1

PROJ ECT
ON
DISSERTATION TOPIC
PREPARED BY
SUMAN PAUL
Roll NO.- 08FC116
BATCH- 2008-10
UNDER THE GUIDENCE OF
Prof.TUSHAR RANJAN PANIGRAHI
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TABLE OF CONTENT
1. Declaration
2. Acknowledgement
3. Abstract
4. Objective, Scope, Limitation
5. Introduction
6. Literature review
7. Motives behind consolidation
8. SWOT Analysis of Merger and acquisition
9. Bank Mergers and Acquisition in Indian history
10. Some case studies
11. Implementation of Basel II norms
12. Accounting Methods for M&As in India
13. Research Methodology
14. Findings
15. Future of Merger and Acquisition in Indian banking
16. Conclusion
17. Reference
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DECLARATION
I, SUMAN PAUL student of PGPFC Programme (Batch: 2008-10) of
Institute of Management and Information Science happily declare that I
have successfully completed my Dissertation project on MERGER AND
ACQUISITION IN BANKING INDUSTRY under the guidance of Prof.
Tushar Ranjan Panigrahi. The project on which I am assigned is a
analysis based project. The recent changes in Indian banking sector,
especially after LPG came in Indian economy. So many changes that we
have witnessed. One of them is Merger and Acquisition in Indian
banking Industry. The report is exclusively and comprehensively
prepared by me. All the information and data has given in the report
being collected in the process of fieldwork and from different websites
and magazines.
Date:
Place:
Name: Suman Paul
Institute of Management and Information Science
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ACKNOWLEDGEMENT
It is a great honour for me that I have been granted with an opportunity to
experience the financial battlefield in terms of the Dissertation. I had
enormous knowledge as well as adaptability of circumstance in due course
which has helped me to overcome the hurdles and realize the scenario. I
also got the valuable support and guidance of the professorsfrom the
institute and I am extremely thankful to them for providing me with their
precious time. Above all, I am grateful to the institution where I am
studying namely Institute of Management & Information Science,
Bhubaneswar.
My sincere thanks goes to the following personnel:
Prof. Tushar Ranjan Panigrahi (Guide).
Prof. S. P. Mohapatra .
Prof. P.H. RAO.
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ABSTRACT
The main focus of this study isto analyze economical, commercial,
financial impact of the banking sector at both season pre- merge and
post-merge season. The study consist with the reason behind the merge
up, the criteria, the changes in share prices, balance sheet items, changes
in income, profitability etc. The study has been developed on the basis of
authentic figures taken from various sources. The study also give a record
of merger and acquisition of different banks at different time. This study
also covers the swot analysis of bank Merger.
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OBJECTIVE
The main object of this project is to analyze the performance of banks
before and after merge up with another bank. To analyze its changes in
profitability, ROE, changes in share prices, Revenue generation pattern,
operational efficiency, product pattern, Changes in shareholding pattern,
functional changes etc. This study also shows how the Basel IInorms has
been applicable when Merger and Acquisition has take place. What is the
future outlook of Merger and Acquisition its also can be known through
this study.
SCOPE
This kinds of project gives knowledge of any particular object through
different dimensions. Because Merger and Acquisition makes a rapid
changes of two different companies, two different brand. It gives a new
face to that organization. So the data whatever has been given it has been
extracted from various but authentic sources. This topic is completely
different from other topic and design on a generalized form. It gives me
the opportunity to know in depth about Banking.
LIMITATION
This project also draws some limitations. Some important data which was
very much crucial was not available in websites where it should be. Like
share prices of the acquired company or delisted company was not
available in the nse websites. So the comparison has been limited into
interfarm comparison. Side by side the ROE, Balance Sheet of the
acquired company is also absent.
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INTRODUCTION
The banking industry has transformed itself from sluggish business entity
to adynamic industry. In the last two decades the Indian banking sector
has grown at an astonishing pace, marked by several paradigm shifts. And
now, mergers and acquisitions have added a new dimension to theIndian
Banking Industry. They will enables banks toachieve world class status
and give more value to all the stakeholders.
The Indian banking industry, which is governed by the Banking
Regulation Act of India, 1949 has a long history of both public and private
banking.
AboutMerger and Acquisition:
One plus one makes three: this equation is the special alchemy of a
merger or an acquisition. The key principle behind buying a company is
to create shareholder value over and above that of the sum of the two
companies. Two companies together are more valuable than two separate
companies - at least, that's the reasoning behind M&A.
Period of Banking erain India :
1. PRE INDEPENDENCE PERIOD:
In the first half of the 19
th
century, three Presidency bank was
founded. After the 1860 introduction of limited liability, private banks
beganto appear and foreign banks entered the market.
