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A Comparative Study On Premerger & Post merger Performance Of ICICI Bank



Group : Group Member List SL. No. Name ID Remarks


Antora Mondol



Tanvia Raihan



Subrina Alamgir



Moushumi Sarker



Tamkina Chowdhury 08303105

Letter of Submission
Date: September 19, 2013 To Mr. Tanvir MD. Hayder Arif Associate Professor Department of Finance and Banking University of Chittagong Subject: Submission of Assignment Sir, With due respect we would like to submit our report on - A Comparative Study On Premerger & Post merger Performance Of ICICI Bank. It was both a pleasure and a challenge to study such topic. We hope that our assignment will please you and meet your satisfaction by serving its purpose. We sincerely pray and hope that the assignment will meet your expectation and will serve its purposes your kind consideration might help me a lot. We sincerely hope this report will receive your attention and approval.

Thanking you with best regards. Sincerely yours, Group M.B.A Session: 2011-2012 Department of Finance and Banking University of Chittagong.

To keep the head high in globalized economy one has to follow the path of growth, which contains various challenges and issues; one has to overpower these challenges and issues to become a success story. We consider a case of ICICI Bank Ltd., the largest private sector bank in India, which has recently acquired Bank of Rajasthan. Therefore, the aim of this study is to make a comparative study of pre-merger and post-merger performance of ICICI Bank. This article is divided into four parts. The first part includes introduction and conceptual framework of mergers and acquisition. The second part discusses the acquisition of Bank of Rajasthan. The third part discusses the financial performance of ICICI Bank before merger and after merger in detail. Finally, the article concludes the findings from the acquisition. The assignment will be helpful for policy makers, strategy makers and investor.

Thanks to Almighty who has given us the courage and energy for every work particularly the activities of this study. In this competitive world every decision should be made with care and analysis helps us to be careful in decision making. Practical knowledge is a must for soundness of the theoretical knowledge. It is a great initiative by our honorable course instructor Tanvir Mohammad Hayder Arif sir to assign us such an assignment which helped us a lot in gathering practical knowledge of data gathering, critically evaluating the financial matters of a company as well as comparative analysis of pre-merger and post-merger financial performance of the selected company. Actually it created a way to check our theoretical knowledge in applied form. It also created a way of practically working in diverse group. We are thankful to all of the sources of information we used and consulted in doing our assignment.

Executive Summary

Mergers and acquisitions (M & A) have been a very important market entry strategy as well as expansion strategy. This present era is known as competition era. In this era companies to avoid the competition, go for merger, and enjoys sometimes monopoly. Liberalization and technological advances are increasingly pushing the banking sector towards greater globalization to improve the operational flexibility of Banks, which is crucial in the competitive environment that banks operate in. The present study is mainly based on secondary data. In order to evaluate financial performance, Ratio analysis, common size financial statements have been used as tools of analysis. It is found that overall the merger and acquisition does not effect of the financial position of banks except when a weaker & non-viable banks are merged with a financially sound and profit making bank in such case the profitability of the later bank will be affected.

Table of Contents
Chapter No. 1 2 3 4 Introduction Conceptual Framework of Merger and Acquisition Pre-Merger & Post-Merger Performance Analysis of ICICI Bank Findings and Conclusion Bibliography Annexure Topics Page Numbers 1-3 4-7 8-32 33-34 35 36-37



1.1 Introduction
In the recent past, mergers and acquisitions are on a steady rise in the financial sector caused by regulatory interventions of the State and also due to business environmental reasons. Synergies arising from geographical diversification, increased efficiency, cost savings and economies of scale are the motivation drivers behind mergers across the world. M&As have become a major strategic tool for achieving the same and it is imperative to avoid the possibilities of small banks from becoming the target of huge foreign banks which are expected to come to India. Based on the motives, merger deals are grouped into 3 categories viz, Voluntary Merger, Compulsory Merger and Universal Banking Model. The merger of ICICI Bank - Bank of Rajasthan is the seventh voluntary merger and the latest in India after the merger of HDFC Bank - Centurion Bank of Punjab in the year 2008. This deal also got lots of attention because of poor corporate governance of the target bank and cancellation of Extra Ordinary General Meeting (EGM) by the Calcutta District Civil Court. In this case, an attempt has been made to analyse the impact of strategic features of the banks on post merger performance.

1.2 Objectives of the Study

It is seen that, most of the works have been done on trends, policies & their framework, human aspect which is needed to be investigated, whereas profitability and financial analysis of the mergers have not give due importance. The present study would go to investigate the detail of Merger and Acquisitions (M&As) sector. The objective of the study is to make a comparative analysis of the pre and the post merger performance of the selected entity.


1.3 Methodology of the study

Data collection
To conduct a study properly designing of the process is essential because reliability and validity of the outcomes of a study depends on the reliable data and information. In this connection some activities has been carried out to collect data and information. For the purpose of evaluation of investigation data is collected from merger and Acquisition (M$As) of Indian Banking Industry. The data is collected from secondary sources such aso Annual Reports of Bank of Rajasthan and ICICI Bank o Website of the banks o Internet

To analyse the post and pre-merger financial performance of the banks various financial ratios and common size financial statements are used for comparison.

1.4 Limitations of the study

Though humble attempt is made to analyze the pre and post merger financial performance of the selected banks it is difficult to narrate all incidents and change brought up due to merger and acquisitions. Secondly, the study is based purely on secondary data which are taken from financial statement of the case through Internet only and therefore cannot be denied for any ambiguity in the data used for the analysis.




2.1 Concept of Merger and Acquisition

The concept of mergers and acquisitions is very much popular in the current scenario. The winds of Liberalization, Privatization and Globalization (LPG) are blowing over all the sectors of the economy but its maximum impact is seen in the industrial sector. It caused the market to become hyper-competitive, to avoid unhealthy competition and to face international and multinational companies.

