Mergers and Acquisitions

Mergers And Acquisitions
INTRODUCTION
We have been learning about the companies coming together to

from another company and companies taking over the existing
companies to expand their business.
With recession taking toll of many Indian businesses and the

feeling of insecurity surging over our businessmen, it is not surprising
when we hear about the immense numbers of corporate restructurings
taking place, especially in the last couple of years. Several
companies have been taken over and several have undergone internal
restructuring, whereas certain companies in the same field of business
have found it beneficial to merge together into one company.
In this context, it would be essential for us to understand what

corporate restructuring and mergers and acquisitions are all about.
All our daily newspapers are filled with cases of mergers,

acquisitions, spin-offs, tender offers, & other forms of corporate
-1–
restructuring. Thus important issues both for business decision and

public policy formulation have been raised. No firm is regarded safe
from a takeover possibility. On the more positive side Mergers &
Acquisition’s may be critical for the healthy expansion and growth of
the firm. Successful entry into new product and geographical markets
may require Mergers & Acquisition’s at some stage in the firm's
development. Successful competition in international markets may
depend on capabilities obtained in a timely and efficient fashion
through Mergers & Acquisition's. Many have argued that mergers
increase value and efficiency and move resources to their highest and
best uses, thereby increasing shareholder value. .
To opt for a merger or not is a complex affair, especially in

terms of the technicalities involved. We have discussed almost all
factors that the management may have to look into
Before going for merger. Considerable amount of brainstorming
would be required by the managements to reach a conclusion. E.g. A
due diligence report would clearly identify the status of the company
-2–
in respect of the financial position along with the net worth and
pending legal matters and details about various contingent liabilities.
Decision has to be taken after having discussed the pros & cons of the
proposed merger & the impact of the same on the business,
administrative costs benefits, addition to shareholders' value, tax
implications including stamp duty and last but not the least also on
the employees of the Transferor or Transferee Company.
WHAT IS MERGER?
Merger is defined as combination of two or more companies

into a single company where one survives and the others lose their
corporate existence. The survivor acquires all the assets as well as
liabilities of the merged company or companies. Generally, the
surviving company is the buyer, which retains its identity, and the
extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of

two or more existing companies. All assets, liabilities and the stock of
-3–
one company stand transferred to Transferee Company in

consideration of payment in the form of:
• Equity shares in the transferee company,

• Debentures in the transferee company,
• Cash, or
• A mix of the above modes.
WHAT IS ACQUISITION?
Acquisition in general sense is acquiring the ownership in the
property. In the context of business combinations, an acquisition is
the purchase by one company of a controlling interest in the share
capital of another existing company.
Methods of Acquisition:
An acquisition may be affected by
a) Agreement with the persons holding majority interest in the
company management like members of the board or major
shareholders commanding majority of voting power;
-4–
b) Purchase of shares in open market;

c) To make takeover offer to the general body of shareholders;
d) Purchase of new shares by private treaty;
e) Acquisition of share capital through the following forms of
considerations viz. Means of cash, issuance of loan capital, or
insurance of share capital.
Takeover:
A ‘takeover’ is acquisition and both the terms are used

interchangeably.
Takeover differs from merger in approach to business
combinations i.e. The process of takeover, transaction involved in
takeover, determination of share exchange or cash price and the
fulfillment of goals of combination all are different in takeovers than
in mergers. For example, process of takeover is unilateral and the
offeror company decides about the maximum price. Time taken in
completion of transaction is less in takeover than in mergers, top
management of the offeree company being more co-operative.
-5–
De-merger or corporate splits or division:
De-merger or split or divisions of a company are the

synonymous terms signifying a movement in the company.
Purpose of Mergers & Acquisitions
The purpose for an offeror company for acquiring another

company shall be reflected in the corporate objectives. It has to
-6–
decide the specific objectives to be achieved through acquisition. The

basic purpose of merger or business combination is to achieve faster
growth of the corporate business. Faster growth may be had through
product improvement and competitive position.
Other possible purposes for acquisition are short listed below: -
(1) Procurement of supplies:
1. To safeguard the source of supplies of raw materials or

intermediary product;
2. To obtain economies of purchase in the form of discount,
savings in transportation costs, overhead costs in buying
department, etc.;
3. To share the benefits of suppliers economies by standardizing
the materials.
(2) Revamping production facilities:
-7–
1. To achieve economies of scale by amalgamating production

facilities through more intensive utilization of plant and
resources;
2. To standardize product specifications, improvement of quality of
product, expanding
3. Market and aiming at consumers satisfaction through

strengthening after sale
Services;
4. To obtain improved production technology and know-how from
the offered company
5. To reduce cost, improve quality and produce competitive
products to retain and
Improve market share.
(3) Market expansion and strategy:
1. To eliminate competition and protect existing market;

2. To obtain a new market outlets in possession of the offeree;
-8–
3. To obtain new product for diversification or substitution of

existing products and to enhance the product range;
4. Strengthening retain outlets and sale the goods to rationalize
distribution;
5. To reduce advertising cost and improve public image of the
offeree company;
6. Strategic control of patents and copyrights.
(4) Financial strength:

1. To improve liquidity and have direct access to cash resource;
2. To dispose of surplus and outdated assets for cash out of
combined enterprise;
3. To enhance gearing capacity, borrow on better strength and the
greater assets backing;
4. To avail tax benefits;
5. To improve EPS (Earning Per Share).
(5) General gains:
-9–
1. To improve its own image and attract superior managerial

talents to manage its affairs;
2. To offer better satisfaction to consumers or users of the product.
(6) Own developmental plans:
The purpose of acquisition is backed by the offeror company’s

own developmental plans.
A company thinks in terms of acquiring the other company only
when it has arrived at its own development plan to expand its
operation having examined its own internal strength where it might
not have any problem of taxation, accounting, valuation, etc. But
might feel resource constraints with limitations of funds and lack of
skill managerial personnel’s. It has to aim at suitable combination
where it could have opportunities to supplement its funds by issuance
of securities, secure additional financial facilities, eliminate
competition and strengthen its market position.
(7) Strategic purpose:
- 10 –
The Acquirer Company view the merger to achieve strategic

objectives through alternative type of combinations which may be
horizontal, vertical, product expansion, market extensional or other
specified unrelated objectives depending upon the corporate
strategies. Thus, various types of combinations distinct with each
other in nature are adopted to pursue this objective like vertical or
horizontal combination.
(8) Corporate friendliness:
Although it is rare but it is true that business houses exhibit

degrees of cooperative spirit despite competitiveness in providing
rescues to each other from hostile takeovers and cultivate situations
of collaborations sharing goodwill of each other to achieve
performance heights through business combinations. The combining
corporate aim at circular combinations by pursuing this objective.
(9) Desired level of integration:
- 11 –
Mergers and acquisition are pursued to obtain the desired level

of integration between the two combining business houses. Such
integration could be operational or financial. This gives birth to
conglomerate combinations. The purpose and the requirements of the
offeror company go a long way in selecting a suitable partner for
merger or acquisition in business combinations.
Types of Mergers
Merger or acquisition depends upon the purpose of the offeror
company it wants to achieve. Based on the offerors’ objectives
profile, combinations could be vertical, horizontal, circular and
conglomeratic as precisely described below with reference to the
purpose in view of the offeror company.
- 12 –
(A) Vertical combination:
A company would like to takeover another company or seek its

merger with that company to expand espousing backward integration
to assimilate the resources of supply and forward integration towards
market outlets. The acquiring company through merger of another
unit attempts on reduction of inventories of raw material and finished
goods, implements its production plans as per the objectives and
economizes on working capital investments. In other words, in
vertical combinations, the merging undertaking would be either a
supplier or a buyer using its product as intermediary material for final
production.
The following main benefits accrue from the vertical

combination to the acquirer company i.e.
1. It gains a strong position because of imperfect market of the

intermediary products, scarcity of resources and purchased
products;
- 13 –
2. Has control over products specifications.
(B) Horizontal combination:
It is a merger of two competing firms which are at the same

stage of industrial process. The acquiring firm belongs to the same
industry as the target company. The mail purpose of such mergers is
to obtain economies of scale in production by eliminating duplication
of facilities and the operations and broadening the product line,
reduction in investment in working capital, elimination in
competition concentration in product, reduction in advertising costs,
increase in market segments and exercise better control on market.
(C) Circular combination:
Companies producing distinct products seek amalgamation to

share common distribution and research facilities to obtain economies
by elimination of cost on duplication and promoting market
- 14 –
enlargement. The acquiring company obtains benefits in the form of

economies of resource sharing and diversification.
(D) Conglomerate combination:
It is amalgamation of two companies engaged in unrelated

industries like DCM and Modi Industries. The basic purpose of such
amalgamations remains utilization of financial resources and enlarges
debt capacity through re-organizing their financial structure so as to
service the shareholders by increased leveraging and EPS, lowering
average cost of capital and thereby raising present worth of the
outstanding shares. Merger enhances the overall stability of the
acquirer company and creates balance in the company’s total
portfolio of diverse products and production processes.
- 15 –
[4]Advantages of Mergers
- 16 –
Mergers and takeovers are permanent form of combinations

which vest in management complete control and provide centralized
administration which are not available in combinations of holding
company and its partly owned subsidiary. Shareholders in the selling
company gain from the merger and takeovers as the premium offered
to induce acceptance of the merger or takeover offers much more
price than the book value of shares. Shareholders in the buying
company gain in the long run with the growth of the company not
only due to synergy but also due to “boots trapping earnings”.
Mergers and acquisitions are caused with the support of

shareholders, manager’s ad promoters of the combing companies.
The factors, which motivate the shareholders and managers to lend
support to these combinations and the resultant consequences they
have to bear, are briefly noted below based on the research work by
various scholars globally.
(1) From the standpoint of shareholders
- 17 –
Investment made by shareholders in the companies

subject to merger should enhance in value. The sale of shares from
one company’s shareholders to another and holding investment in
shares should give rise to greater values i.e. The opportunity gains in
alternative investments. Shareholders may gain from merger in
different ways viz. From the gains and achievements of the company
i.e. Through
(a) Realization of monopoly profits;
(b) Economies of scales;
(c) Diversification of product line;
(d) Acquisition of human assets and other resources not
available otherwise;
(e) Better investment opportunity in combinations.
One or more features would generally be available in each

merger where shareholders may have attraction and favour merger.
(2) From the standpoint of managers
- 18 –
Managers are concerned with improving operations of the