The beginning of the20
th
century saw the introduction of joint stock
banks. In 1935 the Presidency bank weremerged to form Imperial
Bank of India which was subsequently renamed the state Bank Of
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India (SBI). Also that year, Indias Central Bank, the Reserve Bank of
India began its operations.
2. POST INDEPENDENCE PERIOD:
After the independence, RBI was given extensive regulatory authority
over commercial banks of India. In 1959, the SBI obtained the state
owned banks of eight former princely states. Ten years later, i.e. July
1969, roughly 31% of scheduled banks all over India was controlled
by govt. as part of the SBI. In the first phase of financial reforms, in
July 1969, the govt. nationalized all banks with nationwide deposits
exceeding Rs. 500 million.
Since 1969, over 58000 bank branches were opened in India;
Between 1969 and 1980, the number of private banks branches grew
more quickly than those of public banks.
The share of private bank branches stayed fairly constant from 1980
to 2000.
The present structure of Indian Banking scenario is as follows:
Public Sector Banks
Nationalized Banks (19).
State Bank group (8).
Other Private sector Banks (1).
Old Private Banks (20).
New Private Banks (9).
Foreign Banks (31).
Scheduled Urban Co-operative Banks (55).
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LITERATURE REVIEW
Re- Engineering of banking sector through Merger & Acquisition
(With reference to selected New Private sector Banks in Chennai)
Dr.MurthyPamarty
Professor, School of Management Studies,
AdikaviNannaya University,
Rajahmundry-533105
Andhra Pradesh.
India
Email:profmurthy@yahoomail.com
Introduction:
The issue of merger and acquisition of Indian banking has occupied an
important place amongst the personnel and policy-makers of banking
system in recent years, as a sequel to economic reforms to bring in
equilibrium sand stability in the banking industry. During the last few
years, the Indian Banking system has witnessed some very high profile
mergers, such as the merger of ICICI Ltd. with its banking arm ICICI
Banks Ltd, the merger of Global Trust Bank (GTB) with Oriental Bank
of commerce and more recently the merger of IDBI with its banking arm
IDBI Bank Ltd, more so in industrial and service sectors due to the effect
of globalization.
The following are the significant challenges faced and new operational
initiatives introduce by banks since 1990.Non Performing Assets,
Competition,Asset Size, Capital Base, Universal Banking, Customer
Service, Branch Banking, Technology, Basel II Implementation,
Implementation of New Accounting Standards, Transparency and
Disclosures, Financial Conglomerates, Know Your Customer (KYC).
Mergers have been considered as a possible avenue for improving the
structure and efficiency of the banking industry. In view of the global
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phenomenon of consolidation and convergence, the report of the
committee on banking sector reforms (Chairman: Shri M. Narasimhan)
had suggested mergers among strong banks, both in the public and private
sectors and even with financial institutions and NBFCs.
It is understood that there has been mergers in all the categories of banks
(private sector & public sector). In the case of public sector banks, the
main motive has been to merge with the weak bank. In the case of private
sector banks, the motives have been varied. The history has been
rewritten with the merger of I CICI Bank and Bank of Madura, theprofit
making banks.
Rationale for Mergers and Consolidation in Banking Sector:
The principal economic rationale for a merger is that the value of the
combined entities is expected to be greater than the sum of the
independent values of the merging entities to reap the following benefits,
1. Cost benefits - economies of scale, organizational efficiency,
Funding, costs and risks diversification,
2. Revenue benefits - economies of scale, enhancing monopoly rents,
3. Economic conditions mergers after business crises or after the
upswing of the Business cycle to initiate strategies.
4. Other consideration - private managerial benefits, defense against
Takeover, etc.Further there is variety of reasons to induce merger
proposals. Some of them are 1. Synergy 2. Tax considerations, 3.
Economies of scale in operations 4. Diversification etc.
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Significance of the study:
Banking is the most important component of the Indian financial system.
The recent South- East Asian crisis and the earlier economic turmoil in
several developing nations demonstrated that strong banking systems are
critical for sound economic growth. It is important to improve the
competitiveness and quality of the banking system to bring about
efficiency in the performance. Merger taking place in India are in line
with the trend of consolidation that has characterized the financial services
industry and, in particular, the banking industry. The world over, banks
have been merging at a furious pace, driven by the urge to gain synergies
in their operation, derive economies of scale and offer one- stop facilities
to a more demanding clientele. Hence the desire to grow quickly through
mergers rather than through the slow and tortuous path of normal
expansion in business. Merger seems to lead to financial and strategic
growth. The financial and strategic management aspect of merger is to be
analyzed from several bases. The present study evaluated financial
implications before and after mergers in the banking industry. Further, the
reaction of security prices to announcement of M & A decisions are also
studied.
