Mergers Final Pro

7/29/2019 Mergers Final Pro

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Mergers & Acquisitions: An IntroductionINTRODUCTIONThis is an introduction to the subject of mergers,acquisitions, buyouts and divestitures as covered in myMergers & Acquisitions course. The purpose is todelineate how and why a merger decision should bemade. The course focuses on mergers and acquisitions inthe context of private as well as publicly tradedcompanies. Acquisitions of private companies accountfor the majority of transactions. To properly assess a

potential merger we need to perform fundamentalstrategic and financial analysis, but remain aware of theidiosyncrasies that each potential merger contains.

A merger is a pivotal event for the companies involved.Both parties hope to benefit from the greater efficiencyand competitive strength found in the combinedcompany. Strategies are altered and as a result productlines are broadened, strengthened, or refocused;management systems and personnel are changed; andlevels and growth rates of profits are shifted. In many

instances, however, one side or the other (or both) losesubstantial sums of money. Merger costs, including thedirect costs of attorneys, accountants, investment

bankers, and consultants, are substantial even thoughthey are not a large percentage of the value of the merger.There is also substantial cost in terms of time required bykey employees to evaluate, complete, and implement themerger. Perhaps half of all mergers and acquisitions failor do not achieve the desired results. Many mergers fail

because projected synergies do not materialize, often dueto human obstacles. If a merger is not wellreceived bythe employees of the new entity, then its chances ofsuccess are greatly diminished. It is critical that the

parties involved in a merger become skilled in managingchange.


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Mergers and Acquisitions: DefinitionThe Main IdeaOne plus one makes three: this equation is the special alchemy

of a mergeror an acquisition. The key principle behind buyinga company is to create shareholder value over and above thatof the sum of the two companies. Two companies together aremore valuable than two separate companies - at least, that's thereasoning behind M&A.

This rationale is particularly alluring to companies when timesare tough. Strong companies will act to buy other companiesto create a more competitive, cost-efficient company. The

companies will come together hoping to gain a greater marketshare or to achieve greater efficiency. Because of thesepotential benefits, target companies will often agree to bepurchased when they know they cannot survive alone.

Varieties of MergersFrom the perspective of business structures, there is a wholehost of different mergers. Here are a few types, distinguished

by the relationship between the two companies that are

merging:

Horizontal merger- Two companies that are in directcompetition and share the same product lines andmarkets.

Vertical merger - A customer and company or asupplier and company. Think of a cone supplier mergingwith an ice cream maker.

Market-extension merger - Two companies that sell

the same products in different markets. Product-extension merger - Two companies selling

different but related products in the same market.

Conglomeration- Two companies that have nocommon business areas.
http://www.investopedia.com/terms/m/merger.asphttp://www.investopedia.com/terms/a/acquisition.asphttp://www.investopedia.com/terms/h/horizontalmerger.asphttp://www.investopedia.com/terms/h/horizontalmerger.asphttp://www.investopedia.com/terms/v/verticalmerger.asphttp://www.investopedia.com/terms/c/conglomerate.asphttp://www.investopedia.com/terms/c/conglomerate.asphttp://www.investopedia.com/terms/c/conglomerate.asphttp://www.investopedia.com/terms/v/verticalmerger.asphttp://www.investopedia.com/terms/h/horizontalmerger.asphttp://www.investopedia.com/terms/a/acquisition.asphttp://www.investopedia.com/terms/m/merger.asp


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Purchase Mergers - As the name suggests, this kind ofmerger occurs when one company purchases another. The

purchase is made with cash or through the issue of somekind ofdebt instrument; the sale is taxable.

Consolidation Mergers - With this merger, a brand newcompany is formed and both companies are bought andcombined under the new entity. The tax terms are the sameas those of a purchase merger.

AcquisitionsAs you can see, an acquisition may be only slightly

different from a merger. In fact, it may be different inname only. Like mergers, acquisitions are actionsthrough which companies seek economies of scale,efficiencies and enhanced market visibility. Unlike allmergers, all acquisitions involve one firm purchasinganother - there is no exchange of stock orconsolidationas a new company. Acquisitions are often congenial, andall parties feel satisfied with the deal. Other times,acquisitions are more hostile.

In an acquisition, as in some of the merger deals wediscuss above, a company can buy another company withcash, stock or a combination of the two. Another

possibility, which is common in smaller deals, is for onecompany to acquire all the assets of another company.Company X buys all of Company Y's assets for cash,which means that Company Y will have only cash (anddebt, if they had debt before). Of course, Company Y

becomes merely a shell and will eventually liquidate or

enter another area of business.
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Difference between Mergers andAcquisitionsThough the two words mergers and acquisitions are

often spoken in the same breath and are also used in sucha way as if they are synonymous, however, there arecertain differences between mergers and acquisitions.

A buyout agreement can also be known as a merger when

both owners mutually decide to combine their business in

the best interest of their firms. But when the agreement is

hostile, or when the target firm is unwilling to be bought,

it is considered as an acquisition.

