SYNOPSIS OnImpact Of Mergers And Acquisitions On Employees A Study In Banking Sector In partial fulfillment of the requirement for the Award of degree of Master of Business Administration (MBA) Submitted to KCL-IMT (Punjab Technical University) In the partial fulfillment of requirement for the degree of Masters of Business Administration Submitted by: Supervisor: Sukhjeet kaur Mr. Ashutosh MBA IV Roll No. 1174302 DEPARTMENT OF MANAGEMENT KCL-IMT JALANDHAR
To Study on Mergers and Acquisitions- Of Private Banking SectorINTRODUCTION TO THE TOPICMergers and AcquisitionsA merger is a tool used by companies for the purpose of expanding their operations often aimingat an increase of their long term profitability. There are 15 different types of actions that acompany can take when deciding to move forward using M&A. Usually mergers occur in aconsensual (occurring by mutual consent) setting where executives from the target company helpthose from the purchaser in a due diligence process to ensure that the deal is beneficial to bothparties. Acquisitions can also happen through a hostile takeover by purchasing the majority ofoutstanding shares of a company in the open market against the wishes of the targets board. Inthe United States, business laws vary from state to state whereby some companies have limitedprotection against hostile takeovers. One form of protection against a hostile takeover is theshareholder rights plan, otherwise known as the "poison pill".Historically, mergers have often failed (Straub, 2007) to add significantly to the value of theacquiring firms shares (King, et al., 2004). Corporate mergers may be aimed at reducing marketcompetition, cutting costs (for example, laying off employees, operating at a moretechnologically efficient scale, etc.), reducing taxes, removing management, "empire building"by the acquiring managers, or other purposes which may or may not be consistent with publicpolicy or public welfare. Thus they can be heavily regulated, for example, in the U.S. requiringapproval by both the Federal Trade Commission and the Department of Justice.1.1 AcquisitionAn acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another.An acquisition may be friendly or hostile. In the former case, the companies cooperate innegotiations; in the latter case, the takeover target is unwilling to be bought or the targets board
has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm bya larger one. Sometimes, however, a smaller firm will acquire management control of a larger orlonger established company and keep its name for the combined entity. This is known as areverse takeover.1.1.1 Types of acquisition 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 business, 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 sellers shareholders.The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation whereone company splits into two, generating a second company separately listed on a stock exchange
Classifications of mergers:Horizontal mergers take place where the two merging companies produce similar product in thesame industry.Vertical mergers occur when two firms, each working at different stages in the production ofthe same good, combine.Congeneric mergers occur where two merging firms are in the same general industry, but theyhave no mutual buyer/customer or supplier relationship, such as a merger between a bank and aleasing company. Example: Prudentials acquisition of Bache & Company.Conglomerate mergers take place when the two firms operate in different industries.
List of different mergers and acquisitions in banking sector Mumbai-based Abhyudaya Co-operative Bank, is set to acquire one more co-operative bank — Sant Janabai Urban Co-operative Bank — in Parbhani district of Marathwada. This is the third acquisition for the bank which recently took over Citizen’s Co-operative Bank. While Saraswat Bank acquired Maratha Mandir, Cosmos Bank took over four urban cooperative banks. These included Secunderabad-based Premier Urban Co-operative Bank and Annapurna Mahila Co-operative Bank, Baroda-based Unnati Co-operative Bank and Co-operative Bank of Ahmedabad. Cosmos is on a consolidation phase now, and will look at further acquisitions much later. Shamrao Vithal Co-operative Bank (SVCB) a leading multi-state cooperative bank is acquiring two more cooperative banks — Kolhapur’s Mahavir Co-operative Bank and Bangalore’s Sauhadra Co- operative Bank. It plans to conclude acquisition of the two co-operative banks by October, 2006 and has already received permission from the Reserve Bank of India. ICICI Bank has acquired Bank of Madhura in the year 2001 because of its bankruptcy and it was going to be closed down if it would not have been acquired. Vysya Bank Ltd, a premier bank in the Indian Private Sector and a global financial powerhouse, ING of Dutch origin were merged in Oct 2002. Recently, on 28th February, 2008 HDFC Bank has acquired Centurion Bank of Punjab. The capital base and market share of the bank has increased significantly.