Need of the Study:
Survival is the ultimate objective of any organization and Mergers and
Acquisitions is one form of survival strategy. The fastest way to mergers,
acquisitions, takeover etc, is the combination of firms. Indian government
consistently has put forward planned efforts to achieve higher economic
growth. While Income Tax Act 1961carries some incentives to the
merged firms, Indian Companies 1956 provides the procedure for
amalgamation. The merger has drawn the attention of probably all
professionals, consultants, finance managers, bankers and merchant
bankers who provide guidance and know-how to corporate clients.
At the same-time, Indian enterprises work under competition from
MNCs. This possess serious problem to all industries including banking
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sector. Their reorganization through M&A could help them to re-
establish themselves to operate as viable units of optimal size. Therefore,
the success of reorganization is to be critically studied. This study seeks to
explore successfulness of Mergers & Acquisitions after merger efforts in
banking sector.
Scope of the Study:
The proposed study is limited to a select sample of banking companies
who were involved in Mergers & Acquisitions during the period of 1998-
2004. It is proposed to compare the performance of these companies
during three years before and after the period of Mergers and
Acquisitions. The first part of this study evaluates the implications of
Mergers and Acquisitions from the financial point of view. The second
part of this study investigates the adjustments of stock prices to the
announcement of mergers/ acquisitions.
Research Problem:
The present research down sized to major problems in the form of
research gaps through the exploration of extensive research reviews. In all
international literature they fail to identify the factors influencing M&A of
banks. The predominant factors which create target and source banks for
the M&A were also not discussed in the literature works. It is also
identified that the national and international literature did not specify the
oscillation of secondary data for a particular period of pre and post-
merger periods. The share price movements in the public issues were also
not noticed very meticulously in the literature survey the another problem
encounter in the study is how the twining system of M&A which pairs
target banks and source banks. These researchgaps lead to the following
objectives of the study.
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Objectives of the Study:
The following are the main objectives of theresearch using secondary
data:
1.)To study the predominant factors influencing M&A of banks in
Indian banking scenario.
2.)To analyse the M&A of public sector banks with pre and post
periods of M&A.
3.)To examine the M&A process private sectors banks with pre and
post periods of M&A.
4.)To develop an index model to ascertain M&A situation in general in
Indian banking scenario.
5.)To offer suggestion and recommendation for the effective
functioning of bank after M&A.
Methodology:-
This study based on secondary data alone. Two public sector and private
sector banks and M&A scenario in the pre and post periods of six years
are taken up as radical data in which pre merger three years and post
merger three years in particular two public sector merger and two private
sector merger in a particular period 2005-2006 are taken up for the
analysis.
Data Analysis:
The following mathematical and statistical tools are used to develop an
index model to study the factors influencing M&A.
Multiple regression analysis as well as linear probabilistic methods like
Li+Ri =Di.
The status QUO equilibrium characterized by loan rates and loan
market share are used to under pin the main reason for M&A.
Pair Z test and Test are also used to Find the significant difference in pre
merge &post merger periods.
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Limitations of the Study:
This study is a descriptive analysis of financial performance and share
price reaction to sample banks. While carrying on this study, the
researcher has observed certain limitation to cope up with the study.
1. The study is based on secondary data and is confined to banking
sector, only hence no comparison with other sectors was made
2. There is an acute deficiency with reference to M&A in India. The
CMIE is one of the agencies, which has been publishing data on M&A in
India on a regular basis. Hence, the data from CMIE are used in this
study.
The relationship between targetbanks and source banks are established
through the reserve channel denoted by kn are also exploited to identify
the analytical reason for liquidity.
CASE ANALYSIS
In this case, Dr. Pamarty has discussed about the significance and
importance of Merger and Acquisition of various banking industry.Merger
and acquisition of Indian banking has occupied an important place
amongst the personnel and policy-makers of banking system in recent
years, as a sequel to economic reforms to bring in equilibrium sand
stability in the banking industry. Whether it is merger and acquisition in
the free markets or consolidation in the international markets, the
underlying objective is similar. Mergers have been considered as a
possible avenue for improving the structure and efficiency of the banking
industry.
merger is that the value of the combined entities is expected to be greater
than the sum of the independent values of the merging entities to reap the
following benefits, Cost benefits economies of scale, organizational
efficiency, Funding, costs and risks diversification, Revenue benefits -
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economies of scale, enhancing monopoly rents, and Economic
conditions mergers after business crises or after the upswing of the
Business cycle to initiate strategies. Other consideration private
managerial benefits, defense against Takeover, Further there is variety of
reasons to induce merger proposals. Some of them are Synergy, Tax
considerations, Economies of scale in operations, Diversification. Merger
taking place in India are in line with the trend of consolidation that has
characterized the financial services industry and, in particular, the banking
industry. The world over, banks have been merging at a furious pace,
driven by the urge to gain synergies in their operation, deriveeconomies
of scale and offer one- stop facilities to a more demanding clientele.
