ASSIGNMENT ON MERGERS & ACQUISITION ICICI-BANK OF RAJASTHAN MERGER

Kirloskar Institute of Advanced Management Studies, Harihar, Karnataka. 2012-2014

Submitted to: Prof. Atul Kulkarni

GROUP MEMBER NAME:GAURAV SHARMA MAHESHWAR JULKA PANKAJ KUMAR BOTHRA SAKSHI GUPTA SWAYAMDIP DAS

Overview: Between 2000 and 2010, the size of the largest bank in the world has grown near to fourfold by its assets from about US $0.64 trillion to US $2.2 trillion which is almost double the size of GDP of India. Synergies arising from geographical diversification, increased efficiency, cost savings and economies of scale are the motivation drivers behind bank mergers across the world. M&As have become a major strategic tool for achieving the same and it is imperative to avoid the possibilities of small banks from becoming the target of huge foreign banks which are expected to come to India. Based on the motives, merger deals are grouped into 3 categories viz, Voluntary Merger, Compulsory Merger and Universal Banking Model. The merger of ICICI Bank Bank of Rajasthan is the seventh voluntary merger and the latest in India after the merger of HDFC Bank - Centurion Bank of Punjab in the year 2008. When compared with other voluntary mergers, this deal has many oddities in the context and in the background of the merger including various regulatory interventions of authorities like the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Foreign Investment Promotion Board (FIPB). This deal also got lots of attention because of poor corporate governance of the target bank and cancellation of Extra Ordinary General Meeting (EGM) by the Calcutta District Civil Court. In this case, an attempt has been made to analyse the probable impact of strategic features of the banks on post-merger performance. Brief contours of the deal The swap ratio announced is 25 ICICI shares for 118 BoR shares (1: 4.72) higher than the market price related swap ratio of 1:9. This effectively translates into a ~90% premium to the market price (at the time of announcement of the deal). In terms of price to book, it works out to 4.8x trailing book (Q3FY10). Adjusting for NPLs, price to book works out to 5.3x. BoR carries high revaluation reserve of around `4bn (~40% of net worth). Hence, accounting for the revaluation reserve, the price to book value works out to 3.1x trailing adj. book (a more reasonable number). The proposed swap ratio values BoR at `30.4bn, translating into a per branch value of only `65.7mn, given its 463 branches. In contrast, HDFC Bank had paid around `260mn for every branch of Centurion Bank of Punjab when the deal was sealed in February 2008.

 BoRs implied price per share comes at `188.38 per share. ICICI will issue 34.1 million new shares, which will lead to 3.1% dilution. Q 1. What is the acquirers acquisition strategy? Identify the reasons why the acquirer considered acquiring the target. Ans. The acquirers acquisition strategy in this merger was clear cut expansion In terms of reach out of branch which it was getting in terms of in North And North-West market it will augment the banks geographical presence By 23% at the cost of ~3% equity dilution in overall. The synergy will certainly develop over a medium to long term period but this is the best possible route to expand operation and their by improve size and profitability. Reason For Acquisition BOR was facing many problems because of its Bad Corporate governance. There was huge pressure from regulatory authorities to restructure the Bank for a variety of problems from 2009 onwards. In February 2010, the RBI levied a penalty of `25lakhs for a series of violations including irregular property deals, actions against money laundering norms, deletion of corporate records from the information systems, irregularities in the accounts of corporate groups, extension of repayment period over permissible limits on intra-day overdraft, lack of enough credit committees. Sings of poor corporate governance. Because of the above problems the share of BOR was hitting very hard close to its lowest levels of `61.8. This was undervalued. Although During Feb 2010 the bank was in bad names but had sound financial records. Total income received from interest and others income registered a growth of 25.8% from FY 2008 at `1513.40 crores as on 31st March 2009. Wide reach with 478 branches and 96 ATMs.40% of reserves among total net worth. High Return on Loan i.e 16.3% as compared to 12.7% of ICICI Bank. Q2. Was there any vulnerability in the target that made it a candidate for acquisition? Ans. Yes, there was an extreme vulnerability in the target that made it a candidate for acquisition.