Objectives of study: To know the conceptual framework of mergers and acquisitions. To know the impact of mergers on operating efficiency and profitability of the banks. To find the impact of mergers and acquisition on employees and their working conditions.
Review of Literature:SPIEGAL JOHN W. , ALAN GART (1996); This paper explains that the banking industry isundergoing a restructuring. This movement results from (1) the large number of bank and thriftfailures in the 1970s and 1980s , (2) the deregulation that followed, (3) technological change, and (4)the desire to improve profitability by serving customers more efficiently and by increasing sources ofrevenue in the highly competitive environment of the 1990s. There are different reasons and phases forthe continuing of M& A activity.SCALISE JOSEPH M., GREGORY F. UDELL (May 1997); Udell examine the effects of bank M withpost-M&A refocusing of the consolidated institution. They are also the first to estimate the reactions ofother banks in local markets to M&As. They find that the static effects of consolidation which reduce smallbusiness lending are mostly offset by the mergers. Their methodology permits empirical analysis of thegreat majority of U.S. bank M&As since the late 1970s -- over 6,000 M&As involving over 10,000 banks(some active banks are counted multiple times). They are the first to decompose the impact of M&As onsmall business lending into static effects associated with a simple melding of the antecedent institutions anddynamic effects associated e reactions of other banks in the market, and in some cases also by refocusingefforts of the consolidating institutions themselves.WEBER, TINA (1999); The impact of M&As on employees, staff representatives and their unionsEuropean financial services sector is currently undergoing a period of major restructuring. Data from theEurostat Labour Force Survey show a significant decline in the employment in the EU financial servicessector between 1992 and 1998, the survey estimates that 130,000 jobs have been lost in the last 10 years as aresult of mergers and acquisitions alone in the financial services sector. On the whole, job losses in bankinghave been more severe than in insurance, as the restructuring process began earlier in the banking industry.KAKANI, RAM (2002); Recent reports on banking sector often indicate that India is slowly but surelymoving from a regime of large number of small banks to small number of large banks. The aim of thispaper is to probe into the various motivations for mergers and acquisitions in the Indian Banking sector.
Thus, literature is reviewed to look into the various motivations behind a banks merger/ acquisition event.Given the increasing role of the economic power in the turf war of nations, the paper looks at the significantrole of the state and the central bank in protecting customers interests vis-à-vis creating players ofinternational size.SHARMA, MEERA (2002); Indian banking industry is likely to see many more mergers ascompetition intensifies. The mergers are most likely among the private sector and foreign banks. Thisis because the public sector banks are still protected by their large branch network, which insulatesthem from competition from new banks, which will take some time to develop a comparable network.The private and foreign banks, on the other hand, have been most severely impacted by competitionand are likely to seek mergers to improve their competitive position. They are also likely to benefitfrom such mergers on account of scale economies. This need will be felt more once the proposed risein net worth requirements takes place.DATTA K. DEEPAK (2003); This study analyzes the empirical literature concerning the influence ofvarious factors on shareholder wealth creation in mergers and acquisitions using a multivariateframework. Overall, results indicate that while the target firms shareholders gain significantly frommergers and acquisitions, those of the bidding firm do not. Findings also indicate that the use of stockfinancing has a significant impact on the wealth of both the target and bidding firms shareholders. Thepresence of multiple bidders and the type of acquisition influence the bidders return, while regulatorychanges and tender offers influence the targets returns. The paper also provides a comparison of ourfindings with that of previous narrative reviews and discusses their implications from the viewpoint ofmanagers and researchers.SCOTT I. MEISEL (2003); The purpose of this paper is to determine firm characteristics that mightexplain mergers and to predict the likelihood of a merger. Therefore, this study is different in that ituses principal component analysis to determine independent variables for logistic regression and usesa national sample. In addition, the effect of the Financial Services Modernization Act is tested inregards to market structure. The study indicates which characteristics explain the decision to merge or
