m & a's banking

INTRODUCTION

Mergers and acquisitions in IndiaMergers and acquisitions aim towards Business Restructuring and increasing competitiveness and shareholder value via increased efficiency. In the market place it is the survival of the fittest.India has witnessed a storm of mergers in recent years. The Finance Act, 1999 clarified many issues relating to Business Reorganizations there by facilitating and making business-restructuring tax neutral. As per Finance Minister this has been done to accelerate internal liberalization and to release productive energies and creativity of Indian businesses.The year 1999-2000 has notched-up deals over Rs.21000 crore which is over 1% of Indias GDP. This level of activity was never seen in Indian corporate sector. InfoTech, Banking, media, pharma, cement, power are the sectors, which are more active in mergers and acquisitions. Consolidation of banking industry-an overviewHDFC Bank and Times Bank tied the merger knot in year 1999. The coming together of two likeminded private banks for mutual benefit was a land mark event in the history of Indian banking.Many analysis viewed this action as opening of the floodgate of a spate of mergers and consolidations among the banks, but this was not to be, it took nearly a year for another merger. The process of consolidation is a slow and painful process. But the wait and watch game played by the banks seems to have come to an end. With competition setting in and tightening of the prudential norms by the apex bank the players in the industry seems to be taking turns to merge.It was the turn Bank of Madura to integrate with ICICI Bank. This merger is remarkable different from the earlier ones. It is a merger between banks of two different generations. It marks the beginning of the acceptance of merger with old generation banks, which seemed to be out of place with numerous embedded problems.The markets seem to be in favor of bank consolidation. As in the case of HDFC Bank and Times Bank, this time also market welcomed the merger of ICICI Bank and Bank of Madura. Each time a merger is announced it seems to set out a signal in the industry of further consolidation. The shares of the bank reached new heights. This time it was not only the turn of the new private sector banks, but also the shares of old generation private banks and even public sector banks experienced a buying interest. Are these merger moves a culmination of the consolidation in the industry? Will any bank be untouched and which will be left out?

To answer this question let us first glance through the industry and see where the different players are placed. The Indian banking industry is consists of four categories-public sector banks, new private sector banks and foreign banks. The public sector banks control a major share of the banking operations. These include some of the biggest names in the industry like State Bank of India and its associate banks, Bank of Baroda, Corporation bank etc. their strength lies in their reach and distribution network. Their problems rage from high NPAs to over employment. The government controls these banks. Most of these banks are trying to change the perception. The government controls these banks. Most of these banks are trying to change the perception. The recent thrust on reduction of government stake, VRS and NPA settlement are steps in this direction. However, real consolidation can happen if government reduces its stake and changes its perception on the need of merger. The governments stand has always been that consolidation should happen to save a bank from collapsing. The old private sector banks are the banks, which were established prior the Banking Nationalization Act, but could not be nationalized because of their small size. This segment includes the Bank Of Madura, United Western Bank, Jammu and Kashmir bank; etc. who banks are facing competition from private banks and foreign banks. They are trying to improve their margins. Though some of the banks in this category are doing extremely well, the investors and the markets seem not to reward them adequately. These banks are unable to detach themselves effectively from the older tag. The new private banks came into existence with the amendment of Banking Regulation Act in 1993, which permitted the entry of new private sector banks.Of the above the spotlight is on the old generation private banks .the OGPBs can become easy takeover targets .the sizable portfolios of advances and deposits act as an incentive. Added to this these banks have a diversified shareholder base, which inhibits them from launching an effective battle against the potential acquirers. The effective shield against takeovers for these banks could be to get into strategic alliances like the Vysya bank model, which has bank Brussels Lambert of the Dutch ING Group as a strategic investor. United Western Bank and Lord Krishna Bank are already on a lookout for strategic partners. But the problems go beyond the shareholding pattern and are far rooted .the prudential norms like the increasing CAR and the minimum net worth requirements are making the very existence of these banks difficult. They are finding it difficult. They are finding difficult to raise capital and keep up with the ever-tightening norms .one of the survival routes for these banks is to merge with another bank.

