs.2,466 crore andequity volatility of 0.748. Working through options reasoning, we findthat this share price and volatility are consistent with assets worthRs.13,249 crore with volatility 0.15. Thus, ICICI bank had assets whichare 9.7% ahead of liabilities, which is roughly consistent with the spirit ofthe Basle Accord, and has leverage of 5.37 times.

History of ICICI Bank


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The World bank the Government of India and representatives of Indianindustry form ICICI Limited as a development finance institution toprovide medium-term and long-term project financing to Indianbusinesses in 1955.

1994 ICICI establishes ICICI Bank as a subsidiary.

1999 ICICI becomes the first Indian company and the first bank orfinancial institution from non-Japan Asia to list on the NYSE.

2001 ICICI acquired Bank of Madura (est. 1943). Bank of Madura wasa Chettiar bank, 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 themerger of ICICI, ICICI Personal Financial Services Limited and ICICICapital Services Limited, with ICICI Bank. After receiving allnecessary regulatory approvals, ICICI integrates the group'sfinancing and banking operations, both wholesale and retail, into asingle.


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INTRODUCTION OF BANK OF MADURA

The pre--merger status of Bank of Madura is as follows: it hadliabilities of Rs.4,444 crore, equity market capitalization of Rs.100 croreand equity volatility of 0.69. Working through options reasoning, we maysay that the stock market thinks that its assets are worth Rs.4, 095 crorewith a volatility of 0.02. Hence, bom is bankrupt (with assets which areRs.350 crore behind liabilities) and has a leverage of 41 times. If weneeded to bring bom up to a point where its assets were 10% ahead ofliabilities, which is broadly consistent with the Basle Accord, this wouldrequire an infusion of Rs.800 crore of equity capital.How do we combine these to think of the merged entity? Assets andliabilities are additive, so the total assets of the merged entity wouldprove to be roughly Rs.17,345 crore and the liabilities would prove to beRs.16,517 crore. The merged entity would hence need roughly Rs.800crore of fresh equity capital in order to come up to a point where assetswere atleast 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 themerged entity. Pricing the call requires an estimate of the volatility of themerged assets, i.e. It requires knowledge of the extent to which theassets of the two banks are uncorrelated. We find that using values of the


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correlation coefficient ranging from 80% to 95%, the volatility of assets ofthe merged entity proves to be around 0.12. In this case, the valuation ofthe call option, i.e. An estimate of the market capitalization of themerged entity, proves to be roughly Rs.2,500 crore.

This number is not far from the pre--merger market capitalisationof ICICI Bank, which was Rs.2,466 crore. Hence, we can say that on purelyfinancial arguments, the merger is roughly neutral to ICICI Bankshareholders if bom was merged into ICICI Bank for free. Indeed, ifbanking regulators took their jobs more seriously, they would force theshareholders of bom to walk into such a merger at a zero share price as away of reducing

The number of bankrupt banks in India by one. Such a forced-mergerwould be a politically easier alternative for the RBI when compared withclosing 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 willrapidly improve the value of assets of bom in order to compensate. Inaddition, the merged entity will have to rapidly raise roughly Rs.800 croreof equity capital to obtain a 10% buffer between assets and liabilities.

Hence, this proposed merger is a godsend for bom, which wasotherwise a bankrupt entity which was headed for closure given the low


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probability that it would manage to raise Rs.800 crore of equity on a baseof Rs.100 crore of market capitalisation. It is useful to observe that bomprobably did not see things in this way, given the willingness of India'sbanking regulators to interminably tolerate the existence of bankruptbanks. Closure of bom would normally involve pain for bom'sshareholders and workers; instead both groups will get an extremelypleasant ride if the merger goes through.

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

The proposed merger is a good thing for India's economy, since theheadcount of bankrupt banks will go down by one, and there is apossibility of obtaining higher value added out of the poorly utilizedassets and employees of bom. If the merger goes through, then it willreduce the say of the management team of bom in India's resourceallocation, which is a good thing.


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Chapter 13: 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 Bankwas roughly Rs.2500 crore while bom was at roughly Rs.100 crore. Bomis known to have a poor asset portfolio. What will the merged entity beworth?