2.1.1 Meaning and Definition of Merger and Acquisition Merger

Merger is defined as combination of two or more companies into a single company where one survives and the other lose their corporate existence. The survivor acquires the assets as well as liabilities of the merged company or companies. According to the Oxford Dictionary the expression merger or amalgamation means Combining of two commercial companies into one and Merging of two or more business concerns into one respectively. A merger is just one type of acquisition. One company can acquire another in several other ways including purchasing some or all of the companys assets or buying up its outstanding share of stock. To end up the word MERGER may be taken as an abbreviation which means: M = Mixing E = Entities R = Recourses for G = Growth E = Enrichment and R = Renovation.

Acquisition in general sense is acquiring the ownership in the property. Acquisition is the purchase by one company of controlling interest in the share capital of another existing company. This means that even after the takeover although there is change in the management of both the firms retain their separate legal identity.

2.2 Mergers Vs Acquisition

Although these are often used as synonymous, the terms merger and acquisition mean slightly different things. When a company takes over another one and clearly becomes the new owner, the purchase is called an acquisition. From the legal point of view, the target company ceases to exist and the buyer swallows the business and stock of the buyer continues to be traded. In the pure sense of the term, a merger happens when two firms, often about the same size, agree to go forward as a new single company rather than remain separately owned and operated. This kind of action is more precisely referred to as a merger of equals. Both companies stocks are surrendered and new company stock is issued in its place.

2.3 Objectives of Merger and acquisition

The main objectives behind merger and acquisitions may be highlighted as under: To restrict competition and prevent overcrowding of banks To expand market without competing. To gain economies of scale with less amount of investment. To utilize under and unutilized resources so that the banks can compete the foreign banks in global era.

2.4 Benefits of merger and acquisition

The fruits of Merger and Acquisitions for banks are reducing unhealthy competition amongst banks, sound financial position, huge business, large assets, benefits of core banking solutions, networking and technological advancements at low cost, low cost of maintenance and human resource management, large profits, larger customer coverage. Moreover, recapitalization of weaker banks in the lights of Basel II Norms.

Customers are also benefited by better and faster services, competitive pricing of all products and services, increased number of branches, improved and upgraded technology, etc.


Depositors have better investment opportunity, negotiable environment, higher dividends, etc.

Other related parties

They get Indian banks of International Standards, sound and large Indian Banks, no risk in performance of contracts and higher dividends, better and huge deals with one banks rather than two or more etc.


CHAPTER 3: Pre-Merger & Post-Merger Performance Analysis of ICICI Bank


3.1 Profile of the Bidder and Target Banks

Industrial Credit and Investment Corporation of India (ICICI) is the second largest bank in India and the biggest in the private sector. It started its operations in 1994 as a new generation private sector bank. ICICI Bank is the first Indian bank to be listed on the New York Stock Exchange with US GAAP accounting and has a worldwide presence including in the UK and Canada. Merger experience: The bank has been using mergers as a strategy to expand their geographical coverage, increase customer base and to meet regulatory requirements since the year 2000. The present merger with BoR is the 4th acquisition of ICICI Bank. The other deals are: ICICI Bank- Bank of Madura in 2000 ICICI Bank- ICICI Ltd in 2002 ICICI Bank- Sangli Bank in 2006 Focus: ICICI Bank aims at long-term wealth creation through Cs strategy of Current Account Savings Account (CASA) growth, cost control, credit quality and capital preservation. Size and distribution reach: The number of branches and ATM counters were 1,709 and 5219 respectively at the end of fiscal 2010. The Bank has a total business of 3,832,222 million as of 31.03.2010 and has 37,000 employees with a business per branch of 304 crore.


Bank of Rajasthan
Bank of Rajasthan is an old private sector bank which has a strong presence in the northern part of India with registered office at Udaipur, Rajasthan. It started its operation in the year 1943. Branch network: Bank has a branch network of 466 branches out of which 280 were in Rajasthan with 4000 employees. Further, the bank sponsors Mewar Aanchalik Gramin Bank (MAGB) which was established in 1983 under the RRB Act, 1976. Asset base: The Banks asset base and number of customers stands at 173000 million and 3 million respectively as on 31st March 2010. Business: The total business amounted to 233,918 million and the business per branch is 47 crore. Efficiency: BoR reported a net loss of 102.13 crore in 2009-10 against a profit of 117.71 crore in the previous financial year.

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3.2 Background of the Deal - Regulatory Issues

The promoters of the Bank of Rajasthan (BoR) have been under huge pressure from regulatory authorities to restructure the Bank for a variety of problems from 2009 onwards. BoR, controlled by Tayal Group, had been asked by the RBI (Reserve Bank of India) to lessen their shareholding to below 10% from 28%. According to SEBI, the promoters shareholding in the old private sector bank accounted to 55%. On February 26, 2010, the RBI levied a penalty of 25 lakhs for a series of violations including irregular property deals, actions against money laundering norms, deletion of corporate records from the information systems, irregularities in the accounts of corporate groups, extension of repayment period over permissible limits on intra-day overdraft, lack of enough credit committees and poor corporate governance. Further, the RBI appointed a new CEO and nominated 5 directors for the Bank. Following this, SEBI banned 100 entities holding BoR Shares for the sake of their promoters from stock market activities. The RBI then asked the BoR to perform an audit of internal delegation of sanctioning powers followed by the banks and the provisioning procedure of bad debts. Due to a series of actions from the regulators, the Tayal family decided to merge the bank with ICICI Bank, the second largest bank in India which was looking for a target to increase their customer base and geographical reach in northern India. In the probability of RBI favoring the decision, ICICI Bank will get the control of 83 branches of Mewar Aanchalik Gramin Bank (MAGB), a regional rural bank sponsored by the BoR.

