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Mergers And Acquisitions



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.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other
forms of corporate restructuring. Thus important issues both for business decision and public policy
formulation have been raised. No firm is regarded safe from a takeover possibility. On the more positive
side Mergers & Acquisition’s may be critical for the healthy expansion and growth of the firm.
Successful entry into new product and geographical markets may require Mergers & Acquisition’s at
some stage in the firm's development. Successful competition in international markets may depend on
capabilities obtained in a timely and efficient fashion through Mergers & Acquisitions..

To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. We have
discussed almost all factors that the management may have to look into
Before going for merger. Considerable amount of brainstorming would be required by the managements
to reach a conclusion. E.g. A due diligence report would clearly identify the status of the company in
respect of the financial position along with the net worth and pending legal matters and details about
various contingent liabilities. Decision has to be taken after having discussed the pros & cons of the
proposed merger & the impact of the same on the business, administrative costs benefits, addition to

Mergers And Acquisitions

shareholders' value, tax implications including stamp duty and last but not the least also on the
employees of the Transferor or Transferee Company.


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.

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.

Methods of Acquisition:
An acquisition may be affected by

Mergers And Acquisitions

a) Agreement with the persons holding majority interest in the company management like members
of the board or major shareholders 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 of considerations viz. Means of cash,
issuance of loan capital, or insurance of share capital.


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

De-merger or corporate splits or division:

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

Mergers And Acquisitions


The purpose for an offeror company for acquiring another company shall be reflected in the
corporate objectives. It has to decide the specific objectives to be achieved through acquisition. The
basic purpose of merger or business combination is to achieve faster growth of the corporate business.
Faster growth may be had through product improvement and competitive position.

Other possible purposes for acquisition are short listed below: -

(1) Procurement of supplies:

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

2. To obtain economies of purchase in the form of discount, savings in transportation costs,
overhead costs in buying department, etc.;
3. To share the benefits of suppliers economies by standardizing the materials.

(2) Revamping production facilities:

1. To achieve economies of scale by amalgamating production facilities through more intensive

utilization of plant and resources;
2. To standardize product specifications, improvement of quality of product, expanding

3. Market and aiming at consumers satisfaction through strengthening after sale

4. To obtain improved production technology and know-how from the offered company
5. To reduce cost, improve quality and produce competitive products to retain and
Improve market share.

Mergers And Acquisitions

(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 existing products and to enhance the
product range;
4. Strengthening retain outlets and sale the goods to rationalize distribution;
5. To reduce advertising cost and improve public image of the offeree company;
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 combined enterprise;
3. To enhance gearing capacity, borrow on better strength and the greater assets backing;
4. To avail tax benefits;
5. To improve EPS (Earning per Share).

(5) General gains:

1. To improve its own image and attract superior managerial talents to manage 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 own developmental plans.
A company thinks in terms of acquiring the other company only when it has arrived at its own
development plan to expand its operation having examined its own internal strength where it might not
have any problem of taxation, accounting, valuation, etc. But might feel resource constraints with

Mergers And Acquisitions

limitations of funds and lack of skill managerial personnel’s. It has to aim at suitable combination where
it could have opportunities to supplement its funds by issuance of securities, secure additional financial
facilities, eliminate competition and strengthen its market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through alternative type
of combinations which may be horizontal, vertical, product expansion, market extensional or other
specified unrelated objectives depending upon the corporate strategies. Thus, various types of
combinations distinct with each other in nature are adopted to pursue this objective like vertical or
horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite
competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of
collaborations sharing goodwill of each other to achieve performance heights through business
combinations. The combining corporate aim at circular combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between the two
combining business houses. Such integration could be operational or financial. This gives birth to
conglomerate combinations. The purpose and the requirements of the offeror company go a long way in
selecting a suitable partner for merger or acquisition in business combinations.

Mergers And Acquisitions


India has an extensive banking network, in both urban and rural areas. All large Indian banks are
nationalized, and all Indian financial institutions are in the public sector. The Reserve Bank of India is
the central banking institution. It is the sole authority for issuing bank notes and the Supervisory body
for banking operations in India6. It supervises and administers exchange control and banking
regulations, and administers the government's monetary policy. It is also responsible for granting
licenses for new bank branches. 36 foreign banks operate in India with full banking licenses.

Indian Banking System

The banking system has three tiers. These are the scheduled commercial banks; the regional rural banks
which operate in rural areas not covered by the scheduled banks; and the cooperative and special
purpose rural banks. Commercial banks are categorized as scheduled and non-scheduled banks, but for
the purpose of assessment of performance of banks, the Reserve Bank of India categories them as public
sector banks, old private sector banks, new private sector banks and foreign banks.

Scheduled and non Scheduled Banks

There are 93 scheduled commercial banks, Indian and foreign; 196 regional rural banks. In Cooperative
sector- nearly 2000 cooperative banks operate, which include non scheduled banks. In terms of business,
the public sector banks, namely the State Bank of India and the nationalized banks, dominate the
banking sector.

Scheduled Commercial Banks (SCBs) in India are categorized in five different groups according to their
ownership and/or nature of operation. These bank groups are: (I) State Bank of India and its associates,
(ii) Nationalized Banks, (iii) Regional Rural Banks, (iv) Foreign Banks and (v) Other Indian Scheduled
Commercial Banks (in the private sector). The site provides facility of aggregating data for various

Mergers And Acquisitions


Merger 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 as precisely described below with reference to the purpose in view of the offeror

(A) Vertical combination:

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

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

1. It gains a strong position because of imperfect market of the intermediary products, scarcity of
resources and purchased products;

2. Has control over products specifications.

Mergers And Acquisitions

(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage of industrial process. The
acquiring firm belongs to the same industry as the target company. The mail purpose of such mergers is
to obtain economies of scale in production by eliminating duplication of facilities and the operations and
broadening the product line, reduction in investment in working capital, elimination in competition
concentration in product, reduction in advertising costs, increase in market segments and exercise better
control on market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to share common distribution and
research facilities to obtain economies by elimination of cost on duplication and promoting market
enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM and Modi
Industries. The basic purpose of such amalgamations remains utilization of financial resources and
enlarges debt capacity through re-organizing their financial structure so as to service the shareholders by
increased leveraging and EPS, lowering average cost of capital and thereby raising present worth of the
outstanding shares..

