interim - shweta

8/7/2019 INTERIM - SHWETA

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NAME Shweta Sharma

ENROLLMENT NO 09BS0002290

MOBILE NO 09654092212

EMAIL ID [email protected]

MANAGEMENT RESEARCH PROJECT

INTERIM REPORT

FACULTY GUIDE NAME

Dr. Kapil Gupta


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CONTENTS

SL. NO. CONTENTS PAGE- NO

1. TITLE PAGE 3

2. ABSTRACT 4-5

3. MERGERS DEFINED 6-7

4. TYPES OF MERGERS 9

5. BENEFITS OF MERGERS 10-14

6. STUDY OF MERGERS IN BANKING

INDUSTRY

15- 25

7. METHODOLOGY 26

8. CONCLUSION AND REFERENCES 27-28


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A REPORT

ON

MERGERS AND ACQUISITIONS IN BANKING INDUSTRY

By:

SHWETA SHARMA

ENROLLMENT NO: - 09BS0002290


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ABSTRACT

The phrase Mergers and Acquisitions refers to the aspect of corporate strategy, corporate

finance and management dealing with the buying, selling and combining of different companies

that can aid, finance, or help a growing company in a given industry grow rapidly without having

to create another business entity

An acquisition, also known as a takeover or a buyout or "merger", is the buying of one company

by another. An acquisition may be friendly or hostile. In the former case, the companies

cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the

target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a

smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management

control of a larger or longer established company and keep its name for the combined entity.

This is known as a reverse takeover. Another type of acquisition is reverse merger, a deal that

enables a private company to get publicly listed in a short time period. A reverse merger occurs

when a private company that has strong prospects and is eager to raise financing buys a publicly

listed shell company, usually one with no business and limited assets. Achieving acquisition

success has proven to be very difficult, while various studies have shown that 50% of many

acquisitions being unsuccessful. The acquisition process is very complex, with many dimensions

influencing it s outcomes.

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.

This rationale is particularly alluring to companies when times are tough. Strong companies

will act to buy other companies to create a more competitive, cost-efficient company. The

companies will come together hoping to gain a greater market share or to achieve greater

efficiency. Because of these potential benefits, target companies will often agree to be purchased

when they know they cannot survive alone .


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One of the principal objectives behind the mergers and acquisitions in the banking sector is to

reap the benefits of economies of scale. With the help of mergers and acquisitions in the banking

sector, the banks can achieve significant growth in their operations and minimize their expenses

to a considerable extent. Another important advantage behind this kind of merger is that in this

process, competition is reduced because merger eliminates competition from the banking

industry.

MERGERS AND ACQUISITIONS IN DIFFERENT SECTORS IN INDIA

Sector wise, large volumes of mergers and mergers and acquisitions in India have occurred in

finance, telecom, FMCG, construction materials, automotives and metals. In 2005 finance topped

the list with 20% of total value of mergers and acquisitions in India taking place in this sector.

Telecom accounted for 16%, while FMCG and construction materials accounted for 13% and

10% respectively.

In the banking sector, important mergers and acquisitions in India in recent years include the

merger between IDBI (Industrial Development bank of India) and its own subsidiary IDBI Bank.

The deal was worth $ 174.6 million (Rs. 7.6 billion in Indian currency). Another importantmerger was that between Centurion Bank and Bank of Punjab. Worth $82.1 million (Rs. 3.6

billion in Indian currency), this merger led to the creation of the Centurion Bank of Punjab with

235 branches in different regions of India.

Mergers and acquisitions in banking sector have become familiar in the majority of all the

countries in the world. A large number of international and domestic banks all over the world are

engaged in merger and acquisition activities. One of the principal objectives behind the mergers

and acquisitions in the banking sector is to reap the benefits of economies of scale.

With the help of mergers and acquisitions in the banking sector, the banks can achieve

significant growth in their operations and minimize their expenses to a considerable extent.

Another important advantage behind this kind of merger is that in this process, competition is

reduced because merger eliminates competitors from the banking industry. Mergers and


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acquisitions in banking sector are forms of horizontal merger because the merging entities are

involved in the same kind of business or commercial activities. Sometimes, non-banking

financial institutions are also merged with other banks if they provide similar type of services.

Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in

the banking sector. They also try to enhance their customer base.

In the context of mergers and acquisitions in the banking sector, it can be reckoned that size

does matter and growth in size can be achieved through mergers and acquisitions quite easily.

Growth achieved by taking assistance of the mergers and acquisitions in the banking sector may

be described as inorganic growth. Both government banks and private sector banks are adopting

policies for mergers and acquisitions.

DEFINING MERGERS AND ACQUISITIONS

In a MERGER, two (or more) corporations come together to combine and share their resources

to achieve common objectives. The shareholders of the combining firms often remain as joint

owners of the combined entity. A new entity may be formed subsuming the merged firms.

In an ACQUISITION, one firm purchases the assets or shares of another. The acquired firms

shareholders cease to be owners of that firm. The acquired firm becomes the subsidiary of the

acquirer. Acquisitions usually take the form of a public tender offer

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.


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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 :-

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

DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

Although they are often uttered in the same breath and used as though they were

synonymous, the terms merger and acquisition mean slightly different things.


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When one company takes over another and clearly establishes itself as the new owner, the

purchase is called an acquisition. From a legal point of view, the target company ceases to

exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms agree to go forward as a

single new company rather than remain separately owned and operated. This kind of

action is more precisely referred to as a "merger ofequals". The firms are often of about

the same size. Both companies' stocks are surrendered and new company stock is issued in

its place. For example, in the 1999 merger of glaxo Wellcome and SmithKline Beecham,

both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was

created.

In practice, however, actual mergers of equals don't happen very often. Being bought out

often carries negative connotations, therefore, by describing the deal euphemistically as a

merger, deal makers and top managers try to make the takeover more palatable. An

example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was

widely referred to in the time.

A purchase deal will also be called a merger when both CEOs agree that joining together

is in the best interest of both of their companies. But when the deal is unfriendly - that is,

when the target company does not want to be purchased - it is always regarded as an

acquisition .Whether a purchase is considered a merger or an acquisition really depends on

whether the purchase is friendly or hostile and how it is announced.

In other words, the real difference lies in how the purchase is communicated to and

received by the target company's board of directors, employees and shareholders. It is

quite normal though for M&A deal communications to take place in a so called

'confidentiality bubble' whereby information flows are restricted due to confidentiality

agreements (Harwood, 2005).


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TYPES OF MERGERS

Mergers are of many types. Mergers may be differentiated on the basis of activities, which are

added in the process of the existing product or service lines. Mergers can be a distinguished into

the following four types:-

1. Horizontal Merger

2. Vertical Merger

3. Conglomerate Merger

4. Concentric Merger

Horizontal merger

Horizontal merger is a combination of two or more corporate firms dealing in same lines of

business activity. Horizontal merger is a co centric merger, which involves combination of two

or more business units related to technology, production process, marketing research and

development and management.

Vertical Merger

Vertical merger is the joining of two or more firms in different stages of production or

distribution that are usually separate. The vertical Mergers chief gains are identified as the lower

buying cost of material. Minimization of distribution costs, assured supplies and market

increasing or creating barriers to entry for potential competition or placing them at a cost

disadvantage.

Conglomerate Merger

Conglomerate merger is the combination of two or more unrelated business units in respect of

technology, production process or market and management. In other words, firms engaged in thedifferent or unrelated activities are combined together. Diversification of risk constitutes the

rational for such merger moves.


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Concentric Merger

Concentric merger are based on specific management functions where as the conglomerate

mergers are based on general management functions. If the activities of the segments brough

together are so related that there is carry over on specific management functions. Such asmarketing research, Marketing, financing, manufacturing and personnel.

BENEFITS OF MERGERS

1.GROWTH 0R DIVERSIFICATION

Companies that desire rapid growth in size or market share or diversification in the range of their

products may find that a merger can be used to fulfill the objective instead of going through the

tome consuming process of internal growth or diversification. The firm may achieve the same

objective in a short period of time by merging with an existing firm. In addition such a strategy is

often less costly than the alternative of developing the necessary production capability and

capacity. If a firm that wants to expand operations in existing or new product area can find a

suitable going concern. It may avoid many of risks associated with a design; manufacture the

sale of addition or new products. Moreover when a firm expands or extends its product line by

acquiring another firm, it also removes a potential competitor.

