Mergers of Bank

Mergers:

Mergers has been defined as an arrangement whereby the one

company (which may or may not be one of the original two companies),

which has, as its share holders, all or substantial all the share holders of the

companies, it may also include fusion of two or more companies into other.

In a merger one or the two existing companies merger it’s

identify into another existing companies may form a new company, or one

or another form a new company and merger there identify into another

existing company.

Definition:

The term Merger, Acquisition and Take-over are all part of the

Merger parlance. In a merger, the companies 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, an

acquisition resembles more of an arm’s-length deal, with one firm’s

shareholders ceasing to be owners of that firm.

In a merger, a new entity may be formed subsuming the merging

firms, whereas in an acquisition the acquired firm becomes the subsidiary of

the acquirer firm.

Types of Mergers:

From an economic standpoint, different types of merger can be

grouped on the basis of their stage of economic of the form

1) Horizontal merger

2) Vertical merger

3) Conganaric merger

4) Conglomerate merger

The situation may be illustrated as under:

There are two companies “A” & “B”, which decide to merge:

Option 1; where “A” co. merges with “B” co. Combined merged co.

Emerges as “B” Ltd.

Option 2; where “B” co. merges into “A” co, combined merged company

emerges as “A” Ltd.

Option 3; “A” co & -“B” co. Both merges to formed a new company “C”

combined merged companies emerges as “C” Ltd.

Merger is a marriage between two companies of roughly same

size. It is thus, one of the various forms of corporate restructuring modes.

In detail the types of merger are as follows:

1) Horizontal Mergers

2) Vertical Mergers

3) Conglomerate Mergers

1. Horizontal Mergers

This type of merger involves two firms that operate and compete

in a similar kind of business. The merger is based on the assumption that it

will provide economies of scale from the larger combined unit.

Example: Glaxo Wellcome Plc. and SmithKline Beecham Plc.

2. Vertical Mergers

Vertical mergers take place between firms in different stages of

production/operation, either as forward or backward integration. The basic

reason is to eliminate costs of searching for prices, contracting, payment

collection and advertising and may also reduce the cost of communication

and coordinating production. Both production and inventory can be

improved on account of efficient information flow within the organization.

Unlike horizontal mergers, which have no specific timing, vertical

mergers take place when both firms plan to integrate the production

process and capitalize on the demand for the product. Forward integration

takes place when a raw material supplier finds a regular procurer of its

products while backwards integration takes place when a manufacturer

funds a cheap source of raw material supplier.

Example: Merger of Usha Martin and Usha Beltron

3. Conglomerate Mergers

Conglomerate mergers are affected among firms that are in different

or unrelated business activity. Firms that plan to increase their product lines

carry out these types of mergers. Firms opting for conglomerate merger

control a range of activities in various industries that require different skills

in the specific managerial functions of research, applied, engineering,

production, marketing and so on.

This type of diversification can be achieved mainly by external

acquisition and mergers and is not generally possible through internal

development. These types of mergers are also called concentric mergers.

Firms operating in different geographic location also proceed with these

types of mergers. Conglomerate mergers have been sub-divided into:

Financial Conglomerates

Managerial Conglomerates

Concentric Companies

Reasons for undergoing Mergers for bank

Some of the reasons for mergers include:

1. Synergy:

The most used word in Merger is synergy, which is the idea that

by combining business activities, performance will increase and costs will

decrease. Essentially, a business will attempt to merge with another

business that has complementary strengths and weaknesses. 

2. Diversification / Sharpening Business Focus:

These two conflicting goals have been used to describe thousands

of Mergers transactions. A company that merges to diversify may acquire

another company in a seemingly unrelated industry in order to reduce the

impact of a particular industry's performance on its profitability. Companies

seeking to sharpen focus often merge with companies that have

deeper market penetration in a key area of operations. 