Mergers And Acquisitions


Merger Acquisition
The case when two companies (often of same size) The case when one company takes over another and
decide to move forward as a single new company establishes itself as the new owner of the business.
instead of operating business separately.

The stocks of both the companies are surrendered, The buyer company “swallows” the business of the
while new stocks are issued afresh. target company, which ceases to exist.

For example, Glaxo Wellcome and SmithKline Dr. Reddy's Labs acquired Betapharm through an
Beehcam ceased to exist and merged to become a agreement amounting $597 million.
new company, known as Glaxo SmithKline.

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Mergers And Acquisitions


Impacts on Employees

Mergers 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.. Due to the changes in the operating environment and business procedures,
employees may also suffer from emotional and physical problems.

Impact on Management

The 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 Shareholders

Impact 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 Competition

Mergers 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.

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Mergers And Acquisitions


Mergers and takeovers are permanent form of combinations which vest in management complete
control and provide centralized administration which are not available in combinations of holding
company and its partly owned subsidiary. Shareholders in the selling company gain from the merger and
takeovers as the premium offered to induce acceptance of the merger or takeover offers much more price
than the book value of shares. Shareholders in the buying company gain in the long run with the growth
of the company not only due to synergy but also due to “boots trapping earnings”.

Mergers and acquisitions are caused with the support of shareholders, manager’s ad promoters of
the combing companies. The factors, which motivate the shareholders and managers to lend support to
these combinations and the resultant consequences they have to bear, are briefly noted below based on
the research work by various scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subject to merger should

enhance in value. The sale of shares from one company’s shareholders to another and holding
investment in shares should give rise to greater values i.e. The opportunity gains in alternative
investments. 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 available otherwise;
(e) Better investment opportunity in combinations.

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Mergers And Acquisitions

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

(2) From the standpoint of managers

Managers are concerned with improving operations of the company, managing the affairs of the
company effectively for all round gains and growth of the company which will provide them better deals
in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed
outcome get support from the managers. At the same time, where managers have fear of displacement at
the hands of new management in amalgamated company and also resultant depreciation from the merger
then support from them becomes difficult.

(3) Promoter’s gains

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

4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of benefits 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 consumer or the worker
in the companies under merger plan.

(a) Consumers

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Mergers And Acquisitions

The economic gains realized from mergers are passed on to consumers in the form of lower
prices and better quality of the product which directly raise their standard of living and quality of life.
The balance of benefits in favour of consumers will depend upon the fact whether or not the mergers
increase or decrease competitive economic and productive activity which directly affects the degree of
welfare of the consumers through changes in price level, quality of products, after sales service, etc.

(b) Workers community

The merger or acquisition of a company by a conglomerate or other acquiring company may

have the effect on both the sides of increasing the welfare in the form of purchasing power and other
miseries of life. Two sides of the impact as discussed by the researchers and academicians are: firstly,
mergers with cash payment to shareholders provide opportunities for them to invest this money in other
companies which will generate further employment and growth to uplift of the economy in general.
Secondly, any restrictions placed on such mergers will decrease the growth and investment activity with
corresponding decrease in employment. Both workers and communities will suffer on lessening job

Opportunities, preventing the distribution of benefits resulting from diversification of production


(c) General public

Mergers result into centralized concentration of power. Economic power is to be understood as the
ability to control prices and industries output as monopolists. Such monopolists affect social and
political environment to tilt everything in their favour to maintain their power ad expand their business
empire. These advances result into economic exploitation. But in a free economy a monopolist does not
stay for a longer period as other companies enter into the field to reap the benefits of higher prices set in
by the monopolist. Every merger of two or more companies has to be viewed from different angles in the
business practices 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, consumers and does not create
hindrance in administration of the Government polices.

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Mergers and acquisitions are regulated under various laws in India. The objective of the laws is to make
these deals transparent and protect the interest of all shareholders. They are regulated through the
provisions of:-

 The Companies Act, 1956

The Act lays down the legal procedures for mergers or acquisitions:-

• Permission for merger:- Two or more companies can amalgamate only when the
amalgamation is permitted under their memorandum of association. Also, the acquiring
company should have the permission in its object clause to carry on the business of the
acquired company. In the absence of these provisions in the memorandum of association,
it is necessary to seek the permission of the shareholders, board of directors and the
Company Law Board before affecting the merger.
• Information to the stock exchange: - The acquiring and the acquired companies should
inform the stock exchanges (where they are listed) about the merger.
• Approval of board of directors: - The board of directors of the individual companies
should approve the draft proposal for amalgamation and authorize the managements of
the companies to further pursue the proposal.
• Application in the High Court: - An application for approving the draft amalgamation
proposal duly approved by the board of directors of the individual companies should be
made to the High Court.
• Shareholders' and creators' meetings:- The individual companies should hold separate
meetings of their shareholders and creditors for approving the amalgamation scheme. At
least, 75 percent of shareholders and creditors in separate meeting, voting in person or by
proxy, must accord their approval to the scheme.
• Sanction by the High Court: - After the approval of the shareholders and creditors, on
the petitions of the companies, the High Court will pass an order, sanctioning the
amalgamation scheme after it is satisfied that the scheme is fair and reasonable. The date
of the court's hearing will be published in two newspapers, and also, the regional director
of the Company Law Board will be intimated.
• Filing of the Court order: After the Court order, its certified true copies will be filed
with the Registrar of Companies.
• Transfer of assets and liabilities: - The assets and liabilities of the acquired company
will be transferred to the acquiring company in accordance with the approved scheme,
with effect from the specified date.

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• Payment by cash or securities:- As per the proposal, the acquiring company will
exchange shares and debentures and/or cash for the shares and debentures of the acquired
company. These securities will be listed on the stock exchange.