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Table 1 - Important dates in ICICI Bank- Bank of Rajasthan Merger RBI imposed penalty of 25 lakhs on BoR February 26,2010 because of serious violations SEBI banned 100 entities allegedly holding BoR March 8,2010 shares RBI ordered special audit March 9,2010 Rapid round of negotiations and due diligence Merger news on newspaper Board meeting approval of both the banks May 6 - May 17,2010 May 18, 2010 May 23, 2010

BoR cancels EGM on Calcutta Civil Court order June 20, 2010 BoR seeks legal advice on validity of EGM Information to Stock Exchange Submits application to RBI for approval RBI approval June 22, 2010 June 23, 2010 June 24, 2010 Aug 12, 2010

Pre-merger Strategies
Prior to merger, ICICI Bank has been focusing its attention on positioning its balance sheet for growth and focusing on the 4Cs: CASA, Costs, Credit, Quality and Capital. The overall aim has been to- Defend market leadership through consolidation, Improve presence in Northern India to become a truly pan-Indian bank, Improve top-line through increased customer acquisition, Reduce non-performing assets from the current levels of 5.06%, and Improve Asset-Liability Management. Also, ICICI Bank followed a strategy of Product-focus prior to merger. In terms of composition of advances, ICICI was focused on retail finance, services, petroleum, infrastructure, iron & steel. Unlike ICICI Bank, that had a balanced mix of internal and external business focus, BoR largely focused on its internal troubles in the year prior to merger and had strategies aligned to the same as well. The strategy of BoR has been to- improve Corporate Governance, Cut down the high credit costs and employee costs to improve the bottom line, Improve the CAR to regulatory minimum, and Improve branch presence. In terms of
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composition of advances, BoR had a strong focus on infrastructure and metals & mining. BoR also had a strong presence in SMEs by virtue of the location advantage of its branches and strong link-up with RRBs, especially in the sectors of textiles, pharmaceuticals and chemical, and gems & jewellery.

3.3 Amalgamation of the Bank of Rajasthan

On May 23, 2010, the Board of Directors of ICICI Bank and the Board of Directors of The Bank of Rajasthan Limited (BoR), an old private sector bank, at their respective meetings approved an all-stock amalgamation of Bank of Rajasthan with ICICI Bank at a share exchange ratio of 25 shares of ICICI Bank for 118 shares (1:4.72) of Bank of Rajasthan. Deal envisages one ICICI Bank share for every 4.72 of BoRs. The shareholders of ICICI Bank and Bank of Rajasthan approved the scheme of amalgamation at their respective extra-ordinary general meetings. RBI approved the scheme of amalgamation with effect from close of business on August 12, 2010.

3.3.1 Merger Analysis

ICICI bank approved merging of Bank of Rajasthan (BoR) with itself on 18 May 2010. The share swap ratio was announced at 25:118 (25 shares of ICICI Bank for 118 shares of BoR). The Reserve Bank of India on 13th August 2010 gave its nod to the merger. Following the sanctioning of the scheme of amalgamation of Bank of Rajasthan with ICICI Bank, all branches of BoR started functioning as branches of ICICI Bank with effect from August13.

Deal Structure
The amalgamation of Bank of Rajasthan by ICICI was a no-cash deal. The deal was valued at 30.41 billion. Each share of BoR was valued at 189/- giving a premium of around 90 per share. On price per branch basis, ICICI paid 65.7 million per branch. ICICI offered the smaller banks controlling shareholders 25 shares in ICICI for 118 shares of Bank of Rajasthan. The deal, which would give ICICI a sizeable presence in the northwestern desert state of Rajasthan, valued the small bank at about 2.9 times its book value, compared with an Indian banking sector average of 1.84. Bank of Rajasthan had a network of 463 branches and a loan book of 77.81 billion rupees.
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Table 2: Value of Deal Particulars Swap Ratio Outstanding Shares (crores) 111 16 Price per share before announcement 889.35 99.5 Market Deal Value Capitalization (Crore) (crore) 99221 3041 1597


25 118

Valuation of Bank of Rajasthan

Here we can determine the fair market value of Bank of Rajasthan based on Price to Book Ratio. The following table gives P/B ratio of some private banks which can be compared with the BOR( We have excluded high profile private banks like HDFC, ICICI, Axis Bank etc) Table 3: Value of Deal-A Comparables approach Bank Dhanalakshmi Bank Ltd Karur Vysya Bank Ltd City Union Bank Ltd ING Vysya Bank Ltd Development Credit Bank Ltd United Western Bank Ltd Jammu and Kashmir Bank Ltd South Indian Bank Ltd Federal Bank Ltd Karnataka Bank Ltd Lakshmi Vilas Bank Ltd P/B Ratio 2.2 2.0 1.9 1.7 1.6 1.4 1.2 1.2 1.1 1.1 1.1



The average price to book ratio comes to be around 1.5. Using this ratio and calculated book value of 1048.8 crore we have value of BOR = 1.5 x 1048.8 = 1573 crore. The deal value of more than 3000 crore is quite expensive in this regard which values BOR at almost twice the current value. Here, it is seen that the value of BoR determined by Comparable P/B Ratio is approximate to market value of equity of BoR which is 1597 crore.

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So, goodwill created through this acquisition is as followsGoodwill = Price Paid Market Value of Target Firm (BoR) Equity = 30.41 billion 15.97 billion = 14.45 billion As this acquisition has been executed through the transfer of shares, so the amount of goodwill has been transferred to the shareholders of Bank of Rajasthan in the form of premium of 90 per share. The deal was done through stock swap. Initially it was supposed to be 1:3, but later the swap ratio was fixed at 25:118 as mentioned in Table 2; means 25 shares of ICICI for 118 shares of BoR. The swap ratio was around 90% premium over the market pricing of BoR. Since the deal was a no-cash one, ICICI just had to dilute its 3% equity for this deal. The net worth of BoR at the time of merger was estimated at around Rs 760 crore and that of ICICI Bank Rs 5,17,000 crore. Also, in the quarter ending Dec 2009, BoR reported a loss of Rs 44 crore on an income of Rs 373 crore. So, ICICI had to take in these losses too.

