Mergers & acquisitions

Mergers And Acquisitions

INTRODUCTION

We have been learning about the companies coming together to
from another company and companies taking over the existing
companies to expand their business.

With recession taking toll of many Indian businesses and the feeling
of insecurity surging over our businessmen, it is not surprising when we
hear about the immense numbers of corporate restructurings taking
place, especially in the last couple of years. Several companies have been
taken over and several have undergone internal restructuring, whereas
certain companies in the same field of business have found it beneficial
to merge together into one company.

In this context, it would be essential for us to understand what
corporate restructuring and mergers and acquisitions are all about.

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

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Mergers & Acquisition’s at some stage in the firm's development.
Successful competition in international markets may depend on
capabilities obtained in a timely and efficient fashion through Mergers &
Acquisition's. Many have argued that mergers increase value and
efficiency and move resources to their highest and best uses, thereby
increasing shareholder value. .

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

WHAT IS MERGER

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Merger is defined as combination of two or more companies into a
single company where one survives and the others lose their corporate
existence. The survivor acquires all the assets as well as liabilities of the
merged company or companies. Generally, the surviving company is the
buyer, which retains its identity, and the extinguished company is the
seller.

Merger is also defined as amalgamation. Merger is the fusion of two
or more existing companies. All assets, liabilities and the stock of one
company stand transferred to Transferee Company in consideration of
payment in the form of:

Equity shares in the transferee company,
Debentures in the transferee company,
Cash, or
A mix of the above modes.

WHAT IS ACQUISITION
Acquisition in general sense is acquiring the ownership in the
property. In the context of business combinations, an acquisition is the
purchase by one company of a controlling interest in the share capital of
another existing company.

Methods of Acquisition:
An acquisition may be affected by

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a) Agreement with the persons holding majority interest in the
company management like members of the board or major
shareholders commanding majority of voting power;
b) Purchase of shares in open market;
c) To make takeover offer to the general body of shareholders;
d) Purchase of new shares by private treaty;
e) Acquisition of share capital through the following forms of
considerations viz. Means of cash, issuance of loan capital, or
insurance of share capital.

Takeover:

A ‘takeover’ is acquisition and both the terms are used
interchangeably.
Takeover differs from merger in approach to business combinations
i.e. The process of takeover, transaction involved in takeover,
determination of share exchange or cash price and the fulfillment of
goals of combination all are different in takeovers than in mergers. For
example, process of takeover is unilateral and the offeror company
decides about the maximum price. Time taken in completion of
transaction is less in takeover than in mergers, top management of the
offeree company being more co-operative.

De-merger or corporate splits or division:

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

Purpose of Mergers & Acquisitions

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

Other possible purposes for acquisition are short listed below: -

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(1) Procurement of supplies:

1. To safeguard the source of supplies of raw materials or intermediary
product;
2. To obtain economies of purchase in the form of discount, savings in
transportation costs, overhead costs in buying department, etc.;
3. To share the benefits of suppliers economies by standardizing the
materials.

(2) Revamping production facilities:

1. To achieve economies of scale by amalgamating production facilities
through more intensive utilization of plant and resources;
2. To standardize product specifications, improvement of quality of
product, expanding

3. Market and aiming at consumers satisfaction through strengthening
after sale
Services;
4. To obtain improved production technology and know-how from the
offered company
5. To reduce cost, improve quality and produce competitive products
to retain and
Improve market share.

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(3) Market expansion and strategy:

1. To eliminate competition and protect existing market;
2. To obtain a new market outlets in possession of the offeree;
3. To obtain new product for diversification or substitution of existing
products and to enhance the product range;
4. Strengthening retain outlets and sale the goods to rationalize
distribution;
5. To reduce advertising cost and improve public image of the offeree
company;
6. Strategic control of patents and copyrights.

(4) Financial strength:
1. To improve liquidity and have direct access to cash resource;
2. To dispose of surplus and outdated assets for cash out of combined
enterprise;
3. To enhance gearing capacity, borrow on better strength and the
greater assets backing;
4. To avail tax benefits;
5. To improve EPS (Earning Per Share).

(5) General gains:

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1. To improve its own image and attract superior managerial talents to
manage its affairs;
2. To offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror company’s own
developmental plans.
A company thinks in terms of acquiring the other company only
when it has arrived at its own development plan to expand its operation
having examined its own internal strength where it might not have any
problem of taxation, accounting, valuation, etc. But might feel resource
constraints with limitations of funds and lack of skill managerial
personnel’s. It has to aim at suitable combination where it could have
opportunities to supplement its funds by issuance of securities, secure
additional financial facilities, eliminate competition and strengthen its
market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic
objectives through alternative type of combinations which may be
horizontal, vertical, product expansion, market extensional or other
specified unrelated objectives depending upon the corporate strategies.

