Mergers & Acquisitions: An Introduction

INTRODUCTION
This is an introduction to the subject of mergers, acquisitions, buyouts and divestitures as covered in my Mergers & Acquisitions course. The purpose is to delineate how and why a merger decision should be made. The course focuses on mergers and acquisitions in the context of private as well as publicly traded companies. Acquisitions of private companies account for the majority of transactions. To properly assess a potential merger we need to perform fundamental strategic and financial analysis, but remain aware of the idiosyncrasies that each potential merger contains. A merger is a pivotal event for the companies involved. Both parties hope to benefit from the greater efficiency and competitive strength found in the combined company. Strategies are altered and as a result product lines are broadened, strengthened, or refocused; management systems and personnel are changed; and levels and growth rates of profits are shifted. In many instances, however, one side or the other (or both) lose substantial sums of money. Merger costs, including the direct costs of attorneys, accountants, investment bankers, and consultants, are substantial even though they are not a large percentage of the value of the merger. There is also substantial cost in terms of time required by key employees to evaluate, complete, and implement the merger. Perhaps half of all mergers and acquisitions fail or do not achieve the desired results. Many mergers fail because projected synergies do not materialize, often due to human obstacles. If a merger is not well received by the employees of the new entity, then its chances of success are greatly diminished. It is critical that the parties involved in a merger become skilled in managing change.

Mergers and Acquisitions: Definition

The Main Idea
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.

Varieties of Mergers
From the perspective of business structures, there is a whole host 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 direct

competition and share the same product lines and markets. Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with 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 no common business areas.

 Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

Acquisitions
As you can see, an acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times, acquisitions are more hostile. In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company 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 (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business.

Difference between Mergers and Acquisitions

Though the two words mergers and acquisitions are often spoken in the same breath and are also used in such a way as if they are synonymous, however, there are certain differences between mergers and acquisitions.

Merger The case when two companies (often of same size) decide to move forward as a single new company instead of operating business separately. The stocks of both the companies are surrendered, while new stocks are issued afresh.

Acquisition The case when one company takes over another and establishes itself as the new owner of the business. The buyer company swallows the business of the target company, which ceases to exist.

For example, Glaxo Wellcome and SmithKline Dr. Reddy's Labs acquired Betapharm Beehcam ceased to exist and merged to become a new through an agreement amounting $597 company, known as Glaxo SmithKline. million.

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 Picture

It'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.

OBJECTIVES OF MERGERS AND ACQUISITIONS

The immediate objective of an acquisition is selfevidently growth and expansion of the acquirer's assets, sales and market share. A more fundamental objective may be the enhancement of shareholders' wealth through acquisitions aimed at accessing or creating sustainable competitive advantage for the acquirer. In modern finance theory, shareholder wealth maximization is posited as a rational criterion for investment and financing decisions made by managers. Share holder wealth maximization may, however, be supplanted by the self-interest pursuit of managers making those decisions. According to the managerial utility theory, acquisitions may be driven by mangerial ego or desire for power, empire building or perquisites that go with the size of the firm.

EVALUATION OF MERGERS AND ACQUISITIONS

For a merger to be successful, it is extremely important that the M&A be properly evaluated. The value of the merged entity should be greater than the sum of the individual values of the single entities. For this, a proper model for evaluation are to be followed. A few models are described below :

Due Diligence
Under the due Diligence principle, the value of the merged entity should be greater than the sum of the individual entities. The share value has to increase and also the value of the firm should increase as a whole. The company should be in a position to command better financial terms from financial institutions. Otherwise the managers will not be doing due Diligence to their duty.

Thumb rule for Acquisitions

The initial value of the each firm is taken as 150% the turnover in the previous period. The final value should increase by at least one and a half times the value of the acquirer.

Asset and brand valuation

The combined value of assets and the increase in the brand as a result of acquisition can be used as a basis to measure the value of the acquisition. Various methods are prescribed for asset and brand valuation. But the method 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 takes into account the depreciation cost and replacement cost of the assets got by the acquirer and the transaction costs included should be greater than the premium he has paid for it.

Future Cash Flows from Individual Assets, Brands etc.

This is the most common value of calculating the value of an acquisition. The cash flows are discounted at a rate of 18% in India, by convention (and at a rate of 30% in China). The future cash flows from the merged firms should exceed the individual cash flows for the firms. In the case of synergies and integrations, this is affected by the savings in taxes. In the case of diversification, the risk is reduced and for other strategic acquisitions, the value of shareholders' wealth increases.