The financial and strategic management aspect of merger is to be analyzed
from several angles and the study evaluated financial implications before
and after mergers in the banking industry. Further, the reaction of security
prices to announcement of M & A decisions are also studied. Survival is
the ultimate objective of any organization and Mergers and Acquisitions is
one form of survival strategy the predominant factors which create target
and source banks for the M&A were also not discussed in the literature
works.
Motives Behind Consolidation
Growth - Organic growth takes time and dynamic firms prefer acquisitions to
grow quickly in size and geographical reach.
Synergy - The merged entity, in most cases, has better ability in terms of both
revenue enhancement and cost reduction.
Managerial efficiency- Acquirer can better manage the resources of the target
whose value, in turn, rises after the acquisition.
Strategic motives- Two banks with complementary business interests can
strengthen their positions in the market through merger.
Market entry- Cash rich firms use the acquisition route to buyout an established
player in a new market and then build upon the existing platform.
Tax shields and financial safeguards- Tax concessions act as a catalyst for a
strong bank to acquire distressed banks that have accumulated losses and
unclaimed depreciation benefits in their books.
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Regulatory intervention- To protect depositors, and prevent the de-stabilization of
the financial services sector, the RBI steps in to force the merger of a distressed
bank.
A SWOT Analysis of MERGER and ACQUISITION in INDIAN
BANKING I NDUSTRY:
STRENGTH:
Liquidity
Sound Banking System
WEAKNESS:
Competition from foreign Banks
High cost of intermediation.
High level of fragmentation
Lack of product differentiation.
Low penetration.
No competition at international level.
OPPORTUNITIES:
Advance Technology.
Basel norms
Cost cutting.
Enhancement in risk absorption abilities.
Enlarged customer base.
Geographical spread.
Growth in less time.
Improvement in operational efficiency.
Maturing corporate sector.
Product Diversification.
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Tax Shield.
THREATS:
Alignment of technology.
Assimilation of systems and processes.
Customer dissatisfaction.
Integration of people.
Marginalization of small customer.
Regulatory hurdles
Rise of Monopolistic structure.
BANK MERGERS AND ACQUISITIONS IN INDIA SINCE BANK
NATIONALISATION:
YEAR BIDDER BANK TARGET BANK
1969 STATE BANK OF INDIA Bank of Bihar
1970 STATE BANK OF INDIA National Bank of Lahore
1971 Chartered Bank Eastern Bank
1974 STATE BANK OF INDIA KrishnaramBaldeo Bank
Ltd.
1976 Union Bank Belgaum Bank
1984-85 Canara Bank Lakshmi Commercial bank
1984-85 STATE BANK OF INDIA Bank of Coachin
1986 Union Bank of India Miraj State Bank
1986 Punjab National Bank Hindustan Commercial
Bank
1988 Bank of Baroda Traders Bank ltd.
1989-90 Allahabad Bank United Industrial Bank
1989-90 Indian Overseas Bank Bank of Tamilnadu
1989-90 Indian Bank Bank of Thanjavur
1989-90 Bank of India Parur Central Bank
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1990-91 Central Bank of India Purbanchal Bank
1993-94 Punjab National Bank New Bank of India
1994 Bank of India Bank of Karad
1995-96 STATE BANK OF INDIA Kashinath Seth Bank
1997 Oriental Bank of Commerce Punjab Co-operative Bank
1997 Oriental Bank of Commerce Bari Doab Bank
1998 Bank of Baroda Bareilly Corporation Bank
1999 Union Bank of India Sikkim Bank
1999 HSBC British Bank of Middle East
1999 HDFC Bank Times Bank
2000 ICICI Bank Bank of Madura
2001 Bank of Baroda Benaras State Bank
2001-02 Standard Chartered Bank Grindlays Bank
2002 Punjab National Bank Nedungadi Bank
2004 Oriental Bank of Commerce Global Trust Bank
2004 Bank of Baroda South Gujrat local Area
Bank
2005 Centurion Bank Bank of Punjab
2005 Centurion Bank of Punjab Lord Krishna Bank
2006 Federal Bank Ganesh Bank of Kurundwad
2006 IDBI Bank ltd. United Western Bank
2007 Indian Overseas Bank Bharat Overseas Bank
2007 ICICI Bank Ltd. The Sangli Bank Ltd.
2008 HDFC Bank Centurian Bank of Punjab
2008 State Bank of India State Bank of Saurashtra
Key M&A Deals 2000 onwards: Some Case Studies
The cases chosen for the purpose of this study were selected based on
their prominence and recency (all post-2000) to ensure that the motives
driving the deals will remain relevant in the current context.