Integration Process
The final approval for the amalgamation of BoR by ICICI happened on August 12, 2010 .The integration process started after this date. The main part of the amalgamation was the integration of IT systems and the employees. ICICI agreed to implement the systems the bank uses in already existing branches to the BoR branches so as to extend the similar services to the custome The IT and the ATMs connectivity are established as of now . Deposit mobilization from retail customers and advances processing is currently being done, while maintaining continuity in products and charges. The main apprehensions were about taking the BoR employees as part of ICICI. But, around 4000 employees of BoR were ready to join the ICICI, although they raised some concerns when the deal was initially announced in May 2010. Also, the average age of employees at BoR was around 53, whereas in ICICI it was very much lower. So, the BoR employees were also apprehensive about their future amidst the merger. But as per the amalgamation agreement, ICICI promised to absorb all the BoR employees, although the individuals had the option to leave, if they wanted to leave. But this integration is also smoothly done and these employees are now officially ICICI bank employees.

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3.4 Merger Announcement, Share Price Movements and Shareholding Pattern Changes
Mergers and takeovers are important events in the life of any company. Merger announcements have a significant impact on the share prices of both the bidder and target banks. There is concrete evidence for wealth shifting in the global arena from bidder bank shareholders to target bank shareholders and vice versa. The present deal appears more favourable to BoR since their shareholders gained almost 90% between 07.05.2010 (the start of merger negotiations) and 23.05.2010 (Board Meeting approval). Table 4: Swap ratio and relevant closing prices of banks Particulars ICICI Bank Swap ratio 1:4.72 ( 25:118) Price before a day of 901.10 merger announcement Price on the day of merger 809.20 announcement Price after a day of merger 824.45 announcement Source: Economic Times and website of NSE Bank of Rajasthan 82.85 99.45 119.35

The swap indicates that ICICI bank is paying a 90 per cent premium over stocks closing price of Rs 99.50 on the Bombay Stock Exchange on Tuesday. The BoR stock touched a 52-week high on Tuesday, soaring 20 per cent. ICICI Banks shares closed 1.45 per cent lower at Rs 889.35 on a day when the benchmark Sensex rose by 0.24 per cent. The valuation implied by the share exchange ratio is in line with the market capitalisation per branch of old private sector banks in India. For the purpose of analysis, the BoR share price data has been divided into three periods, viz, Period I, Period II and Period III respectively. Period I pertains to the point starting from February 26, 2010 (the day the RBI imposed the penalty) to May 6, 2010 (the day before merger negotiations started). On February 26th, the closing price of BoRs scrip was 61.8 and on 6th May, it was 84.7. This is the period where the bank faced serious actions from the regulato During this period, the banks scrip value appreciated by 20.9% against the Bank Nifty return of 9.9%. BoR recorded a price of 66.85 and 62.5 on March 8 (SEBI ban) and March 9 (RBIs special audit order) respectively.

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Figure 1: Share price movement of Bank of Rajasthan February 26 to May 6 (Period I)

Period II represents the time period from May 6 to May 17, 2010 (period of merger negotiations). On May 6th, BoRs scrip was at 84.7 and ICICI Bank was traded at 902.85. On May 17th, ICICI Bank and BoR recorded a price of 901.1 and 82.25 respectively. It indicates that merger negotiation has a zero effect on the price of merging entities. The Bank Nifty return for the period was 2.7%. Figure 2: Share price movement of BoR and ICICI Bank after the merger announcement (May 17 to June 28)

Period III comprises the time period after the merger announcement, i.e., May 18 to June 24, 2010. On June 24th, BoR filed the information about the merger to the Bombay Stock Exchange. On May 16th, BoRs price was 82.85. After the announcement of the merger, it shot up drastically to 99.45, 119.35, 131.30, 144.45, 158.9, and 162.3 on May 17th, 18th, 19th, 20th, 21th and 24th respectively. On the contrary, ICICIs price reduced from
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901.10 to 809.35. During the period, BoR gained about 77%, whereas ICICI lost 1.7% of its value. It is interesting to note that Bank Nifty showed a decline of 4.6 % during this period. Short term wealth creation of BoR can be read in line with the valuation and fixation of swap ratio. The indicative price agreed by both the banks was 188 per share. In the light of the present analysis, it can be concluded that there was not much vulnerability in the prices during the negotiation period. But, after the announcement, BoRs share price adjusted almost to the price offered by ICICI.

It is worthwhile to analyse the shareholding pattern of BoR for the 4th quarter of FY of 2009 and the first quarter of FY of 2010 in the context of unusual actions from the authorities. Between 31.03.2010 and 30.06.2010, the holding of institutional investors increased from 5.73% to 16.24% out of which FIIs part increased from 2.34% to 8.95%. Both the holding of body corporate and retail investors reduced considerably. This can be interpreted as a case of information asymmetry and insider trading.

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Figure 3: Shareholding pattern of BoR as on 31st March 2010 and as on 30st June 2010

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Table 5: Pre-Post Merger Financial Performance of ICICI Bank Pre-Merger Period Particulars Ratios of ICICI Bank Ratios of Bank of (Acquirer or Parent Rajasthan (Target company) Company)
Mar '10 Investment Valuation Ratios 12 Dividend Per Share Operating Profit Per Share 49.8 (Rs) Net Operating Profit Per 293.74 Share (Rs) Free Reserves Per Share 356.94 (Rs) Profitability Ratios 5.66 Interest Spread 12.17 Net Profit Margin 44.72 Return on Investment (%) 7.79 Return on Net Worth(%) Return on Assets Excluding 463.01 Revaluations Return on Assets Including 463.01 Revaluations Management Efficiency Ratios Interest Income / Total 8.82 Funds Net Interest Income / Total 4.08 Funds Non Interest Income / Total 0.08 Funds Interest Expended / Total 4.74 Funds Operating Expense / Total 2.59 Funds Profit Before Provisions / 1.41 Total Funds 1.08 Net Profit / Total Funds 0.17 Loans Turnover Total Income / Capital 8.9 Employed(%) Interest Expended / Capital 4.74 Employed(%) 0.1 Asset Turnover Ratio Mar '09 11 48.58 343.6 351 3.66 9.74 56.72 7.58 444.9 444.9 Mar '08 11 51.29 354.71 346.21 3.51 10.51 62.34 8.94 417.64 417.64 Mar '10 --8.47 88.57 8.88 4.65 -6.85 177.5 18.86 33.55 58.04 Mar '09 0.2 8.73 90.34 15.77 7.03 7.81 185.5 18.29 39.88 64.8 Mar '08 0.5 9.26 82.57 16.57 5.53 9.75 173 21.75 39.38 69.81