The Real PictureIt's quite rare to find actual mergers in practice. In

majority of the cases, when one company buys another,

according to the terms of the deal, it allows acquired

company to proclaim that it's a merger, in spite of the fact

that, it's actually an acquisition. Being bought out may

send negative impression about the company, and hence

the acquired company prefers to call it merger.

Merger Acquisition

The case when two companies (often of same size)decide to move forward as a single new companyinstead of operating business separately.

The case when one company takes overanother and establishes itself as the newowner of the business.

The stocks of both the companies are surrendered,while new stocks are issued afresh.

The buyer company swallows thebusiness of the target company, whichceases to exist.

For example, Glaxo Wellcome and SmithKlineBeehcam ceased to exist and merged to become a newcompany, known as Glaxo SmithKline.

Dr. Reddy's Labs acquired Betapharmthrough an agreement amounting $597million.


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OBJECTIVES OF MERGERS ANDACQUISITIONSThe immediate objective of an acquisition is self-evidently growth and expansion of the acquirer's assets,sales and market share. A more fundamental objectivemay be the enhancement of shareholders' wealth throughacquisitions aimed at accessing or creating sustainablecompetitive advantage for the acquirer. In modernfinance theory, shareholder wealth maximization is

posited as a rational criterion for investment andfinancing decisions made by managers.

Share holder wealth maximization may, however, besupplanted by the self-interest pursuit of managersmaking those decisions. According to the managerialutility theory, acquisitions may be driven by mangerialego or desire for power, empire building or perquisitesthat go with the size of the firm.

EVALUATION OF MERGERS AND

ACQUISITIONS

For a merger to be successful, it is extremely importantthat the M&A be properly evaluated. The value of themerged entity should be greater than the sum of theindividual values of the single entities. For this, a propermodel for evaluation are to be followed. A few modelsare described below :

Due Diligence

Under the due Diligence principle, the value of themerged entity should be greater than the sum of theindividual entities. The share value has to increase andalso the value of the firm should increase as a whole. Thecompany should be in a position to command betterfinancial terms from financial institutions. Otherwise themanagers will not be doing due Diligence to their duty.


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Thumb rule for Acquisitions

The initial value of the each firm is taken as 150% theturnover in the previous period. The final value shouldincrease by at least one and a half times the value of theacquirer.

Asset and brand valuation

The combined value of assets and the increase in thebrand as a result of acquisition can be used as a basis tomeasure the value of the acquisition. Various methodsare prescribed for asset and brand valuation. But themethod used must be consistently followed for both the

firms for the valuation to be valid.

Depreciation and Replacement cost

The depreciation cost and replacement cost method takesinto account the depreciation cost and replacement costof the assets got by the acquirer and the transaction costsincluded should be greater than the premium he has paidfor it.

Future Cash Flows from Individual Assets,Brands etc.

This is the most common value of calculating the valueof an acquisition. The cash flows are discounted at a rateof 18% in India, by convention (and at a rate of 30% inChina). The future cash flows from the merged firmsshould exceed the individual cash flows for the firms. Inthe case of synergies and integrations, this is affected by

the savings in taxes. In the case of diversification, therisk is reduced and for other strategic acquisitions, thevalue of shareholders' wealth increases.


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Case study of global trust bankand oriental bank of commerceReserve Bank of India's scheme of

amalgamation of Global Trust Bank with

Oriental Bank of Commerce

Global Trust Bank Ltd., (GTB) was placed under an

Order of Moratorium on July 24, 2004. The option

available with the Reserve Bank was to compulsory

merger under section 45 of the Banking Regulation Act,

1949. Oriental Bank of Commerce (OBC) interest was

examined by the Reserve Bank of India keeping in view

its financial parameters, its retail network and its

synergies as well as strategic advantages. Taking into

account the interests of the millions of depositors of

GTB, as well as thebanks strengths and weaknesses, the

Reserve Bank prepared following draft scheme of

amalgamation of GTB with OBC.

The Government of India has sanctioned the scheme foramalgamation of the Global Trust Bank Ltd. with the

Oriental Bank of Commerce. The amalgamation came

into force on August 14, 2004.

Chapter- I

Preliminary

1. Short title and commencement:

(1) The Scheme may be called Global Trust Bank

Limited (Amalgamation with Oriental Bank of

Commerce) Scheme, 2004.


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(2)It shall come into force on such date as the Central

Government may, by notification in the Official Gazette,

specify.

2.Definitions: In the Scheme, unless the context

otherwise requires --

"Act" means the Banking Regulation Act, 1949 (10 to

1949);

"Asset Account" means a notional account opened

pursuant to sub-paragraph (2) of paragraph 5 of the

Scheme for the purpose of ascertaining the surplus orshortfall after adjustment from time to time of liabilities

of the transferor bank as provided in the Scheme;

"Collection Account" means a notional account opened

in accordance with paragraph 7 of the Scheme, for the

purpose of ascertaining the amount, if any, available for

distribution to the members of the transferor bank after

adjustment of assets and liabilities;

"prescribed date' means the date which the Central

Government may specify under sub-paragraph (2) of

paragraph 1;

"Scheme" means the Global Trust Bank Limited

(Amalgamation with Oriental Bank of Commerce)

Scheme, 2004;

"transferor bank" means the Global Trust Bank Limited,

a banking company having its Registered Office at

Secunderabad, Andhra Pradesh;


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"transferee bank" means the Oriental Bank of Commerce,

a corresponding new bank constituted under section 3 of

the Banking Companies (Acquisition and Transfer of

Undertakings) Act, 1970 (5 of 1970);

Words and expressions used herein and not defined but

defined in the Act shall have the meaning respectively

assigned to them in the Act.