Mergers: Making sense of it allIn the process of merger banks will have to give due importance to synergies and complimentary adhesions. The merger must make sound business sense and reflect in increasing the shareholder value. It should help increase the banks net worth and its capital adequacy. A merger should expand business opportunity for both banks. The other critical and competitive edge for survival is the cost of funds, which means stable deposits and risk diversification. Network size is very important in this perspective because one cannot grow staying in one place because the asset market in every place is limited. Unless one prepares the building blocks for growth by looking outside ones area he either sells out or gets acquired. The features, which a bank looks in its target seems to be the distribution network (number of branches and geographical distribution), number of clients and financial parameters like cost of funds, capital adequacy ratio, NPA and provision cover.The merger of strong entities should be encouraged. The reason for the merger should not be to save a bank from extinction rather the motive must be to go join for the distant advantages of both combining banks towards a mutual benefit. PS Shenoy, chairman and managing director, Bank of Baroda said, today public sector bank can merge with another bank only through moratorium route. That means you can takeover only a dead and you die yourself and allow to be merged with a strong bank. Unfortunately this is not the spirit behind the merger and acquisition.Strategic allianceIt is not only important for banks to merge with banks but also entities in the other business activities. Strategic partnership could become the important thing. Strategic mergers between banks for using each others infrastructure enabling remittance of funds to various centers among the strategic partner banks can give the account holder the flexibility of purchasing a draft payable at centers where the strategic tie-up exists. The strategic tie-up could also include a bank with another specialized investment bank to provide value-added services. Tie-ups could also be between a bank and technology firm to provide advanced services. It is these strategic tie-ups that are set to increase in future. These along with providing value-added benefits, also help in building positive perceptions in the market.

In a macro perspective mergers and acquisition can prove effective on strengthening the Indian financial sector. Today, while Indian banks have made tremendous strides in extending the reach domestically, internationally the Indian system is conspicuous by its absence. There are very few catering mostly to India related business. As a result India does not have a presence in international financial markets. If India has to emerge as an international banking center the presence of large banks with foreign presence is essential. With globalization and strategic alliances Indian banks would grow originally. The large banks with international presence. Globally the banking industry is consolidating through cross-border mergers. India seems to be far behind. The law does not allow the foreign banks with branch network to acquire Indian banks. But who knows with pressures of globalization the law of the land could be amended paving way for a cross border deal.

While the private sector banks are on the threshlod of improvement, the public sector banks (PSBs) are slowly contemplating automation to accelerate and cover the lost ground. To contend with new challenges posed by the private sector banks, PSBs are pumping huge amounts to update their It. but still, it looks like, public sector banks need to shift the gears, accelerate their moivements, in the right direction by automation their branches and providing, Internet banking services.

Private sector banks, in order to compete with large and well-established public sector banks, are not only foraying into IT, but also shaking hands with peer banks to establish themselves in the market. While one of the first initiatives was taken in November 1999, when Deepak Prakesh of HDFC and S.M.Datta of Times bank shook hands, created history. It is the first merger in the Indian banking, signaling that Indian banking sector joined the mergers and acquisitions bandwagon. Prior to this private bank merger, there have been quite a few attempts made by the government to rescue weak banks and synergize the operations to achieve scale economies but unfortunately they were all futile. Presently size of the bank is recognized as one of the major strengths in the industry. And, mergers amongst strong banks can both a means to strengthen the base, and of course, to face the cutthroat competition.

The appetite for mergers is making a comeback among the public sector banking industry. The instincts are aired openly at various forums and conferences. The bank economist conference perhaps set the ball rolling after the special secretary for banking Devi Dayal stressed the importance of the size as a factor. He pointed out the consolidation through merger and acquisition was becoming a trend in the global banking scenario wanted the Indian counterparts to think on the same lines. There is also a feeling threat there are far too many banks. PS Shenoy, chairman and managing director of Bank of Baroda, said, There are too many banks to handle the size of business. The pace of mergers will hasten. As the time runs out and the choice of target banks with complementary businesses gets reduced there would be a last minute rush to acquire the remaining banks, which will hasten the process of consolidation.

