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1. M&A-Assignment-I Snigdha
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Reverse Merger of ICICI with ICICI
Bank
6/21/2015 Introduction -Restructuring At ICICI
 ICICI and ICICI Bank Ltd.
 Corporate Information & History
 Operative Environment
 Business Case for Merger
 Deal Structuring
 Reasons behind merger
 Rationale for the Merger
 Impact of the Merger on the Enlarged Entity
 Performance Analysis

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Reverse Merger of ICICI with ICICI Bank
I N T R O D U C T I O N - R E S T R U C T U R I N G A T I C I C I
Business combinations, which may take the form of mergers, amalgamation and
takeovers, are important features of corporate restructuring and governance and have
played an important role in the growth of a number of leading companies the world
over. Subsequent to the structural adjustment programmes in the Indian economy
such restructuring has taken place in most of the industries including banking, IT,
FMCG and pharmaceuticals.
The reverse merger of ICICI Ltd. with ICICI Bank on 30th March, 2002 led to the
creation of India’s first ‘Universal Bank’. This case study critically analyses the merger,
finding out the reasons behind, immediate fallout and consequent implications. The
reasons that compelled this merger had much to do with the change in global
banking environment rather than its internal dynamics. Taking inflationary effect and
normal growth into account, favorable synergic effect is visible in net profit and
earnings per share, which, however is absent in total income and book value. This
merger also seems to provide an impetus to other Indian development banks and
financial institutions to merge and become ‘Financial Conglomerate(s)’.
Brownfield expansion has become one of the popular strategies being pursued by
companies from all over the world. Indian companies are no exception to this trend.
The wave of merger and acquisitions have been knocking at the door of Indian
Financial system. But this trend is not exactly new. There have been 36 mergers in the
Indian banking Industry since 1969- the year in which the banking sector was
nationalized by the government. The merger of ICICI Ltd with ICICI Bank is an
example of reverse merger led to the creation of India’s first Universal Bank.
ICICI Ltd merged with ICICI Bank on 30th March 2002, with the swap ratio of 2 ICICI
shares for 1 share of ICICI Bank limited. With this merger, second largest bank in India
was born. RBI had given approval for reverse merger of ICICI Ltd with its banking arm
ICICI bank. ICICI bank with its 1 lakh crore rupees asset base bank is second only to

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State Bank of India, which is well over Rs. 3 lakh crore in size. RBI also cleared the
merger of two ICICI subsidiaries ICICI Personal Financial Services and ICICI Capital
Services with ICICI Bank. The merged entity will have a capital base of Rs 95 billion,
8,300 employees and a huge nationwide branch network.
The changing environment like demanding sophisticated customer, globalization,
shareholder returns and technological innovation were facilitator in emergence of
integrated universal banks.
Operating Environment
• 2000-03 saw process of financial reforms by regulators.
• Transformational phase (RBI Guidelines on universal banking).
• New private banks.
• CRR reduced to 5.0%
• Higher tax deductions on provision for bad debts.
• Incorporation of subsidiaries by foreign banks.
• Faster resolution of NPAs
• Significant boost to housing (Risk weight from 100% to 50%)
The external advantage in banking sector due to this merger:
• Blurring boundaries between financial intermediaries
• Increasing competitive pressures
• Competitive advantages to be gained from concept of Universal Banking
(current environment)
• “Forward leap” in the hierarchy of Indian banks (size & scale)

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The internal advantage in banking sector due to this merger was:
• Optimization of human and financial capitals
• Higher profitability by leveraging on technology and low cost structure
• Greater tax efficiencies
• Complete product suite with immense cross-selling opportunities
• Risk diversification
• Improved ability to further diversify asset portfolio and business revenues (de -
risking exercise)
• Lower funding costs
• Increased fee income opportunities (client base)
Corporate Information & History
Industrial Credit and Investment Corporation of India Limited (ICICI) was set up in
1955 as a public limited company by the Government of India, the World Bank and
some private Institutions with a paid up share capital of just rupees 5 crores. Its
primary objective was to provide foreign currency loans to Indian companies. But
gradually it expanded its activities into the areas of project finance, underwriting,
venture capital, mutual funds and establishment of various subsidiaries including that
of ICICI bank in 1994. The institution was able to quickly grasp the opportunities
thrown up by the economic liberalization of early nineties and grow into formidable
force in Indian financial scene. Finally, when RBI allowed Indian development bank in
October 2001 to convert themselves into universal banks, ICICI was the sole applicant
to RBI and presented its case with a detailed scheme of reverse merger of itself with
ICICI bank.
ICICI banking corporation limited was set up as a scheduled commercial bank in 1994
by ICICI Ltd as its wholly owned subsidiary. In 1999, ICICI bank became the first
Indian bank or financial Institution from non Japan Asia to be listed on the New York
Stock Exchange. Consequent to the merger, the ICICI group’s financing and banking

