Mergers Of Banks Mergers Mergers has been defined as an arrangement whereby the assets of two companies became vested in, or under the control of one company (which may or may not be one of the original two companies), which has, as its share holders, all or substantial all the share holders of the companies, it may also include fusion of two or more companies into other. In a merger one or the two existing companies merger it’s identify into another existing companies may form a new company, or one or another form a new company and merger there identify into another existing company.
DEFINITION The term Merger, Acquisition and Take-over are all part of the M&A parlance. Ina merger, the companies come together to combine and share their resources to achieve common objectives, the shareholders of the combining firms often remain as joint owners of the combined entity, an acquisition resembles more of an arm’s-length deal, with one firm’s shareholders ceasing to be owners of that firm. In a merger, a new entity may be formed subsuming the merging firms, whereas in an acquisition the acquired firm becomes the subsidiary of the acquirer firm.
<ul><li>The situation may be illustrated as under: </li></ul><ul><li>There are two companies “A” & “B”, which decided to </li></ul><ul><li>merged. </li></ul><ul><li>Option 1 , where “A” co. merges with “B” co. combined </li></ul><ul><li>merged co. emerges as “B”. </li></ul><ul><li>Option 2 , where “B” co. merges into “A” co. combined </li></ul><ul><li>merged company emerges as “A” Ltd. </li></ul><ul><li>Option 3 , “A” co. & “B” co. both merges to formed a new </li></ul><ul><li>company “C” combined merged companies emerges as “C” </li></ul><ul><li>Ltd. </li></ul>
<ul><li>Types of Mergers </li></ul><ul><li>From an economic standpoint, different types of </li></ul><ul><li>mergers can be grouped on the basis of their stage of </li></ul><ul><li>economic of the form: </li></ul><ul><li>Horizontal Mergers </li></ul><ul><li>Vertical Mergers </li></ul><ul><li>Conglomerates Mergers </li></ul>
1. Horizontal Mergers: This type of mergers involves two firms that operate and complete in a similar kind of business. The mergers is based on the assumption that it will provide economies of scale from the larger combined unit. Example: Glaxo welcome PLC and Smith line Beechen PLC megamerger.
2. Vertical Mergers: Vertical Mergers take place between firms in different stages of production/operating either as forward or backward integration. The basic reason is to eliminate costs of searching for prices, contracting, payment collection and advertising and may also reduce the cost of communication and coordinating production. Both production & inventory can be improved on account of efficient information flow within the organization. Unlike horizontal mergers, which have no specific timing, vertical mergers take place when both firms plan to integrate the production process & capitalize on the demand for the products.
Forward integration take place when a raw material supplies funds a regular producers of its products while backwards integration takes place when a manufacturer funds a cheap sources of raw material supplier Example : Merger of Usha martin and Usha Belton .
3. Conglomerate Mergers: Conglomerate mergers are effected among firms that are in different or unrelated business activity. Firms that plan to increase their product lines carry out these types of mergers firms opting for conglomerate mergers firms control a range of activities in various industries that require different skills in the specific managerial functions of research, applied, engineering, production, marketing and so on.
<ul><li>This type of diversification can be achieved mainly by </li></ul><ul><li>external acquisition and mergers and is not generally </li></ul><ul><li>possible through internal development. These type of </li></ul><ul><li>mergers are also called concentric mergers . Firms </li></ul><ul><li>operating in different geographic location also proceed with </li></ul><ul><li>these types of mergers. Conglomerate mergers have been </li></ul><ul><li>sub-divided into : </li></ul><ul><li>Financial Conglomerates </li></ul><ul><li>Managerial Conglomerates </li></ul><ul><li>Concentric Companies </li></ul>
<ul><li>Financial Conglomerate : </li></ul><ul><li> These Conglomerate provide a flow of funds to </li></ul><ul><li>survey segment of their operations, exercise control and are </li></ul><ul><li>the ultimate financial risk takes. </li></ul><ul><li>Managerial Conglomerate: </li></ul><ul><li> Managerial Conglomerate provide counsel and </li></ul><ul><li>interaction on decision thereby, increasing potential for </li></ul><ul><li>improving performance. When two firms of unequal </li></ul><ul><li>managerial competence combine, the performance of the </li></ul><ul><li>combined firm will be greater that the sum of equal parts </li></ul><ul><li>that provide large economic benefits. </li></ul>
<ul><li>Concentric Companies : </li></ul><ul><li> The primary different between managerial </li></ul><ul><li>conglomerate and concentric company is its distinction </li></ul><ul><li>between respective general and specific management </li></ul><ul><li>functions. The mergers is termed as concentric where there </li></ul><ul><li>is a carry-over of specific management functions or any </li></ul><ul><li>complementarities in relative strengths between </li></ul><ul><li>management functions . </li></ul>
<ul><li>Reason for Undergoing Mergers for Banks </li></ul><ul><li>Some of the reasons for mergers include: </li></ul><ul><li>Synergy : </li></ul><ul><li>The most word used in merger is Synergy which is the idea that by combining business activities, performance will increase and cost will decrease. Essentially a business will attempt to mere with another business that has complementary strength and weaknesses. </li></ul><ul><li>Diversification/Sharpening Business focus : </li></ul><ul><li>These two conflicting goals have been to describe thousand of merger transactions . </li></ul>
A company that merge to diversify to acquire another company is seemingly unrelated industry in order to reduce the impact of a particular industry’s performance on its profitability. Companies seeking to sharpen focus often merge with companies that have deeper market penetration in a key area of operations. 3. Growth : Mergers can give the acquiring company an opportunity to grow market shares without having to really earn it by doing the work themselves-instead they buy a competitor's business for a price.