The Indian Banking SectorThe history of Indian banking can be divided into three main phases.I. Phase I (1786- 1969) - Initial phase of banking in India when many small banks were set upII. Phase II (1969- 1991) - Nationalisation, regularisation and growthIII. Phase III (1991 onwards) - Liberalisation and its aftermathWith the reforms in Phase III the Indian banking sector, as it stands today, is mature in supply, product range and reach, with banks having clean, strong and transparent balance sheets. The major growth drivers are increase in retail credit demand, proliferation of ATMs and debit-cards, decreasing NPAs due to Securitisation, improved macroeconomic conditions, diversification, interest rate spreads, and regulatory and policy changes (e.g. amendments to the Banking Regulation Act).Certain trends like growing competition, product innovation and branding, focus on strengthening risk management systems, emphasis on technology have emerged in the recent past. In addition, the impact of the Basel II norms is going to be expensive for Indian banks, with the need for additional capital requirement and costly database creation and maintenance processes. Larger banks would have a relative advantage with the incorporation of the norms.

Recommendations of Narasimham Committee on Banking Sector ReformsThe Narasimham Committee on banking sector reforms suggested that merger should not be viewed as a means of bailing out weak banks. They could be a solution to the problem of weak banks but only after cleaning up their balance sheet. The government has tried to find a solution on similar lines, and passed an ordinance on September 4, 1993, and took the initiative to merger New Bank of India (NBI) with Punjab National Bank (PNB). Ultimately, this turned out to be an unhappy event. Following this, there was a long silence in the market till HDFC Bank successfully took over Times Bank. Market gained confidence, and subsequently, there were two more mega mergers. The merger on Bank Of Madura with ICICI Bank, and of Global Trust Bank with UTI Bank, emerging as a new bank, UTI Bank, emerging as a new bank, UTI-Global Bank.The following are the recommendations of the committee

1) Globally, the banking and financial systems have adopted information and communications technology. This phenomenon has largely bypassed the Indian banking system, and the committee feels that requisite success needs to be achieved in the following areas:a) Bank automationb) Planning, standardization of electronic payment systems c) Telecom infrastructured) Data warehousing network2) Mergers between banks and DFIs and NBFCs need to be based on synergies and should make a sound commercial sense. Committee also opines that mergers between strong banks/FIs would make for greater economic and commercial sense and would be a case where the whole is greater than the sum of its parts and have a force multiplier effect. It is also opined that mergers should not be seen as a means of bailing out weak banks.3) A weak bank could be nurtured into healthy units. Merger could also be a solution to a weak bank, but the committee suggests it only after cleaning up their balance sheets. It also says, if there is no voluntary response to a takeover of their banks a restructuring, merger amalgamation, or if not closure.4) The committee also opines that, licensing new private sector banks, the initial capital requirements need to be reviewed. It also emphasized on a transparent mechanism for deciding the ability of promoters to professionally manage the banks. The committee also feels that a minimum threshold capital for old private banks also deserves attention and mergers could be one of the options available for reaching the required threshold capitals. The committee also opined that a promoter group couldnt hold more than 40% of the equity of a bank.

The Indian banking and financial sector-a wealth creator or a wealth destroyer?The Indian banking and financial sector (BFS) destroyed 22 paise of market value added (MVA) for every rupee invested in it, which is really poor compared to the BFS sector in the U.S, which has created 92 cents of MVA per unit of invested capital. The good news is that the performance of the wealth creating Indian banks has been better than that of the wealthy creating US banks.But the sad part is that the banks, which h destroy 59 paise of wealth for every rupee invested, consume about 88% of total capital invested in out BFS sector. As a benchmark, the US economy invests 83% of its capital in wealth creators.

