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Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
Mergers and acquisitions  lekha
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Mergers and acquisitions lekha

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  • 1. Mergers And Acquisitions of Banking Sector MERGERS AND ACQUISITIONS OF INDIAN BANKING SECTOR [1]
  • 2. Mergers And Acquisitions of Banking Sector INTRODUCTION 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 business and the feelings of insecurity surging over our businessmen, it is not surprising when we hear about the immense numbers of corporate restructuring 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, spinoffs, 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 positives idea Mergers & Acquisitions 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 and Acquisitions. [2]
  • 3. Mergers And Acquisitions of Banking Sector 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 shareholder‟s value, tax implications including stamp duty and last but not the least also on the employees of the Transferor or Transferee Company. [3]
  • 4. Mergers And Acquisitions of Banking Sector 1.1 WHAT IS MERGER ? Merger is defined as combination of two or more companies into a single company where one survive and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, he surviving company is the buyer, which retains its identify, 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 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. [4]
  • 5. Mergers And Acquisitions of Banking Sector 1.2 WHAT IS ACQUISITION? 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 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. [5]
  • 6. Mergers And Acquisitions of Banking Sector Takeover: A „takeover‟ is acquisition and both the terms are used inter changeably. 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 offer or 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-operative. 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. [6]
  • 7. Mergers And Acquisitions of Banking Sector 1.3 PURPOSE OF THE MERGER AND ACQUISITION The purpose for an offer or 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: To safeguard the source of supplies of raw materials or intermediary product; To obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.; To share the benefits of suppliers economies by standardizing the materials. (2) Revamping production facilities: To achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources; To standardize product specifications, improvement of quality of product, expanding Market and aiming at consumers satisfaction through strengthening after sale Services; To obtain improved production technology and know-how from the offered company [7]
  • 8. Mergers And Acquisitions of Banking Sector To reduce cost, improve quality and produce competitive products to retain and Improve market share. (3) Market expansion and strategy: To eliminate competition and protect existing market; To obtain a new market outlets in possession of the offeree; To obtain new product for diversification or substitution of existing products and to enhance the product range; Strengthening retain outlets and sale the goods to rationalize distribution; To reduce advertising cost and improve public image of the offeree company; Strategic control of patents and copyrights. (4) Financial strength: To improve liquidity and have direct access to cash resource; To dispose of surplus and outdated assets for cash out of combined enterprise; To enhance gearing capacity, Bank of Rajasthan row on better strength and the greater assets backing; To avail tax benefits; To improve EPS (Earning per Share). [8]
  • 9. Mergers And Acquisitions of Banking Sector (5) General gains: To improve its own image and attract superior managerial talents to manage its affairs; To offer better satisfaction to consumers or users of the product. (6) Own developmental plans: The purpose of acquisition is backed by the offer or 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 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 Acquire 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. [9]
  • 10. Mergers And Acquisitions of Banking Sector Thus, various types of combinations distinct with each other in nature are adopted to pursue this objective of 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 colla Bank of Rajasthan nations sharing goodwill combinations. He combining corporate aim at circular combinations by pursuing the objective. (9) Desired level of integration: Mergers and acquisitions 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 offer or company go a long way in selecting a suitable partner for merger or acquisition in business combinations. [10]
  • 11. Mergers And Acquisitions of Banking Sector OVER VIEW OF INDIAN BANKING INDUSTRY 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 India. 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. [11]
  • 12. Mergers And Acquisitions of Banking Sector Scheduled and non Scheduled Banks:There are 93 scheduled commercial banks, Indian and foreign; 196 regional rural banks. In Co-operative 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 bank-groups. [12]
