A STUDY ON MERGERS ACQUISITION IN BANKING INDUSTRY- A GLOBAL PHENOMENON

A STUDY ON MERGERS &
ACQUISITION IN BANKING INDUSTRY-
A GLOBAL PHENOMENON
SUBMITTED BY: Shipra Jindal

Table of Contents
S.NO. TOPIC PAGE NOS.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Preface
Acknowledgement
Executive Summary
INTRODUCTION:
Introduction
Indian Banking-An Overview
M&A –A Global Phenomenon
Merger and Acquisition an Overview
OBJECTIVE AND SCOPE
Who Consitute a Merger
The Anticompetitive Threshold
Market Definition
Evaluative Criteria
The Efficiency Exception
M&A in Banking Industry
M&A in Indian Banking
Why Mergers in Banking?
Consolidation in Indian Banking
Is bigger better?
M&A in Indian Banking Sector as an Imperative
M&A in the Indian Banking Sector as an Opportunity
Adoption of M&A as a key Strategic Tool

20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
Role of Strategic Investments
Mergers as a source of Competitive Advantage
LIMITATIONS
Size, Challenges and Final balance of
Opportunities and Threats
Importance of Deregulation and its Impact
The Indian Scenario-Deregulation
THEORETICAL PERSPECTIVE
Value created by Merger
Cost and Benefit of merger
Cross Border M&A in Banks
Underlying Theories in Merger & Acquisition
Stages of Merger and Acquisition Integration Process
The Foreign Experience
The European Bank Experience
Consolidation and Human Resource Management
METHODOLOGY AND PROCEDURE OF
WORK
A Big Merger about to happen in the Industry
Motive of Merger and Acquisition in Indian Banking
Managed Transition
Current Investment Banking Scenario in India
Most famous Merger and Acquisition in India
Merger Between Centurion Bank of Punjab and Lord
Krishna Bank
Merger Between Centurion Bank and Bank of Punjab
Hutuch-Essar goes to Vodafone

42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
Change in name : UTI, then Axis now
Findings
Will Reliance Communication acquire Capgemini to
become India‘s largest IT Service Provider
Mega Acquisition by Indian Company changing brand
India
Matrix Bid : Fight between Infosys & Wipro
ANALYSIS OF DATA
Tools for data collection
Big Acquisition by Indian Company‘s in near future
Indian Merger & Acquisition: The changing face of
Indian Business
Rediff Takeover : Rumour or Reality?
Indian Merger & Acquisition are growing
exponentially
India‘s new found confidence : global Acquisition‘s
Bank Merger a pipedream
FINDINGS, INFERENCES AND
RECOMMENDATIONS
Presentation on Competition on Laws & Policy
Merger & Indian Perspective
Conclusion
SUMMARY OF THE PROJECT REPORT
ANNEXURES
Proposal
References

PREFACE
Practical training imbibes an integral part of management studies. One cannot merely upon the
theoretical knowledge. It is to be coupled with practical for it to be fruitful classroom lectures make
the fundamental concept of management clear. They also facilitate the learning of practical things.
However class lectures must be correlated with practical training in the company has a significant role
to play in the subject in business management. To develop managerial and administrative skill in
future managers have to enhance their analytical skills, it is necessary that they combine their
classroom learning with the knowledge of real business environment.
After liberalization Indian Economy Scene is really a buzz with activity. Lots and lots of multinational
companies are coming in with their technical expertise and proven management concepts. Industrial
activity in Indian has become a thing to watch and I really wanted to be of it and it was essential for
me being a management student.
It is difficult to elaborate everything, which I learned during the training however, I have endeavored
to many, comprehensive picture of details about working in the following pages.
I have accumulated the desired information through personal observations, study of documents and
discussions.

ACKNOWLEDGEMENT
This work is a culmination of sincere efforts put in during the making of this project. This task could
not have been accomplished without the support and help of lots of people. It is with great pleasure
and privilege that I wish to thanks all of them who actively supported me in this project.
I would like to place on record my gratitude to Mr. Sandeep Gupta(Senior Manager, Finance) whose
valuables advice and suggestions were available through out the preparation of this project.

Executive Summary:
Consolidation in the Banking sector is very important in terms of mergers and acquisitions for the
growing Indian Banking Industry. This can be achieved through Cost Reduction and Increasing
Revenue. The important part over here is that why do we need consolidation in Indian Banking and
what is the Challenges Ahead. The role of the Central government is also very necessary to be
analyzed in the entire process as they play a crucial role in the policy formation required for the
growth of Indian Banking.
In the recent times, we have seen some M&A as voluntary efforts of banks. Merger of Times Bank
with HDFC Bank was the first of such consolidations after financial sector reforms ushered in 1991.
Merger of Bank of Madura with ICICI Bank, reverse merger of ICICI with ICICI bank, coming
together of Centurion Bank and Bank of Punjab to form Centurion Bank of Punjab and the recent
decision of Lord Krishna Bank to merge with Federal Bank are voluntary efforts by banks to
consolidate and grow.
Is growing is size better for the Indian banks? India is still an ‗unbanked‘ country and by global
standards, even the biggest of Indian banks are minnows in a business where size means clout and
where geographical boundaries are blurring. Even by Indian standards, most of the banking sector is
disadvantaged by size: the top 25 banks — of which, 18 are owned by the government — account for
about 85 per cent of banking assets.
An analysis of the Indian banking industry shows that due to factors like stability, return to
shareholders, adhering to regulatory norms, etc make m&a as an imperative. Also m&a gives an
opportunity to these Indian banks of creating a universal bank. Also mergers can be used as a strategic
tool and also there is a possibility of strategic investments where traditional M&A are not possible. In
the changing economic and business environment characterized by speed, flexibility and
responsiveness to customers, ‗size‘ has a lot to contribute to staying ahead in the competition. It is in
this context that mergers and acquisitions (M & A‘s) as a tool to gain competitive strength comes into
the forefront with ‗Partnering for competitiveness‘ being a recognized strategic argument for the same.
Also deregulation plays a very important role in the entire economy if its going to opened to foreign
players. A careful study needs to be done before the foreign players are allowed to enter into the
market and examples from different economies across the globe must be considered.

Also there needs to be a proper consideration of the human resource i.e. the employees‘ interest must
not be affected due a particular merger. Also the various other threats need to be considered.
Mergers like the one between Centurion bank and Bank of Punjab and also CBOP and Lord Krishna
Bank shows that its upto the private sector players to understand the need to grow inorganically and
that too without any pressure from a third party. These type of merger and the latest one that is going
to happen between CBOP and HDFC bank would ensure that Indian banks are to take on the foreign
banks when they enter the market in 2009.

OBJECTIVES
The project was undertaken to analyze why merger and acquisition is necessary from a company‘s or a
bank‘s point of view, when two or more of them are agree to combine their operations, then what will
happen to the merged co and to the surviving co.
Objectives are strategic decisions leading to the maximization of a company‘s growth by enchancing
its production and marketing operations. The numbers of reasons that are attributed for the
occurrences of the merger and acquisitions are:
 To limit competition.
 To utilise under-utilised market power
 To overcome the problem of slow growth and profitablility in one‘s own industry.
 To achieve diversification
 To gain economies of scale and increase income with proportionately less investment.
 To establish a transnational bridgehead without excessive start-up cost to gain access to a foreign
market.
 To utilise under-utilised resources—human, physical and managerial skills.
 To displace existing management
 To circumvent government regulations.
 To reap speculative gains attendant upon new security issue or change P/E ratio.
 To create an image of aggressiveness and strategic opportunism, empire building and to amass vast
economic powers of the company.
 To maintain or accelerate a company‘s growth, particularly when the internal growth is constrained
due to paucity of resources.
 To enhance profitability, through cast reduction resulting from economies of scale, operating
efficiency and synergy.
 To diversify the risk of the company, particularly when it acquires those businesses whose income
streams are not correlated.
 To reduce tax liability because of the provision of setting off accumulated losses and unabsorbed
depreciation of one company against the profits of another.
 To limit the severity of competition by increasing the company‘s market power.

NEED FOR TOPIC
As merger is a combination of two or more co‘s into an existing co or a new co. Acquired co. transfer
its assets, liabilities and shares to the acquiring company for cash or exchange of shares.Need for
Merger and Acquisition arises because in general, a merger can facilitate the ability of two or more
competitors to exercise market power interdependently, through an explicit agreement or arrangement,
or through other forms of behaviour that permits firms implicitly to coordinate their conduct. It will be
found to be likely to prevent or lessen competition substantially when the parties to the merger would
like to be in a position to exercise a materially greater degree of market power in a substantial part of a
market for two years or more, than if the merger did not proceed in whole or in part. In short, a
company can achieve its growth objective by:
Expanding its existing markets
Entering in new markets
A company can expand internally or externally. If internally there is a problem due to lack of
resources and managerial skill it can to the same externally through mergers and acquisitions. This
helps a company to grow at a faster pace in a convinent and inexpensive way. Combination of
companies may result in more than the average profitability due to reduction in cost and effective
utilization of resources.

