37374813 ICICI Bank of Rajasthan Merger

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ICICIBank of Rajasthan

Merger

Submitted to Dr. Sheeba Kapil

Submitted by: Pravesh Babu

Roll No. 30, MBA (PT) - 2011-2014)


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Bank of Rajasthan, one of the oldest private sector banks in the country, on May 18 announced

that it would merge with the largest private sector bank, ICICI Bank. The board of ICICI Bank

also agreed to give in-principle approval for merger of Bank of Rajasthan with it subject to due

diligence and valuation by an independent valuer jointly appointed by both banks. Bank of

Rajasthan is a listed bank with its corporate office in Mumbai and registered office at Udaipur in

Rajasthan. As on March 31, 2009, Bank of Rajasthan had 463 branches and 111 ATMs, total

assets of Rs.17,224 crore, deposits of Rs.15,187 crore and advances of Rs.7,781 crore. It made a

net profit of Rs.118 crore in the year ended March 31, 2009, and a net loss of Rs.10 crore in the

nine months ended December 31, 2009. ICICI Bank has a network of 2,009 branches and 5,219

ATMs.

In a day of high drama, BoR stock rose 19.95% on the Bombay Stock Exchange to close atRs99.50, its year high, and after trading hours, the bank sent a release to the stock exchanges

saying its board will meet in the evening to discuss a proposal of merging the bank with ICICI

Bank. ICICI Bank stock was down 1.45% to Rs889.35. The ICICI Bank ADR was trading at

$38.61 down $0.86 or 2.18 per cent on the NYSE.

ICICI Bank further stated that it has entered into an agreement with certain shareholders of Bank

of Rajasthan agreeing to effect the amalgamation of Bank of Rajasthan with ICICI Bank with a

share exchange ratio of 25 shares of ICICI Bank for 118 shares of Bank of Rajasthan. ICICI

Bank said that its willing to pay more than BoRs present market valua tion.

According to banking circles, the Tayals, who acquired BoR a decade ago, have been under

pressure to sell the old private bank which is grappling with directives from Sebi and RBI. In

March, Sebi banned 100 entities allegedly holding BoR shares on behalf of the promoters from

all stock market activities.

A little earlier, RBI had slapped a penalty of Rs 25 lakh on the bank for a string of violations like

deletion of records in the banks IT system, irregular property deals and lapses in the accounts of

a corporate group.

In the past few months, the central bank has virtually taken over BoR. The RBI appointed a new

CEO for the bank, which currently has five RBI nominated directors.


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Advantages

The proposed amalgamation would substantially enhance ICICI Bank's branch network,already the largest among Indian private sector banks.

It would combine Bank of Rajasthan's branch franchise with ICICI Bank's strong capitalbase.

It offers a strategic fit, as it adds to our network in north and western India. It saves usabout three years time to market. In the normal course, it takes about a year to set up 500

branches and then three years for the branches to come up to the kind of deposit levels.

The Bank of Rajasthan is the building block but it gives synergies in the form of a largercustomer base. It gives the ability to offer other products to customer base such as

different loan products from ICICI Bank and other products. ICICI have a high capitaladequacy ratio, so the customer base that they are acquiring will help them in lending.

ICICI Bank is facing stiff competition from HDFC Bank and also the resurging AxisBank. To remain as the top private player, it needs to grow bigger and what better way to

grow than the path of acquisition.

The customers of BOR may now enjoy would class personal banking experience, but ofcourse, at a cost. While personal touch of BOR may be missing, one can then feel

professional touch in banking relationships. ICICI lays emphasis on personal banking

relationships where as customer loyalty has been a USP of Bank of Rajasthan.

The fixed deposits may also witness some shift. Undoubtedly, customers will have richchoice of innovative as well as customized products and corporate customers shall

immensely gain out of such products adding to their efficient cash management. BOR has

considerable business of state government corporations and bodies (eg, roadways, JDA,

University, RIICO etc). While ICICI would benefit out of this, a question may arise in

these corporations to continue banking relations with a new generation private bank or

switch over to any other public sector bank.


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Disadvantages

ICICI Bank has valued BOR at a whopping 3000 crores which ismuch more than its market capitalization. It values the acquired bank at 2.9 times the

book value in comparison to 1.89 times, which is the Indian Banking average. At a time,

where the picture of global financial world again seems to be shallow with Greece crisis,

this expensive deal may decrease EPS of ICICI Bank.

The market gave its judgment on the day of announcement when the shares of ICICI

bank were down by over 7% and BoRs shares hit an upper circuit of 20%. The

shareholders of BOR are to reap benefits as their per share value has been valued at Rs.

188.42 as compared to Rs. 80 on the end of17th May, the day previous to the day ofannouncement.

BOR, though being a private bank, has been managed like apublic sector bank, where the jobs were safe and the productivity per employee was low.

ICICI Bank may probably pay them higher but again the expectations to perform will go

up. Even, the average age of employees in BOR is around 40 as compared to young age

group of ICICI Bank. BoR had a profit per employee of Rs Rs 2.89 lakh for the financial

year up to March 31, 2009, compared to Rs 11 lakh for ICICI Bank.

The staff union at BOR is opposing the merger and has even threatened to take legal

action against the promoters, if the merger goes ahead.

The most challenging task before BOR employees would be to adjust to new target

oriented professional work culture where performance is rewarded and every team

member has to contribute in tangible terms to organizational growth. Those who are

able to change would survive and also rediscover their talent and those who wont would

find such merger really difficult to cope with. The writing is on the wall and this change

(merger) seems to be inevitable. The softer part of the merger is not yet out but it would

be desirable for ICICI Bank to value the BORs brand as well as human resource when


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the final valuation exercise is done and finally approved by the shareholders of both

banks.

Tayal Family had been the promoters of Bank of Rajasthanholding 28.6 percent stake in the bank. But according to a SEBI order, they, in coalition

with related parties, set to hold 55% shares in the company. Tayal family has been barred

by SEBI ti access capital markets and deal in securities.

The SEBI investigation is in progress and thus the possibility of a scam in the said bank

cannot be ignored.

A penalty of Rs. 25 lakhs was imposed on them for violating RBInorms of illegal acquisition of immovable property, non compliance with Know Your

Customer guidelines, deletion of certain records and data in Banks IT system.

Thus, in a nut shell, it can be said that all is not well with the bank and it was highly

mismanaged. After the merger, ICICI Bank may have to bear the brunt of many such

things.

Bank of Rajasthans profit has increased over the years. But still,it has a low EPS and net profit margin. The profit till nine months ended in a negative of

Rs. 44 crores for nine months ended December 2009 against a profit of Rs. 117 crores inthe year ended March 2009.

Thus, the above indicates the pros and cons of this merger but apparently it seems that the

arguments against the merger are higher. We have seen certain expensive deals in the recent past

which has affected the acquirer in a pretty big way. Will this merger also go down as one of the

worst deals or will ICICI bank prove analysts and critiques wrong needs to be seen?

37374813 ICICI Bank of Rajasthan Merger

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