In the banking and financial sector too. The winners on the MVA-scale are different from those on traditional Size-based measures such as total assets, revenues, and profit after tax and market value of equity. Indeed, the banks with most assets such as State Bank of India and Industrial Development Bank of India are amongst the biggest wealth destroyers. SBI tops on size-based measures like revenues, PAT, total assets, market value of equity, but appears among the bottom ranks for wealth creation. On the other hand, HDFC and HDFC Bank top the MVA rankings even though they do not appear in the top 10 ranking based on total assets or revenues.

RESEARCH METHODOLOGY

Objectives:1. To critically analyse the impact of Mergers and Acquisitions on Operating performance of Banking firms in India.2. To Identify how Mergers and Acquisitions in banking sector look for strategic benefits in terms of a) Profitsb) Increase in Customer Basec) Increase in shareholders value.Research Design: Descriptive ResearchType of Data: Secondary DataResearch Instrument: Financial Ratios, Analysis of Economic Value and Market Value.

Critical Analysis of Impact of Mergers and AcquisitionsMergers and acquisitions bring a number of changes within the organization. The size of the organizations change, its stocks, shares and assets also change, even the ownership may also change due to the mergers and acquisitions. The mergers and acquisitions play a major role on the activities of the organizations. However, the impact of mergers and acquisitions varies from entity to entity; it depends upon the group of people who are being discussed here. The impact of mergers and acquisitions also depend on the structure of the deal.

Impact of Mergers and Acquisitions Impacts on EmployeesMergers and acquisitions may have great economic impact on the employees of the organization. In fact, mergers and acquisitions could be pretty difficult for the employees as there could always be the possibility of layoffs after any merger or acquisition. If the merged company is pretty sufficient in terms of business capabilities, it doesn't need the same amount of employees that it previously had to do the same amount of business. As a result, layoffs are quite inevitable. Besides, those who are working, would also see some changes in the corporate culture. Due to the changes in the operating environment and business procedures, employees may also suffer from emotional and physical problems. Impact on ManagementThe percentage of job loss may be higher in the management level than the general employees. The reason behind this is the corporate culture clash. Due to change in corporate culture of the organization, many managerial level professionals, on behalf of their superiors, need to implement the corporate policies that they might not agree with. It involves high level of stress. Impact on ShareholdersImpact of mergers and acquisitions also include some economic impact on the shareholders. If it is a purchase, the shareholders of the acquired company get highly benefited from the acquisition as the acquiring company pays a hefty amount for the acquisition. On the other hand, the shareholders of the acquiring company suffer some losses after the acquisition due to the acquisition premium and augmented debt load. Impact on CompetitionMergers and acquisitions have different impact as far as market competitions are concerned. Different industry has different level of competitions after the mergers and acquisitions. For example, the competition in the financial services industry is relatively constant. On the other hand, change of powers can also be observed among the market players.