METHOLOGY AND PROCEDURE OF
WORK
Research Objective:
The main objective of research is to show the merger and acquisition between two or more companies.
Mergers and Acquisitions are there both in public or private company or whether it is a bank. The
research shows why mergers and acquisitions are necessary in day to day life of a business which is
continuously running in a loss, or for a businessman who want to expand his entire business or a
particular existing unit. What are the major roles played by the acquiring company? What the major
factors behind merger and acquisition?
This research shows the need of merger and acquisition both in banking sector and public/private
sector. I added some biggest hikes and slides in the history of merger and acquisition.
In this report I also added some mega mergers and acquisitions by some bigger companies in the year
2007 other than bank merger.
Research Design
In order to make this project effective and to show the real picture of Merger and Acquisition, I have
undertaken the following steps:-
 I first searched the different companies like Dimension consulting pvt Ltd., Centurion Bank,
HDFC bank, Hutuch, Reliance.
 Then I collected the data from top companies and Bank who provide fundamental reseach to the
customers.

 After I searched for the modes for collecting the information regarding Merger and Acquisition
which is provided by these companies.
 I opted these modes for the completion of this project.
 Then I started off one by one firstly with Mr. Ajay Kapoor, Finance Manager, and his views about
merger and acquisitions done by Dimension Consulting Pvt. Ltd.
 In this report two methods were used for the data collection:
Primary Data
Secondary Data
The primary data collection system consisted of, collection of annual report of the company, merger
and acquisition information, the business profile of the company and the relevant literature one merger
and acquisition.
The mechanism involved in secondary data collection, mainly borrowing through adequate journal
(related to merger and acquisition), web portals, books, white papers.
The methodology adopted for the project was divided into two types of analysis:
Qualitative and Quantitative
Qualitative analysis required studying the business profile of the company, the performance of the
company in last few years and what policy they adopt and studying what role merger and acquisition
play.
Quantitative analysis required analyzing the current assets and current liabilities of the company, the
statement of analysis, analyzing the operating cycle and ratios to reveal the financial position and
soundness of the business and give a good basis for quantative analysis of financial problems.
The information has been primarily sourced and administered from company websites and/or the stock
exchanges. The questionnaire sought details on aspects such as management, memberships, reach &
access, size & strength, products & services, technology platforms & solution providers, growth &
consolidation plans and areas of focus and thrust in the future.

Besides, information has also been collected from secondary sources such as annual reports of the
companies , banks and their respective websites. Every effort was made to ensure that companies
respond to the questionnaire..
At last after collecting all the essential data, I omitted the incomplete/unnecessary data.
INTRODUCTION
INDIAN BANKING
AN OVERVIEW
M&A
A
GLOBAL
PHENOMENON
MERGER &
ACQUISITION
AN
OVERVIEW

Introduction
The banking industry is one of the prominent indicators of the health of an economy. A bank‘s ability
and freedom to borrow from other banks and lend to corporates has a great impact on the growth rate
of the economy. Deregulation of US banks in the 1970s was followed by a drastic change in US
banking – banks became larger and better diversified. Soon banks of other developed nations also
began to operate in more competitive markets. Developing countries also followed suit in the last
decade of the 20th century. Similar to the US, the Indian banking industry too has undergone several
changes since the initiation of financial sector reforms in 1992. Deposits and credit have grown at a
fast pace driven by the booming economy, increasing disposable income and increased corporate
activity; credit penetration has increased significantly though it remains way below the numbers in
developed markets; and foreign banks have set the trend in product and service innovation.
The future of Indian banking looks quite exciting with Competition intensifying which would lead to
consolidation, though foreign banks are likely to jump into the fray only by 2009, New regulations
pertaining to corporate governance and BASEL II coming into effect which would make the banking
infrastructure more robust and transparent, Technology being adopted aggressively by banks to make
processes efficient and cost-effective, provide services 24X7 and analyze customer data to offer
products and services tailor-made to suit their tastes new segments emerging which would enable
banks to tap into new markets and offer new products and services product and service innovation by
banks (both foreign and Indian), offering the customer greater choice.
From the Public sector dominated scenario, Indian Banking has come a long way to the current
scenario where private banks co-exist with their public bank counterparts who have adjusted to the
changing times. While The Indian Banking system has done fairly well in adjusting to the changing
market dynamics, greater challenges lie ahead.
Consolidation in the Banking sector is very important in terms of mergers and acquisitions for the
growing Indian Banking Industry. This can be achieved through Cost Reduction and Increasing
Revenue. The important part over here is that why do we need consolidation in Indian Banking and
what is the Challenges Ahead. The role of the Central government is also very necessary to be

analyzed in the entire process as they play a crucial role in the policy formation required for the
growth of Indian Banking.
Are we seeing the beginning of a phase of consolidation in Indian banking? Will liberalization and
globalization make consolidation through Mergers and Acquisitions a logical way forward for banks to
survive and grow? Will banks in India willingly agree to be taken over by other banks? Do we need
changes in our legal framework for facilitating mergers and acquisitions in the Indian banking
industry? Will Mergers and Acquisitions always lead to an appreciation in shareholder value? Well,
these are some of the questions which need to be analyzed keeping in the mind the future prospects of
the Indian Banking Industry.

Indian Banking-An Overview
The banking industry is the backbone of any monetized economy. The stage of development of this
industry is a good reflection of the development of the economy.
The banking industry in India is governed by Banking Regulation Act of India, 1949. Since 1949, this
sector has undergone phenomenal reforms due to the eddorts and the vision of the policymakers. The
first phase of reform began with nationalization if the 14 banks in 1969. At this stage, priority sectors
were identified and banking support was given to them. The second phase was the nationalization of 6
more banks in 1980. However, what can be considered as a breakthrough in banking services was the
entry to private sector banks whish was initiated in 1993. Eight new banks entered the market at this
stage with state of art technology and a brought with them a new wave of professionalism. It was at
this time that India was introduced to the concept of Debit and Credit cards, e-transfer of funds,
ATM‘s.

Post-liberalisation, the banking industry in India has grown at a fast pace. Increased economic activity
coupled with de-regulation has further strengthened the position of Indian banks. By the end of March
2006, the total deposits held by the scheduled commercial banks stood at INR 21 lakh crores, a growth
of 15.8 percent over 2005 and a compound annual growth rate (CAGR) of 14.9 percent since 2001-02.
The total loans and advances offered by commercial banks grew by 36 percent between March 2005
and March 2006 to reach INR 15 lakh crores, recording a CAGR of 23.6 percent since 2001-02.
By the end of fiscal year 2005-06, there were 26 public sector banks (including seven associates of the
State Bank of India), 29 private sector banks (21 old and 8 new private banks) and 30 foreign banks as
Scheduled Commercial Banks (SCBs) in India. As more foreign banks and aggressive new private
banks are looking towards increasing their footprints in an already crowded Indian banking industry,
the competition for nationalised banks is likely to escalate.
Banks have witnessed a significant decline in NPAs over the last few years (Figure 9). This trend is
visible for almost all categories of banks. This is primarily due to the stringent lending norms
implemented by banks and their better knowledge of Indian customers. Moreover, the RBI has been
tightening norms in line with the best international practices in recent years.

Source: evalueserve whitepaper on Indian Banking
Few Facts
 The nationalized banks have more branches than any other types of banks in India. Now there are
about 33,627 Branches in India, as on March 2005.
 Investments of scheduled commercial banks (SCBs) also saw an increase from Rs 8,04,199 crore in
March 2005 to Rs 8,43,081 crore in the same month of 2006.
 India's retail-banking assets are expected to grow at the rate of 18% a year over the next four years
(2006-2010).
 Retail loan to drive the growth of retail banking in future.
 Housing loan account for major chunk of retail loan.

Indian Banking Industry- A Transition
Phase
The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be
broadly classified into two major categories, non-scheduled banks and scheduled banks.Scheduled
banks comprise commercial banks and the co-operative banks. In terms of ownership,commercial
banks can be further grouped into nationalized banks, the State Bank of India and itsgroup banks,
regional rural banks and private sector banks (the old/ new domestic and foreign).These banks have
over 67,000 branches spread across the country.
The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and
resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in
the geographical coverage of banks. Every bank had to earmark a minimum percentage of their loan
portfolio to sectors identified as ―priority sectors‖. The manufacturing sector also grew during the
1970s in protected environs and the banking sector was a critical source. The next wave of reforms
saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled
commercial banks increased four-fold and the number of bank branches increased eightfold. After the
second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public
Sector Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the
foreign banks. The new private sector banks first made their appearance after the guidelines permitting
them were issued in January 1993. Eight new private sector banks are presently in operation. These
banks due to their late start have access to state-of the- art technology, which in turn helps them to
save on manpower costs and provide better services. During the year 2000, the State Bank Of India
(SBI) and its 7 associates accounted for a 25
percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks accounted for
53.2 percent of the deposits and 47.5 percent of credit during the same period. The share of foreign
banks (numbering 42), regional rural banks and other scheduled commercial banks accounted for 5.7
percent, 3.9 percent and 12.2 percent respectively in deposits and 8.41 percent, 3.14 percent and 12.85
percent respectively in credit during the year 2000.