3. Growth:

Mergers can give the acquiring company an opportunity to

grow market share without having to really earn it by doing the work

themselves - instead, they buy a competitor's business for a price. Usually,

these are called horizontal mergers.

For example, a beer company may choose to buy out a smaller

competing brewery, enabling the smaller company to make more beer and

sell more to its brand-loyal customers.

4. Increase Supply-Chain Pricing Power:

By buying out one of its suppliers or one of the distributors, a

business can eliminate a level of costs. If a company buys out one of its

suppliers, it is able to save on the margins that the supplier was

previously adding to its costs; this is known as a vertical merger. If a

company buys out a distributor, it may be able to ship its products at a

lower cost.

5. Eliminate Competition:

Many Mergers deals allow the acquirer to eliminate future

competition and gain a larger market share in its product's market. The

downside of this is that a large premium is usually required to convince the

target company's shareholders to accept the offer.

Advantages of Bank Merger:

1. The first advantage is said to be an economies of scale. The

larger the scale of assets & liabilities the lower should be the

intermediation cost as a ratio of the former.

2. The primary advantage of the transaction is that a merger is

legally simple & does not cost as much as other forms of

acquisition.

3. The merger also reduces the number of competition in the

markets & captures additional economic scale of market.

4. Is that of the pooling together of the branches of separate

banks?

5. Terms of probable greater scope for spreading of risk in the

asset portfolio.

6. A merger can be accomplished tax-free for both parties.

7. A merger realizes the appreciation potential of the merge

entity instead of being limited to sales proceeds.

8. A merger allows the shareholder of smaller entities to own a

smaller piece of a larger pie increasing their overall net worth.

Disadvantages of Bank Merger

1. Diseconomies of scale if business become too large, which

leads to higher unit costs.

2. Clashes of culture between different types of businesses can

occur, reducing the effectiveness of the integration.

3. May need to make some workers redundant, especially at

management levels – this may have an effect on motivation.

4. May be a conflict of objectives between different businesses,

meaning decisions are more difficult to make & causing

disruption in the running of the business.

5. There is the cost that the parts of the business face are

separated.

6. When a firm divides itself into smaller units it may be

losing the synergy that it had a large entity.

7. The must be approved by votes of the stockholder of each

firm. Typically two thirds of the shares votes are required for

approval.

8. One of the strong disadvantages would be that inevitable

cultural disharmony that couldn’t be avoided no matter how

amiable the work atmosphere is.

RBI Guidelines:

Merger/Amalgamation in the co-operative banking sector-RBI

Guidelines

1. With a view to encouraging and facilitating consolidation and

emergence of strong entities and providing an avenue for non-

disruptive exit of weak/unviable entities in the co-operative banking

sector, the Reserve Bank has issued suitable guidelines to facilitate

merger/amalgamation in the sector.

2. When the net worth of the acquired bank is positive and the acquirer

bank assures to protect entire deposits of all the depositors of the

acquired bank;

3. When the net worth of the acquired bank is negative but the acquirer

bank on its own assures to protect deposits of all the depositors of

the acquired bank; and

4. When net worth of the acquired bank is negative and the acquirer

bank assures to protect the deposits of all the depositors with

financial support from the State Government extended upfront as

part of the process of merger.

5. The Reserve Bank has further stated that in all cases of merger/

amalgamation, the financial parameters of the acquirer bank post

merger will have to conform to the prescribed minimum prudential

and regulatory requirement for urban co-operative banks. The

realizable value of assets will have to be assessed through a process

of due diligence.

6. While considering such proposals, the Reserve Bank will confine itself

to the financial aspects of the merger and to the interests of

depositors as well as the stability of the financial system.

Who can merge?

A co-operative bank can merge only with another co-

operative bank situated in the same state or with a co-operative

bank registered under Multi State Cooperative Societies Act.