INTRODUCTION TO MERGERS AND ACQUISITIONSThe concept of mergers and acquisitions is very much popular in the current scenario. More, so it is significantly popular concept after 1990s where India entered in to the Liberalization, Privatization and Globalization (LPG). The winds of LPG are blowing over all the sectors of the Indian economy but its maximum impact is seen in the industrial sector. It caused the market to become hyper-competitive, to avoid unhealthy competition and to face international and multinational companies. Meaning and Definition of Merger and Acquisition Merger is defined as combination of two or more companies into a single company where one survives and the other lose their corporate existence. The survivor acquires the assets as well as liabilities of the merged company or companies.According to the Oxford Dictionary the expression merger or amalgamation means Combining of two commercial companies into one and Merging of two or more business concerns into one respectively. A merger is just one type of acquisition. One company can acquire another in several other ways including purchasing some or all of the companys assets or buying up its outstanding share of stock.Usually the assets and liabilities of the smaller firms are merged into those of larger firms. Merger may take two forms-1. Merger through absorption2. Merger through consolidation. Absorption Absorption is a combination of two or more companies into an existing company. All companies except one loose their identity in a merger through absorption.ConsolidationA consolidation is a combination if 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.To end up the word MERGER may be taken as an abbreviation which means: M - MixingE - Entities R - Recourses for G - Growth E - Enrichment and R - Renovation. Acquisition Acquisition in general sense is acquiring the ownership in the property. Acquisition is the purchase by one company of controlling interest in the share capital of another existing company. This means that even after the takeover although there is change in the management of both the firms retain their separate legal identity. Mergers Vs Acquisition Although these are often used as synonymous, the terms merger and acquisition mean slightly different things. When a company takes over another one and clearly becomes the new owner, the purchase is called an acquisition. From the legal point of view, the target company ceases to exist and the buyer swallows the business and stock of the buyer continues to be traded. In the pure sense of the term, a merger happens when two firms, often about the same size, agree to go forward as a new single 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 place.TYPES OF MERGERSMergers can be a distinguished into the following four types:-1. Horizontal Merger2. Vertical Merger3. Conglomerate Merger4. Concentric MergerHorizontal MergerHorizontal 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, development and management Vertical MergerVertical 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. Avertical mergeris one of the most common types of mergers. When a company merges with either a supplier or a customer to create an extension of the supply chain, it is known as a vertical merge or integration.Conglomerate MergerConglomerate merger is the combination of two or more unrelated business units in respect of technology, production process or market and management. Conglomerate mergers are types of mergers that are in different market businesses. There is no relationship between the types of business one company is in and the type the other is in. The merger is typically part of a desire on the part of one company to grow its financial wealth. By merging with a completely unrelated, but often equally profitable company, the resulting conglomerate gains a revenue stream in many types of industries.Concentric MergerConcentric merger are based on specific management functions whereas the conglomerate mergers are based on general management functions. If the activities of the segments brought together are so related that there is carry over on specific management functions. Such as marketing research, Marketing, financing, manufacturing and personnel.

Advantages of Mergers and Acquisitions1. Network Economies. In some industries, firms need to provide a national network. This means there are very significant economies of scale. A national network may imply the most efficient number of firms in the industry is one.2. Research and development. In some industries, it is important to invest in research and development to discover new products / technology. A merger enables the firm to be more profitable and have greater funds for research and development. This is important in industries such as drug research.3. Other Economies of Scale. The main advantage of mergers is all the potential economies of scale that can arise. In ahorizontal merger, this could be quite extensive, especially if there are high fixed costs in the industry.Examples of economies of scale. If the merger was avertical mergerorconglomerate merger, the scope for economies of scale would be lower.4. Avoid Duplication.In some industries it makes sense to have a merger to avoid duplication. For example two bus companies may be competing over the same stretch of roads. Consumers could benefit from a single firm with lower costs. Avoiding duplication would have environmental benefits and help reduce congestion.5. Regulation of Monopoly.Even if a firm gains monopoly power from a merger, it doesnt have to lead to higher prices if it is sufficiently regulated by the government. For example, in some industries the government have price controls to limit price increases. That enables firms to benefit from economies of scale, but consumer dont face monopoly prices.6. 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. If a firm that wants to expand operations in existing or new product area can find a suitable going concern. It may avoid many of risks associated with a design; manufacture the sale of addition or new products.7. Synergy: Implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It refers to benefits other than those related to economies of scale. Operating economies are one form of synergy benefits. But apart from operating economies, synergy may also arise from enhanced managerial capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementarity of resources and skills and a widened horizon of opportunitiesMerger may result in financial synergy and benefits for the firm in many ways:- i. By eliminating financial constraints ii. By enhancing debt capacity. This is because a merger of two companies can bring stability of cash flows which in turn reduces the risk of insolvency and enhances the capacity of the new entity to service a larger amount of debt iii. By lowering the financial costs. This is because due to financial stability, the merged firm is able to borrow at a lower rate of interest. 8. Other Motives for Mergers: Merger may be motivated by other factors that should not be classified under synergism. These are the opportunities for acquiring firm to obtain assets at bargain price and the desire of shareholders of the acquired firm to increase the liquidity of their holdings.a) 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 socks 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. b) 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 owners wealth.c) 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 canmaintain or developa competitive edge.i. Operating Economies: Arise because, a combination of two or more firms may result in cost reduction due to operating economies. In other words, a combined firm may avoid or reduce over-lapping functions and consolidate its management functions such as manufacturing, marketing, R&D and thus reduce operating costsii. Increased Revenue or Market Share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.iii. Cross-Selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products. Procedure for Evaluating the decision or Merger & Acquisitions Merger and acquisition process is the most challenging and most critical one when it comes to corporate restructuring. One wrong decision or one wrong move can actually reverse the effects in an unimaginable manner. It should certainly be followed in a way that a company can gain maximum benefits with the deal.