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operations, both wholesale and retail, have been integrated into a single entity. After
the merger, the holding of ICICI Ltd in the bank was diluted to 55.6% from the pre -
merger levelof 62.6%.
ICICI Bank has now became India’s second largest bank after The State Bank of India
with a total assets of about Rs. 1,679.59 billion as on 31st March, 2005. It has a
network of 562 branches and extension counters and about 1,880 ATM’s. It is now
offering a wide range of banking products and financial services to corporate and
retail customers through its specialized subsidiaries and affiliates. The domestic
affiliates of ICICI Bank are ICICI Venture Funds Management, ICICI Prudential Life
Insurance Company, Lombard General Insurance Company, ICICI Securities Limited,
ICICI House Finance Limited, ICICI Investment Management Company Ltd.,
Trusteeship Services Ltd., and ICICI Distribution Finance Private Ltd.
Deal Highlights:
 Complex and challenging - First Indian Universal Bank
 Involvement of RBI
 Effective communications to a wide range of investors, lenders, rating agencies
(critical) – Both companies listed in exchanges within India and US
 Regulations within India (SEBI) & US (SEC)
 US GAAP was followed
 In first step during October, 2001 both the boards approved the merger of ICICI
Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI
Bank
 Next, ICICI group’s financing and banking operations, both wholesale and
retail, were integrated into a single entity.
 Post-merger, the holding of ICICI Ltd. in ICICI Bank was diluted to 52.6% from
62.6%
 SWAP Ratio – one fully paid-up equity share of ICICI Bank for two fully paid-up
equity shares of ICICI

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Market Value of both the company 114780.2738
ICICI Ltd.% holding 68.01%
No. of shares of ICICI Ltd. in new company 418482881
SWAP RATIO (For every two shares of ICICI Ltd.) 1.065730793
Premium to ICICI Bank 6.57%
Reasons behind merger:
The reasons that compelled ICICI Ltd. to become a universal bank has much to do
with change in global banking environment rather than its internal dynamics. The
reasons for the merger merely reflect the dilemma faced by the entire Indian banking
community in general and development-banking sector in particular.
1. Commercial banks have access to low costs funds in the form of savings and
current account deposits. But development banks can access public money only
through bond of at least five years maturity and a fairly high rate of return. So the
attraction of cheap source of funds lured ICICI Ltd to reverse merger itself with its
commercial offspring.
2. It became quite clear after 1992 that concentrating only on project finance was a
very risky strategy. ICICI needed to spread its risks. And the only way for it was to
become a financial conglomerate- a financial superstore that provides banking,
insurance, fund management, mutual funds and securities trading under the same
umbrella.
3. Development banks provide long-term project finance. Therefore, they need cheap
source of long-term funds. The lowering of the bank rate and the Cash Reserve Ratio
by RBI has led to a fall in the prime lending rate leading to erosion in bank income.
This falling interest rate regime has led to serious asset liability mismatch for the
banks. This is another reason for development banks like ICICI Ltd to convert
themselves into universal banks.

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4. One of the prime reasons for the merger was to deprive operational synergies as
both the entities were in the same line of business with slightly different
specialization. While ICICI Ltd was expert in long-term management of finance and
dealing with large institutional clients, ICICI focus on the domestic consumer and
small to medium sized corporate. Moreover, the merger was also expected to lead to
greater tax efficiencies and consolidation of holdings.
5. India has around 61,000 millionaires as of 2003-04 as per a survey conducted by
Merill Lynch Capgemini. Thier combined wealth is approximately Rs. 12,00,000
crores. Moreover, this number is expected to grow by 40% within the next two years.
This category of rich individuals require a different class of banking known as
personal banking. Personal banking is a high marginal line of business with ample
opportunities to push another financial projects like insurance, mutual funds etc. But
this being a type of retail banking product, is out of the reach of development banks
like ICICI Ltd. The combined entity was thus expected to be able to put even more
resources into this line of business that was not possible for ICICI Bank to do alone.
6. Indians are now following the global trend of spending tomorrow’s money today,
i.e. the practice of using credit to finance purchases of all kinds of goods. Banks from
both the public and private domain are now providing consumer loans at cheap rate
of interest. But again development banks cannot provide consumer loans until they
get converted into commercial ones. A similar product targeted at consumers is that
of credit cards. The number of credit cards owners during the last four years has
grown at a compounded annual growth rate of 35%. Credit card companies charge
users interest at up to 39% per annum. This is a very high rate of return for banks
when they can earn only around 9% per annum on home loans. But development
banks are not authorised to issue credit card to thier customers.
7. India has 95 scheduled commercial banks, 4 non-scheduled commercial banks and
196 regional rural banks. A total of more than 68,000 branches dot the landscape
with an average of one branch per 15,000 people. This mammoth sized network with
an over active trade union movement has led to uneconomic segmentation of the
industry. This makes consolidation inevitable partly due to market forces and partly