 The Competition Act, 2002

The Act regulates the various forms of business combinations through Competition. Under the
Act, no person or enterprise shall enter into a combination, in the form of an acquisition, merger
or amalgamation, which causes or is likely to cause an appreciable adverse effect on competition
in the relevant market and such a combination shall be void. Enterprises intending to enter into a
combination may give notice to the Commission, but this notification is voluntary. But, all
combinations do not call for scrutiny unless the resulting combination exceeds the threshold
limits in terms of assets or turnover as specified by the Competition Commission of India. The
Commission while regulating a 'combination' shall consider the following factors:-

• Actual and potential competition through imports;

• Extent of entry barriers into the market;
• Level of combination in the market;
• Degree of countervailing power in the market;
• Possibility of the combination to significantly and substantially increase prices or profits;
• Extent of effective competition likely to sustain in a market;
• Availability of substitutes before and after the combination;
• Market share of the parties to the combination individually and as a combination;
• Possibility of the combination to remove the vigorous and effective competitor or
competition in the market;
• Nature and extent of vertical integration in the market;
• Nature and extent of innovation;
• Whether the benefits of the combinations outweigh the adverse impact of the

Thus, the Competition Act does not seek to eliminate combinations and only aims to eliminate
their harmful effects.

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1. 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.

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

3. With the help of M & A in the banking sector, the banks can achieve significant growth in their
operations and minimize their expenses to a significant level Competition is reduced because
merger eliminates competitors from the banking industry.

4. In India mergers especially of the PSBS may be subject to technology and trade union related
problem. The strong trade union may prove to be big obstacle for the PSBS mergers. Technology
of the merging banks to should complement each other NPA management. Management of
efficiency, cost reduction, tough competition from the market players and strengthens of the
capital base of the banks are some of the problem which can be faced by the merge entities.
Mergers for private sector banks will be much smoother and easier as again that of PSBS.

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

1. Technology drive has benefited the customers in terms of faster improve convenient banking
services and Varity of financial products to suit their requirement. Atms, Phone Banking, Net
banking, Any time and Any where banking are the services which bank have started offering
following the changing trend in sectors. In plastic money segment customer have also got a new
option of debits cards against the earlier popular credit card. Earlier customers had to conduct their
banking transaction within the restricted time frame of banking hours. Now banking hours are

2. Atms ,Phone banking and Net banking had enable the customer to transact as per their convince
customer can now without money at any time and from any branch across country as certain their
account transaction, order statements of their account and give instruction using the tally banking or
on online banking services.

3. Bank traditionally involve working capital financing have started offering consumer loans and
housing loans. Some of the banks have started offering travel loans, as well as many banks have
started capitalizing on recent capital market boom by providing IPO finance to the investors.

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Public announcement:
To make a public announcement an acquirer shall follow the following procedure:

1. Appointment of merchant banker:

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

2. Use of media for announcement:

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

3. Timings of announcement:
Public announcement should be made within four days of finalization of negotiations or entering
into any agreement or memorandum 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.

(1) Paid up share capital of the target company, the number of fully paid up and partially
paid up shares.

(2) Total number and percentage of shares proposed to be acquired from public subject
to minimum as specified in the sub-regulation (1) of Regulation 21 that is:

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a) The public offer of minimum 20% of voting capital of the company to the
b) The public offer by a raider shall not be less than 10% but more than 51% of
shares of voting rights. Additional shares can be had @ 2% of voting rights in
any year.

(3) The minimum offer price for each fully paid up or partly paid up share;

(4) Mode of payment of consideration;

(5) The identity of the acquirer and in case the acquirer is a company, the identity of the
promoters and, or the persons having control over such company and the group, if
any, to which the company belong;

(6) The existing holding, if any, of the acquirer in the shares of the target company,
including holding of persons acting in concert with him;

(7) Salient features of the agreement, if any, such as the date, the name of the seller, the
price at which the shares are being acquired, the manner of payment of the
consideration and the number and percentage of shares in respect of which the
acquirer has entered into the agreement to acquirer the shares or the consideration,
monetary or otherwise, for the acquisition of control over the target company, as the
case may be;

(8) The highest and the average paid by the acquirer or persons acting in concert with
him for acquisition, if any, of shares of the target company made by him during the
twelve month period prior to the date of the public announcement;

(9) Objects and purpose of the acquisition of the shares and the future plans of the
acquirer for the target company, including disclosers whether the acquirer proposes
to dispose of or otherwise encumber any assets of the target company:
Provided that where the future plans are set out, the public announcement shall
also set out how the acquirers propose to implement such future plans;

(10) The ‘specified date’ as mentioned in regulation 19;

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(11) The date by which individual letters of offer would be posted to each of the

(12) The date of opening and closure of the offer and the manner in which and the date by
which the acceptance or rejection of the offer would be communicated to the share

(13) The date by which the payment of consideration would be made for the shares in
respect of which the offer has been accepted;

(14) Disclosure to the effect that firm arrangement for financial resources required to
implement the offer is already in place, including the details regarding the sources of
the funds whether domestic i.e. from banks, financial institutions, or otherwise or
foreign i.e. from Non-resident Indians or otherwise;

(15) Provision for acceptance of the offer by person who own the shares but are not the
registered holders of such shares;

(16) Statutory approvals required to obtained for the purpose of acquiring the shares under
the Companies Act, 1956, the Monopolies and Restrictive Trade Practices Act, 1973,
and/or any other applicable laws;

(17) Approvals of banks or financial institutions required, if any;

(18) Whether the offer is subject to a minimum level of acceptances from the
shareholders; and

(19) Such other information as is essential fort the shareholders to make an informed
design in regard to the offer.

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It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that the merger
will cut costs or boost revenues by more than enough to justify the price premium. It can sound so
simple: just combine computer systems, merge a few departments, use sheer size to force down the price
of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds
great, but in practice, things can go awry.

Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which
means they will lose value on the stock market. The motivations that drive mergers can be flawed and
efficiencies from economies of scale may prove elusive. In many cases, the problems associated with
trying to make merged companies work are all too concrete.

The Obstacles to Making it Work

Coping with a merger can make top managers spread their time too thinly and neglect their core
business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill
of the big deal.

The chances for success are further hampered if the corporate cultures of the companies are very
different. When a company is acquired, the decision is typically based on product or market synergies,
but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily
overcome. For example, employees at a target company might be accustomed to easy access to top
management, flexible work schedules or even a relaxed dress code. These aspects of a working
environment may not seem significant, but if new management removes them, the result can be
resentment and shrinking productivity.

More insight into the failure of mergers is found in the highly acclaimed study from McKinsey, a global
consultancy. The study concludes that companies often focus too intently on cutting costs following
mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on integration and
cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee.
This loss of revenue momentum is one reason so many mergers fail to create value for shareholders.

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These indicators include measures of financial performance:
 asset and liability composition
 capital structure
 liquidity
 risk exposure
 profitability
 financial innovation and efficiency

As dependent variable, we measure change of performance as the difference between the merged banks‟
two-year average return on equity (ROE) after the acquisition and the weighted average of the ROE of
the merging banks two years before the acquisition.

Table: Definition of the variables

Sr.No Definition formula
1 Performance Change (ΔROE) Return on equity (After merger)

2 Liquidity (LIQ) Liquid Asset/Total Deposit

3 Cost-income ratio (COST/INC) Total cost/Total revenue

4 Capital to asset ratio (CA/TA) Total capital/Total asset

5 Loans to total assets ratio (LOAN/TA)) Net Loans/Total asset

6 Credit Risk (BADL/INT_INC) Loan loss provision/Net interest


7 Diversity Earning (OOR/TA) Other operational revenues/Total


8 Off balance sheet (OBS/TA) Off balance sheet item/Total asset

9 Loans to deposit ratio (LOANS/DEP) Customer loan to Customer


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Costs of mergers and acquisitions are an important and integral part of mergers and acquisitions
process. Before going for any merger or acquisition, both the companies calculate
the costs of mergers and acquisitions to find out the viability and profitability of
the deal. Based on the calculation, they decide whether they should go with the deal
or not.
In mergers and acquisitions, both the companies may have different theories about the worth of
the target company. The seller tries to project the value of the company high,
whereas buyer will try to seal the deal at a lower price. There are a number of
legitimate methods for valuation of companies.

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There are a number of methods used in mergers and acquisition valuations. Some of those can be
listed as:
Replacement Cost Method
In Replacement Cost Method, cost of replacing the target company is calculated and acquisitions
are based on that. Here the value of all the equipments and staffing costs are taken
into consideration. The acquiring company offers to buy all these from the target
company at the given cost. Replacement cost method isn't applicable to service
industry, where key assets (people and ideas) are hard to value.

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Discounted Cash Flow (DCF) Method

Discounted Cash Flow (DCF) method is one of the major valuation tools in
mergers and acquisitions. It calculates the current value of the organization
according to the estimated future cash flows.

Estimated Cash Flow = Net Income + Depreciation/Amortization - Capital

Expenditures - Change in Working Capital

These estimated cash flows are discounted to a present value. Here, organization's
Weighted Average Costs of Capital (WACC) is used for the calculation. DCF
method is one of the strongest methods of valuation.

Economic Profit Model

In this model, the value of the organization is calculated by summing up the

amount of capital invested and a premium equal to the current value of the value
created every year moving forward.

Economic Profit = Invested Capital x (Return on Invested Capital - Weighted

Average Cost of Capital)

Economic Profit = Net Operating Profit Less Adjusted Taxes - (Invested Capital x
Weighted Average Cost of Capital)

Value = Invested Capital + Current Value of Estimated Economic Profit

Price-Earnings Ratios (P/E Ratio)

This is one of the comparative methods adopted by the acquiring companies, based

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Mergers And Acquisitions

on which they put forward their offers. Here, acquiring company offers multiple of
the target company's earnings.

Enterprise-Value-to-Sales Ratio (EV/Sales)

Here, acquiring company offers multiple of the revenues. It also keeps a tab on the
price-to-sales ratio of other companies.


 Capacity

 Economies of Scale

 Accessing technology or skills

 Tax reasons

 Growth with External Efforts

 Deregulation

 Technology

 New Products/Services

 Over Capacity

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 Customer Base

 Merger of Weak Banks


 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.

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

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 With a view to facilitating consolidation and emergence of strong entities and providing an
avenue for non disruptive exit of weak/unviable entities in the banking sector, it has been decided
to frame guidelines to encourage merger/amalgamation in the sector.

 Although the Banking Regulation Act, 1949 (AACS) does not empower Reserve Bank to
formulate a scheme with regard to merger and amalgamation of banks, the State Governments
have incorporated in their respective Acts a provision for obtaining prior sanction in writing, of
RBI for an order, inter alia, for sanctioning a scheme of amalgamation or reconstruction.

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 The request for merger can emanate from banks registered under the same State Act or from
banks registered under the Multi State Co-operative Societies Act (Central Act) for takeover of a
bank/s registered under State Act. While the State Acts specifically provide for merger of co-
operative societies registered under them, the position with regard to take over of a co-operative
bank registered under the State Act by a co-operative bank registered under the CENTRAL

 Although there are no specific provisions in the State Acts or the Central Act for the merger of a
co-operative society under the State Acts with that under the Central Act, it is felt that, if all
concerned including administrators of the concerned Acts are agreeable to order merger/
amalgamation, RBI may consider proposals on merits leaving the question of compliance with
relevant statutes to the administrators of the Acts. In other words, Reserve Bank will confine its
examination only to financial aspects and to the interests of depositors as well as the stability of
the financial system while considering such proposals.

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

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

3. Information which is considered relevant for the consideration of the scheme of merger including in

A. Annual reports of each of the Banks for each of the three completed financial years
immediately preceding the proposed date for merger.