Mergers Announcements in India

Year Numbers of M &

A

Percent change

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

15

18

25

71

135

288

363

430

541

636

730

-

20.0

38.9

184.0

90.1

113.3

26.0

18.5

25.8

17.6

14.8

LIST OF BANK MERGERS

YEAR MERGED BANK ACQUIRING

BANK

1969 BANK OF BIHAR STATE BANK OF

INDIA

1970 NATIONAL BANK

OF LAHORE

STATE BANK OF

INDIA

1974 HINDUSTAN

MERCENTILE

BANK

UNITED BANK OF

INDIA

1975 GAUHATI BANK PORBANEHAL

BANK

1976 BELGAUM BANK UNITED BANK OF

INDIA

1976 JHARIA

INDUSTRIAL

BANK

UNITED

COMMERCIAL

BANK

1985 LOKSHMI BANK CANARA BANK

1988 TRADERS BANK BANK OF

BARODA

1993 NEW BANK OF

INDIA

PUNJAB

NATIONAL BANK

1994 BANK OF KARAD BANK OF INDIA

1996 KASHINATH SETH

BANK

STATE BANK OF

INDIA

1997 BAARI DOAB

BANK

ORIENTAL BANK

OF COMMERCE

1999 BAREILY

CORPORATION

BANK

BANK OF

BARODA

1999 TIMES BANK HDFC BANK

2004 GLOBAL TRUST

BANK

ORIENTAL BANK

OF COMMERCE

2005

FEB

INDIAN OCEAN

INTERNATIONAL

BANK,

MAURITIUS

STATE BANK OF

INDIA

Case Study

ICICI and Bank of Madura

The takeover of Bank of Madura (BoM) by ICICI Bank has been the

second success story in the banking industry after the takeover of Times

bank by HDFC Bank last year. The Board of Directors of ICICI Bank and Bank

of Madura (BoM) approved the merger of the two banks at their respective

meetings held on 11thDecember and agreed to a share swap ratio of two

shares of ICICI Bank for one share of BoM.

The amalgamation scheme was placed for approval at the

meeting of shareholders of the two banks on January 19 .The proposed date

of merger was February 1, 2001. ICICI Bank Limited has fixed Wednesday,

April 11, 2001 as the 'Record Date' to determine the shareholders of Bank of

Madura Limited who would be entitled to receive the equity shares of ICICI

Bank.

ICICI Bank was third time lucky after two earlier attempts of

merger. The first was a proposed merger with Centurion Bank, which fizzled

out after the bank’s promoters asked for higher valuations, the second a

recent reverse merger with parent ICICI. The integration exercise was

scheduled to be completed by September 2001.

Before we move onto why the two banks decided to merge. Let us

look at why ICICI decided to merge with Bank of Madura?

ICICI Bank had been scouting for a private banker for merger.

Though it had 21 percent of stake, the choice of Federal bank, was not

lucrative due to the employee size (6600), per employee business is as low

at Rs.161 lakhs and a snail pace of technical up gradation. While, BOM had

an attractive business per employee figure of Rs.202 lakhs, a better

technological edge and had a vast base in southern India when compared to

Federal bank.

Reasons for the merger:

BoM was bankrupt (with assets which are Rs.350 crores behind

liabilities) and had a leverage of 41 times. If it were to be brought up

to a point where its assets were 10% ahead of liabilities, which is

broadly consistent with the Basle Accord, this would require an

infusion of Rs.800 crores of equity capital, which would be impossible

for them to rise.

BoM had a network, which ICICI Bank wanted. They had many

regional branches, which would help ICICI increase their reach in the

regional markets.

Financial consolidation was becoming necessary for the growth of

BoM. The merger with a new private sector bank, particularly a

financially and technological strong bank like ICICI would add to

shareholder value and enhance career opportunities for the

employees besides providing first rate, technology based, modern

banking services to customers.

A major problem for old banks is funds. Reserve Bank of India has

asked several South India based banks to raise their paid-up capital

to Rs 50 crores by March 2001. This could also be one of the reasons

that they merged.