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St andar d Char t er ed Acquir es ANZ Gr indl ays Bank
(November '00)
Standard Chartered wanted to capitalize on the high growth forecast for
the Indian economy. It aimed at becoming the world's leading emerging
markets bank and it thought that acquiring Grindlays would give it a well-
established foothold in India and add strength to its management
resources. For ANZ, the deal provided immediate returns to its
shareholders and allowed it to focus on the Australian market. Grindlays
had been a poor performer and the Securities Scam involvement had
made ANZ willing to wind up.
Benefits
Standard Chartered became the largest foreign bank in India with over
56 branches and more than 36% share in the credit card market. It also
leveraged the infrastructure of ANZ Grindlays to service its overseas
clients.
For ANZ, the deal, at a premium of US $700 million over book value,
funded its share buy-back in Australia (a defence against possible hostile
takeover). The merger also greatly reduced the risk profile of ANZ by
reducing its exposure to default prone markets.
Drawbacks
The post mergerorganizational restructuring evoked widespread criticism
due to unfair treatment of former Grindlays employees.
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There were
also rumorsof the resulting organization becoming too large an entity to
manage efficiently, especially in the fast changing financial sector.
ICICI Bank Lt d. Acquir es Bank of Madur a (Mar ch '01)
ICICI Bank Ltd wanted to spread its network, without acquiring RBI's
permission for branch expansion. BoM was a plausible target since its
cash management business was among the top five in terms of volumes.
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In addition, there was a possibility of reorienting its asset profile to
enable better spreads and create a more robust micro-credit system post
merger.
BoM wanted a (financially and technologically) strong private sector
bank to add shareholder value, enhance career opportunities for its
employees and provide first rate, technology-based, modern banking
services to its customers.
Benefits
The branch network of the merged entity increased from 97 to 378,
including 97 branches in the rural sector.
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The Net Interest Margin
increased from 2.46% to 3.55 %. The Core fee income of ICICI almost
doubled from Rs 87 crores to Rs 171 crores. IBL gained an additional
1.2 million customer accounts, besides making an entry into the small
and medium segment. It possessed the largest customer base in the
country, thus enabling the ICICI group to cross-sell different products
and services.
Drawbacks
Since BoM had comparatively more NPAs than IBL, the Capital
Adequacy Ratio of the merged entity was lower (from 19% to about
17%). The two banks also had a cultural misfit with BoM having a trade-
union system and IBL workers being young and upwardly mobile,
unlike those for BoM. There were technological issues as well as IBL
used Banks 2000 software, which was very different from BoM's ISBS
software. With the manual interpretations and procedures and the lack
of awareness of the technology utilizationin BoM, there were hindrances
in the merged entity.
Oriental Bank of Commerce Acquires Global Trust Bank Ltd (August
'04)
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For Oriental Bank of Commerce there was an apparent synergy post
merger as the weakness of Global Trust Bank had been bad assets and
the strength of OBC lay in recovery.
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In addition, GTB being a south-
based bank would give OBC the much-needed edge in the region apart
from tax relief because of the merger. GTB had no choice as the merger
was forced on it, by an RBI ruling, following its bankruptcy.
Benefits
OBC gained from the 104 branches and 276 ATMs of GTB, a
workforce of 1400 employees and one million customers. Both banks
also had a common IT platform. The merger also filled up OBC's
lacunae - computerization and high-end technology. OBC's presence in
southern states increased along with the modern infrastructure of GTB.
Drawbacks
The merger resulted in a low CAR for OBC, which was detrimental to
solvency. The bank also had a lower business growth (5% vis-a-vis 15% of
peers). A capital adequacy ratio of less than 11 per cent could also
constrain dividend declaration, given the applicable RBI regulation.
SCENARIO OF BANK MERGERS IN INDI AN CONTEXT:
A. Bank of Madura merger with ICICI Bank:
Established in 1943, Bank of Madura (BoM), a south India-based
bank and one of the oldest private banks of India, (established in
1994) has merged with ICICI Bank, Indias second-largest bank.
The merger took place in the 2001. For each share of BoM, the
shareholders received 2 shares of ICICI Bank. The ratio was
worked out on the basis of valuations by discounted cash flows,
book value and comparable multiple methods.
PRE- MERGER STATUSOF ICICI
22
Liabilities =Rs. 12073 crore.
Equity market capitalization of Rs. 2466 cr.
Equity volatility of 0.748
Asset worth Rs. 13,249 crore with volatility 0.15.
Assets were 9.7% more than liabilities.
Has leveraged of 5.37 times.