4. Increase supply-chain Pricing power: By buying out one of its suppliers or one of the distributors, a business can eliminate a level of costs. If the company buys out one of its suppliers it is able to save on the margins that the supplier was previously adding to its costs. If a company buys out a distributor it may be able to ship its products at a lower costs. 5. Eliminate Competition: Many Mergers deals allow the acquirer to eliminate future competition and gain a larger market shares in its product market. The downside of this is that a large premium is usually require to convince the target company’s share holders to accept the offer.
<ul><li>Advantages of Bank Merger : </li></ul><ul><li>The first advantage is said to be an economies of scale. The larger the scale of assets & liabilities the lower should be the intermediation cost as a ratio of the former. </li></ul><ul><li>The primary advantage of the transaction is that a merger is legally simple & does not cost as much as other forms of acquisition. </li></ul><ul><li>The merger also reduces the number of competition in the markets & captures additional economic scale of market. </li></ul>
4. Is that of pooling together of the branches of separate banks. 5. Terms of probable greater scope for spreading of risk in the asset portfolio. 6. A merger can be accomplished tax-free for both parties. 7. A merger realize the appreciation potential of the merge entity instead of being limited to sales proceeds. 8. A merger allows the shareholder of smaller entities to own a smaller piece of a larger pie increasing their overall net worth.
<ul><li>Disadvantages </li></ul><ul><li>Diseconomies of scale if business becomes too large, which leads to higher unit costs. </li></ul><ul><li>Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration. </li></ul><ul><li>May need to make some workers redundant, especially at management levels – this may have an effect on motivation. </li></ul><ul><li>May be a conflict of objectives between different businesses, meaning decisions are more difficult to make & causing disruption in the running of the business. </li></ul><ul><li>5. there are the cost that the parts of the business face is separated. </li></ul>
<ul><li>6. When a firm divides itself into smaller units it may be losing the synergy that it had a large entity. </li></ul><ul><li>The must be approved by votes of the stockholder of each firm. Typically two thirds of the shares votes are required for approval. </li></ul><ul><li>One of the strong disadvantage would be that inevitable cultural disharmony that couldn’t be avoided no matter how amiable the work atmosphere is. </li></ul>
Merger in the co-operative banking sector –RBI Guidelines Procedure for Merger : The Application for merger giving the proposed scheme will have to be submitted by the banks concerned to the Registrar of Co-operative societies/Central Registrar of Co-operative Societies [RCS/CRCS]. The acquirer bank will also forward a copy of the scheme to the RBI along with the draft scheme valuation report and other information relevant for consideration of the scheme of merger.
The RBI will examine the scheme with reference to the financial aspects & the interest of depositors based on the criteria/factors and convey its decisions to the concerned State RCS and in case the acquirer is a multi- State co-operative bank, to the CRCS & the RCS of the State in which the acquired bank is situated. The registrars, being the authorities vested with the responsibility of administering the Acts, would ensure that the due process prescribed in the scheme has been complied with before they seek the approval of the RBI.
6. A merger allows the acquirer to avoid many of the costly and time-consuming aspects of asset purchase such as assignment of leases and bulk sales notification. 7. The parent company might attract more investors and ultimately more capital. 8. The advantage that a cross culture merger brings to both a the companies are myriad the most significant of which is a better and more comprehensive sharing of ideas skill & other resources between the two enterprises.