2. SYNERGISM: -

The nature of synergism is very simple. Synergism exists when ever the value of the

combination is greater than the sum of the values of its parts. In other words, synergism is

2+2=5. But identifying synergy on evaluating it may be difficult, infact sometimes itsimplementations may be very subtle. As broadly defined to include any incremental value

resulting from business combination, synergism in the basic economic justification of merger.

The incremental value may derive from increase in either operational or financial efficiency.


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Operating Synergism: -

Operating synergism may result from economies of scale, some degree of monopoly power or

increased managerial efficiency. The value may be achieved by increasing the sales volume in

relation to assts employed increasing profit margins or decreasing operating risks. Although

operating synergy usually is the result of either vertical/horizontal integration some synergistic

also may result from conglomerate growth. In addition, some times a firm may acquire another

to obtain patents, copyrights, technical proficiency, marketing skills, specific fixes assets,

customer relationship or managerial personnel.

Operating synergism occurs when these assets, which are intangible, may be combined with the

existing assets and organization of the acquiring firm to produce an incremental value. Although

that value may be difficult to appraise it may be the primary motive behind the acquisition.

Financial synergism

Among these are incremental values resulting from complementary internal funds flows more

efficient use of financial leverage, increase external financial capability and income tax

advantages.

a) Complementary internal funds flows

Seasonal or cyclical fluctuations in funds flows sometimes may be reduced or eliminated by

merger. If so, financial synergism results in reduction of working capital requirements of the

combination compared to those of the firms standing alone.

b) Moreefficient use of Financial Leverage

Financial synergy may result from more efficient use of financial leverage. The acquisition firm

may have little debt and wish to use the high debt of the acquired firm to lever earning of the

combination or the acquiring firm may borrow to finance and acquisition for cash of a low debt

firm thus providing additional leverage to the combination. The financial leverage advantage

must be weighed against the increased financial risk.


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c) Increased External Financial Capabilities

Many mergers, particular those of relatively small firms into large ones, occur when the acquired

firm simply cannot finance its operation. Typical of this is the situations are the small growing

firm with expending financial requirements. The firm has exhausted its credit and has virtually

no access to long term debt or equity markets. Sometimes the small firm has encountered

operating difficulty, and the bank has served notice that its loan will not be renewed. In this type

of situation a large firms with sufficient cash and credit to finance the requirements of smaller

one probably can obtain a good buy bee. Making a merger proposal to the small firm. The only

alternative the small firm may have is to try to interest to or more large firms in proposing

merger to introduce, competition into those bidding for acquisition. The smaller firms situations

might not be so bleak. It may not be threatened by non renewable of maturing loan. But its

management may recognize that continued growth to capitalize on its market will require

financing be on its means. Although its bargaining position will be better, the financial synergy

of acquiring firms strong financial capability may provide the impetus for the merger.

Sometimes the acquired firm possesses the financing capability. The acquisition of a cash rich

firm whose operationshave matured may provide additional financing to facilitate growth of the

acquiring firm. In some cases, the acquiring may be able to recover all or parts of the cost of

acquiring the cash rich firm when the merger is consummated and the cash then belongs to it.

d) The Income Tax Advantages

In some cases, income tax consideration may provide the financial synergy motivating a merger,

e.g. assume that a firm A has earnings before taxes of about rupees ten crores per year and firm

B now break even, has a loss carry forward of rupees twenty crores accumulated from profitable

operations of previous years. The merger of A and B will allow the surviving corporation to

utility the loss carries forward, thereby eliminating income taxes in future periods.

Counter Synergism

Certain factors may oppose the synergistic effect contemplating from a merger. Often another

layer of overhead cost and bureaucracy is added. Sometimes the acquiring firm agrees to long

term employments contracts with managers of the acquiring firm. Such often are beneficial but


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2. Increased Managerial Skills or Technology :-

Occasionally a firm will have good potential that is finds it unable to develop fully because of

deficiencies in certain areas of management or an absence of needed product or production

technology. If the firm cannot hire the management or the technology it needs, it might combine

with a compatible firm that has needed managerial, personnel or technical expertise. Of course,

any merger, regardless of specific motive for it, should contribute to the maximization of

owners wealth.