Chapter -II

Transfer of business, properties, assets and

liabilities

3.Transfer of assets and liabilities and general

effect thereof:

(1) On and from the prescribed date, all rights, powers,

claims, demands, interests, authorities, privileges,

benefits, assets and properties of the transferor bank,

movable and immovable, including premises subject toall incidents of tenure and to the rents and other sums of

money and covenants reserved or contained in the leases

or agreements under which they are held, all office

furniture, loose equipments, plant apparatus and

appliances, books, papers, stocks of stationery, other

stocks and stores, all investments in stocks, shares and

securities, all bills receivable in hand and in transit, all

cash in hand and on current or deposit accounts

(including money at call or short notice) with banks,

bullion, all book debts, mortgage debts and other debts

with the benefits of securities, or any guarantee therefor,

all other, if any, property rights and assets, benefit of all

guarantees in connection with the business of the


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transferor bank shall, subject to the other provisions of

the Scheme, stand transferred to, and become the

properties and assets of the transferee bank; and on and

from the prescribed date, all the liabilities, duties and

obligations of the transferor bank shall be and shallbecome the liabilities, duties and obligations of the

transferee bank to the extent and in the manner provided

hereinafter.

(2)Without prejudice to the generality of the foregoing

provisions, all contracts, deeds, bonds, agreements,

powers of attorney, grants of legal representation and

other instruments of whatever nature subsisting or havingeffect immediately before the prescribed date shall be

effective to the extent and in the manner hereinafter

provided against or in favour of the transferee bank and

may be acted upon as if instead of the transferor bank,

the transferee bank had been a party thereto or as if they

had been issued in favour of the transferee bank.

(3) If on the prescribed date any suit, appeal or other

legal proceedings of whatever nature by or against the

transferor bank is pending, the same shall not abate, or be

discontinued or be in any way prejudicially affected, but

shall, subject to the other provisions of the Scheme, be

prosecuted and enforced by or against the transferee

bank.

(4) If according to the laws of any country outside India,

the provisions of the Scheme, by themselves, are not

effective to transfer or vest any asset or liability situated

in that country which forms part of the undertaking of the

transferor bank to or in the transferee bank, the affairs of

the transferor bank in relation to such asset or liability

shall, on the prescribed date, stand entrusted to the Chief


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Executive Officer for the time being of the transferee

bank and the Chief Executive Officer may exercise all

powers and do all such acts and things as would have

been exercised or done by the transferor bank for the

purpose of effectively transferring such assets anddischarging such liabilities. The Chief Executive Officer

shall take all such steps as may be required by the laws of

any such country outside India for the purpose of

effecting such transfer or vesting and in connection

therewith, the Chief Executive Officer may, either

himself or through any person authorized by him in this

behalf, realise any assets or discharge any liability of the

transferor bank and transfer the net proceeds thereof tothe transferee bank.

4.Closure of books of the transferor bank and

preparation of balance sheet:

The books of the transferor bank shall be closed and

balanced and balance sheet prepared in the first instance

as at the close of business on July 24, 2004 and thereafteras at the close of business on the date immediately

preceding the prescribed date and the balance sheet shall

be got audited and certified by a chartered accountant or

a firm of chartered accountants approved or nominated

by the Reserve Bank of India for the purpose.

A copy of the balance sheet of the transferor bank

prepared in accordance with the provisions of theforegoing paragraph, shall be filed by the transferor bank

with the Registrar of Companies as soon as possible after

it has been received and thereafter the transferor bank

shall not be required to prepare balance sheet or profit

and loss accounts, or to lay the same before its members


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or file copies thereof with the Registrar of Companies or

to hold any board meeting or annual general meeting for

the purpose of considering the balance sheet and

accounts or for any other purpose or to comply with the

provisions of section 159 of the Companies Act, 1956 (1of 1956) and it shall not thereafter be necessary for the

Board of Directors of the transferor bank to meet as

required by Section 285 of that Act.

5.Valuation of assets and determination of

liabilities: The transferee bank shall, in

consultation with the transferor bank, value

the assets and reckon the liabilities of thetransferor bank in accordance with the

following provisions; namely:-

(1) Valuation of assets :

(a) Investments other than Government Securities shall

be valued at the market rates prevailing on the day

immediately preceding the prescribed date;

(b) (i) the Government Securities shall be valued as on

the day immediately preceding the prescribed date in

accordance with the principles laid down in the

notification issued by Reserve Bank of India for the

purpose of Section 24 of the Banking Regulation Act,

1949 (10 of 1949).