PRE MERGER STATUS OF BANK OF MADURA
Liabilities =Rs. 4444 crore.
Equity market capitalization =Rs. 100 cr.
Equity volatility =0.69
Assets are worth Rs. 4095 crore with a volatility of 0.02
Assets are Rs. 350 crore less than liabilities.
Total Assets of the merged entity were to the tune of Rs. 17,345 cr. And
the liabilities were Rs. 16,517 cr. So the merged entity required
approximately Rs. 800 cr. Of fresh equity capital so that their assets were
at least 10% ahead of liabilities.
Estimated market capitalization of the merged came out to be
approximately Rs. 2500 crore which was almost very near to the market
capitalization of the ICICI bank i.e. Rs. 2466 cr. Before merger. This
kind of merger was a politically easier alternative for the RBI when closing
down BoM. The shareholders of ICICI Bank have paid a non-zero fee
for the BoM. Hence, the merger was very feasible for BoM and was a
problem for ICICI Bank. But the merger of ICICI Bank and BoM ltd.,
has proved to be advantageous to ICICI Bank. In the process, ICICI
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Bank gained a larger balance sheet size, enhance branch network,
increased customer base with cross selling, increased threshold to
financing SMEs segment and an expanding agro based lending and micro
credit. The merger too has taken up the customer accounts to 32 lakhs
with an addition of 12 lakhs customer base.
IMPLEMENTATION OF BASEL II NORMS:
The fundamental question is, would it be possible to have a dual
approach to Basel II, which requires bigger banks having international
presence to adopt Basel II guidelines, while permitting smaller banks to
continue under Basel I? From the perspective of regulation and
supervision, RBI has been safeguarding depositors Interest and ensuring
strong risk management visa-vis payments, clearing and settlement
systems. RBI has already put in place Prudential Supervisory Reporting
System, covering all vital aspects and a wide range of indicators, which
serve as an early warning signal as well. Macro-Prudential Indicators
(MPIs) are being compiled since March 2000 with a view to collecting
data from various reports that are received in the regulatory and
supervisory wings of the bank. The MPIs covers the areas of capital
adequacy, asset quality, risk management, management soundness,
earnings and profitability liquidity, interest rate, maturity structure of
assets and liabilities, and various indicators pertaining to major segments
of financial markets such as debt, forex, capital market segments,beside
macroeconomic indicators such as growth, inflation, interest rate and
exchangerate. TheMPI review is accompanied by a review of
developments in the global environment. As part of theefforts to
disseminate these financial soundness indicators (FSIs), the Reserve Bank
has started publishing the core set of indicators in its various publications.
Under these circumstances, the systematic risk posed by smaller banks is
already thoroughly monitored. In this backdrop can we also look at the
24
feasibility of taking a line similar to the stance taken United States of
America that only bigger and internationally active banks will be required
to follow Basel II guidelines, while smaller banks can continue under
Basel I ?The smaller banks do not pose the kind of systematic risk posed
by internationally active and large banks. A dual approach to Basel IIwill
also reduce the burden on the regulator and the banks alike without much
impact on financial system in the form of additional risk. Looking to the
complexities involved and the enormous supervisory resources, a review
of the entire approach to Basel II may present some more possibilities.
ACCOUNTING METHODS FOR M & As IN INDIA :
THE POOLING INTEREST METHOD
When an amalgamation is considered to be an amalgamation in the
nature of merger, it should be accounted for under the pooling of interest
method.
1. In preparing the transferee companys financial statements, the
assets, liabilities and reserves (whether capital or revenue or
arising out of revaluation) of the transferor company should be
recorded at their existing carrying amounts and in the same form
as at the date of amalgamation. The balance of the profit and loss
account of the transferor company should be aggregated with the
corresponding balance of the transferee company or transferred
to the general reserve, if any.
2. If, at the time of amalgamation, the transferor and the transferee
companies have conflicting accounting policies, a uniform set of
accounting policies should be adopted following the
amalgamation. The effects on the financial statements of any
changes in accounting policies should be reported in accordance
25
with Accounting Standard (AS) 5 Prior Period and extraordinary
Items and changes in Accounting Policies.
3. The difference between the amount recorded as share capital
issued (plus any additional consideration in the form of cash or
other assets) and the amount of share capital of the transferor
company should be adjusted in reserves.
THE PURCHASE METHOD
When an amalgamation is considered to be an amalgamation in the of
purchase, it should be accounted for under the purchase method.
1. In preparing the transferee companys financial statements,
the assets and liabilities of the transferor company should be
incorporated at their existing carrying amounts or,
alternatively, the consideration should be allocated to
individual identifiable assets and liabilities on the basis of
their fair values as on the date of amalgamation. The reserves
of the transferor company, other than the statutory reserves,
should not be included in the financial statements of the
transferee company.