PostMerger Period
Mar '11

14 64.08 281.04 358.12 4.01 15.91 42.97 9.35 478.31 478.31

9.82 3.99 0.08 5.83 2.6 1.3 0.96 0.18 9.9 5.83 0.11

10.6 4.29 0.02 6.31 2.76 1.4 1.12 0.2 10.62 6.31 0.12

8.47 2.4 0.36 6.08 3.21 -0.52 -0.61 0.18 8.83 6.08 2.21

9.05 2.85 0.3 6.2 1.98 1.11 0.73 0.19 9.35 6.2 2.29

8.08 2.73 0.51 5.36 1.82 1.34 0.84 0.17 8.6 5.36 1.78

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Profitability Ratios Interest Expended / Interest Earned Other Income / Total Income Operating Expense / Total Income Balance Sheet Ratios Capital Adequacy Ratio Advances / Loans Funds(%) Debt Coverage Ratios Credit Deposit Ratio Investment Deposit Ratio Cash Deposit Ratio Total Debt to Owners Fund Leverage Ratios Current Ratio Quick Ratio Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio Adjusted Cash Flow Times EPS Book Value

68.44 0.92 29.05 19.41 58.57 90.04 53.28 10.72 3.91 0.14 14.7 37.31 32.33 61.4 66.7 44.79 36.1 463.01

73.09 0.86 26.22 15.53 69.86 91.44 46.35 10.14 4.42 0.13 5.94 36.6 31 63.23 68.87 49.41 33.76 444.9

76.28 0.17 26 13.97 72.67 84.99 42.68 10.12 5.27 0.11 6.42 33.12 29.08 66.35 70.51 52.34 37.37 417.64

75.36 4.06 36.34 7.52 55.07 53.26 44.73 5.89 27.82 0.02 7.5 ------6.33 33.55

72.16 3.25 21.12 11.5 53.42 52.4 39.74 6.59 23.6 0.01 8.8 3.2 2.91 96.8 97.09 117.1 7.3 39.88

70.09 5.99 21.18 11.87 59.91 53.26 33.93 7.34 26.15 0.01 9.6 6.82 6.22 93.16 93.77 109.74 8.57 39.38

65.29 0.02 24.81 19.54 64.96 87.81 59.77 11.32 4.1 0.11 15.86 35.23 31.76 64.49 68.01 39.77 44.73 478.31

3.5 Analysis of the Financial Results: Ratio Analysis

The above table shows the position of ICICI Bank and Bank of Rajasthan Ltd. During pre and post merger period, ICICI Bank acquired Bank of Rajasthan Ltd., raising the share value of ICICI Bank to new heights and making the former a stronger bank with a stronger balance sheet. When we start comparing the ration of both the banks pre and post merger, one very important ration which indirectly tells the strength of the companies operation is
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operating ratio which was 29.05% for ICICI Bank pre merger while it was 36.34% for Bank of Rajasthan. Post merger the ratio changed to 24.81% indicating a decline. This clearly indicates that the Company has realized some losses which might be due to the high costs incurred during the merger period. Figure 4: Pre and Post Merger Operating Profit Ratio of ICICI Bank

Taking the Net profit ratio for the acquirer company before merger was 12.17% while the net profit ratio for the acquired company was 10.04%. During post merger the Net Profit ratio was 15.91% which shows a significant increase from 12.17% to 15.91% and a clear communication that the company has made profits after merger. It can be suggested that the company has gained monopoly and the advantages of goodwill are helping the company gain some substantial profit. Figure 5: Pre and Post Merger Net Profit Ratio position of ICICI Bank

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The pre-merger ROI for the acquirer company was 44.72% while the return on investment for the acquired company was 177.48% . Post merger the ROI declined to 42.97%. Also the average of Net worth before merger for the acquiring company was 7.79% while the return on Net worth for the target company was -18.86%. After merger the return on net worth increased to 9.35% for the acquired company. This indicates that less was incurred at the time of merger. Figure 6: Pre and Post Merger ROI position of ICICI Bank

Taking the financial condition of the bank in consideration average EPS during pre merger for ICICI Bank was 36.1 while that of the target company was -6.33. Post merger the average EPS increased to 44.73. This might be attributed that the shareholders had retained some profits or dividends to make the company a stronger financial organization
Figure 7: Pre and Post Merger EPS position of ICICI Bank

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The operating ratio , ROI has indicated a slight decline in their performance. The company has shown potential in attaining high profits as the main parameter i.e. net profit ratio, EPS have shown significant increase in their performance. Further the table shows that dividends payout ratio was 32.33% for the acquirer company while of the target company it was 2.91%. After Merger pay out ratio changed to 31.76%. This indicates a slight decrease in the post merger period for the acquirer company from 32.33% to 31.76%.
Figure 8: Pre and Post Merger Dividend Payout Ratio position of ICICI Bank

The average of Debt-Equity ratio before merger for the acquirer company was 3.91 and that of the target company was 27.82. Post merger the ration had declined to 4.10.
Figure 9: Pre and Post Merger Debt Equity Ratio position of ICICI Bank