The key rationale underlying every merger is the question of synergy.Can ICICI Bank's products and technology bring new life to the 263branches of bom? Will ICICI Bank (which has 1,700 employees) be able toovercome the 2,600 employees that bom carries, given that Indian labourlaw makes it troublesome and expensive to sack workers?


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In applying these ideas to ICICI Bank and to bom, we need to believethat the stock market effectively processes information to produceestimates of the price and volatility of the shares of both these banks.This assumption is suspect, because both securities have poor stockmarket liquidity. Hence, we should be cautious in interpreting thenumbers shown here. There are many other aspects in which thisreasoning leans on models, which are innately imperfect depictions ofreality. However, these models are powerful tools for understanding thebasic factors at work, and they probably convey the broad picture quiteeffectively.

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

Though the stock has gained sharply in the last two months afterhitting a recent low of Rs 110, some upside may be left as the bank couldget re-rated on account of the merger. Existing shareholders could holdtheir exposures in ICICI Bank while investors with an appetite for riskcould contemplate exposures despite the impressive gains of the past fewmonths. ICICI Bank continues to be one of the better options in thebanking sector at the moment and the possible merger with ICICI maywell be on the backburner.

The merger would pitchfork ICICI Bank as the leading private sectorbank. The merger may be viewed favorably since Bank of Madura has


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focused strengths and a reasonably good quality balance sheet. Theboard 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 thatholds out a good deal for the shareholders of Bank of Madura. This mayalso be influenced by the fact that the Bank of Madura stock has gainedsharply by around 70 per cent in the past fortnight in the homestretch tothe deal.

As the acquisition is to be financed by issuance of stock, the rise inthe market capitalization of Bank of Madura may mean a higher degree ofequity issuance by ICICI Bank. But the price may well be worth paying asthis is the only way that ICICI Bank may be able to get control over bankswith reasonable quality balance sheets that could make a difference in themedium to long-term.

Bank of Madura has assets of Rs 3,988 crore and deposits of Rs3,395 crore as of March 2000. The fact that the bank has a capitaladequacy of 15.8 per cent with shareholder funds of Rs 263 crore maymean that ICICI Bank (post-merger phase) will have more leeway topursue growth without expanding the equity base (other than paying forthe acquisition).Strong capital adequacy, a strong beachhead on the Internet arena, arevamped IT architecture, a growing retail client base through a


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brick-and-click strategy, and improving asset quality and earningsgrowth are positive features as far as ICICI Bank is concerned.

Despite these factors, the share had been on a downtrend from aftertouching a high of Rs 271, eight months ago. The uptrend then was onthe back of the announcement of its ADR issue and new technologyinitiatives. The subsequent downtrend was triggered by the possibility ofthe merger with its parent. There is continuing concern on asset qualityof ICICI. It has been a stated goal of the ICICI group to go in for universalbanking. It is clear that once regulatory hurdles are removed, such apossibility becomes distinctly feasible. But

Given the battering that bank stock took, ICICI may now hesitate topursue this path. Also ICICI Bank is the most visible investor-friendly facefor the group in terms of returns to shareholders and it may well bemaintained as a separate entity. In this backdrop, the stock may holdscope for improvement in the valuation of the stock.

Financial standing of ICICI Bank & Bank of Madura


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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

CapitalAdequacy Ratio

11.06% 19.64% 18.83% 14.25%

GrossAdvances /Gross NP’s

4.72% 2.54% 8.13% 11.09%

Net Advances /Net NP’s

2.88% 1.53% 4.66% 6.23%

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

Crucial Parameters: - How they stand


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Name of the Bank of ICICI

Bank Madura Bank

Book value of bankon the day ofmergerannouncement

183.0 58.0

Market price on theday announcementof merger

183.0 169.90

Earning per shareDividend paid (in%)P/E Ratio

38%55%1.73

5.415%783

The Generation Gap:- the merger of 57 year old BOM sooth bared oldgeneration bank with a fast growing technology say new Generation


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bank will help the latter and the start merger is likely to bring cheer toshareholder and bank employees of BOM and some amount ofdiscomfort and anxiety to those of ICICI bank.

