MERGER & ACQUISITION IN BANKING SECTOR

SYNOPSIS
ON
“MERGERS & ACQUISITIONS IN
INDIAN BANKING SECTOR”

SUBMITTED TO : SUBMITTED BY:

MR. AMRITPAL SINGH PRACHI SHARMA RT1801B35

GURPREET KAUR RT1801B57
MANDEEP SINGH RT1801B58

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 MERGER & ACQUISITION IN BANKING SECTOR

ABSTRACT

Corporate mergers and acquisitions (M&As) have become popular across the globe during the last
two decades thanks to globalization, liberalization, technological developments and intensely
competitive business environment. The synergistic gains from M&As may result from more
efficient management, economies of scale, more profitable use of assets, exploitation of market
power, and the use of complementary resources. Interestingly, the results of many empirical
studies show that M&As fail to create value for the shareholders of acquirers. In this backdrop,
the paper discusses the causes for the failure of M&As by drawing the results of the following
areas.

This paper is an attempt to evaluate the impact of Mergers on the performance of the companies.
Theoretically it is assumed that Mergers improves the performance of the company due to
increased market power, Synergy impact and various other qualitative and quantitative factors.
Although the various studies done in the past showed totally opposite results. Four parameters;
Total performance improvement, Economies of scale, Operating Synergy and Financial Synergy.
My paper shows that Indian companies are no different than the companies in other part of the
world and mergers were failed to contribute positively in the performance improvement.

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RESEARCH METHODOLOGY

OBJECTIVES

 To study the merger and acquisitions in the banking sector during last 5 years.
 To study the process of merger and acquisition.
 To study the HR issues during merger and acquisition.
 To study the risk involved in merger and acquisition.
 To analyze the performance of banks before merger and after merger.

LIMITATION OF THE STUDY

The analysis is purely based on the secondary data. So, any error in the secondary data might also
affect the study.

SIGNIFICANCE OF THE STUDY

The study which I have under taken is significant and useful as it has given me an experience and
knowledge about the recent merger and acquisitions in banking sector and what was its impact on
the performance of the company.

DATA COLLECTION

The data’s which is collected from various secondary sources like internet, journals and other
publications.

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REVIEW OF LITERATURE
1. AN EXAMINATION OF BANK SECTOR
International Review of Business Research
Papers Vol. 4 No.1 January 2008
This article helps to discuss various regulations which are faced by banks in order to enter the
merger and acquisition phase. In the banking sector, market entry is generally governed by a
specific banking regulator .Actual mergers of equals don't happen very often. Usually, one
company will buy another and, as part of the deal's terms, simply allow the acquired firm to
proclaim that the action is a merger of equals, even if it is technically an acquisition.

2. CHALLENGES THE INDIAN BANKS FACE

SOURCE : http://www.rediff.com/money/2005/feb/17guest.htm

This article is about the various challenges faced by Indian banking sector. It discussed the
position of banks after merger and acquisition. It discusses the challenges such as: interest rates
risk, credit risk by private banks. The first mega merger in the Indian banking sector that of the
HDFC Bank with Times Bank, has created an entity which is the largest private sector bank in the
country.

3. MOTIVES FOR MERGERS AND ACQUISITIONS IN THE INDIAN

BANKING SECTOR - A NOTE ON OPPORTUNITIES & IMPERATIVES

SOURCE :http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1008717

Recent reports on banking sector often indicate that India is slowly but surely moving from a
regime of 'large number of small banks' to 'small number of large banks'. The aim of this paper is
to probe into the various motivations for mergers and acquisitions in the Indian Banking sector.
Thus, literature is reviewed to look into the various motivations behind a banks' merger/
acquisition event. Given the increasing role of the economic power in the turf war of nations, the
paper looks at the significant role of the state and the central bank in protecting customer's
interests vis-à-vis creating players of international size. While, gazing at the mergers &

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acquisitions in the Indian Banking Sector both from an opportunity and as imperative
perspectives, the paper also glances at the large implications for the nation.

4. MERGERS AND ACQUISITIONS - THE INDIAN BANKING SCENARIO

SOURCE:http://www.smartmanagementonline.com/Magazines/Articles/Mergers%20and
%20Acquisitions/IPMA0025.htm

This article studies M&A activities in the Indian banking sector and says that even though the
objective of present bank mergers is to place the weak banks in safe hands, the future mergers will
focus more on strategic issues like increasing geographical reach and improving product mix.

5. M&AS IN THE INDIAN BANKING SECTOR - STRATEGIC AND

FINANCIAL IMPLICATIONS
SOURCE : http://tejas-iimb.org/articles/01.php

Like all business entities, banks want to safeguard against risks, as well as exploit available
opportunities indicated by existing and expected trends. M&As in the banking sector have been on
the rise in the recent past, both globally and in India. In this backdrop of emerging global and
Indian trends in the banking sector, this article illuminates the key issues surrounding M&As in
this sector with the focus on India. It seeks to explain the motives behind some M&As that have
occurred in India post-2000, analyse the benefits and costs to both parties involved and the
consequences for the merged entity. A look at the future of the Indian banking sector, and some
key recommendations for banks, follow from this analysis.