Following are some of the important steps in the M&A process:

Business ValuationBusiness valuation or assessment is the first process of merger and acquisition. This step includes examination and evaluation of both the present and future market value of the target company. A thorough research is done on the history of the company with regards to capital gains, organizational structure, market share, distribution channel, corporate culture, specific business strengths, and credibility in the market. There are many other aspects that should be considered to ensure if a proposed company is right or not for a successful merger.

Proposal PhaseProposal phase is a phase in which the company sends a proposal for a merger or an acquisition with complete details of the deal including the strategies, amount, and the commitments. Most of the time, this proposal is send through a non-binding offer document.

Planning ExitWhen any company decides to sell its operations, it has to undergo the stage of exit planning. The company has to take firm decision as to when and how to make the exit in an organized and profitable manner. In the process the management has to evaluate all financial and other business issues like taking a decision of full sale or partial sale along with evaluating on various options of reinvestments.

Structuring Business DealAfter finalizing the merger and the exit plans, the new entity or the takeover company has to take initiatives for marketing and create innovative strategies to enhance business and its credibility. The entire phase emphasize on structuring of the business deal.

Stage of IntegrationThis stage includes both the company coming together with their own parameters. It includes the entire process of preparing the document, signing the agreement, and negotiating the deal. It also defines the parameters of the future relationship between the two.

Operating the VentureAfter signing the agreement and entering into the venture, it is equally important to operate the venture. This operation is attributed to meet the said and pre-defined expectations of all the companies involved in the process. The M&A transaction after the deal include all the essential measures and activities that work to fulfil the requirements and desires of the companies involved.

Benefits of merger and acquisition Banks

The fruits of Merger and Acquisitions for banks are reducing unhealthy competition amongst banks, sound financial position, huge business, large assets, benefits of core banking solutions, networking and technological advancements at low cost, low cost of maintenance and human resource management, large profits, larger customer coverage. Moreover, recapitalisation of weaker banks in the lights of Basel II Norms. Customers Customer are also benefited by better and faster services, competitive pricing of all products and services, increased number of branches, improved and upgraded technology, etc. RBI Through Merger and Acquisition RBI is benefited by better monitoring, interaction with less number of CEOs, easy implementation of policy and convenience in surveillance due to better and updated technology, etc. Depositors Depositor have better investment opportunity, negotiable environment, higher dividends, etc. Other related parties They get Indian banks of International Standards, sound and large Indian Banks, no risk in performance of contracts and higher dividends, better and huge deals with one banks rather than two or more etc.

MERGER AND ACQUISITION IN BANKING PRESENT SCENARIO In the LPG era, the proposal to grant autonomy to banks board could go a long way to improve the operational flexibility of Public Sector Banks, which is crucial in the competitive environment that banks operate in. the urgency of granting autonomy is so acute that unless the public sector banks managements are given adequate powers to speedily respond to the new competitive and information technology challenges, these banks may not be viable in the long run. The Government also proposes to recapitalize weak banks. The recapitalisation of weak banks has not yielded the expected results in the past and hence should be linked to a viable and time bound restructuring plan. The process of merger and acquisition is not new for Indian banking Times Bank merged with HDFC Bank, Bank of Madura with ICICI Bank, Nedungadi Bank Ltd with Punjab National Bank and most recently Global Trust Bank with Oriental Bank of Commerce.