Current Scenario
The industry is currently in a transition phase. On the one hand, the PSBs, which are the mainstay of
the Indian Banking system are in the process of shedding their flab in terms of excessive manpower,
excessive non Performing Assets (Npas) and excessive governmental equity, while on private sector
banks are consolidating themselves through mergers and
acquisitions. PSBs, which currently account for more than 78 percent of total banking industry assets
are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues from traditional
sources, lack of modern technology and a massive workforce while the new private sector banks are
forging ahead and rewriting the traditional banking business model by way of their sheer innovation
and service. The PSBs are of course currently working out challenging strategies even as 20 percent of
their massive employee strength has dwindled in the wake of the successful Voluntary Retirement
Schemes (VRS) schemes.
The private players however cannot match the PSB‘s great reach, great size and access to low cost
deposits. Therefore one of the means for them to combat the PSBs has been through the merger and
acquisition (M& A) route. Over the last two years, the industry has witnessed several such instances.
For instance, Hdfc Bank‘s merger with Times Bank Icici Bank‘s acquisition of ITC Classic, Anagram
Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said
to be on the lookout. The UTI bank- Global Trust Bank merger however opened a pandora‘s box and
brought about the realization that all was not well in the functioning of many of the private sector
banks.
Private sector Banks have pioneered internet banking, phone banking, anywhere banking, mobile
banking, debit cards, Automatic Teller Machines (ATMs) and combined various other services and
integrated them into the mainstream banking arena, while the PSBs are still grappling with disgruntled
employees in the aftermath of successful VRS schemes. Also, following India‘s commitment to the W
To agreement in respect of the services sector, foreign banks, including both new and the existing
ones, have been permitted to open up to 12 branches a year with effect from 1998-99 as against the
earlier stipulation of 8 branches.
Talks of government diluting their equity from 51 percent to 33 percent in November 2000 has
also opened up a new opportunity for the takeover of even the PSBs. The FDI rules being more
rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A route to acquire
willing Indian partners. Meanwhile the economic and corporate sector slowdown has led to an
increasing number of banks focusing on the retail segment. Many of them are also entering the new
vistas of Insurance. Banks with their phenomenal reach and a regular interface with the retail investor
are the best placed to enter into the insurance sector. Banks in India have been allowed to provide fee-

based insurance services without risk participation, invest in an insurance company for providing
infrastructure and services support and set up of a separate joint-venture insurance company with risk
participation. Aggregate Performance of the Banking Industry Aggregate deposits of scheduled
commercial banks increased at a compounded annual average growth rate (Cagr) of 17.8 percent
during 1969-99, while bank credit expanded at a Cagr of 16.3 percent per annum. Banks‘ investments
in government and other approved securities recorded a Cagr of 18.8 percent per annum during the
same period.
In FY01 the economic slowdown resulted in a Gross Domestic Product (GDP) growth of only 6.0
percent as against the previous year‘s 6.4 percent. The WPI Index (a measure of inflation) increased
by 7.1 percent as against 3.3 percent in FY00. Similarly, money supply (M3) grew by around 16.2
percent as against 14.6 percent a year ago.
The growth in aggregate deposits of the scheduled commercial banks at 15.4 percent in FY01 percent
was lower than that of 19.3 percent in the previous year, while the growth in credit by SCBs slowed
down to 15.6 percent in FY01 against 23 percent a year ago.
The industrial slowdown also affected the earnings of listed banks. The net profits of 20 listed banks
dropped by 34.43 percent in the quarter ended March 2001. Net profits grew by 40.75 percent in the
first quarter of 2000-2001, but dropped to 4.56 percent in the fourth quarter of 2000 -2001.
On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill the norms, it was a
feat achieved with its own share of difficulties. The CAR, which at present is 9.0 percent, is likely to
be hiked to 12.0 percent by the year 2004 based on the Basle Committee recommendations. Any bank
that wishes to grow its assets needs to also shore up its capital at the same time so that its capital as a
percentage of the risk-weighted assets is maintained at the stipulated rate. While the IPO route was a
much-fancied one in the early ‗90s, the current scenario doesn‘t look too attractive for bank majors.
Consequently, banks have been forced to explore other avenues to shore up their capital base.While
some are wooing foreign partners to add to the capital others are employing the M& A route. Many are
also going in for right issues at prices considerably lower than the market prices to woo the investors.

Interest Rate Scene
The two years, post the East Asian crises in 1997-98 saw a climb in the global interest rates. It was
only in the later half of FY01 that the US Fed cut interest rates. India has however remained more or
less insulated. The past 2 years in our country was characterized by a mounting intention of the
Reserve Bank Of India (RBI) to steadily reduce interest rates resulting in a narrowing differential
between global and domestic rates.
The RBI has been affecting bank rate and CRR cuts at regular intervals to improve liquidity and
reduce rates. The only exception was in July 2000 when the RBI increased the Cash Reserve Ratio
(CRR) to stem the fall in the rupee against the dollar. The steady fall in the interest rates resulted in
squeezed margins for the banks in general.
Governmental Policy
After the first phase and second phase of financial reforms, in the 1980s commercial banks began to
function in a highly regulated environment, with administered interest rate structure,
quantitative restrictions on credit flows, high reserve requirements and reservation of a significant
proportion of lendable resources for the priority and the government sectors. The restrictive regulatory
norms led to the credit rationing for the private sector and the interest rate controls led to the
unproductive use of credit and low levels of investment and growth. The resultant ‗financial
repression‘ led to decline in productivity and efficiency and erosion of profitability of the banking
sector in general. This was when the need to develop a sound commercial banking system was felt.
This was worked out mainly with the help of the recommendations of the Committee on the Financial
System (Chairman: Shri M. Narasimham), 1991. The resultant financial sector reforms called for
interest rate flexibility for banks, reduction in reserve requirements, and a number of structural
measures. Interest rates have thus been steadily deregulated in the past few years with banks being free
to fix their Prime Lending Rates(PLRs) and deposit rates for most banking products.
Credit market reforms included introduction of new instruments of credit, changes in the credit
delivery system and integration of functional roles of diverse players, such as, banks, financial
institutions and nonbanking financial companies (Nbfcs). Domestic Private Sector Banks were
allowed to be set up, PSBs were allowed to access the markets to shore up their Cars.
Implications Of Some Recent Policy Measures
The allowing of PSBs to shed manpower and dilution of equity are moves that will lend greater
autonomy to the industry. In order to lend more depth to the capital markets the RBI had in

November 2000 also changed the capital market exposure norms from 5 percent of bank‘s
incremental deposits of the previous year to 5 percent of the bank‘s total domestic credit in the
previous year. But this move did not have the desired effect, as in, while most banks kept away almost
completely from the capital markets, a few private sector banks went overboard and exceeded limits
and indulged in dubious stock market deals. The chances of seeing banks making a comeback to the
stock markets are therefore quite unlikely in the near future.
The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during the
first quarter of this fiscal came as a welcome announcement to foreign players wanting to get a foot
hold in the Indian Markets by investing in willing Indian partners who are starved of networth to meet
CAR norms. Ceiling for FII investment in companies was also increased from 24.0 percent to 49.0
percent and have been included within the ambit of FDI investment. The abolishment of interest tax of
2.0 percent in budget 2001-02 will help banks pass on the benefit to the borrowers on new loans
leading to reduced costs and easier lending rates. Banks will also benefit on the existing loans
wherever the interest tax cost element has already been built into the terms of the loan. The reduction
of interest rates on various small savings schemes from 11 percent to 9.5 percent in Budget 2001-02
was a much awaited move for the banking industry and in keeping with the reducing interest rate
scenario, however the small investor is not very happy with the move Some of the not so good
measures however like reducing the limit for tax deducted at source (TDS) on interest income from
deposits to Rs 2,500 from the earlier level of Rs 10,000, in Budget 2001-02, had met with disapproval
from the banking fraternity who feared that the move would prove counterproductive and lead to
increased fragmentation of deposits, increased volumes and transaction costs. The limit was thankfully
partially restored to Rs 5000 at the time of passing the Finance Bill in the Parliament.
April 2001-Credit Policy Implications
The rationalization of export credit norms in will bestow greater operational flexibility on banks,and
also reduce the borrowing costs for exporters. Thus this move could trigger exports growth in the
future. Banks can also hope to earn increased revenue with the interest paid by RBI on CRR balances
being increased from 4.0 percent to 6.0 percent The stock market scam brought out the unholy nexus
between the Cooperative banks and stockbrokers. In order to usher in greater prudence in their
operations, the RBI has barred Urban Cooperative Banks from financing the stock market operations
and is also in the process of setting up of a new apex supervisory body for them. Meanwhile the
foreign banks have a bone to pick with
the RBI. The RBI had announced that forex loans are not to be calculated as a part of Tier-1 Capital
for drawing up exposure limits to companies effective 1 April 2002. This will force foreign banks

either to infuse fresh capital to maintain the capital adequacy ratio (CAR) or pare their asset base.
Further, the RBI has also sought to keep foreign competition away from the nascent net banking
segment in India by allowing only Indian banks with a local physical presence, to offer Internet
banking Crystal Gazing On the macro economic front, GDP is expected to grow by 6.0 to 6.5 percent
while the projected expansion in broad money (M3) for 2001-02 is about 14.5 percent. Credit and
deposits are both expected to grow by 15-16 percent in FY02. India's foreign exchange reserves should
reach US$50.0 billion in FY02 and the Indian rupee should hold steady. The interest rates are likely to
remain stable this fiscal based on an expected downward trend in inflation rate, sluggish pace of non-
oil imports and likelihood of declining global interest rates. The domestic banking industry is
forecasted to witness a higher degree of mergers and acquisitions in the future. Banks are likely to opt
for the universal banking approach with a stronger retail approach. Technology and superior customer
service will continue to be the imperatives for success in this industry.
Public Sector banks that imbibe new concepts in banking, turn tech savvy, leaner and meaner post
VRS and obtain more autonomy by keeping governmental stake to the minimum can succeed in
effectively taking on the private sector banks by virtue of their sheer size. Weaker PSU banks are
unlikely to survive in the long run. Consequently, they are likely to be either acquired by stronger
players or will be forced to look out for other strategies to infuse greater capital and optimize their
operations.
Foreign banks are likely to succeed in their niche markets and be the innovators in terms of
technology introduction in the domestic scenario. The outlook for the private sector banks indeed
looks to be more promising vis-à-vis other banks. While their focused operations, lower but more
productive employee force etc will stand them good, possible acquisitions of PSU banks will definitely
give them the much needed scale of operations and access to lower cost of funds. These banks will
continue to be the early technology adopters in the industry, thus increasing their efficiencies. Also,
they have been amongst the first movers in the lucrative insurance segment.Already, banks such as
Icici Bank and Hdfc Bank have forged alliances with Prudential Life and Standard Life respectively.
This is one segment that is likely to witness a greater deal of action in the future. In the near term, the
low interest rate scenario is likely to affect the spreads of majors. This is likely to result in a greater
focus on better asset-liability management procedures. Consequently, only banks that strive hard to
increase their share of fee-based revenues are likely to do better in the future.