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INTRODUCTION TO THE TOPIC

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

With recession taking toll of many Indian businesses and the feeling of insecurity
surging over our businessmen, it is not surprising when we hear about the immense numbers of
corporate restructurings taking place, especially in the last couple of years. Several companies
have been taken over and several have undergone internal restructuring, whereas certain
companies in the same field of business have found it beneficial to merge together into one
company.

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

and mergers and acquisitions are all about. The phrase mergers and acquisitions (abbreviated
M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with
the buying, selling and combining of different companies that can aid, finance, or help a growing
company in a given industry grow rapidly without having to create another business entity.

MERGER
Merger is defined as combination of two or more companies into a single company where one
survives and the others lose their corporate existence. The survivor acquires all the assets as well
as liabilities of the merged company or companies. Generally, the surviving company is the buyer,
which retains its identity, and the extinguished company is the seller.

Merger is also defined as amalgamation. Merger is the fusion of two or more

existing companies. All assets, liabilities and the stock of one company stand transferred to
transferee company in consideration of payment in the form of:

 Equity shares in the transferee company,

 Debentures in the transferee company,
 Cash, or
 A mix of the above modes.

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In business or economics a merger is a combination of two companies into one larger

company. Such actions are commonly voluntary and involve stock swap or cash payment to the
target. Stock swap is often used as it allows the shareholders of the two companies to share the
risk involved in the deal. A merger can resemble a takeover but result in a new company name
(often combining the names of the original companies) and in new branding; in some cases,
terming the combination a "merger" rather than an acquisition is done purely for political or
marketing reasons.

Merger is a financial tool that is used for enhancing long-term profitability by

expanding their operations. Mergers occur when the merging companies have their mutual
consent as different from acquisitions, which can take the form of a hostile takeover.

ACQUISITION

An Acquisition usually refers to a purchase of a smaller firm by a larger one. acquisition, also
known as a takeover or a buyout, is the buying of one company by another.

Acquisitions or takeovers occur between the bidding and the target company. There
may be either hostile or friendly takeovers. Acquisition in general sense is acquiring the
ownership in the property. In the context of business combinations, an acquisition is the purchase
by one company of a controlling interest in the share capital of another existing company.

TAKEOVER
In business, a takeover is the purchase of one company (the target) by another (the
acquirer, or bidder). In the UK, the term refers to the acquisition of a public company whose
shares are listed on a stock exchange, in contrast to the acquisition of a private company.

A ‘takeover’ is acquisition and both the terms are used interchangeably. Takeover
differs from merger in approach to business combinations i.e. the process of takeover, transaction
involved in takeover, determination of share exchange or cash price and the fulfillment of goals of
combination all are different in takeovers than in mergers. For example, process of takeover is
unilateral and the offeror company decides about the maximum price. Time taken in completion

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of transaction is less in takeover than in mergers, top management of the offeree company being
more co-operative.

MERGER AND ACQUISITIONS OF LAST 5 YEARS

2004 Global Trust Bank Oriental Bank of Commerce

2005 Bank of Punjab Centurion bank

2005 IDBI bank IDBI

2006 ICICI bank Sangli bank

2007 SBI SBS

2008 HDFC bank Centurion bank of Punjab

Procedure of Bank Merger

 The procedure for merger either voluntary or otherwise is outlined in the respective state
statutes/ the Banking regulation Act. The Registrars, being the authorities vested with the
responsibility of administering the Acts, will be ensuring that the due process prescribed in the
Statutes has been complied with before they seek the approval of the RBI. They would also be
ensuring compliance with the statutory procedures for notifying the amalgamation after obtaining
the sanction of the RBI.

 Before deciding on the merger, the authorized officials of the acquiring bank and the
merging bank sit together and discuss the procedural modalities and financial terms. After the
conclusion of the discussions, a scheme is prepared incorporating therein the all the details of both
the banks and the area terms and conditions.

 Once the scheme is finalized, it is tabled in the meeting of Board of directors of respective

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banks. The board discusses the scheme thread bare and accords its approval if the proposal is
found to be financially viable and beneficial in long run.

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

 After the board approval of the merger proposal, a registered valuer is appointed to valuate
both the banks. The valuer valuates the banks on the basis of its share capital,market capital,
assets and liabilities, its reach and anticipated growth and sends its report to the respective banks.

 Once the valuation is accepted by the respective banks , they send the proposal along with
all relevant documents such as Board approval, shareholders approval, valuation report etc to
Reserve Bank of India and other regulatory bodies such Security & exchange board of India
SEBI for their approval.