3. Acquiring new technology:-

To stay competitive, companies need to stay on top of technological developments and their

business applications. By buying a smaller company with unique technologies, a large company

can maintain or develop a competitive edge


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MERGERS AND ACQUISITIONS IN BANKING SECTOR:-

Mergers and acquisitions in banking sector have become familiar in the majority of all the

countries in the world. A large number of international and domestic banks all over the world are

engaged in merger and acquisition activities. One of the principal objectives behind the mergers

and acquisitions in the banking sector is to reap the benefits of economies of scale.

With the help of mergers and acquisitions in the banking sector, the banks can achieve

significant growth in their operations and minimize their expenses to a considerable extent.

Another important advantage behind this kind of merger is that in this process, competition is

reduced because merger eliminates competitors from the banking industry.

Mergers and acquisitions in banking sector are forms of horizontal merger because the merging

entities are involved in the same kind of business or commercial activities. Sometimes, non-

banking financial institutions are also merged with other banks if they provide similar type of

services. Through mergers and acquisitions in the banking sector, the banks look for strategic

benefits in the banking sector. They also try to enhance their customer base.

In the context of mergers and acquisitions in the banking sector, it can be reckoned that size

does matter and growth in size can be achieved through mergers and acquisitions quite easily.

Growth achieved by taking assistance of the mergers and acquisitions in the banking sector maybe described as inorganic growth. Both government banks and private sector banks are adopting

policies for mergers and acquisitions. In many countries, global or multinational banks are

extending their operations through mergers and acquisitions with the regional banks in those

countries. These mergers and acquisitions are named as cross-border mergers and acquisitions in

the banking sector or international mergers and acquisitions in the banking sector. By doing this,

global banking corporations are able to place themselves into a dominant position in the banking

sector, achieve economies of scale, as well as garner market share.

Mergers and acquisitions in the banking sector have the capacity to ensure efficiency,

profitability and synergy. They also help to form and grow shareholder value.In some cases,

financially distressed banks are also subject to takeovers or mergers in the banking sector and

this kind of merger may result in monopoly and job cuts. Deregulation in the financial market,

market liberalization, economic reforms, and a number of other factors have played an important


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function behind the growth of mergers and acquisitions the banking sector. Nevertheless, there

are many challenges that are still to be overcome through appropriate measures. Mergers and

acquisitions in banking sector are controlled or regulated by the apex financial authority of a

particular country. For example, the mergers and acquisitions in the banking sector of India are

overseen by the Reserve Bank of India (RBI).

MERGERS IN THE BANKING INDUSTRY :-

In the 1950s and 1960s there were instances of private sector banks, which had to be rescued or

closed down because they had very low capital and were mostly operating with other peoples

money. For instance, against total deposits of Rs.2750 crore at the end of December 1968, the

paid-up capital of private sector banks was only Rs.28.5 crore or just a little over 1%. In 1960,

the failure of Palai Central Bank and Laxmi Bank led to loss of confidence in the banking system

as a whole. So mergers were initiated to avoid losses to depositors and maintain confidence in

the system. In 1961, the Banking Companies (Amendment) Act empowered RBI to formulate

and carry out 9 Bank Mergers and Acquisitions a scheme for the reconstitution and compulsory

amalgamation of sub-standard banks with well-managed ones. Consequently, out of 42 banks

which were granted moratoria, 22 were amalgamated with other banks, one was allowed to go

into voluntary liquidation, one to amalgamate voluntarily with another bank, three were ordered

to be wound up and the moratorium on three was allowed to lapse.

In India, mergers have been used to bail out weak banks till the Narasimham Committee-II

discouraged this practice. For instance, since the mid-1980s, several private banks had to be

rescued through mergers with public sector banks, as shown in the Table given below:


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Table

Bank Mergers in India

Name of Bank Year of mergers No. of branches

Merged with Merger

Lakshmi Commercial Bank 1984 230

Canara Bank

Bank of Cochin 1984 108

State Bank of India

Miraj State Bank 1984 26

Union Bank of India

Hindustan Commercial 1985 140

Punjab National Bank

Traders Bank 1987 34

Bank of Baroda

United Industrial Bank 1988-89 145

Allahabad Bank

Bank of Tamilnadu 1988-89 99

Indian OverseasBank

Bank of Thanjavur 1988-89 156

Indian Bank

Parur Central Bank 1988-89 51

Bank of India

Prubanchal Bank 1990 40

Central Bank of India

New Bank of India 1993 59

Punjab National Bank

BCCI (Mumbai) 1993 12

State Bank of India


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Bank of Karad 1994 48

Bank of India

Kasinath Seth Bank 1995 11

State Bank of India

Bari Doab Bank & Punjab 1997 10

Oriental Bank of Commerce

The merger of the loss making New Bank of India with the profitable Punjab National Bank was

the first instance of merger of two public sector commercial banks. Now public sector

commercial banks are themselves in need of restructuring so it may be more efficient to close

down unviable bank. However, the recent merger of banks in private sector , i.e., HDFC Bank

and Times Bank (1999) as well as ICICI Bank and Bank of Madura (2000) , could herald a

welcome trend as it is driven by commercial considerations. It is only such mergers among banks

that will impart strength and stability to the banking system in the new millennium.

With economic reforms and opening up of the economy, like other sectors, banking sector also

saw a lot of changes. Two major changes are worth mentioning.

They are:

y Increased competition, andy Falling interest rates

.

There has been a decline in the interest rates in the last decade world wide. As a result of this

profitability of the banks has been under tremendous pressure. The interest rates both on the

deposits and on the loans have come down drastically. The spread which was available to the

banks thinned down and banks have started searching for cost reduction and market enhancing

strategies. Use of technology in their operations has come up as an immediate strategy and banks

have started using technology in a big way. This has resulted in saving of salary expenses, which


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used to be a major part of the banks expenditure. In addition to this, banks have started looking

for strategies which allow the banks to grow faster. One of the options before the banks was to

merge their counterparts in it and become not only big but also gain entry into the new markets.

As a result of these mergers, banks are able to use their full capacities and avoid unnecessary

duplication of efforts. Some of the banks which merged in recent times

Special Issues are:

Times Bankmerged with HDFC Bank, Bank of Madura Merged with ICICI Bank, Nedungadi Bank Merged with Punjab National Bank.

Subsequently the RBI allowed Development Financial Institutions also to merge with banks on

the recommendation of Khan Group. As a result of this ICICI Limited merged itself with

ICICI Bank and IFCI Limited is being merged with the Punjab National Bank.

As far as the merger activity in banking sector is concerned, there used to be mostly merger of

sick and weak banks with a healthy bank. The only purpose of this type of mergers was to save

the sick bank and its customers from the problems. With the process of liberalization the

thinking of the government also changed. We do not see much of mergers of this type now-a-

days. The merger of New Bank of India with Punjab National Bank was a bad experience. This

has not served any purpose. As a result of the merger, PNB had to face lot of court litigations and

also incurred a loss in the year 1996 which was unusual in the history of the Bank.

With the liberalization policies of the government, many private banks came into

existence. In 1995 the government also removed entry barriers in the banking sector. As a result

of this good number of technology savvy, customer friendly banks have started operating in

India. In order to survive in the competition and get a market share these new banks started

offering innovative and attractive products with the help of their technology. Some of the

services like mobile banking, internet banking, tele-banking, online share trading services,

depository services , anywhere banking, anytime banking which are offered by these new


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generation banks were never thought of about a decade ago in India. These services have given

an edge to these banks over the public sector banks. The public sector banks also realised the

need of the hour and started using technology in a big way. These banks are also collaborating

with the new generation banks in offering certain services and getting mutually benefited.

Some of the new generation banks like HDFC Bank and ICICI Bank have started

looking for external growth by way of merger route. These banks have started looking

for healthy banks rather than sick and weak banks for acquisition. The main criteria while

selecting target bank was synergy benefits like market growth, market presence, effect on profit

and so on. It can be said merger of Times Bank with HDFC Bank in 1999 is a beginning of this

new trend. HDFC Bank emerged as the largest private sector bank in India after the merger. By

this merger HDFC Bank got the customer base of Times Bank, its infrastructure, and branch

network. This merger also had product harmonization effect, as HDFC Bank had Visa network

and Times Bank had Master card network. Following HDFC, ICICI also merged Bank of

Madura into it.