2. Any excess of the amount of the consideration over the value
of the net assets of the transferor company acquired by the
transferee companys financial statements as goodwill arising
on amalgamation. If the amount of the consideration is lower
than the value of the net assets acquired, the difference
should be treated as capital reserve.
3. The goodwill arising on account of amalgamation should be
amortized to income on a systematic basis over its useful life.
The amortization period should not be exceed 5 yrs. Unless
a somewhat longer period can be justified.
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4. As per the requirement, statutory reserve of the transferor
company should be recorded in the financial statement of the
transferee company. The corresponding debit should be
given to a suitable account head (e.g. Amalgamation
Adjustment Account), which should be disclosed as a part of
miscellaneous expenditure or other similar category in the
balance sheet. When the identity of the statutory reserves is
no longer required to be maintained, both the reserves and
the aforesaid account should be reversed.
VALUATION OF MERGER
Apart those methods Comparative Ratios like P/E ratio, EV/Sales,
Replacement Cost method, Discounted Cash Flow method also being
applied while valuation of merger.
RESEARCH AND METHODOLOGY
The research work what I have done in this project has taken on the basis
of collection of primary data from different but authentic source. The
revaluation of two different banks after merger and acquisition can be
done from different angle, different aspectslike change in share price,
change in the income from profit and loss statement or change in the
balance sheet items assets or liabilities can be measure. Here in this study
PRE-MERGER STOCK PRICE =
PRE-MERGER VALUE OF BOTH FIRMS + SYNERGY
POST MERGER NUMBER OF SHARES
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I make a comparative analysis both 4 banks in pre merger and post
merger situation. For making a comparative studyI have taken some
parameters like Profitability, P/E Ratio, Debt-Equity ratio, Earning per
shareetc.
HDFC Bank Acquir es Cent ur ion Bank of Punj ab (May '08)
For HDFC Bank, this merger provided an opportunity to add scale,
geography (northern and southern states) and management bandwidth.
In addition, there was a potential of business synergy and cultural fit
between the two organizations.
For CBoP, HDFC bank would exploit its underutilized branch network
that had the requisite expertise in retail liabilities, transaction banking
and third party distribution. The combined entity would improve
productivity levels of CBoP branches by leveraging HDFC Bank's brand
name.
Benefits
The deal created an entity with an asset size of Rs 1,09,718 crore (7th
largest in India), providing massive scale economies and improved
distribution with 1,148 branches and 2,358 ATMs (the largest in terms
of branches in the private sector). CBoP's strong SME relationships
complemented HDFC Bank's bias towards high-rated corporate entities.
There were significant cross-selling opportunities in the short-term.
CBoP management had relevant experience with larger banks (as
evident in the Centurion Bank and BoP integration earlier) managing
business of the size commensurate with HDFC Bank.
Drawbacks
The merged entity will not lend home loans given the conflict of interest
with parent HDFC and may even sell down CBoP's home-loan book to
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it. The retail portfolio of the merged entity will have more by way of
unsecured and two-wheeler loans, which have come under pressure
recently.
Changes of HDFC Bank before Merger and After Merger:
Particulars 2007-08 2008-09
PAT 159,018 224493
EPS 46.22 52.85
PE Ratio 28.80 18.42
MPS 1331.25 973.40
DPS 8.50 10.00
Net Profit 15,901,930 22,449,392
FIXED ASSETS
At cost
Addition on
Amalgamation
Addition during
the year
Deduction during
the year
5243809
1298061
669230
(50435)
3676903
_
328190
(41858)
OTHER ASSETS
At Cost
Addition on
Amalgamation
Addition during
the year
Deductions
during the yr.
18187640
4906684
5460218
(762533)
15060199
_
3281910
(154469)
Changes in Income 163322611 101150087
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So if we compare of both year, we can see the following changes:
Compare to 2007-08, in the year 2008-09 PAT has been increased
by41.17%.
EPS has been increased by 14.34 % by the yr. 2008-09.
Both P/E Ratio and Market Price per Share has been decline by
36.04% and 26.88% respectively in the yr. 2008-9, compare to 2007-
08.
Dividend per share has been increased by 17.64%.
Change in income in terms of percentage is -38.07% i.e. loss.
Bank of Bar oda Acquir es Sout h Guj ar at Local Ar ea
Bank Lt d (J une '04)
According to the RBI, South Gujarat Local Area Bank had suffered net
losses in consecutive years and witnessed a significant decline in its
capital and reserves
5
. To tackle this, RBI first passed a moratorium
under Section 45 of the Banking Regulation Act 1949 and then, after
extending the moratorium for the maximum permissible limit of six
months
6
, decided that all seven branches of SGLAB function as
branches of Bank of Baroda. The final decision about the merger was of
the Government of India in consultation with the RBI. Bank of Baroda
was against the merger, and protested against the forced deal
7
Benefits
The clients of SGLAB were effectively transferred to Bank of Baroda,
deriving the advantage of dealing with a more secure and bigger bank.