(ii) the Securities of the Central Government such as PostOffice Certificates, Treasury Savings Deposit Certificates

and any other securities or certificates issued under the

small savings scheme of the Central Government shall be

valued at their face value or the encashable value as on

the said date, whichever is higher;


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(iii) where the market value of any Government Security

such as the Zamindari Abolition Bonds or other similar

security if any held by the transferor bank in respect of

which the principal is payable in installments is notascertainable or is, for any reason, not considered as

reflecting the fair value thereof or as otherwise

appropriate, the security shall be valued at such amount

as is considered reasonable having regard to the

installments of principal and interest remaining to be

paid, the period during which such installments are

payable, the yield of any security issued by the

Government to which the security pertains and havingthe same or approximately the same maturity, and other

relevant factors;

(c) where the market value of any security, share,

debenture, bond or other investment is not considered

reasonable by reason of its having been affected by

abnormal factors, the investment may be valued on the

basis of its average market value over any reasonable

period;

(d) where the market value of any security, share,

debenture, bond or other investments is not ascertainable,

only such value, if any, shall be taken into account as is

considered reasonable, having regard to the financial

position of the issuing concern, the dividends paid by it

during the preceding five years and other relevant

factors;

(e) premises and all other immovable properties and any

assets acquired in satisfaction of claims shall be valued at

their market value;


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(f) the furniture and fixtures, stationery in stock and other

assets, if any, shall be valued at the written down value as

per books or the realizable value as may be consideredreasonable;

(g) advances, including bills purchased and discounted,

book debts and sundry assets, will be scrutinized by the

transferee bank and the securities, including guarantees,

held as cover therefor examined and verified by the

transferee bank. Thereafter the advances, including

portions thereof, will be classified into two categoriesnamely, "Advances considered good and readily

realizable" and "Advances considered not readily

realizable and/or bad or doubtful of recovery".

(2) The transferee bank shall open on the prescribed date

an account styled as "Asset Account". The aggregate

amount representing the value of the assets determined as

readily realisable assets in accordance with this

paragraph shall be credited to the "Asset Account".

(3) (i) Where the valuation of any asset cannot be

determined on the prescribed date, it may, with the

approval of the Reserve Bank of India, be treated partly

or wholly as an asset realisable at a later date;

(ii)in the event of any disagreement between the

transferee bank and the transferor bank as regard the

valuation of any asset and/or the classification of any

advance and/or the determination of any liability, the

matter shall be referred to the Reserve Bank of India, for

its opinion, provided that until such an opinion is

received, the valuation of the item or portion thereof by


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the transferee bank shall provisionally be adopted for the

purpose of the Scheme;

(iii)it shall be competent for the Reserve bank of India, in

the event of its becoming necessary to do so, to obtainsuch technical advice as it may consider to be appropriate

in connection with the valuation of any such item of asset

or determination of any such item of liability, and the

cost of obtaining such advice shall be payable in full out

of the assets of the transferor bank.

(4) Determination of liability: Liabilities for purposes of

the Scheme shall include all contingent liabilities whichthe transferee bank may reasonably be expected or

required to meet out of its own resources on or after the

prescribed date.

(5) The valuation of the assets and the determination of

the liabilities in accordance with the foregoing provisions

shall be binding on both the banks and the members and

creditors thereof.

Chapter- III

Payment to creditors and depositors

6.Discharge of liability of the transferor bank:

(1) In respect of: -

(a) any sums deposited by any employee of the transferorbank with that bank as staff security deposits, together

with interest, if any, accrued thereon upto the prescribed

date shall be paid or provided for in full;


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(b) every savings bank account or current account or any

other deposit account including a fixed deposit, cash

certificate, monthly deposit, deposit payable at call or

short notice or any other deposits by whatever namecalled with the transferor bank, the transferee bank shall

open with itself on the prescribed date a corresponding

and similar account in the name of the respective

holder(s) thereof crediting thereto full amount including

interest to the extent payable under the Scheme:

Provided that where the transferee bank entertains a

reasonable doubt about the correctness of the entriesmade in any particular account, it may with the approval

of the Reserve Bank of India withhold the credit to be

made in that account for a period not exceeding three

months from the prescribed date within which the

transferee bank shall ascertain the correct balance in such

account.

(2) In respect of every other liability of the transferor

bank determined under sub-paragraph (4) of paragraph 5,

the transferee bank shall pay to the creditors the amount

of such liability as and when they fall due.

(3) In respect of any interest bearing deposit accounts,

the transferee bank shall pay interest at the rate

applicable in accordance with the directives of the

Reserve Bank of India till the prescribed date. In respect

of balances in any current account or any other non-

interest bearing account, no interest shall be payable to

the account holder. No account holder shall be entitled to

claim any compensation for the non-payment of any

deposit or other money from his account during the

period from July 25, 2004 till the prescribed date.


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(4) Notwithstanding anything to the contrary contained in

any contract, express or implied, interest from the

prescribed date shall be paid in respect of the new

account opened with the transferee bank and credited inaccordance with the provisions of the Scheme only at

such rates as the transferee bank normally allows to its

own depositors for such accounts.

(5) The credit balance in the "Asset Account" shall be

appropriated to the extent required to meet the liability

under this paragraph. If the balance in the Asset Account

is not sufficient, so much of the shortfall shall be treatedas amount spent by the transferee bank and to the extent

possible, be recovered by it as provided in sub-paragraph

(7) of paragraph 7.