B. Financial results, if any, published by each of the Banks for any period subsequent to the
financial statements prepared for the financial year immediately preceding the proposed date of merger.

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

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

• Tier I Capital

• Tier II Capital

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• Risk-weighted Assets

• Gross and Net npas

• Ratio of Tier I Capital to Risk-weighted Assets

• Ratio of Tier II Capital to Risk-weighted Assets

• Ratio of Total Capital to Risk-weighted Assets

• Tier I Capital to Total Assets

• Gross and Net npas to Advances

• Cash Reserve Ratio

• Statutory Liquidity Ratio

4. Information certified by the values as is considered relevant to understand the net realizable value of
assets of the acquired bank including in particular:-

A. The method of valuation used by the values

B. The information and documents on which the values have relied and 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 names and designations of the
persons who have provided such information and the extent of verification, if any, made by the values in
relation to such information

D. Details of the projected information on which the values have relied

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Mergers And Acquisitions

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


 Globally, the banking and financial systems have adopted information and communications
technology. This phenomenon has largely by passed the Indian banking system, and the committee
feels that requisite success needs to be achieved in the following areas:-

- Banking automation

- Planning, Standardization of electronic payment systems

- Telecom infrastructure

- Data were

 Merger between banks and dfls and nbfcs need to be based on synergies and should make a sound
commercial sense. Committee also opines that merger between strong banks / fls would make for
greater economic and commercial sense and would be a case where the whole is 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 weak banks.

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Mergers And Acquisitions

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

 The committee also options that while licensing new private sector banks, the initial capital
requirement need to be review. It also emphasized on a transparent mechanism for deciding the
ability of promoter to professionally manage the bank. The committee also feels that a minimum
threshold capital for old private banks also deserved threshold capitals. The committee also opined
that a promoter group couldn'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) with a strong public sector bank.
Source: Narasimham Committee report on banking sector reforms.

Changes after the merger:-

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

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

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

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Financial Capability: The amalgamation will enable them to have a stronger financial and operational
structure, which is supposed to be capable of greater resourger/deposit mobilization. And ICICI will
emerge a one of the largest private sector banks in the country.

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

Customer base: The emerged largest customer base will enable the ICICI bank to offer banking
financial services and products and also facilitate cross-selling of products and services of the ICICI

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

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

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


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

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

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Mergers And Acquisitions

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



The question on top everybody’s mind is

Are banks and bankers on the road to redundancy?
First consider the reasons that one does not need banks in large numbers any more

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

 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 need not 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 your credit card- with far fewer

 A ‘AAA’ corporate can directly borrow from the market through commercial papers and get better
rates in the bargain. In fact the banks may indeed be left with dad credit risk or those that cannot
access the capital market. This once again makes a shift to non-fund based the activities all the more

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Case study I

Agrees to amalgamate Bank of Rajasthan:

ICICI Bank has entered into an agreement with certain shareholders of Bank of Rajasthan (BoR) to
amalgamate BoR, with a tentative share exchange ratio of 1:4.72 (25 shares of ICICI Bank for 118
shares of BoR). The final exchange ratio will be based on due diligence and independent valuation
reports. Assuming a share swap ratio of 1:4.72, the deal values BoR at Rs30.4b and will lead to ~3%
equity dilution for ICICI Bank.

Branch addition, stronger North India network are key positives:

The key positives for ICICI Bank will be a 23% increase in the number of branches and a stronger
network in North India. Over 60% of BoR’s 463 branches are in the state of Rajasthan and ~70% are in
North India. BoR’s biggest competitors in the state of Rajasthan are SBI’s subsidiary, State Bank of
Bikaner and Jaipur (~750 branches), Bank of Baroda (~350 branches) and Punjab National Bank (~310

Deal at a significant premium; Improvement in deposit franchisee will be key

value driver:

The implied valuation of BoR at 4.8x trailing book value appears expensive, as the book needs to be
adjusted for the re-assessment of BoR’s NPAs by ICICI Bank. The key near-term challenges for ICICI
Bank will be assessment of

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BoR’s asset quality, rationalization and re-positioning of BoR’s branches, and possible regulatory issues.
We will review our target price for ICICI Bank post the merger
details. Maintain Buy.

Valuing BoR at Rs66m/branch

While BoR’s asset base is just 5% of ICICI Bank’s, its 463 branches will result in a ~23%
increase in ICICI Bank’s existing network of 2,000 branches. A share swap ratio of 1:4.72 (25 shares of
ICICI Bank for 118 shares of BoR) implies a valuation of Rs66m per branch and 0.2x the deposit base
for BoR. It is noteworthy that ICICI Bank has opened 580 new branches (1.3x BoR’s branch network)
since March 2009 at a cost of Rs8m-10m per branch. However, it takes almost two years for a new
branch to break even.

Comparision of BOR and ICICI


CASA Deposits Rs 4163crores Rs 21000crores

Business per month Rs 47crores Rs 304crores

Return on average assets 0.7% 1%

Net non-performing assets 1.05% 2.1%

Implied price per branch lower than last deal in the sector
In the last deal in the sector, HDFC Bank had valued CBoP at Rs285m per branch and
0.5x the deposit base. ICICI Bank had acquired Sangli Bank at Rs3.5b, valuing Sangli

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Mergers And Acquisitions

Bank at ~Rs18m per branch. While the price that ICICI Bank is paying is in line with the valuations of
other old private sector banks, it is significantly lower than the CBoP deal.


Banks BRANCHES Deposits Approx price Value Value

(branches) (deposits)
Sangli bank 200 20 3.5 17.5 0.18
UWI 229 65 3.5 15.3 0.05
LKB 118 20 3.3 28.0 0.17
CBOP 394 207 112.2 284.8 0.54
BOR 463 152 30.5 65.9 0.20

Benefit of Merger for ICICI Bank

 The proposed amalgamation would substantially enhance ICICI Bank’s branch network, already
the largest among Indian private sector banks, and especially strengthen its presence in northern
and western India.