  • 13. Mergers And Acquisitions of Banking Sector TYPES OF MERGERS Merger or acquisition depends upon the purpose of the offer or company it wants to achieve. Based on the offer or‟s objective profile, combination could be vertical, horizontal, circular and conglomeratic as precisely described below with reference to the purpose in view of the offer or company. (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 production. 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. [13]
  • 14. Mergers And Acquisitions of Banking Sector (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 diversification. (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 reorganizing 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. [14]
  • 15. Mergers And Acquisitions of Banking Sector 3.1 DIFFERENCE BETWEEN MERGERS AND AQUISITION Merger Acquisition The case when two companies (often The case when one company takes of same size) decide to move forward over another and establishes itself as as a single new company instead of the new owner of the business. operating business separately. The stock of both the companies are The buyer company “swallows” the surrendered while new stock are business of the target company, which ceases to exist. issued afresh. For example, Glaxo Wellcome and Dr. Reddy Labs acquired Betapharm SmithKline Beecham ceased to exist through an agreement and merged to become a new $597 million. company, known as Glaxo SmithKline. [15] amounting
  • 16. Mergers And Acquisitions of Banking Sector 3.2 POSSIBLE IMPACT OF 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. [16]
  • 17. Mergers And Acquisitions of Banking Sector 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. [17]
  • 18. Mergers And Acquisitions of Banking Sector 3.3 ADVANTAGES OF MERGERS Mergers and takeovers are permanent form of combinations which vest in management complete control and provide centralized administration which are not available in combination 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 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; [18]
  • 19. Mergers And Acquisitions of Banking Sector (d)Acquisition of human assets and other resources not available otherwise; ( e ) Better investment opportunity in combinations 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. [19]
  • 20. Mergers And Acquisitions of Banking Sector 4) Benefits to general public Impact of mergers on general public could be viewed as aspect of benefits and c osts to: (a) Consumers 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 thedegree 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. [20]
  • 21. Mergers And Acquisitions of Banking Sector Both workers and communities will suffer on lessening job Opportunities, preventing the distribution of benefits resulting from diversification of production activity. (c) General public Mergers result into centralized concentrate 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 till 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. [21]
  • 22. Mergers And Acquisitions of Banking Sector REGULATIONS OF MERGER AND ACQUISTIONS 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. [22]
  • 23. Mergers And Acquisitions of Banking Sector 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. [23]
  • 24. Mergers And Acquisitions of Banking Sector 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. 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 thresh old limits in terms of assets or turnover as specified by the Competition Commission of India. [24]
  • 25. Mergers And Acquisitions of Banking Sector 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 combination. Thus, the Competition Act does not seek to eliminate combinations and only aims to eliminate their harmful effects. [25]
  • 26. Mergers And Acquisitions of Banking Sector 4.1 PROCEDURE OF MERGERS & ACQUISITIONS 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 a done regional language daily newspaper of that place where the shares of that company are listed and traded. 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. [26]
  • 27. Mergers And Acquisitions of Banking Sector 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: a)The public offer of minimum 20% of voting capital of the company to the shareholders; 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; [27]
  • 28. Mergers And Acquisitions of Banking Sector ( 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 had 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: [28]
  • 29. Mergers And Acquisitions of Banking Sector 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; ( 1 0 ) The „specified date‟ as mentioned in regulation 19; (11)The date by which individual letters of offer would be posted to each of the shareholders; ( 1 2 ) 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 shareholders; (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; [29]
  • 30. Mergers And Acquisitions of Banking Sector ( 1 5 ) 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; ( 1 7 ) Approvals of banks or financial institutions required, if any; ( 1 8 ) 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. [30]