Chapter- IV

7.Rights and liabilities of the members of the

transferor bank:

(1) On the commencement of the Scheme, the entire

amount of the paid-up capital and reserves of the

transferor bank shall be treated as provision for bad and

doubtful debts and depreciation in other assets of the

transferor bank.

(2) In respect of every share in the transferor bank, the

amount of which was treated as paid-up towards sharecapital by or on behalf of each shareholder immediately

before the prescribed date and / or the amount paid on

account of the calls made by the transferee bank in

pursuance of sub-paragraph (4) below shall be treated as

a "Collection Account" and shall be entered as such in


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the books of the transferee bank.

(3) The transferee bank shall call upon every person who

was, as on the prescribed date, registered as the holder of

an ordinary share of the transferor bank (or would havebeen entitled to be so registered) to pay within three

months from such date or dates as may be specified, the

uncalled amount remaining unpaid by him in respect of

such share or shares and the calls in arrears, if any.

(4) The transferee bank shall take all available steps

having regard to the circumstances of each case to

demand and enforce the payment of the amounts dueunder sub-paragraph (3) above together with interest at

six per cent per annum for the period of the default.

(5) The transferee bank shall in respect of the advances,

bills purchased and discounted, book debts and sundry

debts and other assets, which are classified as "Advances

considered not readily realizable and / or bad or doubtful

of recovery " or which are or may be realisable wholly or

partly after the prescribed date, take all available steps

having regard to the circumstances of each case to

demand and enforce payment, and may -

enter into a compromise or arrangement with the debtor

or any other person or write off any such debt or asset;

sell or otherwise dispose of any securities transferred to it

or any asset taken over by it.

(6) The transferee bank shall, in addition, take all

available steps having regard to the circumstances of

each case to demand and enforce the payment of the

amounts, if any, awarded as damages by the High Court


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against any promoter, director, manager or other officer

of the transferor bank under section 45L of the Banking

Regulation Act, 1949 (10 of 1949), read with section 45H

thereof and also with section 543 of the Companies Act,

1956 (1 of 1956).

(7) The transferee bank may appropriate the realizations

effected by it on account of the items mentioned in sub-

paragraphs (4), (5) and (6) above, in the first instance

towards expenses incurred for the recovery of such

amount and thereafter towards the shortfall referred to in

sub-paragraph (5) of paragraph 6. If any surplus remains

after such appropriation, the transferee bank shall makepayment or provision in respect of any contingent

liability as also with the prior approval of the Reserve

Bank of India, in respect of any liability whether

contingent or absolute which was not assessed in terms of

sub-paragraph (4) of paragraph 5 above and has arisen or

been discovered after the prescribed date.

(8) If any surplus remains after the appropriation in terms

of sub-paragraph (7) above, the transferee bank shall,

make payments pro-rata from amount if any available

towards the amounts, if any, due to the accounts of the

former shareholders of the transferor bank in the manner

and to the extent specified below-

in the first place, the amounts, if any, due to the accounts

of the former preference shareholders of the transferor

bank till payment in full against all the accounts has been

made;

after all the amounts mentioned in sub-paragraph (a)

above have been paid in full, the surplus, if any,

remaining in the hands of the transferee bank shall be

distributed pro rata among the former ordinary

shareholders of the transferor bank:


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Provided that if any question arises whether any amounts

are due against an account mentioned in any of the above

sub-paragraphs, it shall be referred to the Reserve Bank

of India for its decision.

(9) The amounts due to the collection accounts referred

to in this paragraph shall be deemed to be a liability of

the transferee bank only to the extent provided for in the

Scheme.

(10) On the expiry of twelve years from the prescribed

date or such earlier period as the Central Governmentafter consulting the Reserve Bank of India may specify

for this purpose, any item referred to in sub-paragraph

(5)of this paragraph which may not have been realized by

that date shall be valued by the transferee bank in

consultation with the Reserve Bank of India and the

transferee bank shall distribute any amount or amounts

determined in the light of that valuation, after deducting

therefrom first any such amount necessary for meeting

the liabilities referred to in sub-paragraph (4) of

paragraph 5 which may remain unsatisfied as on that

date, in the order and the manner provided in sub-

paragraph (8) above.

Chapter- V

Rights and obligations of the Employees of

Transferor Bank


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8. Continuation of services of the employees:

(1) All the employees of the transferor bank shall

continue in service and be deemed to have been

appointed in the transferee bank at the same

remuneration and on the same terms and conditions of

service, as were applicable to such employees

immediately before the close of business on July 24,

2004.

Provided that the employees of the transferor bank, who

have by notice in writing given to the transferor or the

transferee bank at any time before the expiry of one

month next following the prescribed date intimated their

intention of not becoming employees of the transferee

bank, shall be entitled to the payment of such

compensation, if any, under the provisions of the

Industrial Disputes Act, 1947 (14 of 1947) and such

pension, gratuity, provident fund and other retirement

benefits as may be ordinarily admissible under the rules

or authorizations of the transferor bank as in forceimmediately before the close of business on July 24,

2004.