M&A- A Global Phenomenon
Be it industrial sector or services sector, M&As have become way forward in today‘s world. In a free
market economy, companies have to keep evolving to remain competitive. Adaptability to changes in
the market becomes a crucial factor for survival. M&As as a style of doing business got a fillip in the
1980s in the post oil-shock world. USA led the change with over 55000 M&As reported in the decade.
This activity gained further momentum in the nineties and even more so in the new millennium.
Merger between Arcelor and Mittal steel to become the largest steel manufacturer in the world is a
recent development which was followed with great interest by all of us.
What drives M&As? Theoretically, consolidation can be with two basic motives. One, A motive to
maximize value for stakeholders and two, non-value maximizing motives. In a perfect capital market
all activities of any company will be to maximize shareholder value. In reality, value maximization
comes from cost reduction or revenue growth.
MERGER AND ACQUISITON AN
OVERVIEW
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy,
corporate finance and management dealing with the buying, selling and combining of different
companies that can aid, finance, or help a growing company in a given industry grow rapidly without
having to create another business entity.
Acquisition
An acquisition, also known as a takeover or a buyout or "merger", is the buying of one company (the
‗target‘) by another. An acquisition, or a merger, may be private or public, depending on whether the
acquiree or merging company is or isn't listed in public markets. An acquisition may be friendly or
hostile. Whether a purchase is perceived as a friendly or hostile depends on how it is communicated to
and received by the target company's board of directors, employees and shareholders. It is quite
normal though for M&A deal communications to take place in a so called 'confidentiality bubble'
whereby information flows are restricted due to confidentiality agreements (Harwood, 2005). In the

case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the
takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer.
Hostile acquisitions can, and often do, turn friendly at the end, as the acquiror secures the endorsement
of the transaaction from the board of the acquiree company. This usually requires an improvement in
the terms of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will acquire management control of a larger or longer established
company and keep its name for the combined entity. This is known as a reverse takeover. Another type
of acquisition is reverse merger, a deal that enables a private company to get publicly listed in a short
time period. A reverse merger occurs when a private company that has strong prospects and is eager
to raise financing buys a publicly listed shell company, usually one with no business and limited
assets. Achieving acquisition success has proven to be very difficult, while various studies have shown
that 50% of acquisitions were unsuccessful]
The acquisition process is very complex, with many
dimensions influencing its outcome. There is also a variety of structures used in securing control over
the assets of a company, which have different tax and regulatory implications:
The buyer buys the shares, and therefore control, of the target company being purchased. Ownership
control of the company in turn conveys effective control over the assets of the company, but since the
company is acquired intact as a going concern, this form of transaction carries with it all of the
liabilities accrued by that business over its past and all of the risks that company faces in its
commercial environment.
The buyer buys the assets of the target company. The cash the target receives from the sell-off is paid
back to its shareholders by dividend or through liquidation. This type of transaction leaves the target
company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the
transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and
liabilities that it does not. This can be particularly important where foreseeable liabilities may include
future, unquantified damage awards such as those that could arise from litigation over defective
products, employee benefits or terminations, or environmental damage. A disadvantage of this
structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers
of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges
or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders.
The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where one
company splits into two, generating a second company separately listed on a stock exchange.

Distinction between mergers and acquisitions
Although often used synonymously, the terms merger and acquisition mean slightly different things.
[This paragraph does not make a clear distinction between the legal concept of a merger (with the
resulting corporate mechanics - statutory merger or statutory consolidation, which have nothing to do
with the resulting power grab as between the management of the target and the acquirer) and the
business point of view of a "merger", which can be achieved independently of the corporate mechanics
through various means such as "triangular merger", statutory merger, acquisition, etc.]
When one company takes over another and clearly establishes itself as the new owner, the purchase is
called an acquisition. From a legal point of view, the target company ceases to exist, the buyer
"swallows" the business and the buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms agree to go forward as a single new
company rather than remain separately owned and operated. This kind of action is more precisely
referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks
are surrendered and new company stock is issued in its place. For example, in the 1999 merger of
Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new
company, GlaxoSmithKline, was created.
In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy
another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a
merger of equals, even if it is technically an acquisition. Being bought out often carries negative
connotations, therefore, by describing the deal euphemistically as a merger, deal makers and top
managers try to make the takeover more palatable. An example of this would be the takeover of
Chrysler by Daimler-Benz in 1999 which was widely referred to in the time.
A purchase deal will also be called a merger when both CEOs agree that joining together is in the best
interest of both of their companies. But when the deal is unfriendly - that is, when the target company
does not want to be purchased - it is always regarded as an acquisition.

Business valuation
The five most common ways to valuate a business are
asset valuation,
historical earnings valuation,
future maintainable earnings valuation,
relative valuation (comparable company & comparable transactions),
discounted cash flow (DCF) valuation
Professionals who valuate businesses generally do not use just one of these methods but a combination
of some of them, as well as possibly others that are not mentioned above, in order to obtain a more
accurate value. The information in the balance sheet or income statement is obtained by one of three
accounting measures: a Notice to Reader, a Review Engagement or an Audit.
Accurate business valuation is one of the most important aspects of M&A as valuations like these will
have a major impact on the price that a business will be sold for. Most often this information is
expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for interest's
sake. There are other, more detailed ways of expressing the value of a business. These reports
generally get more detailed and expensive as the size of a company increases, however, this is not
always the case as there are many complicated industries which require more attention to detail,
regardless of size.
Financing M&A
Mergers are generally differentiated from acquisitions partly by the way in which they are financed
and partly by the relative size of the companies. Various methods of financing an M&A deal exist:
Cash
Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the
shareholders of the target company are removed from the picture and the target comes under the
(indirect) control of the bidder's shareholders.

Specialist M&A advisory firms
Although at present the majority of M&A advice is provided by full-service investment banks, recent
years have seen a rise in the prominence of specialist M&A advisers, who only provide M&A advice
(and not financing). These companies are sometimes referred to as Transition companies, assisting
businesses often referred to as "companies in transition." To perform these services in the US, an
advisor must be a licensed broker dealer, and subject to SEC (FINRA) regulation. More information
on M&A advisory firms is provided at corporate advisory.
Motives behind M&A
The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial
performance. The following motives are considered to improve financial performance:
Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs
by removing duplicate departments or operations, lowering the costs of the company relative to the
same revenue stream, thus increasing profit margins.
Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such
as increasing or decreasing the scope of marketing and distribution, of different types of products.
Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor
and thus increase its market power (by capturing increased market share) to set prices.
Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the
stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts.
Or, a manufacturer can acquire and sell complementary products.
Synergy: For example, managerial economies such as the increased opportunity of managerial
specialization. Another example are purchasing economies due to increased order size and associated
bulk-buying discounts.
Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by
reducing their tax liability. In the United States and many other countries, rules are in place to limit the
ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an
acquiring company.
Geographical or other diversification: This is designed to smooth the earnings results of a company,
which over the long term smoothens the stock price of a company, giving conservative investors more

confidence in investing in the company. However, this does not always deliver value to shareholders
(see below).
Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction
of target and acquiring firm resources can create value through either overcoming information
asymmetry or by combining scarce resources
Vertical integration: Vertical integration occurs when an upstream and downstream firm merge (or one
acquires the other). There are several reasons for this to occur. One reason is to internalise an
externality problem. A common example is of such an externality is double marginalization. Double
marginalization occurs when both the upstream and downstream firms have monopoly power, each
firm reduces output from the competitive level to the monopoly level, creating two deadweight losses.
By merging the vertically integrated firm can collect one deadweight loss by setting the downstream
firm's output to the competitive level. This increases profits and consumer surplus. A merger that
creates a vertically integrated firm can be profitable
However, on average and across the most commonly studied variables, acquiring firms' financial
performance does not positively change as a function of their acquisition activity. Therefore,
additional motives for merger and acquisition that may not add shareholder value include:
Diversification: While this may hedge a company against a downturn in an individual industry it fails
to deliver value, since it is possible for individual shareholders to achieve the same hedge by
diversifying their portfolios at a much lower cost than those associated with a merger.
Manager's hubris: manager's overconfidence about expected synergies from M&A which results in
overpayment for the target company.
Empire-building: Managers have larger companies to manage and hence more power.
Manager's compensation: In the past, certain executive management teams had their payout based on
the total amount of profit of the company, instead of the profit per share, which would give the team a
perverse incentive to buy companies to increase the total profit while decreasing the profit per share
(which hurts the owners of the company, the shareholders); although some empirical studies show that
compensation is linked to profitability rather than mere profits of the company.