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Thus, various types of combinations distinct with each other in nature are
adopted to pursue this objective like vertical or horizontal combination.

(8) Corporate friendliness:

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

(9) Desired level of integration:

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

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Types of Mergers
Merger or acquisition depends upon the purpose of the offeror
company it wants to achieve. Based on the offerors’ objectives profile,
combinations could be vertical, horizontal, circular and conglomeratic as
precisely described below with reference to the purpose in view of the
offeror company.

(A) Vertical combination:

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

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

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

2. Has control over products specifications.

(B) Horizontal combination:

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

(C) Circular combination:

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

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(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated
industries like DCM and Modi Industries. The basic purpose of such
amalgamations remains utilization of financial resources and enlarges
debt capacity through re-organizing their financial structure so as to
service the shareholders by increased leveraging and EPS, lowering
average cost of capital and thereby raising present worth of the
outstanding shares. Merger enhances the overall stability of the acquirer
company and creates balance in the company’s total portfolio of diverse
products and production processes.

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[4]Advantages of Mergers

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

Mergers and acquisitions are caused with the support of
shareholders, manager’s ad promoters of the combing companies. The
factors, which motivate the shareholders and managers to lend support

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to these combinations and the resultant consequences they have to bear,
are briefly noted below based on the research work by various scholars
globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies
subject to merger should enhance in value. The sale of shares from one
company’s shareholders to another and holding investment in shares
should give rise to greater values i.e. The opportunity gains in alternative
investments. Shareholders may gain from merger in different ways viz.
From the gains and achievements of the company i.e. Through
(a) Realization of monopoly profits;
(b) Economies of scales;
(c) Diversification of product line;
(d) Acquisition of human assets and other resources not available
otherwise;
(e) Better investment opportunity in combinations.

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

(2) From the standpoint of managers

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

(3) Promoter’s gains

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

(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of
benefits and costs to:
(a)Consumer of the product or services;
(b)Workers of the companies under combination;
(c)General public affected in general having not been user or consumer
or the worker in the companies under merger plan.

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(a) Consumers

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

(b) Workers community

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

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

(c) General public

Mergers result into centralized concentration of power. Economic power is to be
understood as the ability to control prices and industries output as monopolists. Such
monopolists affect social and political environment to tilt everything in their favour to
maintain their power ad expand their business empire. These advances result into
economic exploitation. But in a free economy a monopolist does not stay for a longer
period as other companies enter into the field to reap the benefits of higher prices set
in by the monopolist. This enforces competition in the market as consumers are free
to substitute the alternative products. Therefore, it is difficult to generalize that
mergers affect the welfare of general public adversely or favorably. Every merger of
two or more companies has to be viewed from different angles in the business
practices which protects the interest of the shareholders in the merging company and
also serves the national purpose to add to the welfare of the employees, consumers
and does not create hindrance in administration of the Government polices.

Chapter 12: Change in scenario of Banking Sector

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1. The first mega merger in the Indian banking sector that of the HDFC
Bank with Times Bank, has created an entity which is the largest private
sector bank in the country.

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

3. Europe and Japan are also on their way to restructure their financial
sector thought merger and acquisitions. Merger will help banks with
added money power, extended geographical reach with diversified
branch Network, improved product mix, and economies of scale of
operations. Merger will also help banks to reduced them borrowing
cost and to spread total risk associated with the individual banks over
the combined entity. Revenues of the combine entity are likely to shoot
up due to more effective allocation of bank funds. ICICI Bank has
initiated merger talks with Centurian Bank but due to difference arising
over swap ration the merger didn’t materialized. Now UTI Bank is
egeing Centurian Bank. The proposed merger of UTI Bank and
Centurian Bank will make them third largest private banks in terms of
size and market Capitalization State Bank of India has also planned to
merge seven of its associates or part of its long-term policies to
regroup and consolidate its position. Some of the Indian Financial
Sector players are already on their way for mergers to strengthen their
existing base.

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

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THE BANKING SCENARIO HAS BEEN CHANGING AT FAST PLACE.

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

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

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

3. Bank traditionally involve working capital financing have started
offering consumer loans and housing loans. Some of the banks have

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started offering travel loans, as well as many banks have started
capitalizing on recent capital market boom by providing IPO finance to
the investors.