ICICI Bank was looking for a bank which could be merged into it and which

could provide some synergic benefits after the merger. ICICI Bank had considered two possible

banks, Federal Bank and the Bank of Madura and finally went for Bank of Madura, considering

its better technological edge, attractive business per employee, and its vast branch network in

Southern India. At the time of merger the Bank of Madura had 263 branches.

Another trend which is taking place in Bank Mergers is merging of Developmental Financial

Institutions (DFIs) with the Banks. Some of the examples are; merger of ICICI Ltd. with ICICI

Bank, and the proposed merger of IFCI Ltd. with Punjab National Bank. This trend is a fall out

of the recommendations of Khan Group and Narasimham Committee-II

M u l t i p l e r e a s o n s t o b e l i e v e t h a t M & A i n t h e I n d i a n B a n k i n g S e c t o r i sa n i m p e r a t i v e .

F r a gmen t a t i on p o se s in c rea s ing r i sk in th e Ind i an B anking S ector .

Dur i ng t he f i nanc i a l pe r i od 2001- 2005 , on l y f ou r banks have been ab l e

t o c r os s t he mar ke t cap i t a l i za t i on o f Rs . 50 b i l l i on i nc l uded Bank o f


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Bar oda , HDFC Bank , I CI CI Bank , and S t a t e Bank o f I nd i a . Con s id e ra b l e

f ra g m e n ta t i on e x i s t s in th e B a n k in g s e c t o r fo r b a n k s w i th m a rk e t

c a p i t a l i za t i on o f l e s s th a n R s . 5 0 b i l l i on. Mor eover t he c r ea t ed va l ue i s

movi ng away f r om t he t op 5 banks t hus i nd i ca t i ng f r agmen t a t i on i ndeed

has i nc r eas ed ove r t he pe r i od o f l a s t f i ve yea r s .

Y e a r 2 0 0 0 2 0 0 4

S i mi l a r t r ends a r e obs e r ved i n p r o f i t a f t e r t ax , bo r r owi ngs and i n t e r es t

and non i n t e r es t i ncomes o f t he banks , t he r eby h i n t i ng a t i nc r eas ed l eve l s

o f f r agmen t a t i on i n t he t op 20 banks . Though t h i s cou l d be t he s i gn o f a

compe t i t i ve bank mar ke t w i t h hea l t hy banks r emai n i ng i n t he mar ke t t he

goa l o f g l oba l l y compe t en t banks wou l d be mi s s ed . I n o t he r wor ds , wh i l e

a f r agmen t ed I nd i an bank i ng s t r uc t u r e may ve r y we l l be bene f i c i a l t o t he

cus t omer s ( g i ven i nc r eas ed compe t i t i on due t o l ower mar ke t power o f

ex i s t i ng p l aye r s ) , a t t he s ame t i me t h i s a l s o c r ea t e s t he p r ob l em o f no

p l aye r hav i ng t he c r i t i ca l mas s t o p l ay t he game a t t he g l oba l bank i ng

i ndus t r y l eve l . Th i s has t o be l ooked a t s i gn i f i can t l y f r om t he s t a t e s

l ong- t e r m s t r a t eg i c pe r s pec t i ve .

Fur t he r mor e , i t i s obs e r ved t ha t i n an i nc r eas i ng compe t i t i ve a r ena t he

s mal l e r f r agmen t ed banks wi t h no economi es o f s ca l e , l ow capab i l i t i e s t o

manage r i s ks and poor mar ke t power a t t i mes end up t ak i ng exces s i ve

r i s ks r e s u l t i ng i n i r r epa r ab l e l o s s t o t he i r depos i t o r s . Th i s a l s o r e s u l t s i n

a f f ec t i ng t he s t a t e and i t s r egu l a t o r s i . e . , cen t r a l bank nega t i ve l y . Take

t h e fo l l o w i n g c a s e s o f t r o u b l e i n t h e r e c e n t p a s t :

a .