company, managing the affairs of the company effectively for all
round gains and growth of the company which will provide them
better deals in raising their status, perks and fringe benefits. Mergers
where all these things are the guaranteed outcome get support from
the managers. At the same time, where managers have fear of
displacement at the hands of new management in amalgamated
company and also resultant depreciation from the merger then
support from them becomes difficult.
(3) Promoter’s gains
Mergers do offer to company promoters the advantage of

increasing the size of their company and the financial structure and
strength. They can convert a closely held and private limited
company into a public company without contributing much wealth
and without losing control.
(4) Benefits to general public
- 19 –
Impact of mergers on general public could be viewed as aspect

of benefits and costs to:
(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been
user or consumer or the worker in the companies under merger
plan.
(a) Consumers
The economic gains realized from mergers are passed on to

consumers in the form of lower prices and better quality of the
product which directly raise their standard of living and quality of
life. The balance of benefits in favour of consumers will depend upon
the fact whether or not the mergers increase or decrease competitive
economic and productive activity which directly affects the degree of
welfare of the consumers through changes in price level, quality of
products, after sales service, etc.
(b) Workers community
- 20 –
The merger or acquisition of a company by a conglomerate or

other acquiring company may have the effect on both the sides of
increasing the welfare in the form of purchasing power and other
miseries of life. Two sides of the impact as discussed by the
researchers and academicians are: firstly, mergers with cash payment
to shareholders provide opportunities for them to invest this money in
other companies which will generate further employment and growth
to uplift of the economy in general. Secondly, any restrictions placed
on such mergers will decrease the growth and investment activity
with corresponding decrease in employment. Both workers and
communities will suffer on lessening job
Opportunities, preventing the distribution of benefits resulting

from diversification of production activity.
(c) General public
Mergers result into centralized concentration of power.

Economic power is to be understood as the ability to control
- 21 –
prices and industries output as monopolists. Such monopolists

affect social and political environment to tilt everything in
their favour to maintain their power ad expand their business
empire. These advances result into economic exploitation. But
in a free economy a monopolist does not stay for a longer
period as other companies enter into the field to reap the
benefits of higher prices set in by the monopolist. This
enforces competition in the market as consumers are free to
substitute the alternative products. Therefore, it is difficult to
generalize that mergers affect the welfare of general public
adversely or favorably. Every merger of two or more
companies has to be viewed from different angles in the
business practices which protects the interest of the
shareholders in the merging company and also serves the
national purpose to add to the welfare of the employees,
consumers and does not create hindrance in administration of
the Government polices.
- 22 –
Chapter 12: Change in scenario of Banking Sector
1. The first mega merger in the Indian banking sector that of the
HDFC Bank with Times Bank, has created an entity which is the
largest private sector bank in the country.
2. The merger of the city bank with Travelers Group and the merger
of Bank of America with Nation Bank have triggered the mergers
and acquisition market in the banking sector world wide.
3. Europe and Japan are also on their way to restructure their

financial sector thought merger and acquisitions. Merger will help
banks with added money power, extended geographical reach with
diversified branch Network, improved product mix, and economies
of scale of operations. Merger will also help banks to reduced them
borrowing cost and to spread total risk associated with the
individual banks over the combined entity. Revenues of the
combine entity are likely to shoot up due to more effective
allocation of bank funds. ICICI Bank has initiated merger talks
- 23 –
with Centurian Bank but due to difference arising over swap ration
the merger didn’t materialized. Now UTI Bank is egeing Centurian
Bank. The proposed merger of UTI Bank and Centurian Bank will
make them third largest private banks in terms of size and market
Capitalization State Bank of India has also planned to merge seven
of its associates or part of its long-term policies to regroup and
consolidate its position. Some of the Indian Financial Sector
players are already on their way for mergers to strengthen their
existing base.
4. In India mergers especially of the PSBS may be subject to

technology and trade union related problem. The strong trade union
may prove to be big obstacle for the PSBS mergers. Technology of
the merging banks to should complement each other NPA
management. Management of efficiency, cost reduction, tough
competition from the market players and strengthing of the capital
base of the banks are some of the problem which can be faced by
the merge entities. Mergers for private sector banks will be much
smoother and easier as again that of PSBS.
- 24 –
THE BANKING SCENARIO HAS BEEN CHANGING AT

FAST PLACE.
- 25 –
Bank traditionally just borrower and lenders, has started

providing complete corporate and retail financial services to its
customers
1. Technology drive has benefited the customers in terms of faster

improve convenient banking services and Varity of financial
products to suit their requirement. Atms, Phone Banking, Net
banking, Any time and Any where banking are the services which
bank have started offering following the changing trend in sectors.
In plastic money segment customer have also got a new option of
debits cards against the earlier popular credit card. Earlier
customers had to conduct their banking transaction within the
restricted time frame of banking hours. Now banking hours are
extended.
2. Atms ,Phone banking and Net banking had enable the customer to
transact as per their convince customer can now without money at
any time and from any branch across country as certain their
account transaction, order statements of their account and give
instruction using the tally banking or on online banking services.
- 26 –
3. Bank traditionally involve working capital financing have started

offering consumer loans and housing loans. Some of the banks
have started offering travel loans, as well as many banks have
started capitalizing on recent capital market boom by providing
IPO finance to the investors.
Chapter 5: Procedure of Mergers & Acquisitions
Public announcement:
To make a public announcement an acquirer shall follow the

following procedure:
1. Appointment of merchant banker:
- 27 –
The acquirer shall appoint a merchant banker registered as category