(2) The transferee bank shall, in respect of the employees

of the transferor bank who are deemed to have been

appointed as employees of the transferee bank, be

deemed also to have taken over the liability for them of

retrenchment compensation in the event of their beingretrenched while in the service of the transferee bank on

the basis that their service has been continuous and has

not been interrupted by their transfer to the transferee

bank.


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(3) The transferee bank shall, not later than the expiry of

the period of three years from the date on which the

scheme is sanctioned, pay or grant to the employees of

the transferor bank whose services are continued in the

transferee bank under sub-paragraph (1), except such ofthe employees who cease to be in service under the

proviso to sub-paragraph (1), the same remuneration and

the same terms and conditions of service as are

applicable to the employees of corresponding rank or

status of the transferee bank subject to the qualifications

and experience of the said employees of the transferor

bank being the same as or equivalent to those of such

other employees of the transferee bank;

Provided that if any doubt or difference arises as to

whether the qualifications or experience of any of the

said employees are the same as or equivalent to the

qualifications and experience of the other employees of

corresponding rank or status of the transferee bank or as

to the procedure or principles to be adopted for the

fixation of pay of the said employees in the scales of pay

of the transferee bank, the doubt or difference shall be

referred to the Reserve Bank of India whose decision

thereon shall be final.

(4) The trustees or administrators of any provident fund

and gratuity fund constituted for the employees of the

transferor bank, or as the case may be, the transferor

bank, shall on or as soon as possible after the prescribed

date transfer to the trustees of the employees' provident

fund and gratuity fund constituted for the transferee bank

or otherwise as the transferee bank may direct, all the

moneys and investments held in trust for the benefit of

the employees of the transferor bank.


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Provided that such latter trustees shall not be liable for

any deficiency in the value of investments, or in respect

of any act, neglect or default done before the date of

commencement of the Scheme.

Chapter- VI

Miscellaneous

9. Demand by Depositors or Creditors: No

depositor or creditor of the transferor bank shall be

entitled to make any demand against the transferor bank

or the transferee bank in respect of any liability of thetransferor bank to him except to the extent prescribed by

the Scheme

10. Legal proceedings against Central Government,

Reserve Bank of India, Transferee or Transferor bank:

No suit or other legal proceedings shall lie against the

Central Government, the Reserve Bank of India or the

transferee bank or the transferor bank for any thing which

is in good faith done or intended to be done in pursuance

of the Scheme.

11. Reorganization of branches of transferor

bank:

The transferee bank shall have the option of integrating

branches of transferor bank according to its convenience

and may close down or shift the existing loss making

branches of the transferor bank. The aforesaid optionwill, however, be exercised by the transferee bank with

the prior approval of Reserve Bank of India, within a

period of one year.


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12. Furnishing statement and information: The

transferee bank shall submit to the Reserve Bank of India

such statements and information as may be required by

the Reserve Bank of India from time to time regarding

the implementation of the Scheme.

13.Manner of service of notice: Any notice or

other communication required to be given by the

transferee bank shall be considered to be duly given if

addressed and sent by speed post or by courier or by pre-

paid ordinary post or otherwise to the addressee at theaddress registered in the books of the transferor bank,

until a new address is registered in the books of the

transferee bank, and such notice shall be deemed to be

served on the expiry of four days after it has been posted.

Any notice or communication, which is of general

interest shall be advertised, in addition, in one or more

daily newspapers which may be in circulation at the

places where the transferor bank was transacting itsbusiness.

Global Trust Bank is now Oriental Bank of

Commerce

The Government of India has sanctioned the scheme for

amalgamation of the Global Trust Bank Ltd. with the

Oriental Bank of Commerce. The amalgamation will

come into force on August 14, 2004. All the branches of

Global Trust Bank Ltd. will function as branches of

Oriental Bank of Commerce with effect from this date.


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Customers/Depositors of GTB

Customers, including depositors of the Global Trust

Bank Ltd., will be able to operate their accounts as

customers of Oriental Bank of Commerce with effect

from August 14, 2004. Oriental Bank of Commerce ismaking necessary arrangements to ensure that service, as

usual, is provided to the customers of the Global Trust

Bank Ltd.

Shareholders of GTB

In accordance with the Scheme of Amalgamation if any

surplus remains after meeting all the liabilities out of the

realization of assets of the Global Trust Bank Ltd., theshareholders may receive pro-rata payment.

As part of the merger proposal, the OBC would get

Income Tax exemptions in transferring the assets of GTB

in its book during the merger process, while all the bad

debts of the merged entity would be adjusted against the

cash balances and reserves of the Hyderabad-based bank.

OBC is confident of turning around the GTB within one

year. According to OBC chairman B.D. Narang, GTB

"suited it" because of synergies. While weakness of GTB

has been bad assets, strength of OBC is recovery. Since

the GTB is a south-based bank, it would give OBC the

much-needed edge in the southern part of the country.

Moreover, both the banks have a common core banking

solution 'Finacle" which will help in the consolidation.


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Global Trust Bank placed under Moratorium-

Notification of Reserve Bank of India

On an application by the Reserve Bank of India, the

Central Government has today issued an Order ofMoratorium in respect of the Global Trust Bank Ltd. The

Order of Moratorium has been passed by the Central

Government in public interest, in the interest of

depositors and the banking system.