 The rationale for the merger, according to the ICICI Bank management, is that it would have
taken the bank three years to build the kind of low-cost current account and savings account
(CASA) relationship; it gets to build upon now with the latest move. ICICI Bank has had its
sights set firmly on expanding its share of CASA deposits.

 Adds 25% to their branch network.

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 State Bank of India is the largest state-owned banking and financial services company in India,
by almost every parameter - revenues, profits, assets, market capitalization, etc.

 SBI has 21000 ATM’s, 26500 branches including the branches of its associate banks.

 The bank has 131 overseas offices spread over 32 countries. It has branches of the parent in
Colombo, Dhaka, Frankfurt, Hong Kong, Johannesburg, London and environs, Los Angeles,
Male in the Maldives, Muscat, New York, Osaka, Sydney, and Tokyo.

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Financial Performance OF STATE BANK OF INDIA

RATIOS Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Net Profit Margin

11.21 10.12 11.65 12.03 10.54

Return on Net Worth(%)

15.94 14.50 13.72 15.74 13.89

Net Interest Income/Total

Funds 3.71 3.85 3.87 3.79 3.82

Asset Turnover Ratio

5.10 5.44 6.32 7.20 7.26

Interest expended/
56.32 59.35 65.23 67.28 66.66
Interest earned

Capital Adequacy Ratio

11.88 12.34 13.47 14.25 13.39

Advances/total funds(%)
65.66 76.16 78.31 78.34 74.22

Credit Deposit Ratio 62.11 73.44 77.51 74.97 75.96


 On August 26, 2010, State Bank of Indore was officially merged with State Bank of India.

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 State Bank of Indore was formerly named as Bank of Indore Ltd. It was established under a
special charter of His Highness Maharaja Tukojirao Holker-III, the then ruler of Malwa region.

 It became a subsidiary of State Bank of India on 1 January 1960, under the State Bank of India
Subsidiary Banks Act, 1959.

 In the following year (1962), State Bank of Indore took over the business of The Bank of Dewas

 In 1965, State Bank of Indore took over The Dewas Senior Bank Ltd. as well.

 State Bank of Indore was upgraded to class 'A' category bank in 1971.

 The business turnover of the Bank crossed Rs.47000 Crore at the end of December 2008.

 It has emerged as the premier bank of Madhya Pradesh due to its steady progress.

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 The SBI with the sanction of Govt. of India entered into negotiations with State Bank of Indore
for the acquisition on Oct 8, 2009.
 The Board of Directors of State Bank of Indore On October 31, 2009, approved the Scheme of
Acquisition of State Bank of Indore (SBIN) by SBI, under Section 35 of the SBI Act, 1955.
 SBI has already announced a share swap ratio of 34:100 for the merger. That means, SBI would
give its 34 shares for every 100 shares of State Bank of Indore held by minority shareholders.
 For this purpose, SBI would issue up to over 1.16 lakh shares of face value Rs 10 each to
minority shareholders of State Bank of Indore.
 After the merger, the issued capital of SBI would increase from Rs 634.96 crore up to a
maximum of Rs 635.08 crore.
 Both the banks separately and independently appointed M/s Haribhakti & company (qualified
chartered accountants and M/s Axis Bank ltd. (Category 1 merchant bankers) as the independent
 M/s Kotak Mahindra capital company ltd.(Category 1 merchant bankers) was appointed by both
the banks independently to provide a fairness opinion to valuation of the independent valuers.
 After the merger, SBI will be left with five associate banks, State Bank of Bikaner and Jaipur,
State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of
Hyderabad. Among these, the State Banks of Bikaner and Jaipur, Mysore and Travancore are
listed companies.

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Mergers And Acquisitions

 The merger would avoid competition between the two entities and lead to easier access to funds
at competitive rates, compared to what State Bank of Indore would have managed for its growing
balance sheet.

 Acquisition of State Bank of Indore by SBI would allow economies of scale in terms of footprint,
manpower and other resources.

 State Bank of Indore has a large number of branches outside Madhya Pradesh and Chhattisgarh
and all of them would be controlled conveniently from SBI's local head offices in various states
leading to substantial cost savings.

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Case study 3

The merger that was announced on, 2006 between Deutsche Bank and Dresdner Bank,
Germany’s largest and the third largest bank respectively was considered as Germany’s response to
increasingly tough competition markets.

The merger was to create the most powerful banking group in the world with the balance sheet
total of nearly 2.5 trillion marks and a stock market value around 150 billion marks. This would put the
merged bank for ahead of the second largest banking group, U.S. based citigroup, with a balance sheet
total amounting to 1.2 trillion marks and also in front of the planned Japanese book mergers of
Sumitomo and Sukura Bank with 1.7 trillion marks as the balance sheet total.

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

The merged bank was to retain the name Deutsche Bank but adopted the Dresdner Bank’s green
corporate color in its logo. The future core business lines of the new merged Bank included investment
Banking, asset management, where the new banking group was hoped to outside the traditionally
dominant Swiss Bank, Security and loan banking and finally financially corporate clients ranging from
major industrial corporation to the mid-scale companies.

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

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The main issue of the failure was Dresdner Bank’s investment arm, Kleinwort Benson, which the
executive committee of the bank did not want to relinquish under any circumstances.

In the preliminary negotiations it had been agreed that Kleinwort Benson would be integrated
into the merged bank. But from the outset these considerations encountered resistance from the asset
management division, which was Deutsche Bank’s investment arm.

Deutsche Bank’s asset management had only integrated with London’s investment group Morgan
Grenfell and the American Banker’s trust. This division alone contributed over 60% of Deutsche Bank’s
profit. The top people at the asset management were not ready to undertake a new process of integration
with Kleinwort Benson. So there was only one option left with the Dresdner Bank i.e. To sell Kleinwort
Benson completely. However Walter, the chairman of the Dresdner Bank was not prepared for this. This
led to the withdrawal of the Dresdner Bank from the merger negotiations.