– I with SEBI to advise him on the acquisition and to make a public
announcement of offer on his behalf.
2. Use of media for announcement:
Public announcement shall be made at least in one national

English daily one Hindi daily and one regional language daily
newspaper of that place where the shares of that company are listed
and traded.
3. Timings of announcement:
Public announcement should be made within four days of

finalization of negotiations or entering into any agreement or
memorandum of understanding to acquire the shares or the voting
rights.
- 28 –
4. Contents of announcement:
Public announcement of offer is mandatory as required under the
SEBI Regulations.
Procedure of Bank Merger
 The procedure for merger either voluntary or otherwise is

outlined in the respective state statutes/ the Banking regulation
Act. The Registrars, being the authorities vested with the
responsibility of administering the Acts, will be ensuring that the
due process prescribed in the Statutes has been complied with
before they seek the approval of the RBI. They would also be
ensuring compliance with the statutory procedures for notifying
the amalgamation after obtaining the sanction of the RBI.
- 29 –
 Before deciding on the merger, the authorized officials of the

acquiring bank and the merging bank sit together and discuss
the procedural modalities and financial terms. After the
conclusion of the discussions, a scheme is prepared
incorporating therein the all the details of both the banks and the
area terms and conditions.
 Once the scheme is finalized, it is tabled in the meeting of Board

of directors of respective banks. The board discusses the scheme
thread bare and accords its approval if the proposal is found to
be financially viable and beneficial in long run.
 After the Board approval of the merger proposal, an extra

ordinary general meeting of the shareholders of the respective
banks is convened to discuss the proposal and seek their
approval.
 After the board approval of the merger proposal, a registered
- 30 –
valuer is appointed to valuate both the banks. The valuer

valuates the banks on the basis of its share capital,market capital,
assets and liabilities, its reach and anticipated growth and sends
its report to the respective banks.
 Once the valuation is accepted by the respective banks , they

send the proposal along with all relevant documents such as
Board approval, shareholders approval, valuation report etc to
Reserve Bank of India and other regulatory bodies such Security
& exchange board of India (SEBI) for their approval.
 After obtaining approvals from all the concerned institutions,

authorized officials of both the banks sit together and discuss
and finalize share allocation proportion by the acquiring bank to
the shareholders of the merging bank (SWAP ratio)
 After completion of the above procedures , a merger and
- 31 –
acquisition agreement is signed by the bank
Chapter 9: RBI Guidelines on Mergers &

Acquisitions of Banks
 With a view to facilitating consolidation and emergence of

strong entities and providing an avenue for non disruptive exit of
weak/unviable entities in the banking sector, it has been decided
to frame guidelines to encourage merger/amalgamation in the
sector.
 Although the Banking Regulation Act, 1949 (AACS) does not

empower Reserve Bank to formulate a scheme with regard to
merger and amalgamation of banks, the State Governments have
incorporated in their respective Acts a provision for obtaining
prior sanction in writing, of RBI for an order, inter alia, for
sanctioning a scheme of amalgamation or reconstruction.
- 32 –
 The request for merger can emanate from banks registered under
the same State Act or from banks registered under the Multi
State Co-operative Societies Act (Central Act) for takeover of a
bank/s registered under State Act. While the State Acts
specifically provide for merger of co-operative societies
registered under them, the position with regard to take over of a
co-operative bank registered under the State Act by a co-
operative bank registered under the CENTRAL
 Although there are no specific provisions in the State Acts or the

Central Act for the merger of a co-operative society under the
State Acts with that under the Central Act, it is felt that, if all
concerned including administrators of the concerned Acts are
agreeable to order merger/ amalgamation, RBI may consider
proposals on merits leaving the question of compliance with
relevant statutes to the administrators of the Acts. In other
words, Reserve Bank will confine its examination only to
financial aspects and to the interests of depositors as well as the
stability of the financial system while considering such
- 33 –
proposals.
Chapter 10: Amalgamation of Urban Banks
- 34 –
- 35 –
Chapter 11: Information & Documents to be furnished by BY

THE ACQUIRER OF BANKS
1. Draft scheme of amalgamation as approved by the Board of

Directors of the acquirer bank.
2. Copies of the reports of the valuers appointed for the determination

of realizable value of assets (net of amount payable to creditors
having precedence over depositors) of the acquired bank.
3. Information which is considered relevant for the consideration of

the scheme of merger including in particular:-
A. Annual reports of each of the Banks for each of the three
- 36 –
completed financial years immediately preceding the proposed date

for merger.
B. Financial results, if any, published by each of the Banks for

any period subsequent to the financial statements prepared for the
financial year immediately preceding the proposed date of merger.
C. Pro-forma combined balance sheet of the acquiring bank as it

will appear consequent on the merger.
D. Computation based on such pro-forma balance sheet of the