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Nowadays a spate of discussions are going on regarding who will be rewarded due to the merger deal, what will be the plight of employees and also whether the deal will add value to the shareholders or not. The value of synergy indicates the additional value created. Synergy value is created from economies of integrating a target and acquiring a company, the amount by which the value of the combined firm exceeds the sum value of the two individual firms. Synergy is determined by following formulaV= VA-T -(VA +VT) Where, V VT VA = additional value created = the premerger value of the target firm = the premerger value of acquiring firm

VA-T = value of post merger firm The total assets of Bank of Rajasthan represented 4.0% of total assets of ICICI Bank at August 12, 2010. At August 12, 2010, Bank of Rajasthan had total assets of 155.96 billion, deposits of 134.83 billion, loans of 65.28 billion and investments of 70.96 billion. It incurred a loss of 1.02 billion in fiscal 2010. The results for fiscal 2011 include results of Bank of Rajasthan for the period from August 13, 2010 to March 31, 2011. The assets and liabilities of Bank of Rajasthan have been accounted at the values at which they were appearing in the books of Bank of Rajasthan at August 12, 2010 and provisions were made for the difference between the book values appearing in the books of Bank of Rajasthan and the fair value as determined by ICICI Bank. Post merger value addition for ICICI Bank as follows, V = VA-T -(VA +VT) = 1160.407 billion ( 980.089 billion + 13.707 billion) = 166.611 billion It is seen that ICICI Bank had incremental net gain from merger with Bank of Rajasthan Ltd. This means this merger had generated synergy.

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Common Size Financial Statement Analysis

Table 4: Common Size Profit and Loss Account of ICICI Bank Pre-Merger Period Post-Merger Period Particulars Mar Mar Mar '08 '09 '10 Mar '11 Mar' 12 Income Interest Earned 78% 79% 78% 79% 81% Other Income 22% 21% 22% 21% 19% Total Income 100% 100% 100% 100% 100% Expenditure Interest expended 59% 58% 53% 51% 55% Employee Cost 5% 5% 6% 9% 8% Selling and Admin Expenses 15% 15% 18% 11% 7% Depreciation 1% 2% 2% 2% 1% Miscellaneous Expenses 9% 10% 8% 12% 13% Operating Expenses 27% 28% 31% 26% 21% Provisions & Contingencies 3% 5% 4% 7% 8% Total Expenses 90% 90% 88% 84% 84% Net Profit for the Year 10% 10% 12% 16% 16% Profit brought forward 3% 6% 9% 10% 12% Total 13% 16% 21% 26% 28% Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total 3% 0% 3% 6% 13% 5% 0% 4% 7% 16% 6% 0% 5% 10% 21% 5% 0% 5% 15% 26% 6% 0% 5% 17% 28%

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During fiscal 2011, ICICI Bank focused on leveraging our rebalanced funding mix and strong capital position to grow loan portfolio, while substantially reducing our provisions for loan losses to improve our profitability. Though after merger the network and branches of ICICI Bank had increased but interest income did not increase to such extent. This was due to decrease in yield on advance, loss on securitized pool of assets. The decrease in yield on advances was primarily due to a decrease in the proportion of the high yielding unsecured retail portfolio in total advances and decrease in yield on domestic non-retail advances reflecting the declining trend in interest rates during fiscal 2010 which continued in the first half of fiscal 2011. RBI increased the CRR by 75 basis points to 5.75% in February 2010 and further by 25 basis points to 6.00% effective April 24, 2010. As CRR balances do not earn any interest income, these increases had a negative impact on yield on interest-earning assets in fiscal 2011. On the other hand, income on interest earning investment increased primarily due to an increase in investment in higher-yielding credit substitutes like corporate bonds and debentures, certificate of deposits and commercial paper. During fiscal 2011, the decrease in non-interest income was primarily on account of a decrease inincome from treasury-related activities. During fiscal 2011, there was an increase in fee income and income by way of dividends included in lease and other income. The equity markets remained volatile due to global and domestic developments including the political unrest in the Middle East and concerns on global recovery due to possible impact on crude oil prices, and continued high levels of inflation in India and resultant monetary tightening. These factors impacted market sentiment resulting in decline inrealised/unrealised profit on equity investments for fiscal 2011 as compared to fiscal 2010. Profit after tax increased by 28.0% from 40.25 billion in fiscal 2010 to 51.51 billion in fiscal 2011. The increase in profit after tax was mainly due to a 47.9% decrease in provisions and contingencies (excluding provisions for tax) from 43.87 billion in fiscal 2010 to 22.87 billion in the fiscal 2011. The decrease in provisions and contingencies (excluding provisions for tax) was primarily due to a reduction in provisions for retail non-performing loans, as accretion to retail non-performing loans declined sharply in fiscal 2011. Net interest income increased by 11.1% from 81.14 billion in fiscal 2010 to 90.17 billion in fiscal 2011. The cost of funds i.e. interest expense decreased from 5.8% in fiscal 2010 to 5.4% in fiscal 2011 primarily due to decrease in cost of deposits, offset, in part by an increase in cost of borrowings. The decrease in cost of deposits in fiscal 2011 as compared to fiscal
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2010 was due to the higher proportion of low cost current and savings deposits and reduction in cost of term deposits. Cost of borrowings increased from 5.6% in fiscal 2010 to 6.1% in fiscal 2011 primarily on account of an increase in cost of call and term borrowings and bond borrowings. In fiscal 2011, non-interest expenses increased primarily due to an increase in employee expenses partly offset by a decrease in other administrative expenses and a decrease in depreciation on leased assets. Employee expenses increased primarily due to addition of employees of Bank of Rajasthan, annual increase in salaries and provision for payment of performance bonus and performance-linked retention pay during the period and increase in the employee base, including sales executives, employees on fixed term contracts and interns, from 41,068 employees at March 31, 2010 to 56,969 employees at March 31, 2011 (including employees of Bank of Rajasthan). Rent, taxes and lighting and repairs and maintenance expenses increased due to an increase in post-merger branch and ATM network.