Case study 4

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Private Banks are taking to the consolidation route in a big way. Bank of Punjab (BoP) and Centurion
Bank (CB) have been merged to form Centurion Bank of Punjab (CBP). RBI has approved merger of
Centurion Bank and Bank of Punjab effective from October 1, 2005. The merger is at a swap ratio 9:4
and the combined bank is will be called Centurion Bank of Punjab. The merger of the banks will have a
presence of 240 branches and extension counters, 386 ATMs, about 2.2 million customers. As on March
2005, the net worth of the combined entity is Rs 696 crore and the capital adequacy ratio is 16.1 per cent

In the private sector, nearly 30 banks are operating. The top five control nearly 65% of the assets. Most
of these private sector banks are profitable and have adequate capital and have the technology edge.

Due to intensifying competition, access to low-cost deposits is critical for growth. Therefore, size and
geographical reach becomes the key for smaller banks. The choice before smaller private banks is to
merge and form bigger and viable entities or merge into a big private sector bank.

The proposed merger of Bank of Punjab and Centurion Bank is sure to encourage other private sector
banks to go for the M&A road for consolidation.

Highlights of the merger-Centurion Bank and Bank of Punjab

Bank of Punjab will be merged into Centurion Bank.

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New entity will be named 'Centurion Bank of Punjab'.

Centurion Bank's chairman Rana Talwar will take over as the chairman of the merged entity.

Centurion Bank's MD Shailendra Bhandari will be the MD of the merged entity.

KPMG India Pvt Ltd and NM Raiji & Co are the independent valuers 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 nine shares of Rs 1 of Centurion Bank.

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

There will no downsizing via the voluntary retirement scheme.

Financials of the merged entity- Centurion Bank of Punjab

The cost of deposit of Bop were lower than Centurion, while Centurion had a net interest margin of
around 5.8%,. The net interest margin of the merged entity will be at 4.8%.

The combined entity will have net non performing assets (NPAs) of about 3.6 per cent as per Performa
March 2005 data. Centurion banks net NPAs as on 31 March 2005 stood at 2.49 per cent while for Bank
of Punjab the figure stood at 4.6 per cent.

The combined entity will have adequate capital adequacy of 16.1 per cent to provide for its growth
plans. Centurion banks capital adequacy on a standalone basis stood at 23.1 per cent while for Bank of
Punjab the figure stood at 9.21per cent.

The Performa net worth of combined entity as at March 2005 stood at Rs 696 crore with Centurion's net
worth at Rs 511 crore and Bank of Punjab's net worth at Rs 181 crore, and the combine entity (Centurion
Bank of Punjab) will have total asset 9,395 crore, deposit 7,837crore and operating profit 43 crore.

The merged entity will have a paid up share capital of Rs 130 cr and a net worth of Rs 696 cr.

The merged entity will have 235 Branches & extension counters, 382 ATMs and 2.2 million customers .

Gains from the merger

Combined entity the Punjab-centurion bank would be the among the top 10 private sector banks in the

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Merged entity would benefit from the fact that centurion bank had recently written of its bad loans
against equity.

Branch network of the two banks will complement each other. The combined entity will have a
nationwide reach.

Centurion Bank is strong in South India, Maharashtra and Goa whereas Bank of Punjab is strong in
Punjab, Haryana and Delhi. While Centurion Bank has 82 per cent of its business coming from retail,
Bank of Punjab is strong in the Small and Medium Enterprises (SMEs) segment and agricultural sector.

The book value of the bank would also go up to around Rs 300 crore. The higher book value should help
the combine entity to mobilize funds at lower rate.

The combined bank will be full-service commercial bank with a strong presence in the Retail, SME and
Agricultural segments.

Case study 5

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HDFC Bank, Centurion swap ratio fixed at 1:29

HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab
(CBoP) for Rs 9,510 crore in one of the largest merger in the financial sector in India. CBoP
shareholders will get one share of HDFC Bank for every 29 shares held by them.

This will be HDFC Bank’s second acquisition after Times Bank. HDFC Bank will jump to the 7th
position among commercial banks from 10th after the merger. However, the merged entity would
become second largest private sector bank.

The merger will strengthen HDFC Bank's distribution network in the northern and the southern
regions. CBoP has close to 170 branches in the north and around 140 branches in the south. CBoP has
a concentrated presence in the in the Indian states of Punjab and Kerala. The combined entity will
have a network of 1148 branches. HDFC will also acquire a strong SME (small and medium
enterprises) portfolio from CBoP. There is not much of overlapping of HDFC Bank and CBoP

The entire process of the merger would take about four months for completion. The merged entity
will be known as HDFC Bank. Rana Talwar's Sabre Capital would hold less than 1 per cent stake in
the merged entity from 3.48 in CBoP, while Bank Muscat's holding will decline to less than 4 per
cent from over 14 per cent in CBoP. HDFC shareholding falls to will fall from 23.28 per cent to
around 19 per cent in the merged entity.

Mr Rana Talwar, Chairman of Centurion Bank, has been offered a seat on the Board as non-executive
director and Mr Shailendra Bhandari, Managing Director, Centurion Bank, has been invited to join as
the Executive Director on the board post merger.

According to HDFC Bank Managing Director and Chief Executive Officer Aditya Puri, Integration
will be smooth as there is no overlap. In an interview, he mentioned that at 40% growth rate there will
be no lay-offs. The integration of the second rung officials should be smooth as there is hardly any

The boards of the two banks will meet again on February 28 to consider the draft scheme of
amalgamation, which will be subject to regulatory approvals. HDFC Bank will consider making a
preferential offer to its parent Housing Development Finance Corp Ltd (HDFC). The move would
allow HDFC to maintain the same level of shareholding in the bank.

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Banking sector reforms in India are in the progress. Both Finance Ministry of India and Reserve Bank of
India (RBI) are actively suggesting many far reaching reforms for banking and financial industry of

One of such reforms pertains to regulating mergers and acquisitions (M&A) pertaining to banking
sector. Till now the Competition Commission of India (CCI) has a say in the M&A pertaining to
banking companies.