The moratorium will be effective from the close of

business on Saturday, July 24, 2004 up to and inclusive

of October 23, 2004 or an earlier date, if alternatearrangements are put in place. During this period, the

Reserve Bank of India will consider the various options,

including amalgamation of the Global Trust Bank Ltd.

with any other bank and finalise the plans in public

interest and with a view to ensuring that the public

deposits are protected.

During the period of moratorium, the bank will be

permitted to make only those payments that have been

specified in the Order of Moratorium and the depositors

of the Global Trust Bank Ltd. will be permitted to

withdraw up to Rs.10,000 (Rs. ten thousand only) from

their savings bank account or current account or any

other deposit account through any of the branches of the

bank. For the present, withdrawals through ATMs of the

bank/ATMs shared with other banks will not be

permitted so as to give effect to the monetary ceiling

prescribed in the moratorium, but the customers can

make withdrawals up to the limit specified at any of the

banks branches.

Any requirement of cash at the branches of the bank for

making permitted payments will be ensured in full by the


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Reserve Bank of India since cash balances are

maintained with it by the Global Trust Bank Ltd.

Countdown to collapse of Global Trust Bank

This was a crisis in the making for the last three years.The genesis of the GTB collapse lies in now ousted

promoter Ramesh Gelli's involvement in the Ketan

Parekh securities scam of 2001, when he gave huge

unsecured loans to the stock broker and group companies

of Zee Telefilms.

GTBs audited balance sheet for March 31, 2002, showed

net worth of Rs 400.4 crore & a profit of Rs 40 crore.

However, RBIs inspection revealed that net worth is

negative.

In view of very large variance in the assessment of

GTBs financial position as reported by auditors and by

RBIs inspectors, an independent chartered accountant

was appointed to reconcile the position.

GTB was placed under directions relating to certain types

of advances, certain premature withdrawal of deposits,

declaration of dividend and its capital market exposure.

RBI also started monitoring GTB on monthly basis.

In view of the need to complete the statutory audit and to

assess the steps necessary to be taken on the future set up

of the bank, RBI permitted GTB, time up to Sept 30,

2003 to publish its annual accounts.On March 31, 2003, GTB announced deposits of Rs

6,921 crore and advances (loans) of Rs 3,276 crore. On

its balance sheet, it showed gross non-performing assets

of Rs 915 crore while total provisions (against bad loans)

were Rs 268 crore.


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RBI issued press release, which said: Even though the

financial statements show an overall loss, the bank has

made an operating profit for the year 2002-03. The RBI

welcomes the decision taken by the GTB and its board toclean up the balance sheetBut RBIs inspection showed

that banks net worth has further eroded and capital

adequacy ratio (CAR) was negative.

GTB was advised to take immediate steps to infuse fresh

capital to restore its CAR to 9% and indicate a time-

bound programme. Bank was advised to explore options

of raising capital through domestic sources or throughmerger with another bank.

Ealier, Centurion Bank was able to get RBI permission

for Sabre Capital of Rana Talwar to infuse capital to bail

out the bank. However, GTB proposal to RBI for

infusion of capital and restructuring by NewBridge

Capital was rejected by RBI. Thereafter, government on

the 24th July placed GTB under moratorium for three

months on application from RBI.

What is in store for customers?

The decision of the government to impose a moratorium

on Global Trust bank is not Liquidation of the bank. In a

moratorium, government imposes a freeze on the bank's

liabilities so that bank is not able to grant any loan or

advances, incur any liability, make any investment or

disburse any amount. In the present case, the governmenthas allowed the depositors of GTB to withdraw only up

to Rs 10,000.

RBI has clarified that during the moratorium it will

consider various options to protect depositors and their


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money, including amalgamation of GTB with another

bank. RBI has appointed three directors on the board of

GTB. It has also given an assurance that any requirement

of cash at the branches of the bank for making permitted

payments will be met in full by the RBI, since cashbalances are maintained with it by the GTB.

Moratorium on withdrawal of money by

depositors of Global Trust Bank (GTB) is not

the first of its kind. In all the previous cases,

RBI has merged the sick banks with healthy

bank to protect depositor's interests anddepositors have not lost money. However,

shareholders, generally had been the loosers.

Clarifications issued by Reserve Bank of India

RBI reiterates that the objective of the moratorium is to

protect the interests and safety of funds of all depositors.

Necessary actions are being initiated to ensure the return

to normalcy.All the branches of Global Trust Bank Ltd,will continue to remain open as per their normal working

hours to help their customers and enable them to make

the permitted withdrawals.

RBI stands by its assurance to meet any requirement of

cash at the branches of the bank for making permitted

payments under the Order of moratorium .

It is also clarified that the D-mat accounts and Safe

Deposit Lockers of customers will be allowed to beoperated as usual.

The Reserve Bank of India has set up help lines to assist

the members of public at Mumbai and Hyderabad.


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Balance sheet of global trust bank.