Primarily, the condition of Bank of Rajasthan had been seeing in under pressure after a series of probes continued by RBI. Irregular performance of the bank gave rise to several investigations along with the order of RBI for a special audit. The decision of audit had been taken when Bank of Rajasthan corresponded to give prominent intraday overdraft which was beyond the limit to the Sahara Group, Lucknow based. On 25th Feb 2010, Reserve Bank of India has imposed a pecuniary penalty of `25 lakh(Rupees Twenty Five Lakh only) on The Bank of Rajasthan Ltd. in exert of powers enthroned under the provisions of Section 47A(1)(b) of the Banking Regulation Act, 1949. On the following grounds the penalty were imposed:i. Acquisition of Immovable properties- Violation the RBIs guidelines/directions issued under Section 35A of the Banking Regulation Act, 1949. ii. Loopholes in the records banks IT system iii. Non-adherence of guidelines related to Know Your Customers and antimoney laundering in opening and conduct of accounts. iv. Irregular accounts conduct of a corporate group v. Misrepresentation of facts- unable to produce documents sought by the Reserve Bank of India. The issue of Corporate Governance Standards was also one of the key areas which acted as a loophole for the merger. During the annual inspection of BoR, RBI found out unconventional disclosure of Shareholding patterns of the promoter group. The shareholding pattern had been declined from 55% to 28.6% between June 2007 and 2009 revealed by Market watchdog, SEBI. The Tayals, Controllers of the Bank of Rajasthan, themselves started their search for suitable deal with heading bank in order to enter into merger deal after the series of probes. Nevertheless, the potential synergies which the management of ICICI had foreseen in this deal could be in any flow such as cost optimization through better negotiation with vendors, economies of scale, eliminating overlaps and many more. Secondly, through revenue enhancement this infers new market access (as ICICI bank will be able to get readymade access to Bank of Rajasthans wide branch network in north and west India). The extensive tentacles of the Bank

of Rajasthan in terms of branches were the biggest factor determining the investment-worthiness of the said company. Thirdly, by way of technological leverage and forth could be forward and backward integration. Due to lack of capital, Bank of Rajasthan has been facing low credit growth of 4.69% due to lower disbursement and large prepayments by some of its clients. The credit growth was stable with advances during FY 2010. But, borrowings at Bank of Rajasthan have shown good sign for the bank as it has been continuously decreasing since from FY 2006. Currently the banks borrowings stood at `6.5million as on year ended 2010. Q 3. What was the targets response to the overtures of the acquirer? Ans . The target response to the overture of the acquirer was the fact that since the Bank of Rajasthan had been under pressure after a series of probes continued by RBI. Irregular performance of the bank gave rise to several investigations along with the order of RBI for a special audit. The decision of audit had been taken when Bank of Rajasthan corresponded to give prominent intraday overdraft which was beyond the limit to the Sahara Group, Lucknow based. The Central Banking Institution of India had appointed Deloitte Haskin & Sells to look after the banks lending policies and information security system. The discussions were held with many leading banks named ICICI Bank, HDFC Bank, Axis Bank etc. The HDFC Bank has not shown any positive concern in this preposition. The officials of Axis bank have denied the deal as they were not ready to pay demanded price. Somehow The ICICI bank becomes ready to pay the price higher than the market valuation of Bank of Rajasthan. However, the deal would mean little dilution for ICICI, as the market capitalization of ICICI registered at `1, 00,717 crore whereas, BoR had `1323 crore only. A non-cash merger deal was approved by the board of directors of the Indias second largest private sector bank. It was estimated that the merger would further flourish the ICICIs branch network by 23% approximately. Q 4. What synergies were identified by the acquirer? How were they quantified? Ans. Identification Of synergies Reach The merger enhances ICICIs branch network by 23% with 463 branches and 96 ATMs at one go with a minimal equity dilution of 3%

book value dilution is limited to 1.8%. It will strengthen its position in the North and Northwest part of India. Before merger ICICI has a strong presence in South and West post mergers with Bank of Madura and Sangli Bank, respectively now it will increase its yield to northern India. Cost Of Funds With wider reach the merger will help to improve the CASA Of BOR as ICICI has the requisite expertise in Retail Banking, Transaction Banking, and third party distribution to as currently BORs branch network is underutilized with CASA per branch at `90 mn against ICICIs `421 mn. So ICICI Will leverage BORs underutilized branch network. There is substantial scope of productivity improvement. Product Line Merger will help the ICICI to increase its Product line. Present Products Finance And Insurance Retail Banking Commercial banking Mortgage Credit Card Additions Corporate and Whole sale banking Personal Banking Auxiliary Services Merchant Banking Trust and custodial services Credit Facility To SMEs