Case study of global trust bank and oriental bank of commerce

Reserve 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 the banks strengths and weaknesses, the Reserve Bank prepared following draft scheme of amalgamation of GTB with OBC. The Government of India has sanctioned the scheme for amalgamation 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.

(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 or shortfall 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;

"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 to all 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

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 shall become 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 having effect 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

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 and discharging 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 to the 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 thereafter as 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 the foregoing 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

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 (1 of 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 the transferor 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 Post Office 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;

(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 not ascertainable 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 having the 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;

(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 considered reasonable; (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 categories namely, "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

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 obtain such 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 which the 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 transferor bank 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;

(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 name called 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 entries made 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 noninterest 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.

(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 in accordance 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 treated as 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 share capital 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

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 have been 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 due under 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

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 subparagraphs (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 make payment 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 belowin 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:

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 Government after 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 subparagraph (8) above.

Chapter- V Rights and obligations of the Employees of Transferor Bank

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 force immediately 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 being retrenched 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.

(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 of the 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.

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 the transferor 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 option will, however, be exercised by the transferee bank with the prior approval of Reserve Bank of India, within a period of one year.

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 prepaid ordinary post or otherwise to the addressee at the address 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 its business.

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.

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 is making 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., the shareholders 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.

Global Trust Bank placed under MoratoriumNotification of Reserve Bank of India

On an application by the Reserve Bank of India, the Central Government has today issued an Order of Moratorium 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 alternate arrangements 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

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.

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 to clean up the balance sheet But 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 timebound programme. Bank was advised to explore options of raising capital through domestic sources or through merger 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 government has 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

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 cash balances 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 and depositors 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 be operated as usual. The Reserve Bank of India has set up help lines to assist the members of public at Mumbai and Hyderabad.

Balance sheet of global trust bank.

Mar ' 03 Mar ' 02 Mar ' 01 Mar ' 00

Sources of funds
Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus 121.36 146.16 121.36 272.96 121.36 467.05 121.36 406.78

Loan funds
Secured loans Unsecured loans Total 6,920.92 6,443.08 7,734.23 6,198.85 7,188.44 6,837.40 8,322.64 6,726.99

Uses of funds
Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments 512.85 212.06 300.80 2,498.74 785.50 451.13 334.37 3,133.91 502.57 182.37 320.20 2,900.10 442.71 405.88 36.83 3,257.14 3,701.09 1213.59 556.55 177.12 379.44 3,864.92 407.65 549.62 -141.98 4,102.38 6,873.90 1213.59 469.65 131.36 338.29 2,925.84 318.24 405.57 -87.33 3,176.80 7,791.35 1213.59

Net current assets

Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total

Notes:
Book value of unquoted investments Market value of quoted investments Contingent liabilities 3,578.33 Number of equity shares outstanding (Lacs) 1213.59

Balance sheet of oriental bank of commerce

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

Sources of funds
Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus 291.76 10,793.24 291.76 9,918.97 250.54 7,069.98 250.54 6,201.81 250.54 5,525.36

Loan funds
Secured loans Unsecured loans Total 1,55,964.92 1,39,054.26 1,20,257.59 98,368.85 77,856.70 1,67,049.92 1,49,264.99 1,27,578.11 1,04,821.20 83,632.60

Uses of funds
Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments 2,350.01 857.51 950.73 541.78 21.37 52,101.33 3,903.55 4,963.70 -1,060.15 51,604.33 73,137.71 2917.61 2,236.41 886.41 862.72 487.28 24.11 42,074.77 2,873.86 5,552.76 -2,678.90 39,907.25 65,971.33 2917.61 2,138.53 917.43 756.56 464.54 12.08 35,785.32 2,162.43 4,048.43 -1,886.00 34,375.94 51,523.45 2505.40 2,062.88 951.10 680.34 431.45 1.31 28,488.95 1,984.28 6,088.34 -4,104.06 24,817.65 32,903.57 2505.40 970.31 587.55 382.76 4.70 23,950.68 1,586.61 5,232.89 -3,646.28 20,691.86 22,317.34 2505.40

Net current assets

Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total

Notes:
Book value of unquoted investments Market value of quoted investments Contingent liabilities Number of equity shares outstanding (Lacs)

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 promoter Ramesh 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 nonperforming 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.

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

INDEX
1. Introduction 2. Merger & acquisition definition 3. Variety of merger and acquisition 4. Difference of merger and acquisition 5. Objectives of mergers and acquisition 6. Case study 7. Gtb turns obc 8. Monatorium 9. Countdown of downfall 10. 11. 12. 13. Customer benefits Clarification by RBI Conclusion Bibliography