Mergers and Acquisitions of Banks:1. HDFC Bank Acquires Centurion Bank of Punjab (May '08)IntentFor HDFC Bank, this merger provided an opportunity to add scale, geography (northern and southern states) and management bandwidth. In addition, there was a potential of business synergy and cultural fit between the two organizations.For CBoP, HDFC bank would exploit its underutilized branch network that had the requisite expertise in retail liabilities, transaction banking and third party distribution. The combined entity would improve productivity levels of CBoP branches by leveraging HDFC Bank's brand name.BenefitsThe deal created an entity with an asset size of Rs 1,09,718 crore (7th largest in India), providing massive scale economies and improved distribution with 1,148 branches and 2,358 ATMs (the largest in terms of branches in the private sector). CBoP's strong SME relationships complemented HDFC Bank's bias towards high-rated corporate entities.There were significant cross-selling opportunities in the short-term. CBoP management had relevant experience with larger banks (as evident in the Centurion Bank and BoP integration earlier) managing business of the size commensurate with HDFC Bank.DrawbacksThe merged entity will not lend home loans given the conflict of interest with parent HDFC and may even sell down CBoP's home-loan book to it. The retail portfolio of the merged entity will have more by way of unsecured and two-wheeler loans, which have come under pressure recently.Merger of HDFC and Centurion Bank of Punjab08S.NO.ContentsHDFCCenturion bank of PunjabMerged entity

1.Branches 452274746

2.ATMs6743931047

3.Deposits 7.11 crore5.70 crore15.8 crore

4.Net profit132.1 crore102.5 crore224.5 crore

5.Net worth713.3 crore699.3 crore848.7 crore

2. Standard Chartered Acquires ANZ Grindlays Bank (November '00)IntentStandard Chartered wanted to capitalise on the high growth forecast for the Indian economy. It aimed at becoming the world's leading emerging markets bank and it thought that acquiring Grindlays would give it a well-established foothold in India and add strength to its management resources. For ANZ, the deal provided immediate returns to its shareholders and allowed it to focus on the Australian market. Grindlays had been a poor performer and the Securities Scam involvement had made ANZ willing to wind up.BenefitsStandard Chartered became the largest foreign bank in India with over 56 branches and more than 36% share in the credit card market. It also leveraged the infrastructure of ANZ Grindlays to service its overseas clients.2For ANZ, the deal, at a premium of US $700 million over book value, funded its share buy-back in Australia (a defence against possible hostile takeover). The merger also greatly reduced the risk profile of ANZ by reducing its exposure to default prone markets.3DrawbacksThe post-merger organisational restructuring evoked widespread criticism due to unfair treatment of former Grindlays employees.4There were also rumours of the resulting organisation becoming too large an entity to manage efficiently, especially in the fast changing financial sector.

3. ICICI Bank Ltd. Acquires Bank of Madura (March '01)IntentICICI Bank Ltd wanted to spread its network, without acquiring RBI's permission for branch expansion. BoM was a plausible target since its cash management business was among the top five in terms of volumes. In addition, there was a possibility of reorienting its asset profile to enable better spreads and create a more robust micro-credit system post-merger.8BoM wanted a (financially and technologically) strong private sector bank to add shareholder value, enhance career opportunities for its employees and provide first rate, technology-based, modern banking services to its customers.BenefitsThe branch network of the merged entity increased from 97 to 378, including 97 branches in the rural sector.9The Net Interest Margin increased from 2.46% to 3.55 %. The Core fee income of ICICI almost doubled from Rs 87 crores to Rs 171 crores. IBL gained an additional 1.2 million customer accounts, besides making an entry into the small and medium segment. It possessed the largest customer base in the country, thus enabling the ICICI group to cross-sell different products and services.DrawbacksSince 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.Merger of ICICI Bank with Bank of Madura01Key financials for the year ended Mar. 2000

ICICI BankBank of Madura

Particulars0003(12)0003(12)

