Students of MMS batch 2014-16

Introduction to Mergers

A Merger is defined as consolidation of two or more companies into a single company where one survives and the other lose their corporate existence.

Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller.

Types

Statutory merger

–A total takeover of assets and liabilities of the target company by the bidding company. (Target Co. ceases to exist)

Subsidiary merger

–The target company becomes a subsidiary of the bidder.

Consolidation

–Both companies cease to exist in their prior form, and they come together to form a completely new company.

Introduction to Acquisitions

An Acquisition is defined as a corporate action in which a company buys most, if not all, of the target company’s ownership stakes in order to assume control of the target firm.

Salient Features of acquisitions

May be paid in cash, the acquiring company’s stock or a combination of both.

May be either friendly (with the consent of the company to be acquired) or hostile (without any consent from the company to be acquired).

Generally a premium is offered on the market price of the target company to entice the shareholders to sell.

Introduction to Takeover

In business, a takeover is the purchase of one company (the target) by another (the acquirer, or bidder).

Types

Friendly takeovers

–The shareholders and the board of directors are informed prior to the action taking place. The takeover is done with their consent

Hostile takeovers

–A clear opposite to friendly takeovers where the bidding company acquires a majority stake in the target company without the permission of the shareholders and the board via open market operations or other means

Contd.

Reverse takeovers

–A type of takeover where a private company acquires a public company.

–Done by the private company to effectively float itself and avoid time and cost that are generally incurred in a conventional IPO.

HISTORY OF MERGER AND ACQUISITION IN INDIA

The concept of merger and acquisition in India was not popular until the year 1988.

The key factor contributing to fewer companies involved in the merger is the regulatory and prohibitory provisions of MRTP Act, 1969. (Monopolies and Restrictive Trade Practices Act,1969)

The year 1988 witnessed one of the oldest business acquisitions or company mergers in India.

As for now the scenario has completely changed with increasing competition and globalization of business. It is believed that at present India has now emerged as one of the top countries entering into merger and acquisitions.

Motives Behind M&A 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.

CURRENT SCENARIO OF INDIAN BANKS:

The total assets of Indian banks, which are regulated by the Reserve Bank of India (RBI) and the Ministry of Finance (MoF)1, were pegged at Rs 82,99,220 crore (US$ 1564.8 billion) during FY12

Hypothetical post merger scenario

MERGER AND ACQUISITION PROCESS

 

Preliminary Assessment or Business Valuation- In this process of assessment not only the current financial performance of the company is examined but also the estimated future market value is considered

Phase of Proposal- After complete analysis and review of the target firm's market performance, in the second step, the proposal for merger or acquisition is given.

Exit Plan- When a company decides to buy out the target

firm and the target firm agrees, then the latter involves in Exit Planning.

Structured Marketing- After finalizing the Exit Plan, the target firm involves in the marketing process and tries to achieve highest selling price.

Stage of Integration- In this final stage, the two firms are integrated through Merger or Acquisition.

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Pictorial representationPrelimina

ry Assessme

nt or Business Valuation

Phase of Proposal

Exit PlanStructure

d Marketin

g

Stage of Integratio

n

MERGERS AND ACQUISITION EXPERIENCE OF INDIAMerger year Target bank Acquirer Motive

1993 New bank of India Punjab National bank Forced merger restructuringof weak bank

1994 Bank of Karad ltd Bank of India Forced merger restructuringof weakbank

1996 Punjab co-op Ltd Oriental bank ofcommerce

Forced merger restructuringof weakbank

1999 Bareilly coop Ltd Bank of Baroda Forced merger restructuringof weakbank

2000 Times bank Ltd HDFC Bank Ltd Voluntary merger

2001 Bank of Madura ICICI Bank Voluntary merger

MERGERS AND ACQUISITION EXPERIENCE OF INDIA

Merger year Target bank Acquirer Motive

2002 ICICI Ltd ICICI Bank Universal bankingobjective-merger offinancial institutionwith bank

2003 Nedungadi Bank Ltd Punjab National Bank Forced merger restructuringof weakbank

2004 IDBI Bank Ltd Industrial developmentbank of India

Universal bankingobjective-merger offinancial institutionwith bank

2005 Centurion bank Bank of Punjab Voluntary merger

2006 Lord Krishna bank Centurion bank ofPunjab

Expansion of size voluntarymerger

2007 Bharat overseas bank

Indian overseas bank Regulatoryintervention

PROCESS OF MERGER & ACQUISITION IN INDIA:

The process of merger and acquisition has the following steps:

i. Approval of Board of Directors

ii. Information to the stock exchange

iii. Application in the High Court

iv. Shareholders and Creditors meetings

v. Sanction by the High Court

vi. Filing of the court order

vii. Transfer of assets or liabilities

viii. Payment by cash and securities

Maximum Waiting period:210 days from the filing of notice(or the order of the commission - whichever earlier).

Source of potential gains

1. Economies of Scale, Cost Cutting

2. Increase Market Share

3. Enhanced Product lines

4. Entry into Attractive New Markets

5. Improved Managerial Capabilities, and Increased Financial Leverage

6. Financial and Operating Leverage

Impacts of Merger

Diversification

Increase in efficiency

i. Cost reduction

ii. Increase in revenue

Broader array of products

Domestic merger and cross border

Need of consolidation

Strengthen performance of banks

Maintain global competitiveness

Development of new technology

Universalization of banking

Excess capacity

Take advantage of opportunities

Comparison of mergers ICICI v/s SBI

Comparison of mergers ICICI v/s SBI

ICICI Bank

SBI

Ratios over period of years

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