Chapter 5: Procedure of Mergers & Acquisitions

Public announcement:

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

1. Appointment of merchant banker:

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

2. Use of media for announcement:

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

3. Timings of announcement:

Public announcement should be made within four days of
finalization of negotiations or entering into any agreement or
memorandum of understanding to acquire the shares or the voting rights.

4. Contents of announcement:
Public announcement of offer is mandatory as required under the
SEBI Regulations.

Procedure of Bank Merger

The procedure for merger either voluntary or otherwise is outlined
in the respective state statutes/ the Banking regulation Act. The
Registrars, being the authorities vested with the responsibility of

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administering the Acts, will be ensuring that the due process prescribed
in the Statutes has been complied with before they seek the approval of
the RBI. They would also be ensuring compliance with the statutory
procedures for notifying the amalgamation after obtaining the sanction of
the RBI.

Before deciding on the merger, the authorized officials of the
acquiring bank and the merging bank sit together and discuss the
procedural modalities and financial terms. After the conclusion of the
discussions, a scheme is prepared incorporating therein the all the details
of both the banks and the area terms and conditions.

Once the scheme is finalized, it is tabled in the meeting of Board of
directors of respective banks. The board discusses the scheme thread
bare and accords its approval if the proposal is found to be financially
viable and beneficial in long run.

After the Board approval of the merger proposal, an extra ordinary
general meeting of the shareholders of the respective banks is convened
to discuss the proposal and seek their approval.

After the board approval of the merger proposal, a registered valuer
is appointed to valuate both the banks. The valuer valuates the banks on

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the basis of its share capital,market capital, assets and liabilities, its
reach and anticipated growth and sends its report to the respective banks.

Once the valuation is accepted by the respective banks , they send
the proposal along with all relevant documents such as Board approval,
shareholders approval, valuation report etc to Reserve Bank of India and
other regulatory bodies such Security & exchange board of India SEBI
for their approval.

After obtaining approvals from all the concerned institutions,
authorized officials of both the banks sit together and discuss and
finalize share allocation proportion by the acquiring bank to the
shareholders of the merging bank SWAP ratio

After completion of the above procedures , a merger and acquisition
agreement is signed by the bank

Chapter 9: RBI Guidelines on Mergers & Acquisitions of
Banks

With a view to facilitating consolidation and emergence of strong

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entities and providing an avenue for non disruptive exit of weak/unviable
entities in the banking sector, it has been decided to frame guidelines to
encourage merger/amalgamation in the sector.

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

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

Although there are no specific provisions in the State Acts or the
Central Act for the merger of a co-operative society under the State Acts
with that under the Central Act, it is felt that, if all concerned including
administrators of the concerned Acts are agreeable to order merger/
amalgamation, RBI may consider proposals on merits leaving the question

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of compliance with relevant statutes to the administrators of the Acts. In
other words, Reserve Bank will confine its examination only to financial
aspects and to the interests of depositors as well as the stability of the
financial system while considering such proposals.

Chapter 10: Amalgamation of Urban Banks

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Chapter 11: Information & Documents to be furnished by BY THE
ACQUIRER OF BANKS

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

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

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

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

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

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

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

I. Tier I Capital

Ii. Tier II Capital

Iii. Risk-weighted Assets

Iv. Gross and Net npas

V. Ratio of Tier I Capital to Risk-weighted Assets

Vi. Ratio of Tier II Capital to Risk-weighted Assets

Vii. Ratio of Total Capital to Risk-weighted Assets

Viii. Tier I Capital to Total Assets

Ix. Gross and Net npas to Advances

X. Cash Reserve Ratio

Xi. Statutory Liquidity Ratio

4. Information certified by the values as is considered relevant to

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understand the net realizable value of assets of the acquired bank
including in particular:-

A. The method of valuation used by the values

B. The information and documents on which the values have relied
and the extent of the verification, if any, made by the values to test
the accuracy of such information

C. If the values have relied upon projected information, the names
and designations of the persons who have provided such
information and the extent of verification, if any, made by the values
in relation to such information

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

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

5. Such other information and explanations as the Reserve Bank may

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require.