SGLAB did not benefit much, except that it was able to merge with a
bigger bank and able to retain its branches and customers, albeit under a
different name. Since BoB was a large entity (total assets of Rs. 793.2
30
billion at the time of merger), addition of a small liability did not affect it
much. Albeit minor, it obtained seven more branches and the existing
customers of SGLAB. This further strengthened its position in rural
Gujarat.
Drawbacks
There was no widespread criticism or any apparent drawback of the
merger since the financials involved were not very high.
CHANGE OF BANK OF BARODA BEFORE AND AFTER MERGER :
PARTICULARS 31.03.2005 31.03.2004
PAT 67,68,399 9669959
EPS 23.08 32.97
DIVIDEND PAYOUT
RATIO
24.67% N.A.
FIXED ASSETS 8608033 8152686
OTHER ASSETS 40744077 34068926
CHANGES IN
INCOME
77362456 78660752
If we analyse theabove changes we found that :
PAT had been decline by 30%.
PAT has been decline hence EPS came to the negative point, it also come
around 29.99%.
Fixed Assets has been increased by 5.58 %.
Other assets has been increased by 19.59 %.
Income has been decline by 1.65%.
FINDINGS:
Compare to private bank HDFC bank the growth rate of public sector bank Bank
of Baroda, is not satisfactory. Because after merger companies net profit ,EPS,
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Income has been decline. Companies operational efficiency has been come down
in case of Bank of Baroda. So may be the merger has not been fruitful for Bank of
Baroda. But it is a public sector Bank , so it has not lost its trust worthiness.
On the other side HDFC bank has been merge up with Centurian Bank of Punjab at
the recessionary period. After that Banks operational efficiency, profitability has
been increased, which is a very good sign. Banks EPS, PE ratio has grown up.
Though market price of the share has been decline, but it was an instance effect,
soon it gets back the recovery.
Future of M&A in Indian Banking
In 2009, further opening up of the Indian banking sector is forecast to occur due
to the changing regulatory environment (proposal for upto 74% ownership by
Foreign banks in Indian banks). This will be an opportunity for foreign banks to
enter the Indian market as with their huge capital reserves, cutting-edge
technology, best international practices and skilled personnel they have a clear
competitive advantage over Indian banks. Likely targets of takeover bids will be
Yes Bank, Bank of Rajasthan, and IndusInd Bank. However, excessive valuations
may act as a deterrent, especially in the post-sub-prime era.
Persistent growth in Indian corporate sector and other segments provide further
motives for M&As. Banks need to keep pace with the growing industrial and
agricultural sectors to serve them effectively. A bigger player can afford to invest
in required technology. Consolidationwith global players can give the benefit of
global opportunities in funds' mobilization, credit disbursal, investments and
rendering of financial services. Consolidation can also lower intermediation cost
and increase reach to underserved segments.
The Narasimhan Committee (II) recommendations are also an important indicator
of the future shape of the sector. There would be a movement towards a 3-tier
structure in the Indian banking industry: 2-3 large international banks; 8-10
national banks; and a few large local area banks. In addition, M&As in the future
are likely to be more market-driven, instead of government-driven.
CONCLUSION:
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Based on the trends in the banking sector and the insights from the cases
highlighted in this study, one can list some steps for the future which banks
should consider, both in terms of consolidation and general business. Firstly,
banks can work towards a synergy-based merger plan that could take shape latest
by 2009 end with minimization of technology-related expenditure as a goal.
There is also a need to note that merger or large size is just a facilitator, but no
guarantee for improved profitability on asustained basis. Hence, the thrust should
be on improving risk management capabilities, corporate governance and
strategic business planning. In the short run, attempt options like outsourcing,
strategic alliances, etc. can be considered. Banks need to take advantage of this
fast changing environment, where product life cycles are short, time to market is
critical and first mover advantage could be a decisive factor in deciding who wins
in future. Post-M&A, the resulting larger size should not affect agility. The aim
should be to create a nimble giant, rather than a clumsy dinosaur. At the same
time, lack of size should not be taken to imply irrelevance as specialized players
can still seek to provide niche and boutique services.
REFERENCE:
PROFESSOINAL BANKERS
ICFAI J OURNALS
WWW.ECONOMICTIMES.COM
WWW.SSRN.COM
www.google.com
www.hdfc.com
www.bankofbaroda.com
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