BoM is extremely strong in the south and this merger would help ICICI

grow in that area.

ICICI wanted to increase their client base.

Benefits:

For BoM, the most significant benefit would be the brand equity it

would acquire by becoming a part of the ICICI group, with the most

overt advantage being technology infusion.

BoM would not have been able to raise the Rs800 crores that it needs

to get the assets 10% ahead of its liabilities, but after the merger

with ICICI this amount will be infused into the bank.

The shareholders of both the banks will benefit. Although the swap

ratio favors BoM the ICICI bank shareholders still earn higher

Earnings per Share (EPS).

ICICI Bank’s growth prospects had improved, as it would now get

access to the branch network of Bank of Madura.

Larger Client base :

1. To get an additional 1.2 million customers, which is BoM's client

base now; it would have required a minimum of two years. Hence

they get 1.2 million customers in one go, this is significant

especially when viewed in the light that ICICI Bank took almost 7

years to build a customer base of 1.9m.

2. Thus, the merger enables ICICI to have an aggregate of 2.7

million customer base and a combined asset base of Rs.16, 000

crores, cross selling opportunities for assets and other products,

and good cash management services.

3. BoM is strong in south India states and ICICI is very strong in

Central and North Indian states, which would give a complacent

advantage to both the banks. The south has a high rate of

economic development. This merger has enabled ICICI Bank to

gain a size and presence, which on its own would have taken

around 2-3 years. Moreover, it also opens up the south Indian

market for the bank where it had a very low presence earlier.

4. The south is considered to be a big retail market, which has been

untapped by the new generation private sector banks. This

merger will provide ICICI Bank with a significant lead in this

region. Whereas it would give BoM a chance to explore the

Northern Territories.

Financial Capability :

The amalgamation will enable them to have a stronger financial

and operational structure, which is supposed to be capable of

greater resource/deposit mobilization. And ICICI will emerge as

one of the largest private sector banks in the country.

Tech edge :

The merger will enable ICICI to provide ATMs, Phone and the

Internet banking and financial services and products to a large

customer base, with expected savings in costs and operating

expenses.

BoM would not have to close down due to bankruptcy. It gets a

new lease on life.

Problems in the merger:

Managing rural branches :

ICICI’s major branches are in major metros and cities, whereas BOM

spread its wings mostly in semi urban and city segments of south India.

There is a task ahead lying for the merged entity to increase

dramatically the business mix of rural branches of BOM. On the other

hand, due to geographic location of its branches and level of

competition, ICICI Bank will have a tough time to cope with.

Managing Software :

 Another task, which stands on the way is technology. While ICICI

Bank, which is a fully automated entity is using the package, Banks

2000; BOM has computerized 90 percent of its businesses and was

conversant with ISBS software. The BOM branches are supposed to

switch over to Banks 2000. Though it is not a difficult task, with 80

percent computer literate staff would need effective retraining which

involves a cost. The ICICI Bank needs to invest Rs.50 crores, for

upgrading BOM’s 263 branches.

Managing Human resources : 

One of the greatest challenges before ICICI Bank is managing

human resources. When the head count of ICICI Bank is taken, it is less

than 1500 employees; on the other hand, BOM has over 2500. The

merged entity will have about 4000 employees which will make it one of

the largest banks among the new generation private sector banks. The

staff of ICICI Bank is drawn from 75 various banks, mostly young

qualified professionals with computer background and prefer to work in

metros or big cities with good remuneration packages. While under the

influence of trade unions most of the BOM employees have low career

aspirations.

State Bank of India & Bank of Saurashtra

Mumbai/New Delhi, Aug. 25: The State Bank of India (SBI) will merge

its associate, the State Bank of Saurashtra (SBS), with itself. This is the first

time that a subsidiary bank will be merged with the parent in the SBI family.