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due to regulatory intervention. As an offshoot of this trend, development banks are
going to merge with commercial banks.
8. India is slowly becoming a global economy. So inevitable every industry has to
reach global scale to survive. But out of 95 scheduled banks, only State Bank of India
ranks among top 200 banks in the world. So all types of banks are frantically trying to
grow in size in any way possible. And the shortest way to achieve it is through the
way of merger. During the last 35 years, about 36 banks and non-banking finance
companies have merged. But the greatest wave is yet to come. ICICI Ltd has shown
the way. IDBI bank has taken the same path.
Financial Impact:
The most visible change that has come about as a result of the merger is in the
income statement and the balance sheet. The total income and net profit figures have
climbed up to Rs. 128.26 billion and Rs. 20.05 billion respectively. Operating profit
has reached Rs. 29.56 billion while EPS has become Rs.27.33. ICICI bank is now in the
process of strengthening its presence in various emerging financial sectors in India. It
has collaborated with experienced foreign entities so that it can leverage upon its
partners skills and support it with its own nationwide infrastructure. ICICI bank has
designated these joint ventures as strategic Business Units and is striving to maintain
or capture the top slot in each of these segments.
ICICI Lombard has become the largest private non-life insurance company with a
market share of 22% among a total of 12 players. ICICI Ventures is the largest private
equity investors and plan to further consolidate its position in 2004-05. ICICI
Prudential Life Insurance, with a market share of 5%, is among top five in its category.
While ICICI Securities is among the largest arranger of funds in Debt and Equity
Segments and also amongst the leading advisors in M&A.
Rationale for the Merger:
For ICICI the merger meant:
1. Increasing the speed in financing long term projects.
2. Obtaining access to cheaper funds for lending.

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3. Increasing its appeal to investors for raising capital base needed to write up bad
loans.
4. Competing more effectively in retail finance market dominated by banks.
For ICICI Bank it meant:
1. Expanding geographically
2. Utilizing large capital base of ICICI.
3. Gaining brand equity from the strong brand name of ICICI.
4. Deriving benefits from ICICI’s well-established corporate relationships.
The Merger deal and its Motivations:
The swap ratio was based on the valuations and recommendations of Deloitte,
Haskins and Sells. ICICI was advised by investor bankers, JM Morgan Stanley and ICICI
Bank by DSP Merill Lynch. The merger ratio was set at two ICICI shares for every ICICI
Bank share that is one equity share of ICICI bank was swapped for two equity shares
of ICICI. Under the scheme of amalgamation, American Depository share (ADS)
holders of ICICI got five ADS of ICICI Bank in exchange of four ADS of ICICI.
Impact of the Merger on the Enlarged Entity
Through this merger, ICICI Bank became India’s first universal bank, that is, one stop-
shop for financial services in India and acquired large market share of retail banking
and offered a complete range of banking products. The enlarged entity (ICICI bank)
derived the following benefits:
1. Optimum utilization of human capital.
2. Improved ability to further diversify asset portfolios and business revenue.

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3. Reduced costs of funds.
4. Availability of more float money due to active participation in the payment
system.
5. Diversified fund raising due to access to retail funds.
6. Leveraged the ICICI’s capital and client base in terms of increase in fee income.
7. Improved profitability by leveraging technology and low cost structure.
8. Access to ICICI group’s talent pool and thereby development of human resource
at lower costs.
Performance Analysis
ICICI Ltd set before itself some specific goals prior to the merger process. The initial
indications are that it is well on its way to fulfil almost all its objectives that propelled
it to reverse merger with ICICI bank. Let us now analyze its financial results in the
light of its merger objectives.
ICICI Ltd wanted to gain from the synergistic effect of the merger. This can be studied
by comparing the projected figure of both ICICI Ltd and ICICI Bank with that of the
merger entities for the years 2002-03 to 2004-05.
The trend growth rate for ICICI bank has been derived from the result of 1997-98 to
2000-01, the year before merger. The result of 1994-95, 1995-96 and 1996-97
have been left out because ICICI bank was still in its infancy and so the figures were
too small to give any useful clue for future comparison. For ICICI Ltd the same period
has been chosen for the sake of symmetry. The figure has been adjusted to inflation
at 4.75% p.a., this has been done by multiplying the combined figure with average
inflation rate so that it matches up to the nominal figures of the respective years with
the effect of inflation already impounded.
Table below shows that within first three years of merger, the effect of synergy has
been reflected in certain areas. While total income is far short of projected combined
figures for all the years, the net profit earned by the company in the post-merger
situation has been way ahead of projections. This shows that ICICI bank has an
operational efficiency by a large margin. The rise in paid up share capital post-merger
(from Rs. 200 crores to Rs. 613 crores) has led to a far lower earnings per share and
Book value figures in the later years in spite of the growth in net profit. All in all, ICICI
bank has achieved operational efficiency to a large extent.