The scheme of amalgamation will increase the equity bank of ICICIBank to RS 220.36 CR. ICICI Bank will issue 235.4-lakh share of RS 10each to the shareholder of BOM. The merger entity will have an increaseof 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 ofATM’s across the country and also enable the ICICI to serve a largecustomer bone of 1.2 million customers of BOM through a widernetwork, adding to the antoma bare to 2.7 million.

Managing rural branches:

ICICI major branches are in major and cities, where as BOM spreadsits wings mostly in semi urban and city segments of south India. Therein a task ahead lying for the merged entity to increase dramatically thebusiness mix of rural branches of BOM. On the other hand due toGeographical location of its branches and level of competition. ICICIBank will have a tough time to cope with.


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Managing software:

Another task which stand on the way is technology while ICICI bankwhich is fully automatic.

Quality of assets:- the nature of assets a bank is holding wouldsignify its operational efficiency. Usually the level of Non – performingAssets ( NPAS) judges the quality of assets. The lower the NAPS tototal advances or total assets the better the quality is and vice versa.

Staff productivity: - One of the key area where banks can developcompetition advantage. The measurement of staff productivitybecomes one of the essential factors while measuring the performanceof the banks.

Liquidity:- While assessing the liquidity of a bank the most soughtratio is net loans to total assets. A rise in the net loans to total assetsmay 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 paid up equity capital plus resource and surplus)divided by the number of outstanding equity shares.


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Earning per share:- specific valuation per unit of investment given byNet income after income taxes and after dividends on preferred stockof the company.

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

Profitability: - the most crucial ratio in measuring the profitability isnet profit of the bank. The ratio such as Net Interest Income (NIL) andNet Interest Margin (NIM) measure sustenance ability of the bank basedon the spread. Entity is using the package, Banks 2000, BOMcomputerized 90 percent of its business and was converted with ISBSsoftware.

The BOM branches are supposed to switch over to Banks 2000. Thoughit is not a difficult task, with 80% computer literate staff would needeffective retraining which involves a cost. The ICICI Bank need to investRS 50 core for upgrading BOM’s 263 branches.

Managing Human Resources:

One of the greatest challenges before ICICI Banks is managinghuman resources. When the head count of ICICI Bank is taken it in lessthan 1500 employees on the other hand BOM has over 2500.


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The merged entity will have bout 4000 employees which will make itone of the largest banks among the new generation private sector banks.Th staff of ICICI Banks are drawn from 75 various banks mostly youngqualified professionals with computer background and prefer to work inmetro or by either with good remuneration packages.

While under the influence of tread unions most of the BOM employeeshave low career aspiration. The announcement by H.N. signor, CEO andMD of ICICI, that three would be no VRS or retrenchment, creates a newhope 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 aHerevlean task to integrate two work welters?

Managing Client Base:-

The clients base of ICICI Bank after merger, will be as 2.7 Millionfrom it past 0.5 Million, as accumulation of 2.2 Million from BOM. Thenature 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 BOMclientele, the ICICI Bank needs to redefine its strategies to suit to the newclientele. The sentiments or a relationship of small and medium borrower


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is hurt it may be difficult for them to reestablish the relationship whichcould also hamper the image of the bank.

Given the situation, we need to wait and view, as to how the ICICI will facethis challenge.

Recommendation of Narasimham Committee on banking sectorreforms

Globally, the banking and financial systems have adopted informationand communications technology. This phenomenon has largely bypassed the Indian banking system, and the committee feels thatrequisite success needs to be achieved in the following areas:-

- Banking automation

- Planning, Standardization of electronic payment systems

- Telecom infrastructure

- Data were


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Merger between banks and dfls and nbfcs need to be based onsynergies and should make a sound commercial sense. Committee alsoopines that merger between strong banks / fls would make for greatereconomic and commercial sense and would be a case where the wholeis greater than the sum of its party and have a ‘force multiplier effect”.It also have merger should not be seen as a means of bailing out weakbanks.