acquire. In addition, for the seller, the model may indicate the potential for being acquired. The modelmay also be useful to investors because mergers lead to abnormal returns.SETH, ANJU (2005); This study provides a conceptual framework and an empirical methodology toassess the extent of value creation in acquisitions. Arguments are presented to examine why relatedacquisitions might not outperform unrelated acquisitions on average. New measures of value creationare developed which resolve the difficulties with measures used by earlier researchers. In addition, theinfluence of the classification scheme used to identify acquisition types, and the impact of the relativesize of the target to the bidder, on the measurement of the extent of value creation, is examined. Theempirical results indicate that value is created in both unrelated and related acquisitions. Further, thedata do not appear to indicate that related acquisitions create more value than unrelated acquisitions onaverage.DIRK HACKBARTH, ERWAN MORELLEC (2006); The paper develops a real optionsframework to analyze the behavior of stock returns in mergers and acquisitions. The implications ofthe model for abnormal announcement returns are consistent with the available empirical evidence. Inaddition, the model generates new predictions regarding the dynamics of firm-level betas for the timeperiod surrounding control transactions. They used primary data by taking a sample of 1090 takeoversof publicly traded US firms between 1985 and 2002, and they present new evidence on the dynamicsof firm-level betas, which is strongly supportive of the models predictions.AHMED, WS (2007); This paper states the performance puzzle of mergers and acquisitions over apast few decades, mostly on British results with minor results, covering Irish experience. It has beenseen in the recent past that, with the progression of takeover activity, the debate over its advantageousaspects has considerably increased.MANTRAVADI, PRAMOD (2007); In todays globalised economy, mergers and acquisitions are beingincreasingly used the world over as a strategy for achieving a larger size and asset base, faster growth inmarket share and for becoming more competitive through economies of scale. One of the important factorsthat could affect the outcome of a merger is the relative size of the acquiring and acquired companies. Thispaper studies the impact of mergers on the operating performance of acquiring corporates by examining
some pre- and post-merger financial ratios with a sample of firms chosen from all mergers involving publiclimited and traded companies in India between 1991 and 2003.PEIYI YU, WERNER NEUS (2007); The paper aims to investigate whether the wave of mergers observedin other European countries is suitable for the German banking industry. This question is approached bystudying the relationship between market structure and profit (the so-called profit-structure relationship) inthe German banking industry using the model suggested by Berger. By extending his econometric model toinclude portfolio and capital risk and using German banks financial data, the authors are able to testsimultaneously for three competing theories of the profit-structure relationshipANAND MANOJ, SINGH JAGANDEEP (2007); The study analyses five mergers in the Indian bankingsector to capture the returns to shareholders as a result of the merger announcements using the event studymethodology (Brown & Warner, 1980, 1985; and Mac Kinlay, 1997). These are merger of Times Bank withthe HDFC Bank, Bank of Madura with the ICICI Bank, ICICI with the ICICI Bank, Global Trust Bank withthe Oriental Bank of Commerce, and Bank of Punjab with the Centurion Bank. The Fama and Miller (1972)market model and Cox and Portes (1998) two-factor model form the theoretical framework of this study.The aim is to understand the shareholder wealth effects of bank mergersRAINER LENZ, University of Applied Sciences, Bielefeld (2007); The valuation of synergy is vital tothe success of any merger, however, given current valuation methodologies and the complexity of the task;it is also the most challenging element of merger and acquisition pricing. Conventional valuation methodsassume that sales figures and market share of the acquiring company are easily transferable within the newentity. Current synergy practices also assume amalgamating various corporate functions will producesignificant cost reductions.SHARMA RUCHI (2007); The regional strength is one of the benefits that HDFC Bank was lookingfor, but the merger also offer several others. HDFC Bank says it was looking to supplement organicgrowth with a merger that would add scale, geographical reach and experienced staff who are in shortsupply. HDFC Bank has 23,000 employees while CBoP has about 7,500. The deal add 394 branchesand 452 ATMs to HDFC Banks existing 754 branches and 1,906 ATMs, giving the combined entity1,148 branches. That will be the countrys largest private branch network, larger than private-sectorleader ICICI Banks 955 branches