  • 31. Mergers And Acquisitions of Banking Sector 4.2 WHY MERGERS FAIL? 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. [31]
  • 32. Mergers And Acquisitions of Banking Sector 4.3 FINANCIAL IMPLICATIONS OF BANKING M&A 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. [32]
  • 33. Mergers And Acquisitions of Banking Sector COST OF MERGERS AND ACQUISITIONS 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. [33]
  • 34. Mergers And Acquisitions of Banking Sector 5.1 REASONS FOR MERGERS AND ACQUISITIONS  Capacity  Economies of Scale  Accessing technology or skills  Tax reasons  Growth with External Efforts  Deregulation  Technology  New Products/Services  Over Capacity  Customer Base  Merger of Weak Banks [34]
  • 35. Mergers And Acquisitions of Banking Sector 5.2 PROCEDURE FOR BANK MERGER  The procedure for merger either voluntary or otherwise is outlined in the respective state statutes/the Banking regulation Act. The Registrars, being the authorizes vested with the responsibility of administering the Acts, will be ensuring that the due process prescribed in the Statues has been compiled with before they seek the approval of the RBI. They would also be ensuring compliance with the statutory procedures for notifying the amalgamation after obtaining the sanction of the RBI.  Before deciding on the merger, the authorized officials of the acquiring bank and the merging bank sit together and discuss the procedural modalities and financial terms. After the conclusion of the discussions, a scheme is prepared incorporating therein the all the details of both the banks and the area terms and conditions.  Once the scheme is finalized, it is tabled in the meeting of Board of directors of respective 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. [35]
  • 36. Mergers And Acquisitions of Banking Sector  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 and Exchange Board of India(SEBI) for their approval.  After obtaining approvals from all the concerned institutions, authorized officials of both the banks sit together and discuss and finalize share allocation proportion by the acquiring bank to the shareholders of the merging bank (SWAP ratio)  After completion of the above procedures, a merger and acquisition agreement is signed by the bank. [36]
  • 37. Mergers And Acquisitions of Banking Sector GUIDELINES ON MERGERS & ACQUISITIONS OF BANKS  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. [37]
  • 38. Mergers And Acquisitions of Banking Sector  The request for merger can emanate from banks registered under the same State Act or from banks registered under the Multi State Cooperative 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 t o 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. [38]
  • 39. Mergers And Acquisitions of Banking Sector RECOMMENDATION OF NARASIMHAM COMMITTEE ON BANKING SECTOR REFORMS Globally, the banking and financial systems have adopted information and com munications 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. [39]
  • 40. Mergers And Acquisitions of Banking Sector 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, are structuring 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. [40]
  • 41. Mergers And Acquisitions of Banking Sector REASONS BEHIND THE RECENT TREND OF MERGER IN BANKING SECTOR 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 facility.  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. [41]
  • 42. Mergers And Acquisitions of Banking Sector  If you are solvent and want to Bank of Rajasthan row money, you can do so on your credit card- with far fewer hassles.  A „AAA‟ corporate can directly Bank of Rajasthan row 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 can not access the capital market. This once again makes a shift to non-fund based the activities all the more important. CASE STUDY [42]
  • 43. Mergers And Acquisitions of Banking Sector 8.1 Case study About Bank Of Rajasthan Private sector lender Bank of Rajasthan on 18 may 2010 agreed to merger with ICICI Bank, India‟s second largest private sector lender Bank of Rajasthan has a market value of $296 million [43]
  • 44. Mergers And Acquisitions of Banking Sector The acquisition of Bank of Rajasthan by ICICI bank is the first consolidation of country‟s crowded banking sector since 2008. ICICI Bank and Bank of Rajasthan boards on Sunday cleared their merger through an all-share deal, valued at about 30.41billion rupees. ICICI offered to Bank of Rajasthan ICICI offered to pay 188.42 rupees per share, an all-share deal, for Bank of Rajasthan, a premium of 89 percent to the small lender‟s closing price on Tuesday, valuing the business at $668 million. ICICI is offering the smaller bank‟s controlling shareholders 25 shares in ICICI for 118 shares of Bank of Rajasthan. The Big Deal The deal, which will give ICICI a sizeable presence in the northwestern desert state of Rajasthan, values the small bank at about 2.9 times its book value, compared with an Indian banking sector average of 1.84. Bank of Rajasthan has a network of 463 branches and a loan book of 77.81 billion rupees ($1.7 billion). [44]