Chapter 6: Mergers in the Banking Sector

ICICI Bank

INTRODUCTION

ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is
India's largest private bank. ICICI Bank has total assets of about Rs.20.05bn (end-Mar
2005), a network of over 550 branches and offices, and about 1900 atms. ICICI Bank
offers a wide range of banking products and financial services to corporate and retail
customers through a variety of delivery channels and through its specialized
subsidiaries and affiliates in the areas of investment banking, life and non-life
insurance, venture capital and asset management. ICICI Bank's equity shares are listed
in India on stock exchanges at Kolkata and Vadodara, the Stock Exchange,

Mumbai and the National Stock Exchange of India Limited and its adrs are
listed on the New York Stock Exchange (NYSE). During the year 2005 ICICI bank

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was involved as a defendant in cases of alleged criminal practices in its debt collection
operations and alleged fraudulent tactics to sell its products.

The industrial Credit and Investment Corporation of India Limited now
known as ICICI Ltd. Was founded b the World bank, the Government of
India and representatives of private industry on January 5, 1955. The
objective was to encourage and assist industrial development and
investment in India. Over the years, ICICI has evolved into a diversified
financial institution. ICICI’s principal business activities include:

Project Finance
Infrastructure Finance
Corporate Finance
Securitization
Leasing
Deferred Credit
Consultancy services
Custodial services

The ICICI Groups draws its strength from the core competencies
of its individual companies. Today, top Indian Corporate look towers ICICI
as a business partner for providing solutions to their varied financial
requirements. The Group also offers a gamut of personal finance
solutions to individuals. To lead the financial services into the new

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millennium, the Group is now truly positioned as a Virtual Universal Bank.
The liberalization of the Indian economy in the 1990s offered ICICI an
opportunity to provide a wide range of financial services. For regulatory
and strategic reasons, ICICI set up specialized subsidiaries in the areas of
commercial banking, investment banking, non- banking finance, investor
servicing brooking, venture capital financing and state level infrastructure
financing.

ICICI plans to focus on its retail finance business and expect the
same to contribute upto 15-20 % of its turnover in the next five years. It
is trying to change the perception that it is a corporate oriented bank.
The bank hard selling its image as a retail segment bank has for the first
time come up with an advertisement that addresses its products at the
individual. This is to drive home the point that the bank has product and
services catering to all individuals. For this purpose the network of ICICI
Bank shall come into use. The parent plants to sell its products and also
raise retail funds through the banking subsidiary.

THE ICICI GROUP COMPRISES OF:
ICICI Bank Limited,
ICICI Securities and Finance Company Limited (ICICI Securities),
ICICI Credit Corporation Limited ( ICICI Credit),
ICICI Investors Services Limited (ICICI Services),
ICICI Venture Funds Management Limited (ICICI Venture),
ICICI international Limited,

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ICICI -KINFRA Limited (I-KIN),

Mr. K.V. Kamath, CEO of ICICI Limited, has recently voiced the
intentions of ICICI Limited towards banking and ICICI Bank. ICICI Limited
is endeavoring to forge a closer relationship with ICICI bank. Mr. K V
Kamath recently quoted in a leading daily “Banking is dead. Universal
banking is in offering with a whole range of financial products and
services. The basic idea is for banks to do business along with “banking”.
Bankers will have to emerge as businessmen.”

ICICI Bank is a focused banking company coping with the changing
times of the banking industry. So it can be a lucrative target for other
player in the same line of operations. However, when merged with ICICI
Limited the attraction is reduced manifold considering the magnitude of
operations of the ICICI limited.

Of course, one would still need a bank to open letters of credit, offer
guarantees, handle documentation, and maintain current account
facilities etc. So banks will not superfluous. But nobody needs so many of
them any more.

Secondly, besides credit, a customer may also want from a bank
efficient cash management, advisory services and market research on his

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product. Thus the importance of fee based is increasing in comparison
with the fund-based income.

The pre--merger status of ICICI Bank is as follows: it had liabilities of
Rs.12,073 crore, equity market capitalization of Rs.2,466 crore and
equity volatility of 0.748. Working through options reasoning, we find
that this share price and volatility are consistent with assets worth
Rs.13,249 crore with volatility 0.15. Thus, ICICI bank had assets which
are 9.7% ahead of liabilities, which is roughly consistent with the spirit of
the Basle Accord, and has leverage of 5.37 times.

History of ICICI Bank

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The World bank the Government of India and representatives of Indian
industry form ICICI Limited as a development finance institution to
provide medium-term and long-term project financing to Indian
businesses in 1955.

1994 ICICI establishes ICICI Bank as a subsidiary.

1999 ICICI becomes the first Indian company and the first bank or
financial institution from non-Japan Asia to list on the NYSE.

2001 ICICI acquired Bank of Madura (est. 1943). Bank of Madura was
a Chettiar bank, and had acquired Chettinad Mercantile Bank (est.
1933) and Illanji Bank (established 1904) in the 1960s.