following:-
I. Tier I Capital
Ii. Tier II Capital
Iii. Risk-weighted Assets
- 37 –
Iv. Gross and Net npas
V. Ratio of Tier I Capital to Risk-weighted Assets
Vi. Ratio of Tier II Capital to Risk-weighted Assets
Vii. Ratio of Total Capital to Risk-weighted Assets
Viii. Tier I Capital to Total Assets
Ix. Gross and Net npas to Advances
X. Cash Reserve Ratio
Xi. Statutory Liquidity Ratio
4. Information certified by the values as is considered relevant to

understand the net realizable value of assets of the acquired bank
including in particular:-
A. The method of valuation used by the values
B. The information and documents on which the values have

relied and the extent of the verification, if any, made by the values
to test the accuracy of such information
- 38 –
C. If the values have relied upon projected information, the

names and designations of the persons who have provided such
information and the extent of verification, if any, made by the
values in relation to such information
D. Details of the projected information on which the values have

relied
E. Detailed computation of the realizable value of assets of the

acquired bank.
5. Such other information and explanations as the Reserve Bank may

require.
- 39 –
Chapter 6: Mergers in the Banking Sector
ICICI Bank
INTRODUCTION
ICICI Bank (formerly Industrial Credit and

Investment Corporation of India) is India's largest private
bank. ICICI Bank has total assets of about Rs.20.05bn (end-
Mar 2005), a network of over 550 branches and offices, and
about 1900 atms. ICICI Bank offers a wide range of banking
products and financial services to corporate and retail
customers through a variety of delivery channels and through
its specialized subsidiaries and affiliates in the areas of
investment banking, life and non-life insurance, venture
- 40 –
capital and asset management. ICICI Bank's equity shares are

listed in India on stock exchanges at Kolkata and Vadodara, the
Stock Exchange, Mumbai and the National Stock Exchange of
India Limited and its adrs are listed on the New York Stock
Exchange (NYSE). During the year 2005 ICICI bank was
involved as a defendant in cases of alleged criminal practices
in its debt collection operations and alleged fraudulent tactics
to sell its products.
The industrial Credit and Investment Corporation of India Limited

now known as ICICI Ltd. Was founded b the World bank, the
Government of India and representatives of private industry on
January 5, 1955. The objective was to encourage and assist
industrial development and investment in India. Over the years,
ICICI has evolved into a diversified financial institution. ICICI’s
principal business activities include:
 Project Finance
 Infrastructure Finance
- 41 –
 Corporate Finance
 Securitization
 Leasing
Deferred Credit
Consultancy services
Custodial services
The ICICI Groups draws its strength from the core

competencies of its individual companies. Today, top Indian
Corporate look towers ICICI as a business partner for providing
solutions to their varied financial requirements. The Group also offers
a gamut of personal finance solutions to individuals. To lead the
financial services into the new millennium, the Group is now truly
positioned as a Virtual Universal Bank. The liberalization of the
Indian economy in the 1990s offered ICICI an opportunity to provide
a wide range of financial services. For regulatory and strategic
reasons, ICICI set up specialized subsidiaries in the areas of
commercial banking, investment banking, non- banking finance,
- 42 –
investor servicing brooking, venture capital financing and state level

infrastructure financing.
ICICI plans to focus on its retail finance business and expect

the same to contribute upto 15-20 % of its turnover in the next five
years. It is trying to change the perception that it is a corporate
oriented bank. The bank hard selling its image as a retail segment
bank has for the first time come up with an advertisement that
addresses its products at the individual. This is to drive home the
point that the bank has product and services catering to all
individuals. For this purpose the network of ICICI Bank shall come
into use. The parent plants to sell its products and also raise retail
funds through the banking subsidiary.
THE ICICI GROUP COMPRISES OF:

 ICICI Bank Limited,
 ICICI Securities and Finance Company Limited (ICICI
Securities),
 ICICI Credit Corporation Limited ( ICICI Credit),
 ICICI Investors Services Limited (ICICI Services),
- 43 –
 ICICI Venture Funds Management Limited (ICICI Venture),

 ICICI international Limited,
 ICICI -KINFRA Limited (I-KIN),
Mr. K.V. Kamath, CEO of ICICI Limited, has recently voiced

the intentions of ICICI Limited towards banking and ICICI Bank.
ICICI Limited is endeavoring to forge a closer relationship with
ICICI bank. Mr. K V Kamath recently quoted in a leading daily
“Banking is dead. Universal banking is in offering with a whole range
of financial products and services. The basic idea is for banks to do
business along with “banking”. Bankers will have to emerge as
businessmen.”
ICICI Bank is a focused banking company coping with the

changing times of the banking industry. So it can be a lucrative target
for other player in the same line of operations. However, when
merged with ICICI Limited the attraction is reduced manifold
considering the magnitude of operations of the ICICI limited.
- 44 –
Of course, one would still need a bank to open letters of credit,

offer guarantees, handle documentation, and maintain current account
facilities etc. So banks will not superfluous. But nobody needs so
many of them any more.
Secondly, besides credit, a customer may also want from a bank

efficient cash management, advisory services and market research on
his product. Thus the importance of fee based is increasing in
comparison with the fund-based income.
The pre--merger status of ICICI Bank is as follows: it had liabilities

of Rs.12,073 crore, equity market capitalization of Rs.2,466 crore and
equity volatility of 0.748. Working through options reasoning, we
find that this share price and volatility are consistent with assets
worth Rs.13,249 crore with volatility 0.15. Thus, ICICI bank had
assets which are 9.7% ahead of liabilities, which is roughly consistent
with the spirit of the Basle Accord, and has leverage of 5.37 times.
- 45 –
History of ICICI Bank
The World bank the Government of India and representatives of