Net Interest Income185.92104.12

Net Profit105.345.58

Deposits9866.023631.04

Advances (Incl. Credit Substitutes)5030.962072

Total Assets12072.64443.7

Capital Adequacy Ratio (%)19.615.8

RoNW (%)30.119.9

RoA (%)0.91

Cost of Deposits (%)7.37.3

Net NPA (%)1.14.7

Business per employee5.952.02

Profit per employee0.080.02

Shareholding pattern in %

Pre-MergerPost-Merger

ParticularsICICI BankBOMICICI Bank

ICICI Ltd62.2-55.6

ADS16.2-14.4

FIIs6.9-6.1

FIs4.77.35

MF & Banks1.41.41.4

BOM Promoter-24.92.7

Kotak Mahindra-11.41.2

Employees-6.2-

Public8.648.813.6

4. Oriental Bank of Commerce Acquires Global Trust Bank Ltd (August '04)IntentFor Oriental Bank of Commerce there was an apparent synergy post-merger as the weakness of Global Trust Bank had been bad assets and the strength of OBC lay in recovery.10In addition, GTB being a south-based bank would give OBC the much-needed edge in the region apart from tax relief because of the merger. GTB had no choice as the merger was forced on it, by an RBI ruling, following its bankruptcy.BenefitsOBC gained from the 104 branches and 276 ATMs of GTB, a workforce of 1400 employees and one million customers. Both banks also had a common IT platform. The merger also filled up OBC's lacunae - computerisation and high-end technology. OBC's presence in southern states increased along with the modern infrastructure of GTB.DrawbacksThe merger resulted in a low CAR for OBC, which was detrimental to solvency. The bank also had a lower business growth (5% vis-a-vis 15% of peers). A capital adequacy ratio of less than 11 per cent could also constrain dividend declaration, given the applicable RBI regulations.ParticularsGlobal Trust bankOriental Bank of CommerceCombined

Advances 32.76156.77189.53

Investments 26.5147.8174.3

Deposits 69.21298.09367.3

Net profit-2.734.57

Gross NPA9.1611.4620.62

Net NPA6.482.258.73

Gross NPA (%)25.86.910.8

Net NPA (%)19.81.44.6

Branches (nos)879891076

Staff (nos)131413507

Capital adequacy ratio 0.014.012.2

Future of M&A in Indian BankingIn 2009, 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. Likely targets of takeover bids will be Yes Bank, Bank of Rajasthan, and IndusInd Bank. However, excessive valuations may act as a deterrent, especially in the post-sub-prime era.Persistent growth in Indian corporate sector and other segments provide further motives for M&As. Banks need to keep pace with the growing industrial and agricultural sectors to serve them effectively. A bigger player can afford to invest in required technology. Consolidation with global players can give the benefit of global opportunities in funds' mobilisation, credit disbursal, investments and rendering of financial services. Consolidation can also lower intermediation cost and increase reach to underserved segments.The Narasimhan Committee (II) recommendations are also an important indicator of the future shape of the sector. There would be a movement towards a 3-tier structure in the Indian banking industry: 2-3 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.

Motives behind ConsolidationBased on the cases, we can narrow down the motives behind M&As to the following: Growth- Organic growth takes time and dynamic firms prefer acquisitions to grow quickly in size and geographical reach. Synergy- The merged entity, in most cases, has better ability in terms of both revenue enhancement and cost reduction. Managerial efficiency- Acquirer can better manage the resources of the target whose value, in turn, rises after the acquisition. Strategic motives- Two banks with complementary business interests can strengthen their positions in the market through merger. Market entry- Cash rich firms use the acquisition route to buyout an established player in a new market and then build upon the existing platform. Tax shields and financial safeguards- Tax concessions act as a catalyst for a strong bank to acquire distressed banks that have accumulated losses and unclaimed depreciation benefits in their books. Regulatory intervention- To protect depositors, and prevent the de-stabilisation of the financial services sector, the RBI steps in to force the merger of a distressed bank.