G lo b a l T r u s t B ank: Si gn i f i can t expos ur e t o h i gh r i s k mi d s i ze

cor por a t e s and an exces s i ve expos ur e t o cap i t a l mar ke t ope r a t i ons .

b. M adh avp u r a M erc an t i le C o - o p e r a t ive B ank: N i n e t e e nc u s t o m e r s h a d u n s e c u r e d l o a n s o f m o r e t h a n R s . 1 0 b i l l i o n


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. c . S o u t h Ind i an C o - o p e r a t ive B ank: N o n P e r f o r m i n g A s s e t fr o m

e x c e s s iv e le n d i n g t o s m a l l g r o u p o f c l i e n t s

d . Nedung ad i B ank: T h i s b a n k b a s e d i n S o u t h e r n p a r t o f I n d i a h a d

s i g n i f i c a n t e x p o s u r e t o p l a n t a t i o n i n d u s t r y a n d h a d w e a k c r e d i t r i s k

m a n a g e m e n t s y s t e m s a n d p r o c e s s e s .

Fur t he r r ecen t cas es ( i n 2005- 06) o f t wo banks i n I nd i a namel y Un i t e d

Wes tern Bank and Sa n g l i B a n k b e c a m e a t t ra c t i v e t a rg e t s f o r a c q u i s i t i on

by pr iva te sec t o r b a n k s b e c a u se o f th e i r r i sk p r o f i l e . The mer ge r w i t h

t hes e l a r ge r banks i s expec t ed t o i mpr ove t he a s s e t p r o f i l e , NPA

management and p r o t ec t t he depos i t o r s a t t he s ame t i me o f f e r t he

a c q u i r i n g p r i v a t e s e c t o r b a n k s f u r t h e r r e a c h i n t e r m s o f b r a n c h e s a n d

c u s t o m e r b a s e .

A prime reason to believe that M&A in the Indian Banking Sector is an opportunity creation of

a Financial Super Market or a Universal Bank:

A recent trend is to promote the concept of a financial super market chain, making available all

types of credit and non-fund facilities under one roof under one umbrella organization (or

through specialized subsidiaries).

An example of such a financial supermarket would be the reverse merger of ICICI and ICICI

Bank. ICICI Bank today stands as Indias second largest bank offering its clients both in India

and overseas a product range as varied us retail banking products to exotic investment banking

and treasury solutions. Similarly, IDBI and IDBI Bank treaded the same route. Though one has

to state that consolidated accounting and supervisory techniques would have to evolve and

appropriate fire walls built to address the risks underlying such large organizations and banking

conglomerates. Technological Expertise: New entrants in the banking sector are armed with

technological expertise while older players are well equipped with experience in practices.

Mergers would thus help both parties gain an expertise in areas in which they lack. In India, the


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retail banking market biased towards the urban markets is growing at a Compounded Annual

Growth Rate (CAGR) of almost 18-20% while the rural market is yet to be fully tapped. Keeping

in focus the population profile, technology would be a major enabler for banking in the future. A

number of state owned banks in India are adopting sophisticated core banking solutions and

these are just the larger ones. For smaller banks to adopt technology platforms the expenditure

may not be sustainable and hence this may be one more reason for M&A. Growing integration of

economies and the markets around the world is making global banking a reality. The surge in

globalization of finance has also gained momentum with the technological advancements which

have effectively overcome the national borders in the financial services business. Widespread

use of internet banking, mobile banking, and other modern technologies (such as SWIFT) has

widened frontiers of global banking, and it is now possible to market financial products and

services on a global basis.

In the coming years globalization would spread further on account of the likely opening up of

financial services under WTO. India is one of the signatories of Financial Services Agreement

(FSA) of1997. This gives Indias financial sector including banks an opportunity to expand their

business on a quid pro quo basis. An easy way for this is thus to go through adequate

reconstruction to acquire the necessary technology and get an early mover advantage in

globalizing the Indian Banks.

CROSS BORDER M&A IN BANKS:-

One more reason for M&A which has sprung up in the recent years is Indian Banks seeking

international presence. A new recent trend is the increase in the interest of foreign expats to work

in India. Both these communities seek banking products in remittances and other cross border

retail products. Further firms are looking for funds overseas for various purposes ranging from

capital expenditure to leveraged M&A financing. Hence, Indian banks are setting up branches

and subsidiaries overseas and foreign banks are expanding their operations in India. These bank

branches (set up abroad) further target the local population to be profitable and hence target local

acquisitions. Evidently, this results in an M&A opportunity for Foreign Banks to acquire an


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Indian Bank and also Indian Banks to acquire foreign banks. For example, ICICI Bank has made

an acquisition of a bank in Europe in 2006 to establish itself in a geographical area.