Effects on management
A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that
mergers and acquisitions destroy leadership continuity in target companies‘ top management teams for
at least a decade following a deal. The study found that target companies lose 21 percent of their
executives each year for at least 10 years following an acquisition – more than double the turnover
experienced in non-merged firms.
The Great Merger Movement
The Great Merger Movement was a predominantly U.S. business phenomenon that happened from
1895 to 1905. During this time, small firms with little market share consolidated with similar firms to
form large, powerful institutions that dominated their markets. It is estimated that more than 1,800 of
these firms disappeared into consolidations, many of which acquired substantial shares of the markets
in which they operated. The vehicle used were so-called trusts. To truly understand how large this
movement was—in 1900 the value of firms acquired in mergers was 20% of GDP. In 1990 the value
was only 3% and from 1998–2000 it was around 10–11% of GDP. Organizations that commanded the
greatest share of the market in 1905 saw that command disintegrate by 1929 as smaller competitors
joined forces with each other. However, there were companies that merged during this time such as
DuPont, US Steel, and General Electric that have been able to keep their dominance in their respected
sectors today due to growing technological advances of their products, patents, and brand recognition
by their customers. The companies that merged were mass producers of homogeneous goods that
could exploit the efficiencies of large volume production. However more often than not mergers were
"quick mergers". These "quick mergers" involved mergers of companies with unrelated technology
and different management. As a result, the efficiency gains associated with mergers were not present.
The new and bigger company would actually face higher costs than competitors because of these
technological and managerial differences. Thus, the mergers were not done to see large efficiency
gains, they were in fact done because that was the trend at the time. Companies which had specific
fine products, like fine writing paper, earned their profits on high margin rather than volume and took
no part in Great Merger Movement.

Short-run factors
One of the major short run factors that sparked in The Great Merger Movement was the desire to keep
prices high. That is, with many firms in a market, supply of the product remains high. During the panic
of 1893, the demand declined. When demand for the good falls, as illustrated by the classic supply and
demand model, prices are driven down. To avoid this decline in prices, firms found it profitable to
collude and manipulate supply to counter any changes in demand for the good. This type of
cooperation led to widespread horizontal integration amongst firms of the era. Focusing on mass
production allowed firms to reduce unit costs to a much lower rate. These firms usually were capital-
intensive and had high fixed costs. Because new machines were mostly financed through bonds,
interest payments on bonds were high followed by the panic of 1893, yet no firm was willing to accept
quantity reduction during that period.[citation needed]
Long-run factors
In the long run, due to the desire to keep costs low, it was advantageous for firms to merge and reduce
their transportation costs thus producing and transporting from one location rather than various sites of
different companies as in the past. This resulted in shipment directly to market from this one location.
In addition, technological changes prior to the merger movement within companies increased the
efficient size of plants with capital intensive assembly lines allowing for economies of scale. Thus
improved technology and transportation were forerunners to the Great Merger Movement. In part due
to competitors as mentioned above, and in part due to the government, however, many of these
initially successful mergers were eventually dismantled. The U.S. government passed the Sherman Act
in 1890, setting rules against price fixing and monopolies. Starting in the 1890s with such cases as
U.S. versus Addyston Pipe and Steel Co., the courts attacked large companies for strategizing with
others or within their own companies to maximize profits. Price fixing with competitors created a
greater incentive for companies to unite and merge under one name so that they were not competitors
anymore and technically not price fixing.

Merger waves
The economic history has been divided into Merger Waves based on the merger activities in the
business world as:
Period Name Facet
1889 - 1904 First Wave Horizontal mergers
1916 - 1929 Second Wave Vertical mergers
1965 - 1989 Third Wave Diversified conglomerate mergers
1992 - 1998 Fourth Wave Congeneric mergers; Hostile takeovers; Corporate Raiding
2000 - Fifth Wave Cross-border mergers
Cross-border M&A
In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals
cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirers.
The rise of globalization has exponentially increased the market for cross border M&A. In 1997 alone
there were over 2333 cross border transactions worth a total of approximately $298 billion. This rapid
increase has taken many M&A firms by surprise because the majority of them never had to consider
acquiring Due to the complicated nature of cross border M&A, the vast majority of cross border
actions have unsuccessful anies seek to expand their global footprint and become more agile at
creating high-performing businesses and cultures across national boundaries
Even mergers of companies with headquarters in the same country are very much of this type (cross-
border Mergers). After all,when Boeing acquires McDonnell Douglas, the two American companies
must integrate operations in dozens of countries around the world. This is just as true for other
supposedly "single country" mergers, such as the $29 billion dollar merger of Swiss drug makers
Sandoz and Ciba-Geigy (now Novartis).

Types of Mergers & Acquisitions
Merger types can be broadly classified into the following five subheads as described below.
They are
Horizontal Merger
Conglomeration,
Vertical Merger,
Product-Extension Merger
Market-Extension Merger.
Horizontal Merger
Horizontal mergers are those mergers where the companies manufacturing similar kinds of
commodities or running similar type of businesses merge with each other. The principal objective
behind this type of mergers is to achieve economies of scale in the production procedure through
carrying off duplication of installations, services and functions, widening the line of products, decrease
in working capital and fixed assets investment, getting rid of competition, minimizing the advertising
expenses, enhancing the market capability and to get more dominance on the market.
Nevertheless, the horizontal mergers do not have the capacity to ensure the market about the product
and steady or uninterrupted raw material supply. Horizontal mergers can sometimes result in
monopoly and absorption of economic power in the hands of a small number of commercial entities.
According to strategic management and microeconomics, the expression horizontal merger delineates
a form of proprietorship and control. It is a plan, which is utilized by a corporation or commercial
enterprise for marketing a form of commodity or service in a large number of markets. In the context
of marketing, horizontal merger is more prevalent in comparison to horizontal merger in the context of
production or manufacturing.

Horizontal Integration
Sometimes, horizontal merger is also called as horizontal integration. It is totally opposite in nature to
vertical merger or vertical integration.
Horizontal Monopoly
A monopoly formed by horizontal merger is known as a horizontal monopoly. Normally, a monopoly
is formed by both vertical and horizontal mergers. Horizontal merger is that condition where a
company is involved in taking over or acquiring another company in similar form of trade. In this way,
a competitor is done away with and a wider market and higher economies of scale are accomplished.
In the process of horizontal merger, the downstream purchasers and upstream suppliers are also
controlled and as a result of this, production expenses can be decreased.
Horizontal Expansion
An expression which is intimately connected to horizontal merger is horizontal expansion. This refers
to the expansion or growth of a company in a sector that is presently functioning. The aim behind a
horizontal expansion is to grow its market share for a specific commodity or service.
Examples of Horizontal Mergers
Following are the important examples of horizontal mergers:
฀ Theformation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond
฀ Themerger of Bank of Mathura with ICICI (Industrial Credit and Investment Corporation of India)
Bank
฀ Themerger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply Company
฀ Themerger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar Cement
Advantages of Horizontal Merger:
Horizontal merger provides the following advantages to the companies which are merged:
1) Economies of scope
The notion of economies of scope resembles that of economies of scale. Economies of scale
principally denote effectiveness related to alterations in the supply side, for example, growing or

reducing production scale of an individual form of commodity. On the other hand, economies of scope
denote effectiveness principally related to alterations in the demand side, for example growing or
reducing the range of marketing and supply of various forms of products. Economies of scope are one
of the principal causes for marketing plans like product lining, product bundling, as well as family
branding.
2) Economies of scale
Economies of scale refer to the cost benefits received by a company as the result of a horizontal
merger. The merged company is able to have bigger production volume in comparison to the
companies operating separately. Therefore, the merged company can derive the benefits of economies
of scale. The maximum use of plant facilities can be done by the merged company, which will lead to
a decrease in the average expenses of the production.
The important benefits of economies of scale are the following:
฀ Synergy
฀ Growthor expansion
฀ Riskdiversification
฀ Diminutionin tax liability
฀ Greatermarket capability and lesser competition
฀ Financial synergy (Improved creditworthiness, enhancement of borrowing power, decrease in the
cost of capital, growth of value per share and price earning ratio, capital raising, smaller flotation
expenses)
฀ Motivation forthe managers
For attaining economies of scale, there are two methods and they are the following:
฀ Increasedfixed cost and static marginal cost
฀No or small fixed cost and decreasing marginal cost
one example of economies of scale is that if a company increases its production twofold, then the
entire expense of inputs goes up less than twofold.

3) Dominant existence in a particular market
Conglomeration.
As per definition, a conglomerate merger is a type of merger whereby the two companies that merge
with each other are involved in different sorts of businesses. The importance of the conglomerate
mergers lies in the fact that they help the merging companies to be better than before.
Types of Conglomerate Mergers
There are two main types of conglomerate mergers – the pure conglomerate merger and the mixed
conglomerate merger. The pure conglomerate merger is one where the merging companies are doing
businesses that are totally unrelated to each other.
The mixed conglomerate mergers are ones where the companies that are merging with each other are
doing so with the main purpose of gaining access to a wider market and client base or for expanding
the range of products and services that are being provided by them
There are also some other subdivisions of conglomerate mergers like the financial conglomerates, the
concentric companies, and the managerial conglomerates.
Reasons of Conglomerate Mergers
There are several reasons as to why a company may go for a conglomerate merger. Among the more
common reasons are adding to the share of the market that is owned by the company and indulging in
cross selling. The companies also look to add to their overall synergy and productivity by adopting the
method of conglomerate mergers.