Indian industry form ICICI Limited as a development finance
institution to provide medium-term and long-term project financing to
Indian businesses in 1955.
• 1994 ICICI establishes ICICI Bank as a subsidiary.
• 1999 ICICI becomes the first Indian company and the first bank
or financial institution from non-Japan Asia to list on the NYSE.
- 46 –
• 2001 ICICI acquired Bank of Madura (est. 1943). Bank of

Madura was a Chettiar bank, and had acquired Chettinad
Mercantile Bank (est. 1933) and Illanji Bank (established 1904)
in the 1960s.
• 2002 The Boards of Directors of ICICI and ICICI Bank approve

the merger of ICICI, ICICI Personal Financial Services Limited
and ICICI Capital Services Limited, with ICICI Bank. After
receiving all necessary regulatory approvals, ICICI integrates the
group's financing and banking operations, both wholesale and
retail, into a single.
INTRODUCTION OF BANK OF MADURA
- 47 –
The pre--merger status of Bank of Madura is as follows: it had

liabilities of Rs.4,444 crore, equity market capitalization of Rs.100
crore and equity volatility of 0.69. Working through options
reasoning, we may say that the stock market thinks that its assets are
worth Rs.4, 095 crore with a volatility of 0.02. Hence, bom is
bankrupt (with assets which are Rs.350 crore behind liabilities) and
has a leverage of 41 times. If we needed to bring bom up to a point
where its assets were 10% ahead of liabilities, which is broadly
consistent with the Basle Accord, this would require an infusion of
Rs.800 crore of equity capital.
How do we combine these to think of the merged entity? Assets and
liabilities are additive, so the total assets of the merged entity would
prove to be roughly Rs.17,345 crore and the liabilities would prove to
be Rs.16,517 crore. The merged entity would hence need roughly
Rs.800 crore of fresh equity capital in order to come up to a point
where assets were atleast 10% ahead of liabilities.
How can we estimate the market capitalization of the merged

entity? The value of equity is the value of a call option on the assets
of the merged entity. Pricing the call requires an estimate of the
- 48 –
volatility of the merged assets, i.e. It requires knowledge of the extent

to which the assets of the two banks are uncorrelated. We find that
using values of the correlation coefficient ranging from 80% to 95%,
the volatility of assets of the merged entity proves to be around 0.12.
In this case, the valuation of the call option, i.e. An estimate of the
market capitalization of the merged entity, proves to be roughly
Rs.2,500 crore.
This number is not far from the pre--merger market

capitalisation of ICICI Bank, which was Rs.2,466 crore. Hence, we
can say that on purely financial arguments, the merger is roughly
neutral to ICICI Bank shareholders if bom was merged into ICICI
Bank for free. Indeed, if banking regulators took their jobs more
seriously, they would force the shareholders of bom to walk into such
a merger at a zero share price as a way of reducing
The number of bankrupt banks in India by one. Such a forced-merger

would be a politically easier alternative for the RBI when compared
with closing down bom.
- 49 –
The shareholders of ICICI Bank have paid a non-zero fee for

bom. This reflects a hope that the products and processes of ICICI
Bank will rapidly improve the value of assets of bom in order to
compensate. In addition, the merged entity will have to rapidly raise
roughly Rs.800 crore of equity capital to obtain a 10% buffer between
assets and liabilities.
Hence, this proposed merger is a godsend for bom, which was

otherwise a bankrupt entity which was headed for closure given the
low probability that it would manage to raise Rs.800 crore of equity
on a base of Rs.100 crore of market capitalisation. It is useful to
observe that bom probably did not see things in this way, given the
willingness of India's banking regulators to interminably tolerate the
existence of bankrupt banks. Closure of bom would normally involve
pain for bom's shareholders and workers; instead both groups will get
an extremely pleasant ride if the merger goes through.
The proposed merger is a daunting problem for ICICI Bank. It

will need to rapidly find roughly Rs.800 crore in equity. If India's
banking regulators were serious about capital adequacy, ICICI Bank
- 50 –
should have to pay roughly zero to merge with bom (it is doing a
favour to bom and to India's banking system); instead ICICI Bank has
paid a positive price for bom. The key question that will be answered
in the next two/three years is: Will ICICI Bank's superior knowledge
of products and processes revitalize the assets and employees of bom,
and generate shareholder value in the merged entity? ICICI's top
management clearly thinks so, and it would be a very happy outcome
if this did indeed happen
.
The proposed merger is a good thing for India's economy, since
the headcount of bankrupt banks will go down by one, and there is a
possibility of obtaining higher value added out of the poorly utilized
assets and employees of bom. If the merger goes through, then it will
reduce the say of the management team of bom in India's resource
allocation, which is a good thing.
- 51 –
Chapter 13: Merger of ICICI Bank with Bank of Madura
The proposed merger between ICICI Bank and Bank of Madura