SBI has decided to merge SBS, a wholly owned associate bank, with

itself. The boards of both SBI & SBS have given an in-principle approval to

the merger proposal, a senior SBI official confirmed on Saturday. SBI will

now have to get approvals from both the Government, the majority owner of

the bank holding 59.73% stake, & the RBI. “Consolidation will benefit all the

stake holders, be it shareholders, employees, customers & the SBI as an

entity,” said an SBI official.

“There is a lot of business synergy. The merger would enhance the

capital & the balance sheet of SBI. This is important for the bank to grow its

business,” he added.

Smallest bank

SBS is the smallest among the seven associate banks of SBI, in

terms of net worth. The other six associates are State Bank of Travancore,

State Bank of Mysore, State Bank of Bikaner & Jaipur, State Bank of

Hyderabad, State Bank of Indore & State Bank of Patiala. Of these, the first

three are listed on the stock exchanges. SBI’s controlling interest in the

associate banks range from 75% to 100%.

SBS has a branch network of 460 & SBI officials said once the

merger is approved, consolidation of the branch network for eliminating

duplication of branches in the same geographical area would start in six

months. SBS reported a net profit of Rs. 87.4 crores in 2006-07, a jump of

45.4% from Rs. 60.1 crores in the previous year. The bank has paid-up

equity capital of Rs. 314 crores. SBS’s total deposits stood at Rs. 15,804

crores while total advances were at Rs. 11,081 crores. The capital adequacy

stood at 12.78% as on March 31, 2007.

Banking analysts said the merger was a significant move as it

could be a prelude at a larger stage. The SBI is looking to expand its

presence in the country to take on foreign banks. The RBI has earlier said it

would allow foreign banks to acquire private sector banks from 2009. “It is

not only the foreign banks with big pockets that are a threat to the SBI.

Even banks such as ICICI Bank, which recently completed a massive follow-

up offering, can pose a threat. The bank, therefore, wants to be bigger &

mightier,” a banking analyst with a foreign brokerage said.

Conclusion:

“Marriages in the corporate world”, “King of Corporate Marriages”

These words seem to be flashing in front of our eyes day in and day

out. One wonders why the importance to marriages. But the catchword here

is “corporate”.

Today marriage is the image associated with mergers or

acquisitions. The word is not used only because it is in “vogue” or to attract

attention. A marriage is the coming together of two people to become one,

but each of them has their own individuality and in order to make the

marriage a success compromises need to be made.

This is also true for mergers and acquisitions. When two companies

come together both of them have their individual work cultures and

identities but in order to work together successfully they have to make

some changes. Only then can a merger or an acquisition be successful. This

is very simply put.

However it is not so simple, nor is it just a matter of making

changes. In fact there are a lot of things that go into making a merger

successful. These are the issues that one needs to take care of while going

in for a merger.

A merger can be friendly or hostile. If the merger or acquisition is

friendly it has higher chances of success.

Now we move onto the important issues that one needs to look at

in order to be successful or in order to carry out a merger.

It is imperative to carry out a due diligence process before the

merger takes place since this helps the merging or acquiring company to

assess the value of the target company. The due diligence must be

thorough, only if the result is positive then one should continue the merger

process.

Communication with the employees, suppliers and customers is

crucial. When a company is going through a merger process the people

related to the organization tend to feel vulnerable. They have no idea what

the outcome of the process will be and where they stand, hence it is

important to constantly communicate with everyone who has an interest in

the organization.

Synergy is extremely crucial to a merger or an acquisition because

that is what will ensure that the merger is a success. Synergy means that

2+2 > 4, which is to say that the companies must create a higher value

together than they create when they are functioning on a standalone basis.

Companies may merge worldwide but when it comes to India, very

often they do not get the same benefits that they get in other countries.

This is due to various factors like size of the companies, legislation in India

and so on.

The Indian environment is not as merger friendly as it can be; a few

ways in which to make India more mergers friendly are given.

To conclude I would like to say that this is just the

beginning….. The best is yet to come the marriages are going to

get bigger & bigger…..