Mar ' 03 Mar ' 02 Mar ' 01Mar '

00

Sources of fundsOwner's fund

Equity share capital 121.36 121.36 121.36 121.36

Share application money - - - -

Preference share capital - - - -

Reserves & surplus 146.16 272.96 467.05 406.78

Loan funds

Secured loans - - - -

Unsecured loans 6,920.92 6,443.08 7,734.23 6,198.85

Total 7,188.44 6,837.40 8,322.64 6,726.99Uses of funds

Fixed assets

Gross block 512.85 502.57 556.55 469.65

Less : revaluation reserve - - - -

Less : accumulated depreciation 212.06 182.37 177.12 131.36

Net block 300.80 320.20 379.44 338.29

Capital work-in-progress - - - -

Investments 2,498.74 2,900.10 3,864.92 2,925.84

Net current assetsCurrent assets, loans & advances 785.50 442.71 407.65 318.24

Less : current liabilities & provisions 451.13 405.88 549.62 405.57

Total net current assets 334.37 36.83 -141.98 -87.33

Miscellaneous expenses not written - - - -

Total 3,133.91 3,257.14 4,102.38 3,176.80

Notes:

Book value of unquoted investments - - - -

Market value of quoted investments - - - -

Contingent liabilities 3,578.33 3,701.09 6,873.90 7,791.35Number of equity shares outstanding (Lacs) 1213.59 1213.59 1213.59 1213.59


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Balance sheet of oriental bank of commerce

Mar ' 12 Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08

Sources of funds

Owner's fundEquity share capital 291.76 291.76 250.54 250.54 250.54

Share application money - - - - -

Preference share capital - - - - -

Reserves & surplus 10,793.24 9,918.97 7,069.98 6,201.81 5,525.36

Loan funds

Secured loans - - - - -

Unsecured loans 1,55,964.92 1,39,054.26 1,20,257.59 98,368.85 77,856.70

Total 1,67,049.92 1,49,264.99 1,27,578.11 1,04,821.20 83,632.60

Uses of fundsFixed assets

Gross block 2,350.01 2,236.41 2,138.53 2,062.88 970.31

Less : revaluation reserve 857.51 886.41 917.43 951.10 -

Less : accumulated depreciation 950.73 862.72 756.56 680.34 587.55

Net block 541.78 487.28 464.54 431.45 382.76

Capital work-in-progress 21.37 24.11 12.08 1.31 4.70

Investments 52,101.33 42,074.77 35,785.32 28,488.95 23,950.68

Net current assets

Current assets, loans & advances 3,903.55 2,873.86 2,162.43 1,984.28 1,586.61Less : current liabilities &provisions

4,963.70 5,552.76 4,048.43 6,088.34 5,232.89

Total net current assets -1,060.15 -2,678.90 -1,886.00 -4,104.06 -3,646.28

Miscellaneous expenses not written - - - - -

Total 51,604.33 39,907.25 34,375.94 24,817.65 20,691.86

Notes:

Book value of unquoted investments - - - - -

Market value of quoted investments - - - - -

Contingent liabilities 73,137.71 65,971.33 51,523.45 32,903.57 22,317.34Number of equity sharesoutstanding (Lacs)

2917.61 2917.61 2505.40 2505.40 2505.40


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Conclusion

This was a crisis in the making for the last three years.

The genesis lies in GTB involvement in the Ketan Parekh

securities scam of 2001 and the ouster of promoterRamesh Gelli.

But general depositors and investors, have taken the

balance sheets of GTB as the true picture of financial

health of the bank. On March 31, 2003, GTB had

deposits of Rs 6,921 crore and advances (loans) of Rs

3,276 crore. On its balance sheet, it showed gross non-

performing assets of Rs 915 crore while total provisions(against bad loans) were Rs 268 crore.

Therefore sudden decision of RBI and Government of

India to place GTB under Moratorium caught more than

8.5 lakh customers of the bank unaware and shocked.

The moratorium is aimed at freezing the assets and

liabilities of the bank in order to protect the bank's health

from further deterioration. It also provides an opportunity

for a potential acquirer to evaluate the assets and

liabilities of the bank. The moratorium is a temporary

freeze to explore all the available options.

Such crisis raises serious questions on the transparency in

the private sector banks and the credibility of their

financial statements.


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BIBLOGRAPHY

www.banknetindia.com

www.wikipedia.com

www.opppapers.com

www.toi.co.in

Other sources

Newspapers

Business magazines

Balance sheets of the respective banks
http://www.banknetindia.com/http://www.banknetindia.com/http://www.wikipedia.com/http://www.wikipedia.com/http://www.opppapers.com/http://www.opppapers.com/http://www.toi.co.in/http://www.toi.co.in/http://www.toi.co.in/http://www.opppapers.com/http://www.wikipedia.com/http://www.banknetindia.com/


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INDEX

1. Introduction2.Merger & acquisition definition3.Variety of merger and acquisition4.Difference of merger and acquisition5.Objectives of mergers and acquisition6.Case study7.Gtb turns obc8.Monatorium9.Countdown of downfall10. Customer benefits11. Clarification by RBI12. Conclusion13. Bibliography

Mergers Final Pro

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Transcript of Mergers Final Pro