Private Banking Asset Management Investment Banking

In addition to above BOR is very efficient in Treasury and Banking Operations, will sink with ICICI well. Asset Base The Asset Base of ICICI bank is on decreasing trend. It has been decreased by 34% percent during 2006-07 and reduced by 17% during 2009-2010 from `2,183.11 billion at year-end FY 2009 to ` 1,812.06 billion at year-end FY 2010. So Merger will straight away increase the Asset base by `17235.09 crores, increased by 9% from last year. Customer Base BOR has strong customer base of 3 million

 Business - The total business amounted to `233918 million and the business per branch is `47 crore. Quantification Of synergies With the help of above synergies the ICICI help will be able to improve its NIMs. ICICIs Efficient working will help to make the operations of BOR sound and reduce the operational cost. Now because of wider reach ICICI will have access to cheaper Funds and can generate its assets base.

Income Statement Particular Interest income Interest expanded Net interest income Non interest income Net Revenue Opex Growth Rate Interest income Interest expanded Net interest income Non interest income Net Revenue Opex 2009 310925 227259 83666 76037 159703 70457 2010 257069 175926 81143 74780 155923 58598 2011 8.0 6 13.0 2 8 12 2011E 277547 185893 91654 76575 168229 65661 2012E 2013E 322873 387447.6 214586 253211.5 108287 134236.1 89639 75793 109359.6 88677.81 2013 20.0 18 24.0 22 23 17 197926 243595.7

2012 16.3 15 18.1 17 18 15

Strategic Variables ICICI Bank (in %) Bank of Rajasthan (in %) Diversity of Earnings 2.25 8.70 Return on Loan 12.72 16.30 Liquidity Ratio 49.86 48.14 Financial Leverage 14.20 5.41 Cost to Income Ratio 87.87 106.87 Efficiency Ratio 34.86 38.08

Index Value 6.50 3.58 1.72 8.79 19.00 3.22

Loan to Deposit 89.70 55.30 34.40 Ratio CRAR 19.40 7.74 11.66 NPA 1.87 1.6 .27 Source: Annual reports of the banks, Calculations are based on secondary data. Q 5. How was the price of the target decided? Ans. Who says Financial Valuation is always sacrosanct and hence its result should be treated as the Rule of Thumb? Its correct that valuation in monetary terms have far-reaching impact on the feasibility of an acquisition. But, still Synergies should not be overlooked by the management of the Acquirer. The Bank of Rajasthan was an entity which used to flaunt about its 463 branches catering to more than 3 million customers. Besides the stigma mentioned in Ques.2, if ICICI didnt take this factor into consideration, then the deal might have turned into a colossal failure. The deal was based on the internal analysis of the proposed amalgamation which certainly be calculated considering the followings:i. Strategic value of the deal ii. Market capitalization per branch of the former private sector banks iii. And comparison of deal with the relevant precedent transactions. First of all, a non-cash merger deal was approved by the board of directors of the Indias second largest private sector bank. It was estimated that the merger would further flourish the ICICIs branch network by 25 percent approximately. It was decided that the report will be presented to Board of Directors after the approval of independent assessor and further to Shareholders & Reserve Bank of India. The deal in its intermediation decided that the swapping ration will be at 1:4.72 which will inferred as The ICICI Bank would allot 25 shares for every 118 shares of Bank of Rajasthan. On May 18th 2010, Bank of Rajasthans closing price mounted 52-weeks high at `99.50 while the benchmark SENSEX grew only by 0.24 percent whereas ICICI Bank closed at 1.45 percent lower at `889.35. After consideration of share prices the swap deal indicated that 89.5 percent premium has been given by ICICI bank to Bank of Rajasthan. The Bank of

Rajasthan cost to ICICI bank at nearly `3041 crore on the basis of internal valuation. In elaborated form, ICICI bank have to pay about `6.6 crore* for each of the BoR Branch. *Valuation= `3041/ 463 branches (`6.6 crore at an average rate) At least, the ICICI expected to earn synergy of more than 89.5%, the proportion of BoRs Market Price which ICICI paid as a Premium to the said bank. Q 6. How were the shares of the target acquired? (Tender??) The shares of target were acquired by entering into an agreement by the acquirer with certain shareholders of Bank of Rajasthan agreeing to effect the amalgamation of Bank of Rajasthan with ICICI Bank with a share exchange ratio of 25 shares of ICICI Bank for 118 shares of Bank of Rajasthan. ICICI Bank said that it is willing to pay more than BoRs present market valuation. Thus basically they acquired all the shares of BoR and in lieu issued them shares of ICICI against it, which resulted in dilution of 3% equity stake for ICICI Bank. Thus, it was tender offer for exchange of shares. Q 7. What was the consideration for the acquired shares (cash or stock). Ans. The consideration for the acquired shares was the stock of ICICI Bank shares. It resulted in 3% equity dilution in entirety for the ICICI Bank to acquire BoR 100% stake at a valuation of `30.4Billion. Q 8. How did the share price of the two companies move during the preacquisition period Ans. Pre-merger analysis of ICICI Bank and Bank of Rajasthan After the announcement of ICICI Bank's plan to acquire Bank of Rajasthan, the stock prices of both companies surged. The stock price of ICICI Bank gained around 22% between the date of announcement (May 19, 2010) and August 23,2010. The stock price of Bank of Rajasthan surged around 78% in the same period from `119 to `212 on August 23, 2010. "ICICI Bank was active immediately after the deal due to the arbitrage opportunity between ICICI Bank and Bank of