A weak bank could be nurtured into healthy units. Merger could alsobe a solution to a after cleaning up their balances sheets it only say ifthese is no Voltaire response to a takeover of such bank, arestructuring commission for such PSB, can consider other optionssuch as restructuring , merger and amalgamations to it not closure.

The committee also options that while licensing new private sectorbanks, the initial capital requirement need to be review. It alsoemphasized on a transparent mechanism for deciding the ability ofpromoter to professionally manage the bank. The committee also feelsthat a minimum threshold capital for old private banks also deservedthreshold capitals. The committee also opined that a promoter groupcouldn't hold more that 40 percent of the equity of a bank.The Narasimham Committee also suggested that the merger could be a

solution to ‘Weak banks’ Coney after clearing up the balance sheets) witha strong public sector bank.


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Source: Narasimham Committee report on banking sector reforms.

Changes after the merger:-

While, BOM had an attractive business per employee figure of Rs.202lakh, a better technological edge and had a vast base in southern Indiawhen compared to Federal bank. While all these factors sound good, acultural integration would be a tough task ahead for ICICI Bank.

ICICI Bank has announced a merger with 57-year-old Bank ofMadure, 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 ofmerger) 09-12-00), Kotak mahindra group was holding about 12 percentstake in BOM, the Chairman BOM, Mr.K.M. Thaiagarajan, along with hisassociates was holding about 26 percent stake, Spic groups has about 4.7percent, while LIC and UTI were having marginal holdings. The mergerwill give ICICI Bank a hold on South India market, which has high rate ofeconomic development.

The board of Director at ICICI has contemplated the following synergiesemerging from the merger:

Financial Capability: The amalgamation will enable them to have astronger financial and operational structure, which is supposed to be


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capable of greater resourger/deposit mobilization. And ICICI will emergea one of the largest private sector banks in the country.

Branch network: The ICICI’s branch network would not only 264, but alsoincreases geographic coverage as well as convenience to its customers.

Customer base: The emerged largest customer base will enable the ICICIbank to offer banking financial services and products and also facilitatecross-selling of products and services of the ICICI groups.

Tech edge: The merger will enable ICICI to provide atms, Phone and theInternet banking and finical services and products and also facilitatecross-selling of products and services of the ICICI group.

Focus on Priority Sector: The enhanced branch network will enable theBank to focus on micro-finance activities through self-help groups, in itspriority sector initiatives through its acquired 87 rural and 88 semi-urbanbranches.

Source: Report submitted at EGM on January 19, 2001.

THE SWAP RATIO:


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The swap ratio has been approved in the ratio of 1:2 – two shares of ICICIBank for every one share of Bank of Madera.

The deal with Bank of Madera is likely to dilute the current equity capitalby around 12 percent. And the merger is expected to bring 20 percentgains in EPS of bank.

And also the bank’s comfortable capital Adequacy Ratio (CAR) of 19.64percent has declined to 17.6 percent.

Chapter 14: Reasons behind the recent trend of merger in BankingSector

The question on top everybody’s mind isAre banks and bankers on the road to redundancy?First consider the reasons who one does not need banks in largenumbers any more


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A depositor today can open a cheque account with a money marketmutual fund and obtain both higher returns and greater and greaterflexibility. Indian mutual funds are queuing up to offer this facility.

After can be drawn or a telephone bill paid easily through credit cards.

Even if a bank is just a safe place to put away your savings, you neednot go to it. There is always an ATM you can do business with.

If you are solvent and want to borrow money, you can do so on yourcredit card- with far fewer hassles.

A ‘AAA’ corporate can directly borrow from the market throughcommercial papers and get better rates in the bargain. In fact thebanks may indeed be left with dad credit risk or those that cannotaccess the capital market. This once again makes a shift to non-fundbased the activities all the more important.

Chapter 15: Case Studies

Case study I

IDBI – UNITED WESTERN MERGER BANK (Merger)


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The merger that was announced on , 2006 between Deutsche Bankand Dresdner Bank, Germany’s largest and the third largest bankrespectively was considered as Germany’s response to increasingly toughcompetition markets.