  • 45. Mergers And Acquisitions of Banking Sector Why Merger???? In March, The Reserve Bank of India appointed consulting firms to conduct a special audit of the books and accounts of Bank of Rajasthan. The Government has called for consolidation in the banking sector in order to make lenders more competitive but there has been little activity. RBI had imposed a penalty of Rs 25 lakh on Bank of Rajasthan for various violations. Total of BOR For the nine- month ended December‟09, the bank had net loss of Rs 9crore with total income of Rs 1,086crore. For the year ended March‟09, Bank of Rajasthan had net profit of Rs 117crore with total income of Rs 1,507crore. Operating income fell 11% to Rs 373.78crore in Q3 December 2009 over Q3 December 2008. Advantage for ICICI and BOR ICICI Bank will gain marginally from the merger as Bank of Rajasthan has a reasonable penetration in its home state. As a March‟09, it had 463 branches across the country. The deal will also help ICICI tackle increasing competition by HDFC Bank. [45]
  • 46. Mergers And Acquisitions of Banking Sector The deal value BOR about 2.9 times its book value, compared with an Indian banking sector average of 1.84. Comparison of ICICI and BOR ICICI bank added CASA deposits totaling over 210 billion rupees in the year ended March 2010, compared with 41.63 billion rupees of BOR. ICICI recorded a business per branch of 3 billion rupees compared with 47 million rupees of BOR for fiscal 2009. For the quarter ended Dec 09, BOR recorded 1.05percent of advances as NPA‟s, which is far better than 2.1 percent recorded by ICICI Bank. Why is RBI allowing the merger of this bank? This is very intriguing factor; when RBI claims that there is corporate governance. Finance Minister Pranab Mukherjee claims that there is corporate governance prevailing in SEBI, RBI and Finance Ministry. Hurdles [46]
  • 47. Mergers And Acquisitions of Banking Sector To protest the Bank of Rajasthan‟s management plan to merger with the ICICI Bank, more than 4200 employees of Bank of Rajasthan went on a two-day counter wide strike. SEBI maintains that Tayals hold 55% in the bank and that would make them owners of nearly 1.87crore ICICI Bank shares from new dilution by ICICI Bank, amounting to around 1.75% stake in the bank. ICICI Bank found it economic as always to invest in this deal on a 100% stock swap basis. Impact of the Deal The deal is very expensive The proposed amalgamation would substantially enhance branch network and presence in northern and western India for ICICI Bank of Rajasthan has a network of 463 branches and a loan book of 77.81 billion rupees ($1.7 billion). As on March 2009, BOR had 463 branches and 111 ATMs, total assets of Rs 17,224crore, deposits of Rs 15,187corore and advances of Rs 7,781crore. [47]
  • 48. Mergers And Acquisitions of Banking Sector LATEST NEWS ABOUT MERGERS ANDACQUISITION IN BANKING SECTOR [48]
  • 49. Mergers And Acquisitions of Banking Sector 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 India. 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. [49]
  • 50. Mergers And Acquisitions of Banking Sector 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 Top Mathew of Standard Chartered. Billionaire Sunil Mittal‟s $10.7 billion acquisition of mobilephone 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 in2011 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.” Cross-Bank of Rajasthander 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. [50]
  • 51. Mergers And Acquisitions of Banking Sector 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,” 35year-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. [51]
  • 52. Mergers And Acquisitions of Banking Sector BANK MERGER TO AFFECT ON INSURANCE SECTOR  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. [52]
  • 53. Mergers And Acquisitions of Banking Sector  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 smallsized policies procured by agents.  For new private life insurers who want to achieve fast revenue growth, banks are the only source of business. 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 ona policy, say industry experts However, new private life insurers are [53]
  • 54. Mergers And Acquisitions of Banking Sector finding it difficult to sign up a banking partner to sell their products as early entrants have already inked distribution agreements with them.  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.  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 [54]
  • 55. Mergers And Acquisitions of Banking Sector CONCLUSION 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. Suchsynergies 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 asa 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. [55]
  • 56. Mergers And Acquisitions of Banking Sector Merger of Bank of Rajasthan 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 Bank of Rajasthan will also get new direction as it already witness the share price of Bank of Rajasthan in BSE is almost doubled after the announcement of the merger. [56]
  • 57. Mergers And Acquisitions of Banking Sector BIBLOGRAPHY www.investopedia.com www.business.mapsofindia.com www.bloomberg.com www.legalserviceindia.com www.slideboom.com www.papercamp.com www.moneycontrol.com [57]

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