Benefits of Conglomerate Mergers
There are several advantages of the conglomerate mergers. One of the major benefits is that
conglomerate mergers assist the companies to diversify. As a result of conglomerate mergers the
merging companies can also bring down the levels of their exposure to risks.
Implications of Conglomerate Mergers
There are several implications of conglomerate mergers. It has often been seen that companies are
going for conglomerate mergers in order to increase their sizes. However, this also, at times, has
adverse effects on the functioning of the new company. It has normally been observed that these
companies are not able to perform like they used to before the merger took place.
This was evident in the 1960s when the conglomerate mergers were the general trend. The term
conglomerate mergers also implies that the two companies that are merging do not even have the same
customer base as they are in totally different businesses.
It has normally been seen that a lot of companies that go for conglomerate mergers are able to manage
a wide variety of activities in a particular market. For example, these companies can carry out research
activities and applied engineering processes. They are also able to add to their production as well as
strengthen the marketing area that ensures better profitability.
It has been seen from case studies that conglomerate mergers do not affect the structures of the
industries. However, there might be significant impact if the acquiring company happens to be a
leading company of its market that is not concentrated and has a large number of entry barriers.

Vertical Merger
Vertical mergers refer to a situation where a product manufacturer merges with the supplier of inputs
or raw materials. In can also be a merger between a product manufacturer and the product's distributor.
Vertical mergers may violate the competitive spirit of markets. It can be used to block competitors
from accessing the raw material source or the distribution channel. Hence, it is also known as "vertical
foreclosure". It may create a sort of bottleneck problem.
As per research, vertical integration can affect the pricing incentive of a downstream producer. It may
also affect a competitors incentive for selecting input suppliers. Research studies single out several
factors, which point to the fact that vertical integration facilitates collusion. Vertical mergers may
promote collusion through an outlets effect. A corollary of vertical integration is that integrated
business structures are able to perform better in crisis phases.
There are multiple reasons, which promote the vertical integration by firms. Some of them are
discussed below.
฀ The prime reason being the reduction of uncertainty regarding the availability of quality inputs as
also the uncertainty regarding the demand for its products.
฀ Firms may also enter vertical mergers to avail the plus points of economies of integration.
฀ Verticalmerger may make the firms cost-efficient by streamlining its distribution and production
costs. It is also meant for the reduction of transactions costs like marketing expenses and sales taxes. It
ensures that a firm's resources are used optimally.

Bird's Eye View of US Laws Pertaining to Vertical Mergers
In USA the vertical mergers abide by the 'Clayton Act (15 U.S.C.A. § 12 et seq.)'. The transactions
conducted here fall under the purview of antitrust acts.
It is interesting to note that vertical mergers do not lead to a fall in the number of operating economic
agents at a particular market level. However, it may result in a change of industry behavior pattern.
At its worst suppliers might be faced with a loss of product market. The retail chains may run out of
stock. Competitors may also face blockages for supplies as well as outlets.
Vertical mergers by virtue of their market power may effectively block new firms from entering the
market thereby violating the competitive flavor of the market.
The Supreme Court of USA has given a ruling on just 3 cases pertaining to vertical merger under the
―Clayton Act ( section 7 )‖ as per the latest available information.
In the first case the Court contradicted the general assumption that section 7 was not applicable for
vertical mergers.
In the following vertical merger case the US Supreme Court observed that the primary disadvantage of
vertical merger lies in the throttling of the spirit and essence of competition. Business rivals may be
denied a fair chance at competition.
The Court observed that regarding vertical mergers two areas need close scrutiny and regulation.
One concerns the purpose and nature of the vertical merger arrangement. The other parameter
concerns the industry concentration trend in that specific sector.
In the third judgment passed on vertical merger US Supreme Court quashed Ford's claim that its
acquisition of Autolite had made the latter a better competitor.

Thus a vertical merger is a situation where a firm acquires a product supplier or a customer. Vertical
mergers may at times violate the US federal antitrust laws.
Gist of European Commission Guidelines on Vertical Mergers
In 2007 the European Commission released a new set of guidelines for non-horizontal mergers. It can
be noted that vertical merger is a type of non-horizontal merger. The Commission is the regulatory
body overseeing the compliance aspect of firms going for vertical mergers.
The guidelines cited instances where conglomerate and vertical mergers significantly affected the
competitive nature of the market.
The European Commission normally is not bothered about 'competition concerns' in what is
commonly known as 'safe harbors'. The guidelines set benchmarks for market share levels and
concentration levels below which comes the 'safe harbors'. Market analysts consider this 'safe harbor'
aspect of the new guidelines to be an innovative one.
Seen in overall terms the new guidelines from the European Commission aims at providing a
transparent regulatory guideline framework for the business community as well as the legal fraternity.

Product Extension Merger
Product-Extension Merger is executed among companies, which sell different products of a related
category. They also seek to serve a common market. This type of merger enables the new company to
go in for a pooling in of their products so as to serve a common market, which was earlier fragmented
among them.
According to definition, product extension merger takes place between two business organizations that
deal in products that are related to each other and operate in the same market. The product extension
merger allows the merging companies to group together their products and get access to a bigger set of
consumers. This ensures that they earn higher profits.
Example of Product Extension Merger
The acquisition of Mobil ink Telecom Inc. by Broadcom is a proper example of product extension
merger. Broadcom deals in the manufacturing Bluetooth personal area network hardware systems and
chips for IEEE 802.11b wireless LAN.
Mobil ink Telecom Inc. deals in the manufacturing of product designs meant for handsets that are
equipped with the Global System for Mobile Communications technology. It is also in the process of
being certified to produce wireless networking
chips that have high speed and General Packet Radio Service technology. It is expected that the
products of Mobilink Telecom Inc. would be complementing the wireless products of Broadcom
.
.

Market Extension Merger
Market-Extension Merger occurs between two companies that sell identical products in different
markets. It basically expands the market base of the product
As per definition, market extension merger takes place between two companies that deal in the same
products but in separate markets. The main purpose of the market extension merger is to make sure
that the merging companies can get access to a bigger market and that ensures a bigger client base.
Example of Market Extension Merger
A very good example of market extension merger is the acquisition of Eagle Bancshares Inc by the
RBC Centura. Eagle Bancshares is headquartered at Atlanta, Georgia and has 283 workers. It has
almost 90,000 accounts and looks after assets worth US $1.1 billion.
Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in the
metropolitan Atlanta region as far as deposit market share is concerned. One of the major benefits of
this acquisition is that this acquisition enables the RBC to go ahead with its growth operations in the
North American market.
With the help of this acquisition RBC has got a chance to deal in the financial market of Atlanta ,
which is among the leading upcoming financial markets in the USA. This move would allow RBC to
diversify its base of operations.
Difference between Market Extension Merger and Product Extension Merger
The difference between market extension merger and product extension merger lies in the fact that the
later is meant to add to the existing variety of products and services offered by the respective merging
companies; while, in case of the former the two merging companies are dealing in similar products.
In case of the market extension merger the two merging companies are operating in the same market
and as far as product extension merger is concerned the two merging companies are operating in
different markets.

SCOPE AND OBJECTIVE
 WHO CONSTITUTE A MERGER
 THE ANTICOMPETITIVE THRESHOLD
 MARKET DEFINITION
 EVALUATIVE CRITERIA
 THE EFFICIENCY EXCEPTION
 M&A IN BANKING INDUSTRY
 WHY MERGERS IN BANKING?
 CONSOLIDATION IN INDIAN BANKING
 IS BIGGER BETTER?
 NEED FOR CONSOLIDATION
 BENEFITS OF CONSOLIDATION
 RISKS OF CONSOLIDATION
 M&A IN INDIAN BANKING SECTOR AS AN IMPERATIVE
 M&A IN THE INDIAN BANKING SECTOR AS AN OPPORTUNITY
 ADOPTION OF M&A AS A KEY STRATEGIC TOOL
 ROLE OF STRATEGIC INVESTMENT
 MERGERS AS A SOURCE OF COMPETITIVE ADVANTAGE

WHAT CONSTITUTE A MERGER
In general terms, section 91 deems a "merger" to occur when direct or indirect control over, or
significant interest in, the whole or a part of a business of another person is acquired or established.
The principal issue is the interpretation of the words "significant interest". The acquisition or
establishment of a significant interest in the whole or a part of a business of another person is
considered to occur when a person acquires or establishes the ability to materially influence the
economic behaviour of the business of a second person; (e.g., block special or ordinary resolutions or
make decisions relating to pricing, purchasing, distribution, marketing or investment). In general, a
direct or indirect holding of less than a 10 percent voting interest in another entity will not be
considered a significant interest.A significant interest may be acquired or established pursuant to
shareholder agreements, management contracts and other contractual arrangements involving
incorporated or non-incorporated entities.
The Anticompetitive Threshold
In general, a merger will be found to be likely to prevent or lessen competition substantially when the
parties to the merger would more likely be in a position to exercise a materially greater degree of
market power in a substantial part of a market for two years or more, than if the merger did not
proceed in whole or in part. Market power can be exercised unilaterally or interdependently with other
competitors. To date, most of the mergers that the Director has concluded would likely have prevented
or lessened competition substantially have raised concerns about the ability of the merging parties to
unilaterally exercise market power. However, the Guidelines indicate that a merger can also facilitate
the ability of two or more competitors to exercise market power interdependently, through an explicit
agreement or arrangement, or through other forms of behaviour that permit firms implicitly to
coordinate their conduct. In the assessment of the extent to which market power will likely be acquired
or entrenched as a result of a merger, the focus is primarily upon the price dimension of competition.
Nevertheless, competition can be substantially prevented or lessened with respect to service, quality,
variety, advertising or innovation, where rivalry in the market in respect of these dimensions of
competition is important.