2002 The Boards of Directors of ICICI and ICICI Bank approve the
merger of ICICI, ICICI Personal Financial Services Limited and ICICI
Capital Services Limited, with ICICI Bank. After receiving all
necessary regulatory approvals, ICICI integrates the group's
financing and banking operations, both wholesale and retail, into a
single.

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INTRODUCTION OF BANK OF MADURA

The pre--merger status of Bank of Madura is as follows: it had
liabilities of Rs.4,444 crore, equity market capitalization of Rs.100 crore
and equity volatility of 0.69. Working through options reasoning, we may
say that the stock market thinks that its assets are worth Rs.4, 095 crore
with a volatility of 0.02. Hence, bom is bankrupt (with assets which are
Rs.350 crore behind liabilities) and has a leverage of 41 times. If we
needed to bring bom up to a point where its assets were 10% ahead of
liabilities, which is broadly consistent with the Basle Accord, this would
require an infusion of Rs.800 crore of equity capital.
How do we combine these to think of the merged entity? Assets and
liabilities are additive, so the total assets of the merged entity would
prove to be roughly Rs.17,345 crore and the liabilities would prove to be
Rs.16,517 crore. The merged entity would hence need roughly Rs.800
crore of fresh equity capital in order to come up to a point where assets
were atleast 10% ahead of liabilities.

How can we estimate the market capitalization of the merged entity?
The value of equity is the value of a call option on the assets of the
merged entity. Pricing the call requires an estimate of the volatility of the
merged assets, i.e. It requires knowledge of the extent to which the
assets of the two banks are uncorrelated. We find that using values of the

- 37 –


correlation coefficient ranging from 80% to 95%, the volatility of assets of
the merged entity proves to be around 0.12. In this case, the valuation of
the call option, i.e. An estimate of the market capitalization of the
merged entity, proves to be roughly Rs.2,500 crore.

This number is not far from the pre--merger market capitalisation
of ICICI Bank, which was Rs.2,466 crore. Hence, we can say that on purely
financial arguments, the merger is roughly neutral to ICICI Bank
shareholders if bom was merged into ICICI Bank for free. Indeed, if
banking regulators took their jobs more seriously, they would force the
shareholders of bom to walk into such a merger at a zero share price as a
way of reducing

The number of bankrupt banks in India by one. Such a forced-merger
would be a politically easier alternative for the RBI when compared with
closing down bom.

The shareholders of ICICI Bank have paid a non-zero fee for bom.
This reflects a hope that the products and processes of ICICI Bank will
rapidly improve the value of assets of bom in order to compensate. In
addition, the merged entity will have to rapidly raise roughly Rs.800 crore
of equity capital to obtain a 10% buffer between assets and liabilities.

Hence, this proposed merger is a godsend for bom, which was
otherwise a bankrupt entity which was headed for closure given the low

- 38 –


probability that it would manage to raise Rs.800 crore of equity on a base
of Rs.100 crore of market capitalisation. It is useful to observe that bom
probably did not see things in this way, given the willingness of India's
banking regulators to interminably tolerate the existence of bankrupt
banks. Closure of bom would normally involve pain for bom's
shareholders and workers; instead both groups will get an extremely
pleasant ride if the merger goes through.

The proposed merger is a daunting problem for ICICI Bank. It will
need to rapidly find roughly Rs.800 crore in equity. If India's banking
regulators were serious about capital adequacy, ICICI Bank should have to
pay roughly zero to merge with bom (it is doing a favour to bom and to
India's banking system); instead ICICI Bank has paid a positive price for
bom. The key question that will be answered in the next two/three years
is: Will ICICI Bank's superior knowledge of products and processes
revitalize the assets and employees of bom, and generate shareholder
value in the merged entity? ICICI's top management clearly thinks so, and
it would be a very happy outcome if this did indeed happen
.
The proposed merger is a good thing for India's economy, since the
headcount of bankrupt banks will go down by one, and there is a
possibility of obtaining higher value added out of the poorly utilized
assets and employees of bom. If the merger goes through, then it will
reduce the say of the management team of bom in India's resource
allocation, which is a good thing.

- 39 –


Chapter 13: Merger of ICICI Bank with Bank of Madura

The proposed merger between ICICI Bank and Bank of Madura (bom)
is a remarkable one. The pre--merger market capitalization of ICICI Bank
was roughly Rs.2500 crore while bom was at roughly Rs.100 crore. Bom
is known to have a poor asset portfolio. What will the merged entity be
worth?

