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ICICI Bank of Rajasthan Merger

Submitted to Dr. Sheeba Kapil Submitted by: Pravesh Babu Roll No. 30, MBA (PT) - 2011-2014)

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 at Rs99.50, 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 valuation. 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.

Significantly, well before the downturn, ICICI had considered the possibility of taking over BoR. But the deal fell through as ICICI was unwilling to fork out the money Mr Tayal had asked for. On 24th May, ICICI Bank (The Board of Directors of ICICI Bank Ltd ) approved the amalgamation of Bank of Rajasthan with it for a share exchange ratio of one share of ICICI Bank for every 4.72 shares of Bank of Rajasthan. Unsatisfied with the internal valuation arrived at by ICICI Bank, Bank of Rajasthan's promoter Tayals have asked their suitor to sweeten the deal to a level that would value the Udaipur-based bank at Rs 4,500 crore. After the two banks agreed to merge, ICICI Bank released an internal valuation that put BoR's worth at nealry Rs 3,040 crore. During the week, shares of Bank of Rajasthan gained 74 per cent on the BSE to settle at Rs 144.40 on 27th May. On 13th Aug the country's oldest private sector bank, Bank of Rajasthan Ltd, had become part of ICICI bank Ltd. Accordingly, all Bank of Rajasthan branches have started functioning as ICICI Bank branches. This follows the Reserve Bank of India's (RBI) sanctioning the scheme of amalgamation of Bank of Rajasthan Ltd with ICICI Bank Ltd.The scheme has come into force from the close of business on 12 August 2010. Shares of ICICI Bank closed at Rs 963.95, down 0.74 per cent, while that of Bank of Rajasthan slipped 0.03 per cent to Rs 190.15 on the Bombay Stock Exchange. K N Bhandari, Director Bank of Rajasthan assured that all BoR employees will be retained and there would be no job losses. The research reports by some foreign institutional investors have given a mixed reaction to the proposed take-over bid of Bank of Rajasthan by ICICI Bank. JP Morgan says the valuations of the deal is very expensive. The swap ratio implies a price of Rs188/share for BoR, which is at a 90% premium to the current market price. It would typically take a year for ICICI Bank to set up a similar network to that of BoR and another two years to break-even. Key downside risk to the deal is potentially higher non performing loans (NPL)

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 capital base. It offers a strategic fit, as it adds to our network in north and western India. It saves us about 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 larger customer 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 capital adequacy 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 Axis Bank. 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 of course, 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 rich choice 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.

Disadvantages ICICI Bank has valued BOR at a whopping 3000 crores which is much 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 of announcement. BOR, though being a private bank, has been managed like a public 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

the final valuation exercise is done and finally approved by the shareholders of both banks. Tayal Family had been the promoters of Bank of Rajasthan holding 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 RBI norms 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 in the 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?

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