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Table 5: Common Size Balance Sheet of ICICI Bank Pre-Merger Period Post-Merger Period Particulars Mar '08 Mar '09 Mar '10 Mar '11 Mar '12 Capital and Liabilities: Total Share Capital 0.37% 0.39% 0.31% 0.28% 0.24% Equity Share Capital 0.28% 0.29% 0.31% 0.28% 0.24% Preference Share Capital 0.09% 0.09% 0.00% 0.00% 0.00% Reserves 11.35% 12.77% 13.90% 13.28% 12.51% Net Worth 11.71% 13.15% 14.20% 13.56% 12.75% Deposits 61.14% 57.57% 55.59% 55.54% 53.94% Borrowings Total Debt Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Fixed Assets Other Assets Total Assets 16.42% 77.56% 10.73% 100.00% 17.75% 75.32% 11.53% 100.00% 25.94% 81.53% 4.27% 100.00% 26.97% 82.50% 3.94% 100.00% 29.59% 83.54% 3.71% 100.00%






2.17% 56.43% 27.88% 1.76% 0.73% 1.03% 5.15% 100.00%

3.28% 57.56% 27.17% 1.96% 0.96% 1.00% 6.37% 100.00%

3.13% 49.86% 33.27% 1.96% 1.07% 0.88% 5.29% 100.00%

3.25% 53.26% 33.15% 2.24% 1.07% 1.17% 4.02% 100.00%

3.33% 53.57% 33.69% 1.99% 1.02% 0.97% 4.12% 100.00%

The total assets increased by 11.8% from 3,634.00 billion at March 31, 2010 to 4,062.34 billion at March 31, 2011 (including 155.96 billion of Bank of Rajasthan at August 12, 2010), primarily due to increase in investments and advances. Investments
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increased by 11.4% from 1,208.93 billion at March 31, 2010 to 1,346.86 billion at March 31, 2011. The net advances increased by 19.4% from 1,812.06 billion at March 31, 2010 to 2,163.66 billion at March 31, 2011. Cash and cash equivalents decreased from 388.73 billion at March 31, 2010 to 340.90 billion at March 31, 2011. The decrease was primarily due to a decrease in balances with RBI from 241.73 billion at March 31, 2010 to 171.23 billion at March 31, 2011 due to higher than stipulated CRR balance maintained at March 31, 2010. Total investment was in increasing trend during pre-merger periods, however after merger Total investments increased by 11.4% from 1,208.93 billion at March 31, 2010 to 1,346.86 billion at March 31, 2011 including 70.96 billion of Bank of Rajasthan at August 12, 2010, primarily due to an increase in investment in corporate bonds and debentures by 125.1 1 billion, RIDF and other related investments in lieu of shortfall in directed lending requirements by 49.70 billion including 21.34 billion of Bank of Rajasthan at August 12, 2010 and investments in commercial paper and certificate of deposits by 31.21 billion. Depreciation on owned property increased by 1.3% from 4.78 billion in fiscal 2010 to 4.84 billion in fiscal 2011primarily due to increase in the branch and ATM network and capitalisation of the Banks new building in Hyderabad, offset, in part, by sale of assets of merchant acquiring operations and other properties. The amount of loans and advances was in fluctuating manner during pre-merger period, but in post-merger periods the percentage of loans and advances was seen stable and in increasing trend. Net advances increased by 19.4% from 1,812.06 billion at March 31, 2010 to 2,163.66 billion at March 31, 2011 primarily due to increase in domestic corporate loans, overseas corporate loans and loans taken over from Bank of Rajasthan amounting to 65.28 billion at August 12, 2010. During pre-merger periods, the percentage of deposits was in decreasing trend due to ICICI Banks conscious strategy of reducing wholesale deposits. During fiscal 2010 and fiscal 2011, ICICI Bank focused on its strategy of increasing the share of current and savings account deposits in total deposits and re-balancing its funding mix. The current and savings account deposits increased from 842.16 billion at March 31, 2010 to 1,016.47 billion at March 31, 2011 including 46.80 billion of Bank of Rajasthan at August 12, 2010 and the ratio of current and savings account deposits to total deposits increased from 41.7% at March 31, 2010 to 45.1% at March 31, 2011.
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But this increase in deposits was offset by the increase in borrowings. Though the borrowings was in increasing trend in pre-merger periods, but in post-merger periods the expansion of new branches and network and operation of banking activities caused to increase borrowings more than pre-merger periods. Borrowings increased primarily due to an increase in call and term borrowings and an increase in capital-eligible borrowings in the nature of sub-ordinated debt. Equity share capital and reserves increased from 516.18 billion at March 31, 2010 to 550.91 billion at March 31, 2011 (including statutory reserve of 2.00 billion taken over from Bank of Rajasthan at August 12, 2010) primarily due to allotment of shares to the shareholders of Bank of Rajasthan and annual accretion to reserves out of profit. Excess of paid-up value of equity shares issued over the fair value of the net assets acquired in the amalgamation and amalgamation expenses, amounting to 2.10 billion have been adjusted against the securities premium account. But as percentage to total liabilities total equity shares of post merger period is lower than that of post merger period, this is because ICICI Bank increased its leverage by raising borrowings.