Market Definition
Outlines the conceptual framework that underlies the approach taken to market definition, and
describes the various factual criteria that are typically assessed in the case-by-case application of this
framework. In general, a relevant market is defined as the smallest group of products and the smallest
geographic area in relation to which sellers could impose and maintain a significant and nontransitory
price increase above levels that would likely exist in absence of the merger.In most contexts, the
Bureau considers a 5 percent price increase to be significant, and a one year period to be nontransitory.
However, a different price increase or time period may be employed where the Director is satisfied
that the application of the 5 percent or one year thresholds would not reflect market realities, Where
potential competition from new entrants or expansion by fringe firms within the market would require
significant construction or adaptation of facilities, or overcoming significant difficulties related to
marketing and distribution, it is considered subsequent to market definition, in the assessment of
whether new entry into the relevant market would ensure that competition would not likely be
prevented or lessened substantially.
Evaluative Criteria
Addresses the various evaluative criteria that are analyzed in the determination of the likely effects of
a merger on competition in a relevant market. The first matter discussed is the significance of
information relating to market share and concentration. Mergers generally will not be challenged on
the basis of concerns relating to the unilateral exercise of market power where the post-merger market
share of the merged entity would be less than 35 percent. Similarly, mergers generally will not be
challenged on the basis of concerns relating to the interdependent exercise of market power, where the
share of the market accounted for by the largest four firms in the market post-merger would be less
than 65 percent. Notwithstanding that market share of the largest four firms may exceed 65 percent,
the Director generally will not challenge a merger on the basis of concerns relating to the
interdependent exercise of market power where the merged entity's market share would be less than 10
percent. These thresholds merely serve to distinguish mergers that are unlikely to have anticompetitive
consequences from mergers that require further analysis, of various qualitative assessment criteria
such as those highlighted in section 93. No inferences regarding the likely effects of a merger on
competition are drawn from evidence that relates solely to market share or concentration. In all cases,
an assessment of market shares and concentration is only the starting point of the analysis.

The Guidelines then address the seven qualitative assessment criteria specifically mentioned in section
93 of the Act, together with two additional criteria that are often important to consider. As is the case
with high market share and concentration, the presence of impediments to new competition that would
impose on entrants a significant cost disadvantage, irrecoverable costs, or time delays is generally a
necessary, but not sufficient precondition to a finding that competition is likely to be prevented or
lessened substantially. In the absence of such impediments, a significant degree of market power
generally cannot be maintained. Where future entry or expansion by fringe firms within the market
would likely occur on a sufficient scale within two years to ensure that a material price increase could
not be sustained beyond this period in a substantial part of the relevant market, the Bureau would
likely conclude that the merger does not require enforcement action.
Similarly, information relating to either the failing firm or the effective remaining competition factors
can be sufficient to warrant a decision not to challenge a merger. In cases where one of the merging
parties is likely to exit the market in absence of the merger, and there are no alternatives to this exit
that would result in a materially higher degree of competition than if the merger proceeded, the merger
will generally not be found to be likely to contravene the Act. Likewise, where the degree of effective
remaining competition that would remain in the market is not likely to be reduced, the merger likely
will not be challenged.
The Efficiency Exception
Address in detail the approach taken to the efficiency exception provisions of section 96. These
provisions become operative where a merger has been found to be likely to substantially prevent or
lessen competition. The review of submissions relating to efficiency gains focuses primarily upon
quantifiable production related efficiency gains. However, qualitative dynamic efficiencies can in
certain circumstances also receive significant weight. The total efficiency gains that would not likely
be attained if the merger did not proceed are balanced against the effects of any prevention or
lessening of competition likely to be brought about by the merger. The focus of the evaluation of the
magnitude of these anticompetitive effects is upon the part of the total loss likely to be incurred by
buyers or sellers that is not merely a transfer from one party to another but represents a loss to the
economy as a whole, attributable to the diversion of resources to lower valued uses.

M&A in Banking Industry
Banking system is the bloodline of any economy and banks are trustees of public money. The
depositors therefore, have more stakes in the welfare of banks than the share holders. Failure of a bank
has more systemic implications than say, the failure of a manufacturing company. Laws governing
regulation and supervision of banks in all countries therefore focus on protecting the interests of
depositors. Naturally, fillip to bank consolidation in many countries came through regulatory and
governmental actions in public interest. Large scale public funding has also taken place in a number of
countries to prevent failure of banks/banking system.
United States witnessed large scale bank failures in the eighties (Savings and Loan Institutions) and
the Government came to the rescue of banking system through liberal FDIC (Federal Deposit
Insurance Corporation) support. An estimated USD 100 Billion was sent on the rescue. In the process
the Government encouraged mergers among banks by giving incentives to the banks taking over assets
and liabilities of failed banks. Subsequent M & A activity in the USA in nineties and in recent years
have been motivated by market forces.
Nearer home, we have the Asian experience in bank consolidation post 1997 economic meltdown. The
crisis brought out the vulnerability of a weak banking system to economic shocks. Here again, the
governments had come up with funding support and actively encouraged consolidation among banks.
Let us look at some of the initiatives taken in this region for strengthening the banking system.
 Indonesia witnessed large scale infusion of public funds into the banking system through a specialized
restructuring agency. Regulatory forbearance was also present in good measure to facilitate bank
recovery. As against Basel Capital adequacy norm of 8%, banks were allowed to operate with 4% as
an interim measure. Only banks which had Capital adequacy ratio reduced to below - 25% were
marked for immediate closure. Consolidation among banks was actively encouraged and FDI was
allowed up to 99%. Net result was that the number of banks in Indonesia which stood at 239 in 1996
came down to 138 by 2003. Consolidation was most visible among private banks with the number of
such banks coming down from 164 to 76 during the period. Post restructuring, the banks are now
healthier and their branch network and coverage has increased significantly in recent years.
 In Malaysia Bank Negara, the Central Bank implemented a well crafted financial master plan aimed at
strengthening the domestic banks, create a level playing field for foreign banks and open banking

 sector to global competition. The regulator used suasion to create 10 anchor banks through the
consolidation of 22 banks and 39 finance companies. FDI capped at 30% is expected to be increased in
the second phase of reforms scheduled to commence from 2007.
 In Singapore, there are 3 main banking groups and they have given boost to consolidation process not
only within the country, but also in South Korea and Malyasia
 Thailand has implemented a Financial Sector Master Plan aimed at removing obstructions to M & A
and also allows FDI flow to strengthen the banking system.
 Japan is a country which has witnessed a virtual collapse of the banking system along with economic
stagnation which lasted over 15 years. Japan had some of the leading names in global banking arena.
The economic slowdown saw the NPA levels going up over the roofs and the banks virtually looking
for government‘s support. Needless to say, the low interest rate regime (near zero rates) would have
eased their sufferings somewhat. However, the banking system has recovered in recent years helped
by liberal financial assistance from the government and an environment of extremely loose monetary
policy. Consolidation process which was kicked off as restructuring strategy has resulted in emergence
of three large banks viz. Mitsubishi UFJ, Mizuho and Sumitomo Mitusui.
 Today NPA levels have come down to an acceptable level of 2% from a peak level of 8.4% in the year
2002. Capital adequacy ratios have improved above the Basel Benchmark of 8%. Banks have started
showing profits and there is a pick-up in their credit portfolio. Japanese banks may still have a long
way to go as their ratings continue to be low and they are heavily dependant on interest income with
heavy reliance on low margin corporate loans.
 Another interesting development taking place in Japan is the government move to privatise the postal
agency, which doubles as a financial institution that holds the world‘s largest pool of household
savings. The Housing Loan Corporation managing the advances of the postal agency had, at one time,
nearly 50% of all mortgage loans in Japan. As part of privatisation this Corporation is being wound up
with the assets getting transferred to the banking system. The privatisation of the postal agency would
see the emergence of a new bank (named as Yacho Bank) which could probably be one of the largest
banking entities in the world.

M&A in Indian Banking
Mergers and Acquisitions are not an unknown phenomenon in Indian Banking. In fact, the predecessor
of State Bank of India, the Imperial Bank of India was born out of consolidation of three Presidency
Banks way back in 1920. In fact there were several cases of bank failures, mergers and acquisitions
which were reported in pre-independence period dating back to even early 19th Century. Proper
regulation and control of banks and intervention by the regulator in the event of a crisis came into
being with the passing of Banking Regulation Act in 1949.
However, forced merger and amalgamation as a tool to provide relief to ailing banks besides
protecting public and depositor confidence in banking system came into being only in 1960 when
Section 45 inserted in BR Act. Panic created by the Nath Bank in the fifties and Laxmi bank and Palai
Central bank in 1960 had prompted this legislative move. The first half of the sixties saw 45 forced
mergers under section 45. In the post nationalization period also a number of mergers and acquisitions
took place, most of them under Section 45. Interestingly almost all of them were amalgamations of
failed private banks with one of the Public sector banks.
In the recent times, we have seen some M&A as voluntary efforts of banks. Merger of Times Bank
with HDFC Bank was the first of such consolidations after financial sector reforms ushered in 1991.
Merger of Bank of Madura with ICICI Bank, reverse merger of ICICI with ICICI bank, coming
together of Centurion Bank and Bank of Punjab to form Centurion Bank
of Punjab and the recent decision of Lord Krishna Bank to merge with Federal Bank are voluntary
efforts by banks to consolidate and grow.
Consolidation fever has not been confined to the Scheduled Commercial Banks. We have seen
consolidation process gaining strength in other sectors as well. We had 196 RRBs since 1989. The last
year and a half has seen their numbers dwindle to 103 with merger of RRBs sponsored by commercial
banks within the same state. This move is expected to bring most of the RRBs into profit making
entities capable of playing their role in the way they were expected to do when the RRB Act was
passed in 1996.