The key rationale underlying every merger is the question of synergy.
Can ICICI Bank's products and technology bring new life to the 263
branches of bom? Will ICICI Bank (which has 1,700 employees) be able to
overcome the 2,600 employees that bom carries, given that Indian labour
law makes it troublesome and expensive to sack workers?

- 40 –


In applying these ideas to ICICI Bank and to bom, we need to believe
that the stock market effectively processes information to produce
estimates of the price and volatility of the shares of both these banks.
This assumption is suspect, because both securities have poor stock
market liquidity. Hence, we should be cautious in interpreting the
numbers shown here. There are many other aspects in which this
reasoning leans on models, which are innately imperfect depictions of
reality. However, these models are powerful tools for understanding the
basic factors at work, and they probably convey the broad picture quite
effectively.

The stock of ICICI Bank may be in the limelight on the back of the
proposed acquisition of Bank of Madura.

Though the stock has gained sharply in the last two months after
hitting a recent low of Rs 110, some upside may be left as the bank could
get re-rated on account of the merger. Existing shareholders could hold
their exposures in ICICI Bank while investors with an appetite for risk
could contemplate exposures despite the impressive gains of the past few
months. ICICI Bank continues to be one of the better options in the
banking sector at the moment and the possible merger with ICICI may
well be on the backburner.

The merger would pitchfork ICICI Bank as the leading private sector
bank. The merger may be viewed favorably since Bank of Madura has

- 41 –


focused strengths and a reasonably good quality balance sheet. The
board of directors is to meet on December 11 to consider the merger.

It is quite likely that the swap ratio may be fixed in a manner that
holds out a good deal for the shareholders of Bank of Madura. This may
also be influenced by the fact that the Bank of Madura stock has gained
sharply by around 70 per cent in the past fortnight in the homestretch to
the deal.

As the acquisition is to be financed by issuance of stock, the rise in
the market capitalization of Bank of Madura may mean a higher degree of
equity issuance by ICICI Bank. But the price may well be worth paying as
this is the only way that ICICI Bank may be able to get control over banks
with reasonable quality balance sheets that could make a difference in the
medium to long-term.

Bank of Madura has assets of Rs 3,988 crore and deposits of Rs
3,395 crore as of March 2000. The fact that the bank has a capital
adequacy of 15.8 per cent with shareholder funds of Rs 263 crore may
mean that ICICI Bank (post-merger phase) will have more leeway to
pursue growth without expanding the equity base (other than paying for
the acquisition).
Strong capital adequacy, a strong beachhead on the Internet arena, a
revamped IT architecture, a growing retail client base through a

- 42 –


brick-and-click strategy, and improving asset quality and earnings
growth are positive features as far as ICICI Bank is concerned.

Despite these factors, the share had been on a downtrend from after
touching a high of Rs 271, eight months ago. The uptrend then was on
the back of the announcement of its ADR issue and new technology
initiatives. The subsequent downtrend was triggered by the possibility of
the merger with its parent. There is continuing concern on asset quality
of ICICI. It has been a stated goal of the ICICI group to go in for universal
banking. It is clear that once regulatory hurdles are removed, such a
possibility becomes distinctly feasible. But

Given the battering that bank stock took, ICICI may now hesitate to
pursue this path. Also ICICI Bank is the most visible investor-friendly face
for the group in terms of returns to shareholders and it may well be
maintained as a separate entity. In this backdrop, the stock may hold
scope for improvement in the valuation of the stock.

Financial standing of ICICI Bank & Bank of Madura

- 43 –


Parameters ICICI Bank Bank of Madura
1998-19 1999-2 1998-1 1999-2
99 000 999 000
Net worth 308.33 1129.90 211.32 247.83
Total Deposit 6072.94 9866.02 3013.00 3631.00
Advances 3377.60 5030.96 1393.92 1665.42
Net Profit 63.75 105.43 30.13 45.58
Share Capital 165.07 196.81 11.08 11.08
Capital 11.06% 19.64% 18.83% 14.25%
Adequacy Ratio
Gross 4.72% 2.54% 8.13% 11.09%
Advances /
Gross NP’s
Net Advances / 2.88% 1.53% 4.66% 6.23%
Net NP’s

Source: Complied from Annual Report (March 2000) of ICICI Bank &
Bank of Madura.