3.6Merger benefits for ICICI

Expansion of Branch Network: The main result of this amalgamation is the geographical expansion in ICICI branch network in the north-western region of the country, by just diluting 3% of its equity stake. To start new branches would have been tough for ICICI and for BoR it was a chance to merge itself with Indias biggest private sector bank. So, from ICICIs point to view, its an expansive strategy and for BoR it results in improving operations and service quality. So, this merger has been fruitful to both the acquirer and the target. ICICI bank expanded its network of branches through acquisition. Addition of 463 branches increased the number of banks by 25%. ICICI banks position in North and West India is strengthened. ICICI Bank would strengthen its rural marketing drive through 98 branches of BoR which are in rural area. Increase in deposits: deposits of ICICI bank increased due to amalgamation of BoR. It could have taken 3 to 4 years to increase the deposits to this level. This saved time and cost of ICICI bank also gave them advantage in terms of time to market. New customers: ICICI bank got new customers through BoRs customer base which is close to 3 million. This would improve revenue of ICICI bank.
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Improvement in services of BoR: ICICI banks internet and telephone banking services are being implemented for BoR and expected to complete by third quarter of 2011. Cross selling: ICICI bank can do cross selling of products and services to customer base of BoR. This would be new source of revenue for ICICI bank. Efficiency improvement: ICICI bank can improve the efficiency of BoR branches thus improve profitability.

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CHAPTER 4: Findings and Conclusion

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4.1 Findings
On the basis of the analytical study of the sample merger case following findings can be drawn From the shareholders point of view of Profitability the ICICI Bank attained positive results in the post merger period. The merger increased the market value of ICICI Bank which indicates that the merger had generated synergy. The earnings growth after merger was found at much higher rate resulted in value addition to shareholde A substantial dividend growth was observed after merger in ICICI Bank.

4.2 Conclusion
Mergers and Acquisitions of banks are one of the major outcomes of the financial transformation process . Mergers and acquisitions (M&As) are considered as corporate events which helps an organization to create synergy and provide sustainable competitive advantage, but, simultaneous these sorts of corporate events have the potential to create severe personal trauma and stress which can result in psychological, behavioural, health, performance, and survival problems for both the individuals and companies, whether it is a bank or a non banking financial corporation, involved in it. It is evident from the case of ICICI Bank Ltd. that how an organization can become market leader by adopting some strategic tools like mergers and acquisitions. From the study, one can come to a definitive conclusion that the primary reason for the merger between ICICI Bank and the Bank of Rajasthan, a major landmark in Indian Banking history, has occurred due to the regulatory interventions of the authorities. The analysis showed that the merger has increased the net profit, value and overall financial performance of the bank which justify the decision of merger undertaken by ICICI Bank.

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ICICI Bank- Bank of Rajasthan Merger: An analysis of strategic Features and Valuation Sony Kuriakose, *M S Senam Raju and **G S Gireesh Kumar

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Profit & Loss account of ICICI Bank (in Cr)

Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Operating Expenses Provisions & Contingencies Total Expenses Net Profit for the Year Extraordionary Items Profit brought forward Total Equity Dividend Corporate Dividend Tax Per share data (annualised) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total 2,306.07 0.32 2,122.39 7,054.23 11,483.01 1,780.29 0.26 1,814.86 5,018.18 8,613.59 1,867.22 1.04 1,501.90 3,464.38 6,834.54 2,008.42 0.01 1,375.79 2,809.65 6,193.87 1,342.31 0.01 1,377.37 2,436.32 5,156.01 56.09 165 524.01 44.73 140 478.31 36.1 120 463.01 33.76 110 444.94 37.37 110 417.64 22,808.50 3,515.28 2,888.22 524.53 5,248.97 8,843.63 3,333.37 34,985.50 6,465.26 -0.43 5,018.18 11,483.01 1,902.04 220.35 16,957.15 2,816.93 3,785.13 562.44 3,809.93 8,594.16 2,380.27 27,931.58 5,151.38 -2.17 3,464.38 8,613.59 1,612.58 202.28 17,592.57 1,925.79 6,056.48 619.5 2,780.03 10,221.99 1,159.81 28,974.37 4,024.98 -0.09 2,809.65 6,834.54 1,337.86 164.04 22,725.93 1,971.70 5,977.72 678.6 4,098.22 10,795.14 1,931.10 35,452.17 3,758.13 -0.58 2,436.32 6,193.87 1,224.58 151.21 23,484.24 2,078.90 5,834.95 578.35 3,533.03 10,855.18 1,170.05 35,509.47 4,157.73 0 998.27 5,156.00 1,227.70 149.67 33,542.65 7,908.10 41,450.75 25,974.05 7,108.91 33,082.96 25,706.93 7,292.43 32,999.36 31,092.55 8,117.76 39,210.31 30,788.34 8,878.85 39,667.19 Mar '12 Mar '11 Mar '10 Mar '09

Mar '08

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Balance Sheet of ICICI Bank (in Cr)

Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities 1,152.77 1,152.77 2.39 0 59,250.09 0 60,405.25 255,499.96 140,164.91 395,664.87 17,576.98 473,647.10 1,151.82 1,151.82 0.29 0 53,938.82 0 55,090.93 225,602.11 109,554.28 335,156.39 15,986.35 406,233.67 1,114.89 1,114.89 0 0 50,503.48 0 51,618.37 202,016.60 94,263.57 296,280.17 15,501.18 363,399.72 1,463.29 1,113.29 0 350 48,419.73 0 49,883.02 218,347.82 67,323.69 285,671.51 43,746.43 379,300.96 1,462.68 1,112.68 0 350 45,357.53 0 46,820.21 244,431.05 65,648.43 310,079.48 42,895.39 399,795.08 Mar '12 Mar '11 Mar '10 Mar '09

Mar '08

Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets 20,461.29 15,768.02 253,727.66 159,560.04 9,424.39 4,809.70 4,614.69 0 19,515.39 473,647.09 20,906.97 13,183.11 216,365.90 134,685.96 9,107.47 4,363.21 4,744.26 0 16,347.47 406,233.67 27,514.29 11,359.40 181,205.60 120,892.80 7,114.12 3,901.43 3,212.69 0 19,214.93 363,399.71 17,536.33 12,430.23 218,310.85 103,058.31 7,443.71 3,642.09 3,801.62 0 24,163.62 379,300.96 29,377.53 8,663.60 225,616.08 111,454.34 7,036.00 2,927.11 4,108.89 0 20,574.63 399,795.07

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