However, with the recent proposed amendments in the Banking Regulations Act, 1949, only RBI would
have power to regulate M&A pertaining to banking sector. In fact, the proposed amendments have
already been approved by Cabinet of India.

Finance Minister Pranab Mukherjee has also recently said that RBI would have the final say on bank
M&A. He told that banking mergers and acquisitions will not come under the purview of the
Competition Act or the Companies Act.

Indian mergers and acquisitions in 2011 may surpass this year’s record $71 billion of deals, led by oil
and gas, metals and mining companies, according to M&A bankers including Topsy Mathew of
Standard Chartered.
Billionaire Sunil Mittal’s $10.7 billion acquisition of mobile-phone operators in Africa led an almost
four-fold increase in takeovers this year as deals surpassed 2007’s $69 billion, according to data
compiled by Bloomberg.
Companies in Asia-Pacific including India and China are expected to be the most acquisitive buyers in
2011 as attractive valuations and domestic competition drive deals globally, according to Bloomberg’s
M&A Global Outlook survey. Overseas firms may target Indian pharmaceutical and consumer firms,
and local enterprises will seek natural resources, said Bank of America, ranked No. 3.
“Outbound deals would continue to be highly active given that international companies’ valuations are
still relatively depressed, and Indian companies have access to debt and equity capital,” Saurabh
Agrawal, the 41-year-old head of India investment banking at Charlotte, North Carolina-based Bank of
America, wrote in an e-mailed response to questions. “Inbound and local deals will also take place.”

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Cross-border deals rose to a record $59.2 billion in India this year, after Mittal’s New Delhi-Bharti
Airtel in March agreed to buy the African assets of Zain for $10.7 billion. Outbound M&A accounted for
74% of that volume. The acquisition spree in India, China and Brazil contrasts with a slowdown in
global deals. Mergers worldwide are down 46% from 2007’s record. In the US, the world’s largest
market, volumes are 51% lower, and levels in Europe are down by 59%.

“Large Indian corporate are going through a growth phase: they think there is a lot of opportunity, they
think they have access to capital,” 35-year-old Mathew, managing director for M&A for India, said in an
interview. The London-based bank climbed 13 places to No. 2 among Indian takeover advisers this year,
its highest ranking. “They are capitalizing on the positive sentiment to undertake long-term strategic
transactions,” he said.

The mergers and acquisitions of banks will now come under the purview of the Banking Regulation Act.
This means M&A in banking sector would no more require the approval of the Competition Commission
of India.

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Feb 26 (IANS) Bank mergers in India are likely to impact the insurance sector as many insurers have
select banks as their banc assurance partners. Banc assurance is the sale of life, pension and investment
products through the branch network of a bank.

The recent merger announcement of HDFC Bank and Centurion Bank of Punjab Ltd is expected to
impact the business of Aviva Life Insurance Co Ltd and ICICI Lombard General Insurance Co Ltd.

Centurion Bank is the banc assurance partner for these two insurers.

The arrangements might be discontinued because HDFC Bank sells life and non-life insurance policies
of group companies HDFC Standard Life Insurance Co Ltd and HDFC General Insurance Co Ltd.

After the opening up of the insurance sector, banks have come to occupy an important role in insurance
distribution, particularly for private life insurers.

Banks procure nearly 40 percent of the fresh business for life insurers. It is not surprising therefore to
have life insurers whose very lifeline is their banking partners.

Insurers find recruiting and training individual agents a time-consuming and costly process. There are
also issues like agency attrition and small-sized policies procured by agents.

For new private life insurers who want to achieve fast revenue growth, banks are the only source of

Banks also find that selling life insurance products is a lucrative activity.

Normally banc assurance deals are for three years and each bank can represent only one insurer as a
corporate agent.

Realizing their vital role, banks are now dictating the terms of the banc assurance deals. In some cases
banks are demanding commission and other fees totaling nearly 70 percent of the first year premium on
a policy, say industry experts However, new private life insurers are finding it difficult to sign up a
banking partner to sell their products as early entrants have already inked distribution agreements with

Some banks have started representing a new life insurer at regular intervals.

For instance, Aviva Life had recently inked a banc assurance deal with the Bank of Rajasthan, which has
switched life insurance partners in recent times.

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Initially, the bank vended policies of Birla Sun Life Insurance Co Ltd. It changed over to Life Insurance
Corp of India (LIC) before signing up with Aviva Life.

V. Srinivasan, chief financial officer of Bharti Axa Life Insurance Co Ltd, said that the one bank-one
insurer concept was not right and would lead to skewed scenario.

“A bank has a wide variety of customers. No single insurer can satisfy the needs of all the bank
customers. A bank should be allowed to be a broker and sell the policies of different insurers

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Mergers And Acquisitions


One of the most common reasons for mergers and acquisitions is the belief that "synergies" exist,
allowing the two companies to work more efficiently together than either would separately. Such
synergies may result from the firms' combined ability to exploit economies of scale, eliminate duplicated
functions, share managerial expertise, and raise larger amounts of capital.
Another reason for banks to move towards merger is that they are motivated by a desire for greater
market power.
The 'human factor' is a major cause of difficulty in making the integration between two companies work
successfully. If the transition is carried out without sensitivity towards the employees who may suffer as
a result of it, and without awareness of the vast differences that may exist between corporate cultures,
the result is a stressed, unhappy and uncooperative workforce - and consequently a drop in productivity
Decision to carry out a merger or acquisition should consider not only the legal and financial
implications, but also the human consequences - the effect of the deal upon the two companies'
managers and employee
Almost 60 -70% mergers and acquisitions and the reason for the failure is cultural differences, flawed
intentions, and sometimes decisions are taken without properly analysis the future of the merger.
Merger of BoR an old private sector bank with India's 2nd largest private sector bank will definitely help
both of this parties as ICICI Bank can extend it activities as it total number branches will go up by 25%
and BoR will also get new direction as it already witness the share price of BoR in BSE is almost
doubled after the announcement of the merger

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