ROY ROBIN (2007); HDFC Bank has an asset size of Rs. 131,439 crore ($33 billion) as of the thirdquarter of 2007-08, 1,100 branches and 21,477 employees. CBoPs equivalent figures are Rs. 25,404crore ($6.3 billion), 390 branches and 7,500 employees. HDFC Bank has better asset quality with netnon-performing loans at 0.4% (with 2.5% provisioning) against 1.7% (1.5%) for CBoP. The latter,however, has a higher share of retail (60%) in its total loan portfolio than HDFC Bank (51%). "It is notquite a merger of equals or a large bank completely swallowing a smaller one," according to a reportby Macquarie Research, the Australia-headquartered provider of investment and financial services.Both banks have been through mergers beforeKUMAR, SATISH (2008); This paper states that while going for mergers and acquisitions (M&A)management smell financial synergy or/and operating synergy in different ways. But actually are theyable to generate that potential synergy or not, is the important issue. The aim of this study is to find outwhether the claims made by the corporate sector while going for M&As to generate synergy, are beingachieved or not in Indian context. Measuring merger performance has been one of the most difficultproblems in front of researchers. Different tools and techniques in the forms of ratio analysis etc. areused by scholars to identify the effects of M&As and interestingly different results are there in themarket.ECONOMIST INTELLIGENCE UNIT VIEWS WIRE (2008); On February 25th the boards ofHDFC Bank and Centurion Bank of Punjab (CBoP) agreed to the biggest merger in Indian bankinghistory, valued at around Rs95.2bn (US$2.4 billion). The merger is subject to statutory and regulatoryapprovals and will take some four months to go through. CBoP shareholders will get one share ofHDFC Bank for 29 shares of CBoP. The merged entity will be called HDFC Bank and CBoPs non-executive chairman, Rana Talwar, and its managing director and CEO, Shailendra Bhandari, will jointhe new board as a non-executive and executive director, respectively.GEOFF, PARR (2009); This paper states the global credit crunch and the recession that will followwill surely impact on the size and number of M&A deals in 2009, although there may well be moredistress sales than usual, whether of entire businesses or non-core assets. Also, the recession mightcause the exit of key competitors from certain markets, which might reduce the chances that the
authorities would allow further concentration by merger in those sectors. Against these considerations,there are at least three reasons why the impending recession may lead to a more permissive stancetowards M&A deals by the competition authorities.
RESEARCH METHODOLOGYResearch methodology is careful investigation or inquiry in a systematic manner and finding solutionto a problem under investigation. It includes population, sampling of respondents, tools ofinvestigation and analysis. Rationale of the Problem: Banking Industry has always contributed productively to the GDP of the economy that is the reason of taking banking sector as a basis for the present study. The outcome of the present study is likely to offer far reaching implications for customers (in terms of satisfaction), banks (improved functioning), banking industry as a whole (as an important component of national income) and economy as a whole (as a major contributor to GDP). This study will also be undertaken with an objective to know how customers perceive different banking services provided to them by different banks after merger or acquisition (as the case may be) i.e. what are their preferences and expectations. Research Methodology: The methodology includes the research design of the study, sampling technique and datacollection methods. Design of the Study:The study is exclusively exploratory in nature. The research design is characterized by flexibility inorder to discover insight not previously recognized. Sample design: The data is required from one source keeping in mind the objectives of the study.
Sources of DataBoth Primary and Secondary Data is used to collect information for the present study.Primary data: Primary data as defined is first time data collected. This type of data is collectedthrough the survey. For this purpose, a convenience sampling technique is used to selectrespondents but the method used for collecting of primary data is personal interview, getting thequestionnaire filled.Secondary data: These types of data have already been collected by someone else and whichhave already been passed through the statistical process. The techniques/ methods used to collectthe secondary data are books, pamphlets and various websites.Sampling plan:The following factors have been decided within the scope of sampling plan: Sampling size: 100 employees Analysis: Analysis is done using bar graphs and pie diagrams.