(bom) is a remarkable one. The pre--merger market capitalization of
ICICI Bank was roughly Rs.2500 crore while bom was at roughly
Rs.100 crore. Bom is known to have a poor asset portfolio. What will
the merged entity be worth?
The key rationale underlying every merger is the question of

synergy. Can ICICI Bank's products and technology bring new life to
the 263 branches of bom? Will ICICI Bank (which has 1,700
employees) be able to overcome the 2,600 employees that bom
- 52 –
carries, given that Indian labour law makes it troublesome and

expensive to sack workers?
In applying these ideas to ICICI Bank and to bom, we need to

believe that the stock market effectively processes information to
produce estimates of the price and volatility of the shares of both
these banks. This assumption is suspect, because both securities have
poor stock market liquidity. Hence, we should be cautious in
interpreting the numbers shown here. There are many other aspects in
which this reasoning leans on models, which are innately imperfect
depictions of reality. However, these models are powerful tools for
understanding the basic factors at work, and they probably convey the
broad picture quite effectively.
The stock of ICICI Bank may be in the limelight on the back of

the proposed acquisition of Bank of Madura.
Though the stock has gained sharply in the last two months after
hitting a recent low of Rs 110, some upside may be left as the bank
could get re-rated on account of the merger. Existing shareholders
- 53 –
could hold their exposures in ICICI Bank while investors with an

appetite for risk could contemplate exposures despite the impressive
gains of the past few months. ICICI Bank continues to be one of the
better options in the banking sector at the moment and the possible
merger with ICICI may well be on the backburner.
The merger would pitchfork ICICI Bank as the leading private

sector bank. The merger may be viewed favorably since Bank of
Madura has focused strengths and a reasonably good quality balance
sheet. The board of directors is to meet on December 11 to consider
the merger.
It is quite likely that the swap ratio may be fixed in a manner

that holds out a good deal for the shareholders of Bank of Madura.
This may also be influenced by the fact that the Bank of Madura
stock has gained sharply by around 70 per cent in the past fortnight in
the homestretch to the deal.
As the acquisition is to be financed by issuance of stock, the rise

in the market capitalization of Bank of Madura may mean a higher
- 54 –
degree of equity issuance by ICICI Bank. But the price may well be
worth paying as this is the only way that ICICI Bank may be able to
get control over banks with reasonable quality balance sheets that
could make a difference in the medium to long-term.
Bank of Madura has assets of Rs 3,988 crore and deposits of Rs

3,395 crore as of March 2000. The fact that the bank has a capital
adequacy of 15.8 per cent with shareholder funds of Rs 263 crore
may mean that ICICI Bank (post-merger phase) will have more
leeway to pursue growth without expanding the equity base (other
than paying for the acquisition).
Strong capital adequacy, a strong beachhead on the Internet arena, a
revamped IT architecture, a growing retail client base through a
brick-and-click strategy, and improving asset quality and earnings
growth are positive features as far as ICICI Bank is concerned.
Despite these factors, the share had been on a downtrend from

after touching a high of Rs 271, eight months ago. The uptrend then
was on the back of the announcement of its ADR issue and new
technology initiatives. The subsequent downtrend was triggered by
- 55 –
the possibility of the merger with its parent. There is continuing

concern on asset quality of ICICI. It has been a stated goal of the
ICICI group to go in for universal banking. It is clear that once
regulatory hurdles are removed, such a possibility becomes distinctly
feasible. But
Given the battering that bank stock took, ICICI may now hesitate to
pursue this path. Also ICICI Bank is the most visible investor-
friendly face for the group in terms of returns to shareholders and it
may well be maintained as a separate entity. In this backdrop, the
stock may hold scope for improvement in the valuation of the stock.
Financial standing of ICICI Bank & Bank of Madura
- 56 –
Parameters ICICI Bank Bank of Madura

1998- 1999- 1998- 1999-
1999 2000 1999 2000
Net worth 308.33 1129.90 211.32 247.83
Total Deposit 6072.94 9866.02 3013.00 3631.00
Advances 3377.60 5030.96 1393.92 1665.42
Net Profit 63.75 105.43 30.13 45.58
Share Capital 165.07 196.81 11.08 11.08
Capital 11.06% 19.64% 18.83% 14.25%
Adequacy
Ratio
Gross 4.72% 2.54% 8.13% 11.09%
Advances /
Gross NP’s
Net 2.88% 1.53% 4.66% 6.23%
Advances /
Net NP’s
Source: Complied from Annual Report (March 2000) of ICICI

Bank & Bank of Madura.
- 57 –
Crucial Parameters: - How they stand
Name of the Bank of ICICI

Bank Madura Bank
Book value of
bank on the day of 183.0 58.0
merger
announcement
Market price on
the day 183.0 169.90
announcement of
merger
Earning per share 38% 5.4
Dividend paid (in 55% 15%
%) P/E Ratio 1.73 783
- 58 –
 The Generation Gap:- the merger of 57 year old BOM sooth

bared old generation bank with a fast growing technology say new
Generation bank will help the latter and the start merger is likely to
bring cheer to shareholder and bank employees of BOM and some
amount of discomfort and anxiety to those of ICICI bank.
The scheme of amalgamation will increase the equity bank of