Well, the big question is ―When will we see M&A activity among Public Sector Banks?‖ Public
Sector Banks form nearly 75% of Indian Banking and we need to see consolidation in this sector for
the Indian Banking sector to stand up and be counted in the Global Banking map.
Why Mergers in Banking?
Achieving Cost Reduction
a) Cost reduction through economy of Scale- Consolidation helps in scaling in up operations, there by
reducing per unit cost
b) Cost reduction through economy of Scope- This is achieved through synergy involved in the ability
to offer multiple products using the same infrastructure. Example: Banks can offer insurance and
investment products using their branch network and thereby achieve economy of scope
c) Cost reduction through rationalization of man power. The merged entity will be able to identify the
right persons to man critical functions from a larger pool of human resources.
d) Reduction in risk. The merged entity will be able to reduce credit risk through spreading it across
wider geographies or product range.
e) Cost reduction through possible reduction in tax obligations
f) Cheaper sourcing of inputs with increased bargaining power with vendors and suppliers
g) Ability to enter new business areas with reduced initial cost as compared to a new set up.
Increasing Revenue
a) A bigger entity will be able to serve a large customer better. By offering more services and taking
bigger share in the business of the customer the bank will be able to increase the revenue per customer
b) Product diversification will facilitate ‗one stop shopping‘ by the bank‘s customers.
c) A larger customer base will generate more revenue
d) Greater visibility in the market place will enhance the ability to attract new customers.
e) A bigger size and share in the market will boost the bank‘s ability to raise product prices without
losing customers
f) The merged entity will be able to take bigger risk and reap its rewards.

Consolidation in Indian Banking
Indian banks are smaller in size and scale, compared to their international counterparts. This can be
gauged from the fact that India‘s largest bank, SBI, stands 72nd among the top 1000 banks in the
world (according to a list published by ―The Banker‖ in 2006) and its Tier I capital is roughly 1/10th
the size of the world‘s biggest bank, Citigroup. Moreover, SBI does not find a place in the top ten
banks even in Asia. On the contrary, there are six Chinese banks that feature in the list of the top 25
banks in Asia. Only two Indian Banks, SBI and ICICI, are among the top 25 Asian Banks.
The lack of size and scale acts as a major inhibitor to the Indian banks competing against the foreign
banks. Currently, the banking sector is very strictly regulated, limiting the growth of foreign banks in
India. Indian banks require approval from RBI for expanding overseas. These measures have shielded
the Indian banks from competing with foreign banks.
With India strongly pushing for liberalisation and globalisation, this situation is bound to change.
The RBI has proposed opening the banking sector and providing a level playing field to foreign and
national banks in 2009. This has spurred the Indian banks to consolidate to achieve size and scale
comparable to foreign banks. Further, the pressure on capital structure to meet prudential capital
adequacy norms as prescribed by Basel II necessitates the need for consolidation in the banking
industry.
Besides achieving scale and size, consolidation can reduce the cost of operations through economies
of scale, for example, the effective use of manpower and offering multiple products using the same
infrastructure. The larger banks are in a better position to manage credit risk by spreading it across
geographies and multiple product range. The bigger entities are also in a better position to attract
customers and provide diversified products to the customers.

Is Bigger Better?
At around $780 billion, India‘s GDP (gross domestic product) is comparable to that of South Korea,
yet Korean banks have seven times more banking assets than Indian banks. With assets of around Rs
4,93,000 crore, State Bank of India (SBI) is the country‘s largest bank, yet it is only ranked 84 in the
world, according to The Banker; the next biggest is ICICI Bank, which is half the size of SBI and
ranked around 200 globally.
Two things become clear. One, India is still an ‗unbanked‘ country. Two, by global standards, even the
biggest of Indian banks are minnows in a business where size means clout and where geographical
boundaries are blurring. Even by Indian standards, most of the banking sector is disadvantaged by
size: the top 25 banks — of which, 18 are owned by the government — account for about 85 per cent
of banking assets.
Such fragmentation is a matter of concern, more so approaching 2009 — the date set by the Reserve
Bank of India (RBI) to relax operational norms for foreign banks. The sweep, nature and timeline of
those changes haven‘t been articulated yet, but as and when foreign banks are allowed unrestricted
access, or even something approaching that, they could muscle out the smaller banks with their large
capital base.
Squeezed by size and competition, a similar fate could await banks that are small or are uncompetitive,
where there‘s a lot of duplication of products and services without any value-addition to the customer.
The set of public sector banks, which account for 75 per cent of banking assets, are ripe for mergers
and acquisitions, and hold the key for any meaningful change in the dynamics of the banking sector.
Barring SBI, there‘s not much to distinguish one public sector bank from another. It‘s common to find
10 public sector banks in an area, all offering an identical banking proposition. Consolidation will lead
to more efficient use of resources — branches, ATMs, employees, technology — enabling them to
offer cheaper banking services.

Compared to their smaller peers, big banks can allocate more towards technology, the benefits of
which are being able to service more customers and reach the desired economies of scale. In some of
the new, large private sector banks, as much as 75 per cent of banking transactions are now conducted
through the automated route (ATMs, Internet banking and call centres), compared to 20 per cent about
four years ago.
The common consensus among banking sector experts is that M&As are desirable, even inevitable.
But since the Left doesn‘t think the same way, the sense of urgency is missing in the set of banks that
need it the most: public sector banks. Since any merger moves are likely to be scuttled by employee
unions and the Left, the best public sector banks are able to do today is form loose alliances of the kind
struck by Corporation Bank, Indian Bank and Oriental Bank of Commerce, which agreed to, among
other things, rationalise branch network, and share IT and treasury resources.
Private Banks have to grapple with survival issues of their own. Being financial intermediaries that
mobilise public savings and lend them onwards, banks have a fiduciary responsibility. Hence, the
ownership pattern of banks is considered crucial to protecting the interests of depositors. As some of
the private sector banks are community-based or promoter-driven, their shareholding pattern is
concentrated in the hands of a few, which raises the possibility of misappropriation of funds. If their
stakes are to be reduced, some of the smaller banks will necessarily have to merge among themselves.
Compared to public sector banks, there‘s less overlap between private banks, as they have different
business models and cater to different segments, but that also creates its own shortcomings.
The RBI has also mandated a net worth of at least Rs 300 crore for banks. Some of the smaller banks
with a lower net worth will be forced to become bigger and find ways to raise more capital. In a short
period of time till 2009, it will be difficult for banks to grow organically; hence they are left with no
option but to merge. The RBI has paved the way over the next few years for banks to grow bigger,
whether by themselves or through M&As.

List of mergers in Indian Banking
Serial
No
Banks/Entities Merged Time of
Merger
1 United Western Bank IDBI Bank September
2006
2 Lord Krishna Bank Centurion
Bank
August
2007
3 Ganesh Bank of Kurunwad Federal
Bank
January
2006
4 IDBI Bank IDBI Limited April
2006
5 Bank of Punjab Centurion
Bank
June 2005
6 Global Trust Bank Oriental Bank of
Commerce
July 2004
7 Nedungadi Bank Bank of
Punjab
December
2002
8 Benares State Bank Bank of
Baroda
June 2002
9 Bank of Madura ICICI Bank March
2001
10 ICICI Limited ICICI Bank January
2000
11 Times Bank HDFC Bank December
1999
12 Sikkim Bank Union Bank December
1999
13 Bareilly Corporation Bank Bank of
Baroda
June 1999

M&A in Indian Banking Sector as an Imperative
There are multiple reasons that lead to the fact that M&A in the Indian Banking sector as an
imperative.
Stability
Fragmentation poses increasing risk in the Indian Banking Sector. During the financial period 2001-
2005, only four banks have been able to cross the market capitalization of Rs. 50 billion included Bank
of Baroda, HDFC Bank, ICICI Bank, and State Bank of India. Considerable fragmentation exists in
the Banking sector for banks with market capitalization of less than Rs. 50 billion.
Moreover the created value is moving away from the top 5 banks thus indicating fragmentation indeed
has increased over the period of last five years. Shown below are the deposit shares of the Banks
operating in India over the period 2000-2004. It is observed that the share of the top 5 players has
eroded and been consumed by the next fifteen players.
Considering that the base of total deposits has been consistently increasing, consequently the value in
deposits gained by the next 15 banks has been tremendous.
Source: Data on deposits from RBI website
Similar trends are observed in profit after tax, borrowings and interest and non interest incomes of the
banks, thereby hinting at increased levels of fragmentation in the top 20 banks. Though this could be
the sign of a competitive bank market with healthy banks remaining in the market the goal of globally
competent banks would be missed.
Year 2000 2004
Top 5 Banks 52.40% 47.09%
Next 15 Banks 34.39% 38.04%
Remaining
Banks
13.21% 14.87%

A STUDY ON MERGERS ACQUISITION IN BANKING INDUSTRY- A GLOBAL PHENOMENON

A STUDY ON MERGERS ACQUISITION IN BANKING INDUSTRY- A GLOBAL PHENOMENON

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