The merger was to create the most powerful banking group in theworld with the balance sheet total of nearly 2.5 trillion marks and a stockmarket value around 150 billion marks. This would put the merged bankfor ahead of the second largest banking group, U.S. based citigroup, witha balance sheet total amounting to 1.2 trillion marks and also in front ofthe planned Japanese book mergers of Sumitomo and Sukura Bank with1.7 trillion marks as the balance sheet total.

The new banking group intended to spin off its retail banking whichwas not making much profit in both the banks and costly, extensivenetwork of bank branches associated with it.

The merged bank was to retain the name Deutsche Bank butadopted the Dresdner Bank’s green corporate color in its logo. The futurecore business lines of the new merged Bank included investment Banking,asset management, where the new banking group was hoped to outsidethe traditionally dominant Swiss Bank, Security and loan banking andfinally financially corporate clients ranging from major industrialcorporation to the mid-scale companies.


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With this kind of merger, the new bank would have reached the no.1position of the US and create new dimensions of aggressiveness in theinternational mergers.But barely 2 months after announcing their agreement to form the largestbank in the world, had negotiations for a merger between Deutsche andDresdner Bank failed on April 5, 2000.

The main issue of the failure was Dresdner Bank’s investment arm,Kleinwort Benson, which the executive committee of the bank did notwant to relinquish under any circumstances.

In the preliminary negotiations it had been agreed that KleinwortBenson would be integrated into the merged bank. But from the outsetthese considerations encountered resistance from the asset managementdivision, which was Deutsche Bank’s investment arm.

Deutsche Bank’s asset management had only integrated withLondon’s investment group Morgan Grenfell and the American Banker’strust. This division alone contributed over 60% of Deutsche Bank’s profit.The top people at the asset management were not ready to undertake anew process of integration with Kleinwort Benson. So there was only oneoption left with the Dresdner Bank i.e. To sell Kleinwort Benson


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completely. However Walter, the chairman of the Dresdner Bank was notprepared for this. This led to the withdrawal of the Dresdner Bank fromthe merger negotiations.

In economic and political circles, the planned merger was celebratedas Germany’s advance into the premier league of the internationalfinancial markets. But the failure of the merger led to the disaster ofGermany as the financial center.


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Case study II

MERGER OF ICICI BANK WITH SANGLI BANK

COMING TOGETHER: The regional office of Sangli Bank in Mumbai.

The merger that was announced on APRIL 18, 2007 between ICICI Bank and SANGLIBank.All branches of Sangli Bank functions as branches of ICICI Bank from April 19,said the Reserve Bank of India.

Sangli Bank is an unlisted private bank headquartered at Sangli in Maharashtra. As onMarch 31, 2006, Sangli Bank had deposits of Rs. 2,004 crore, advances of Rs. 888

crore, net NPA (non-performing assets) ratio of 2.3 per cent and capital adequacy of1.6 per cent. Its loss at the end of 2005-06 amounted to Rs. 29 crore.


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It has 198 branches and extension counters, including 158 branches in Maharashtraand 31 branches in Karnataka.

About 50 per cent of the total branches are located in rural and semi-urban areas and50 per cent in metropolitan and urban centres. The bank has about 1,850 employees.

ICICI Bank is the second largest bank in India and the biggest in terms of marketcapitalisation.

As on September 30, 2006, ICICI Bank had total assets of Rs. 282,373 crore. In the sixmonths ended September 30, 2006, it made a net profit of Rs. 1,375 crore.

It had 632 branches and extension counters and 2,336 ATMs as on that date, and isin the process of setting up additional branches and ATMs pursuant to authorisations

granted by the RBI. It has about 31,500 employees.

ICICI Bank offers a wide range of financial products and services directly and through

subsidiaries in the areas of life and general insurance, asset management andinvestment banking.

Its shares are listed on the Bombay Stock Exchange Limited and the National StockExchange of India Limited and its American Depositary Shares are listed on the New

York Stock Exchange


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mergers & acquisitions

Economy & Finance

transferee company

company management

extinguished company

surviving company

asingle company

purpose of mergers

mergers acquisitionsmay

cases of mergers