Crucial Parameters: - How they stand

- 44 –


Name of the Bank of ICICI
Bank Madura Bank
Book value of bank
on the day of 183.0 58.0
merger
announcement
Market price on the
day announcement 183.0 169.90
of merger
Earning per share 38% 5.4
Dividend paid (in%) 55% 15%
P/E Ratio 1.73 783

The Generation Gap:- the merger of 57 year old BOM sooth bared old
generation bank with a fast growing technology say new Generation

- 45 –


bank will help the latter and the start merger is likely to bring cheer to
shareholder and bank employees of BOM and some amount of
discomfort and anxiety to those of ICICI bank.

The scheme of amalgamation will increase the equity bank of ICICI
Bank to RS 220.36 CR. ICICI Bank will issue 235.4-lakh share of RS 10
each to the shareholder of BOM. The merger entity will have an increase
of a net base over RS 160 bn and deposit base of RS 131 bn.

The merged entity will have 360 branches and a similar number of
ATM’s across the country and also enable the ICICI to serve a large
customer bone of 1.2 million customers of BOM through a wider
network, adding to the antoma bare to 2.7 million.

Managing rural branches:

ICICI major branches are in major and cities, where as BOM spreads
its wings mostly in semi urban and city segments of south India. There
in a task ahead lying for the merged entity to increase dramatically the
business mix of rural branches of BOM. On the other hand due to
Geographical location of its branches and level of competition. ICICI
Bank will have a tough time to cope with.

- 46 –


Managing software:

Another task which stand on the way is technology while ICICI bank
which is fully automatic.

Quality of assets:- the nature of assets a bank is holding would
signify its operational efficiency. Usually the level of Non – performing
Assets ( NPAS) judges the quality of assets. The lower the NAPS to
total advances or total assets the better the quality is and vice versa.

Staff productivity: - One of the key area where banks can develop
competition advantage. The measurement of staff productivity
becomes one of the essential factors while measuring the performance
of the banks.

Liquidity:- While assessing the liquidity of a bank the most sought
ratio is net loans to total assets. A rise in the net loans to total assets
may be considered as a fall in the liquidity of the bank.

Book Value per share:- It is simply the net worth of the company
(which is equal to the paid up equity capital plus resource and surplus)
divided by the number of outstanding equity shares.

- 47 –


Earning per share:- specific valuation per unit of investment given by
Net income after income taxes and after dividends on preferred stock
of the company.

Net work:- Book value of a company is common stock, surplus,
resources and retained earnings.

Profitability: - the most crucial ratio in measuring the profitability is
net profit of the bank. The ratio such as Net Interest Income (NIL) and
Net Interest Margin (NIM) measure sustenance ability of the bank based
on the spread. Entity is using the package, Banks 2000, BOM
computerized 90 percent of its business and was converted with ISBS
software.

The BOM branches are supposed to switch over to Banks 2000. Though
it is not a difficult task, with 80% computer literate staff would need
effective retraining which involves a cost. The ICICI Bank need to invest
RS 50 core for upgrading BOM’s 263 branches.

Managing Human Resources:

One of the greatest challenges before ICICI Banks is managing
human resources. When the head count of ICICI Bank is taken it in less
than 1500 employees on the other hand BOM has over 2500.

- 48 –


The merged entity will have bout 4000 employees which will make it
one of the largest banks among the new generation private sector banks.
Th staff of ICICI Banks are drawn from 75 various banks mostly young
qualified professionals with computer background and prefer to work in
metro or by either with good remuneration packages.

While under the influence of tread unions most of the BOM employees
have low career aspiration. The announcement by H.N. signor, CEO and
MD of ICICI, that three would be no VRS or retrenchment, creates a new
hope amongst the BOM employees. It is a tough task ahead to manage.
On the other hand their pay would be revised up wards. It is not a
Herevlean task to integrate two work welters?

Managing Client Base:-

The clients base of ICICI Bank after merger, will be as 2.7 Million
from it past 0.5 Million, as accumulation of 2.2 Million from BOM. The
nature and quality of clients is not of uniform quality.

The BOM had built up it client base for a long time, in a hard way,
on the basis of personalized services. In order to deal with the BOM
clientele, the ICICI Bank needs to redefine its strategies to suit to the new
clientele. The sentiments or a relationship of small and medium borrower

- 49 –


is hurt it may be difficult for them to reestablish the relationship which
could also hamper the image of the bank.

Given the situation, we need to wait and view, as to how the ICICI will face
this challenge.

Recommendation of Narasimham Committee on banking sector
reforms

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

- Banking automation

- Planning, Standardization of electronic payment systems

- Telecom infrastructure

- Data were

- 50 –


Merger between banks and dfls and nbfcs need to be based on
synergies and should make a sound commercial sense. Committee also
opines that merger between strong banks / fls would make for greater
economic and commercial sense and would be a case where the whole
is greater than the sum of its party and have a ‘force multiplier effect”.
It also have merger should not be seen as a means of bailing out weak
banks.