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

 After completion of the above procedures , a merger and acquisition agreement is signed
by the bank

HR Issues in Mergers & Acquisitions

People issues like staffing decision, organizational design, etc., are most sensitive issues in case of
M&A negotiations, but it has been found that these issues are often being overlooked.

 Before the new organization is formed, goals are established, efficiencies projected and
opportunities appraised as staff, technology, products, services and know-how are
combined.

 But what happens to the employees of the two companies? How will they adjust to the
new corporate environment? Will some choose to leave?

 When a merger is announced, company employees become concerned about job security
and rumors start flying creating an atmosphere of confusion, and uncertainty about change.

 Roles, behaviors and attitudes of managers affect employees' adjustment to M&A.

 Multiple waves of anxiety and culture clashes are most common causes of merger failure.

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 HR plays an important role in anticipating and reducing the impact of these cultural
clashes.

 Lack of communication leads to suspicion, demoralization, loss of key personnel and

business even before the contract has been signed.

 Gaining emotional and intellectual buy-in from the staff is not easy, and so the employees
need to know why merger is happening so that they can work out options for themselves.

 Major stress on the accompany merger activity are: -

* Power status and prestige changes
* Loss of identity
* Uncertainty

 Unequal compensation may become issue of contention among new co-workers.

Risk invoved in merger and acquisition

 Credit risk: The risk that someone who owes you money does not pay it back.

 Liquidity risk: the risk that you cannot refinance a borrowing when it comes due, or
alternatively that you cannot liquidate an asset to cover a liability.

 Market Risk: The risk that the value of your assets change less/more than the value of
your liabilities in response to changes in market rates/prices.

 Operational Risk: The risk that you suffer a loss due to some operational process going
wrong (e.g. fraud)

 Legal Risk: The risk that you cannot enforce a legal contract.

 Compliance Risk: The risk that you break a law or reugulation.

 Model Risk: The risk that you suffer a loss because you do not price an asset correctly or
misunderstand its properties.

 Job loss

 Insecurity
 Diseconomies of scale if business becomes too large, which leads to higher unit costs.
 Clashes of culture between different types of businesses can occur, reducing the effectiveness of
the integration.

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 May need to make some workers redundant, especially at management levels – this may have an
effect on motivation.
 May be a conflict of objectives between different businesses, meaning decisions are more difficult
to make and causing disruption in the running of the business.

HIGHLIGHTS OF THE MERGER

THE MERGER- HDFC AND CENTURION BANK OF PUNJAB

1) HDFC bank is merged with Centurion Bank of punjab

2) New entity is named as “HDFC bank itself”.

3) The merger will strengthen HDFC Bank's distribution network in the northern and the southern

regions.

4) HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab

(CBoP) for Rs 9,510 crore

THE MERGER- IDBI AND IDBI BANK

 On April 2, 2005, the merger of IDBI Bank Ltd. with its parent company (IDBI held 57%

stake in IDBI Bank) was announced.

 The merged entity was to be called IDBI Ltd.

 IDBI Ltd, will become the holding company with two strategic business units — IDBI

and IDBI Bank

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 Swap ratio was established at 1:1.42 , that is, IDBI issued 100 equity shares for every 142

equity shares held by the shareholders in IDBI Bank.

 Merger aimed at consolidating businesses across the value chain and realizing economies
of scale.
 Merger would benefit both IDBI and IDBI Bank.

 They can start operations as a full-fledged bank without incurring expenditure on setting

up branches, inducting technology, or bringing in new people.

THE MERGER- CENTURION BANK AND BANK OF PUNJAB

 Bank of Punjab is merged into Centurion Bank.

 New entity is named as “Centurion Bank of Punjab”.

 Centurion Bank’s chairman Rana Talwar had taken over as the chairman of the merged entity.

 Centurion bank’s MD Shailendra Bhandari became the MD of the merged entity.

 KPMG India pvt ltd and NM Raiji & Co are the independent values and ambit corporate finance

was the sole investment banker to the transaction.

 Swap ratio has been fixed at 4:9 that is for every four shares of Rs 10 of Bank of Punjab, its

shareholders would receive 9 shares of Centurion Bank.

 There has been no cash transaction in the course of the merger; it has been settled through the

swap of shares.

 There is no downsizing via the voluntary retirement scheme.

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Bibliography
Books
1. Financial management:-Subir Kumar Banarjee
2. Merger and acquisition :- C.H.Rajeshwar

Paper
The Economics times

Web
 www.deccanherald.com
 www.papers.ssrn.com/sol3/papers.cfm?abstract_id=1008717
 www.smartmanagementonline.com/Magazines/Articles/Mergers%20and
%20Acquisitions/IPMA0025.htm
 www.tejas-iimb.org/articles/01.php
 www.rediff.com/money/2005/feb/17guest.htm
 www.wikipedia/acquisition.com
 www.wikipedia/merger.com

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