The Indian M&A environment is a strongly regulated by the following major pieces of

legislation/bodies:

The Companies Act, 1956

The Takeovers Code, 1997

The Monopolies and Restrictive Trade Practices Act, 1969

The Foreign Exchange Management Act, 1999

The Foreign Investment Promotion Board (FIPB)

The Reserve Bank of India

The Income Tax Act, 1961

Mergers, amalgamations, de-mergers, acquisitions of business units or divisions, are all

governed by The Companies Act for all registered companies

Acquisition of shares in listed Indian companies is governed by The Takeover Code, 1997


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CASE ON MERGER IN BANKING INDUSTRY:-

MERGER OF STATE BANK OF INDIA AND STATE BANK OF

SAURASHTRA:-

SBS is the smallest of the seven associates. The other associates are State Bank of Travancore,

State Bank of Mysore, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank

of Indore and State Bank of Patiala.

SBS has 460 branches and the merger would help eliminate duplication of branches in the same

area. Its net profit rose 45 per cent to Rs 87.4 crore in 2006-07. The bank has paid-up equity

capital of Rs 314 crore. The total deposits stood at Rs 15,804 crore while total advances were at

Rs 11,081 crore. The merger would help SBI consolidate its position as the country's biggest

bank and widen the gap with nearest rival ICICI Bank. With 9,579 branches, SBI has total assets

of Rs 5,66,565 crore and posted a net profit of Rs 4,541 crore as on March 31, 2007. ICICI Bank

had assets of Rs 3,44,658 crore and posted a net profit of Rs 3,110 crore in 2006-07. The merger

comes at time when the bank has decided to go in for big expansion. The bank is also looking at

freeing up capital by setting up a holding company for its life insurance and asset management

businesses. SBIs move to merge its arms could pave the way for further consolidation in the

industry, which faces imminent competition from foreign banks from 2009.

Merger of State Bank of Saurashtra with SBI would enable it to up-scale in terms of footprint,

manpower and other resources. It would also enable it to face competition arising from

globalization of the economy, apart from augmenting efficiency and enabling better management

of risk. State Bank of Saurashtra is the smallest of its associate banks and operates in regions

where SBI does not have a large presence.


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METHODOLOGY:-

There are two types of data collection method which is to be used in my project report:-

y Primary datay Secondary data

For my project, I decided on primary data collectionmethod for observing working of mergers

and approaching the people directly in the banking industry and through references to know how

the process occurs.

I decided on secondary data collection method which is going to be used from various

websites, books, magazines, journals and daily newspapers for collecting information regarding

project under study.

Secondary data:

I. BooksII. Newspapers

III. NewsletterIV. InternetV. Booklet

VI. Financial reports


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Conclusion:-

The following conclusion have been drawn from the study:-

MERGER & ACQUISITION IN INDIA

1. Post- liberalization, most Indian business houses are undergoing major structural changes, thelevel of restructuring activity is increasing rapidly and the consolidations through M&A have

reached every corporate boardroom.

2. Most of the mergers that took place in India during the last decade seemed to have followed the

consequence of mergers in India corroborate the conclusions of research work in U.S. with most

of the M&A are taking place in India to improve the size to withstand international competition

which they have been exposed to in the Post-liberalization regime.

3. The M&A activity is undertaken with the objective of financial restructuring and to avail of the

benefits of financial restructuring. Nowadays, before financial restructuring, it has become a pre-

requisite that companies need to merge or acquire. Moreover, financial restructuring becomes

easier because of M&A. the small companies cannot approach international markets without

becoming big i.e. without merging or acquiring.

4. Market capitalization of a company sometimes is found to be going up or down without any

corresponding change in the EVA and MVA since the stock may be strong because of the

general bullish scenario in the market, s is observed in most of the cases in our study

.


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REFERENCES

Websites

www.google.com

www.wikipedia.com

www.icicidirect.com

www.mergersindia.com

www.mergerdigest.com

Books

Books: - Merger, Acquisition and corporate restructuring in India (Rachna jawa)

Financial services 3rd edition (M.Y.khan)

interim - shweta

Documents