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ICICI Bank has now become the second largest bank in India after State Bank of India
in terms of asset size. Its total assets were rupees 1, 67,659 crores in 2004-05 in
comparison to rupees 4, 59,800 billion of State Bank of India, India’s premier
commercial bank. The immediate gain of the reverse merger was the near fivefold rise
of total assets of the pre-merger level. The growth in assets were continued even
after the merger.
Particulars 2002-2003
Projected Actual
2003-2004
Projected Actual
2004-2005
Projected Actual
Total
Income(Rs.
Crore) 17,732 12,526 22,697 11,958 29,775 12,826
Net Profit
(Rs. Crore)
751 1,206 869 1,637 1,098 2,005
E.P.S.
(Rupees)
1,958
1,965 2,523 2,644 3,379 2,773
B.V.
(Rupees)
204.94 113.10 258.25 127.27 339.60 169
ICICI Bank’s overall average cost of deposit at 4.5% in 2004-05 is one of the best
among Indian Banks. This is far better than figures of 2000-01 when it was high as
7.7% at the same time, its net interest margin or yield spread has started to
improve after a brief slide during post-merger period as the effect of ICICI ltd wanes
off.

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Other income has grown from Rs. 574 crores in 2001-02 to Rs. 12,826 crores in
2004-05, a growth of 495%. Other income represents income earned by way of
dividend, profit from sale of investments, profit from merchant foreign exchange
transactions etc. This shows that ICICI bank is successfully reducing its dependence
on interest income and increases soared from increasing exposure to fee based
services. Its income from fee based services has soared from Rs 171 Crores in 2000-
01 to Rs. 2,098 crores in 2004-05. Its retail loan portfolio has grown substantially. It
now forms 61% of total loans disbursed compared to just 9.5% in 2000-01.
ICICI bank has now the leverage to force its investment banking clients to maintain
thier salary and other employees account with the bank, there by boasting its captive
client base and increasing its repertoire of cheap funds. ICICI Bank through its
subsidiaries can also cross sell its mutual funds and non-life insurance products to its
institutional clients. Cross selling has become an important tool to increase the retail
business.
One of the reasons behind the merger was to increase shareholder wealth. ICICI bank
submitted its proposal for reverse merger on 1/10/2001 to RBI. Its share price has
risen from Rs. 72.00 as on that date to Rs. 127.00 on 29/3/2002, just prior to the
merger. This resulted in 76% gain for the shareholders just out of the news of merger.
This shows that the stock market had welcomed the decision and has factored in the
expected gains into the share price. The trend continued even after the merger.
ICICI Bank is actively getting into wealth management activities through its personal
banking division. It has also launched its credit and debit cards. The number of such
cards have risen from 6.5 million in 2002-03 to about 10.1 million in 2003-04,
representing a growth of 55.5%. It has also become very active in the area on home
loans and charges very competitive rates to its clients.
Model retail banking is all about technology banking. ICICI bank has deployed Finacle
from Infosys to manage its Core Banking Applications. It has spread its wings in the
area of tele banking, ATMs, call centers and e-banking. It’s 1,759 seats call centers
operate round the clock and handles 1.5 lakh calls from customer per day, while
1,880 ATMs provide banking services all-round the country. Its e-banking facility has
made anytime, anywhere banking a reality. Thus ICICI bank has been able to further
solidify its position in the Indian banking scenario. The above instances clearly points

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out that ICICI bank is going all out to achieve the goals it has set for itself before the
reverse merger.
Conclusion
Merger and acquisitions is nothing new in the Indian banking system. But there has
been a change in the impetus. Earlier with the banks firmly under the control of RBI,
mergers were forced upon to save weak banks from collapsing. The gradual
privatization and globalization of the banking industry has now forced bank
themselves to go in for merger. Increase in profitability synergies in operation, global
scale and other such reasons has replaced the social and political motives of
yesteryears, successful merger can lead to prosperity both for shareholders of the
merged company and for the economy as a whole. The true catalysts of the successful
merger is the top executive whose pragmatic and dynamic leadership and a clear
foresight can help a merger click. The trick is to neutralize the expected pitfalls while
bringing the best out of operational synergies. The making of ICICI bank into
universal bank has shown the way. This reverse merger has thus opened up a
challenge to the banks and financial institutions in India to merge and become
‘financial conglomerates’ by exploiting the preserve favorable business environment
and to de-risk thier operating environment.