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

The committee also options that while licensing new private sector
banks, the initial capital requirement need to be review. It also
emphasized on a transparent mechanism for deciding the ability of
promoter to professionally manage the bank. The committee also feels
that a minimum threshold capital for old private banks also deserved
threshold capitals. The committee also opined that a promoter group
couldn't hold more that 40 percent of the equity of a bank.
The Narasimham Committee also suggested that the merger could be a
solution to ‘Weak banks’ Coney after clearing up the balance sheets) with
a strong public sector bank.

- 51 –


Source: Narasimham Committee report on banking sector reforms.

Changes after the merger:-

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

ICICI Bank has announced a merger with 57-year-old Bank of
Madure, with 263 branches, out of which 82 of them are in rural areas,
with most of them in southern India. As on the day of announcement of
merger) 09-12-00), Kotak mahindra group was holding about 12 percent
stake in BOM, the Chairman BOM, Mr.K.M. Thaiagarajan, along with his
associates was holding about 26 percent stake, Spic groups has about 4.7
percent, while LIC and UTI were having marginal holdings. The merger
will give ICICI Bank a hold on South India market, which has high rate of
economic development.

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

Financial Capability: The amalgamation will enable them to have a
stronger financial and operational structure, which is supposed to be

- 52 –


capable of greater resourger/deposit mobilization. And ICICI will emerge
a one of the largest private sector banks in the country.

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

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

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

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

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

THE SWAP RATIO:

- 53 –


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

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

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

Chapter 14: Reasons behind the recent trend of merger in Banking
Sector

The question on top everybody’s mind is
Are banks and bankers on the road to redundancy?
First consider the reasons who one does not need banks in large
numbers any more

- 54 –


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

After can be drawn or a telephone bill paid easily through credit cards.

Even if a bank is just a safe place to put away your savings, you need
not go to it. There is always an ATM you can do business with.

If you are solvent and want to borrow money, you can do so on your
credit card- with far fewer hassles.

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

Chapter 15: Case Studies

Case study I

IDBI – UNITED WESTERN MERGER BANK (Merger)

- 55 –


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

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

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

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

- 56 –


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

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

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

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

- 57 –


completely. However Walter, the chairman of the Dresdner Bank was not
prepared for this. This led to the withdrawal of the Dresdner Bank from
the merger negotiations.

In economic and political circles, the planned merger was celebrated
as Germany’s advance into the premier league of the international
financial markets. But the failure of the merger led to the disaster of
Germany as the financial center.

- 58 –


Case study II

MERGER OF ICICI BANK WITH SANGLI BANK

COMING TOGETHER: The regional office of Sangli Bank in Mumbai.

The merger that was announced on APRIL 18, 2007 between ICICI Bank and SANGLI
Bank.All branches of Sangli Bank functions as branches of ICICI Bank from April 19,
said the Reserve Bank of India.

Sangli Bank is an unlisted private bank headquartered at Sangli in Maharashtra. As on
March 31, 2006, Sangli Bank had deposits of Rs. 2,004 crore, advances of Rs. 888
crore, net NPA (non-performing assets) ratio of 2.3 per cent and capital adequacy of
1.6 per cent. Its loss at the end of 2005-06 amounted to Rs. 29 crore.

- 59 –


It has 198 branches and extension counters, including 158 branches in Maharashtra
and 31 branches in Karnataka.

About 50 per cent of the total branches are located in rural and semi-urban areas and
50 per cent in metropolitan and urban centres. The bank has about 1,850 employees.
ICICI Bank is the second largest bank in India and the biggest in terms of market
capitalisation.

As on September 30, 2006, ICICI Bank had total assets of Rs. 282,373 crore. In the six
months ended September 30, 2006, it made a net profit of Rs. 1,375 crore.

It had 632 branches and extension counters and 2,336 ATMs as on that date, and is
in the process of setting up additional branches and ATMs pursuant to authorisations
granted by the RBI. It has about 31,500 employees.

ICICI Bank offers a wide range of financial products and services directly and through
subsidiaries in the areas of life and general insurance, asset management and
investment banking.

Its shares are listed on the Bombay Stock Exchange Limited and the National Stock
Exchange of India Limited and its American Depositary Shares are listed on the New
York Stock Exchange

- 60 –


- 61 –

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