Rajasthan as it was a share swap deal between two listed entities," points out Samar Vijay of Invest Care. In case of ICICI the net profit margin is 10.51 in the year 2008 and it went down in the year 2009 and again it went up in the 2010. In case of BOR the Net profit margin was 9.75 in the year 2008 and it went down in the year 2009 it becomes negative in 2010.

Return on Net Worth(%) ICICI Bank BOR

2008 8.94 21.75

2009 7.58 18.29

2010 7.79 -18.86

In case of ICICI banks the return on net worth is decreasing in the year 2009 and increasing in the year 2010. But in case of BOR it is decreasing in the year 2009 and it went negative in the year 2010. In case of ICICI banks the EPS is decreasing in the year 2009 and increased in the year 2010. But in case of BOR it is decreasing in the year 2009 and it went negative in the year 2010 EPS 2008 2009 2010 ICICI Bank 37.37 33.76 36.10 BOR 8.57 7.30 -6.33 Q 9. Was the acquisition successful? Ans. Post-merger results are satisfactory. Merger has increased the liquidity and profitability position of ICICI bank. HR ISSUES has always being a major concern for the merging firms because the major impact of this merger is on the employment position of employees of BOR. The merger has increased no. of branches and no. of ATMs. The deal is seen benefiting ICICI Bank in terms of an addition of about a quarter of its existing branch network, which will in turn enhance its earning potentials, return on assets (RoA) and return on equity (RoE). RoA tells us what earnings were generated from invested capital (assets), while RoE measures a companys profitability by revealing how much profit it generated with the money shareholders invested. ICICI Bank posted a net profit of `4,025 crore for FY10 and its RoE stood at 7.80%. As on December 31, BoR had a network of 463 branches. ICICI Banks network has 2,000 branches.

The present deal appears more favourable to BoR since their shareholders gained almost 90% between 07.05.2010 (the start of merger negotiations) and 23.05.2010 (Board Meeting approval). Hence, the merger is beneficial for both the banks.

References:

Particulars Price before a day of merger announcement Price on the day of merger announcement Price after a day of merger announcement Swap Ratio Parameter ICICI Bank BOR

ICICI Bank 901.10 809.20 824.45

Bank of Rajasthan 82.85 99.45 119.35

1:4.72 (25:118) Exchange Ratio 0.51 Acquisition Price (`) 467.00 Deal Value (`/ Million) 753.50

Balance Sheet 3633997.20 1730000.60 Size (`/Million) No. of Branches Owners Equity (`/Million) Deposits 1709 516183.70 466 936.51

1.87 .12

1681.20 112.08

2712.61 180.84

2020166.00

150623.10

0.32

288.35

465.25

(`/Million) Advances (`/Million) NPAT (`/Million)

1812056.00 40249.83

83294.70 -1021.30

0.51 NA

459.57 NA

741.51 NA

Minimum 0.12 112.08 18084 Average 0.69 622.67 100467 Maximum 1.87 1681.20 271261 Actual 0.21 190.90 30801 Note: Acquisition price is calculated by multiplying exchange ratios with the market price of the acquiring bank and Deal value= Acquisition price number of shares of the target bank.

Particulars No. of Shares (Mn) Price (INR) NETWORTH CALCULATION FY10 Networth (INR Mn) FY10 NPA (INR Mn) Adj. Book Value (INR Mn) BVPS (INR) BVPS Dilution (%) P/BV

ICICI BANK@ 2010 1115 832 516184 38411 489296 439 1.9

ICICI BANK + BOR @ 2010 1149 832 522521 39255 495042 431 (1.8%) 1.9