ICICI Bank to RS 220.36 CR. ICICI Bank will issue 235.4-lakh share
of RS 10 each to the shareholder of BOM. The merger entity will
have an increase of a net base over RS 160 bn and deposit base of RS
131 bn.
The merged entity will have 360 branches and a similar number
of ATM’s across the country and also enable the ICICI to serve a
- 59 –
large customer bone of 1.2 million customers of BOM through a

wider network, adding to the antoma bare to 2.7 million.
Managing rural branches:
ICICI major branches are in major and cities, where as BOM

spreads its wings mostly in semi urban and city segments of south
India. There in a task ahead lying for the merged entity to increase
dramatically the business mix of rural branches of BOM. On the
other hand due to Geographical location of its branches and level
of competition. ICICI Bank will have a tough time to cope with.
Managing software:
Another task which stand on the way is technology while ICICI

bank which is fully automatic.
- 60 –
 Quality of assets:- the nature of assets a bank is holding would

signify its operational efficiency. Usually the level of Non –
performing Assets ( NPAS) judges the quality of assets. The lower
the NAPS to total advances or total assets the better the quality is
and vice versa.
 Staff productivity: - One of the key area where banks can develop
competition advantage. The measurement of staff productivity
becomes one of the essential factors while measuring the
performance of the banks.
 Liquidity:- While assessing the liquidity of a bank the most sought

ratio is net loans to total assets. A rise in the net loans to total
assets may be considered as a fall in the liquidity of the bank.
 Book Value per share:- It is simply the net worth of the company
(which is equal to the paid up equity capital plus resource and
surplus) divided by the number of outstanding equity shares.
- 61 –
 Earning per share:- specific valuation per unit of investment

given by Net income after income taxes and after dividends on
preferred stock of the company.
 Net work:- Book value of a company is common stock, surplus,

resources and retained earnings.
 Profitability: - the most crucial ratio in measuring the profitability

is net profit of the bank. The ratio such as Net Interest Income
(NIL) and Net Interest Margin (NIM) measure sustenance ability
of the bank based on the spread. Entity is using the package, Banks
2000, BOM computerized 90 percent of its business and was
converted with ISBS software.
The BOM branches are supposed to switch over to Banks 2000.

Though it is not a difficult task, with 80% computer literate staff
would need effective retraining which involves a cost. The ICICI
Bank need to invest RS 50 core for upgrading BOM’s 263
branches.
- 62 –
Managing Human Resources:
One of the greatest challenges before ICICI Banks is managing

human resources. When the head count of ICICI Bank is taken it in
less than 1500 employees on the other hand BOM has over 2500.
The merged entity will have bout 4000 employees which will make
it one of the largest banks among the new generation private sector
banks. Th staff of ICICI Banks are drawn from 75 various banks
mostly young qualified professionals with computer background and
prefer to work in metro or by either with good remuneration
packages.
While under the influence of tread unions most of the BOM

employees have low career aspiration. The announcement by H.N.
signor, CEO and MD of ICICI, that three would be no VRS or
retrenchment, creates a new hope amongst the BOM employees. It is
a tough task ahead to manage. On the other hand their pay would be
revised up wards. It is not a Herevlean task to integrate two work
welters?
- 63 –
Managing Client Base:-
The clients base of ICICI Bank after merger, will be as 2.7

Million from it past 0.5 Million, as accumulation of 2.2 Million from
BOM. The nature and quality of clients is not of uniform quality.
The BOM had built up it client base for a long time, in a hard
way, on the basis of personalized services. In order to deal with the
BOM clientele, the ICICI Bank needs to redefine its strategies to suit
to the new clientele. The sentiments or a relationship of small and
medium borrower is hurt it may be difficult for them to reestablish
the relationship which could also hamper the image of the bank.
Given the situation, we need to wait and view, as to how the ICICI
will face this challenge.
- 64 –
Recommendation of Narasimham Committee on banking sector

reforms
 Globally, the banking and financial systems have adopted

information and communications technology. This phenomenon
has largely by passed the Indian banking system, and the
committee feels that requisite success needs to be achieved in the
following areas:-
- Banking automation
- Planning, Standardization of electronic payment systems
- Telecom infrastructure
- Data were
- 65 –
 Merger between banks and dfls and nbfcs need to be based on

synergies and should make a sound commercial sense. Committee
also opines that merger between strong banks / fls would make for
greater economic and commercial sense and would be a case where
the whole is greater than the sum of its party and have a ‘force
multiplier effect”. It also have merger should not be seen as a
means of bailing out weak banks.
 A weak bank could be nurtured into healthy units. Merger could

also be a solution to a after cleaning up their balances sheets it only
say if these is no Voltaire response to a takeover of such bank, a
restructuring commission for such PSB, can consider other options
such as restructuring , merger and amalgamations to it not closure.
 The committee also options that while licensing new private sector
banks, the initial capital requirement need to be review. It also
emphasized on a transparent mechanism for deciding the ability of
promoter to professionally manage the bank. The committee also
- 66 –
feels that a minimum threshold capital for old private banks also
deserved threshold capitals. The committee also opined that a
promoter group couldn't hold more that 40 percent of the equity of
a bank.
The Narasimham Committee also suggested that the merger could
be a solution to ‘Weak banks’ Coney after clearing up the balance
sheets) with a strong public sector bank.
Source: Narasimham Committee report on banking sector
reforms.
Changes after the merger:-
While, BOM had an attractive business per employee figure of

Rs.202 lakh, a better technological edge and had a vast base in
southern India when compared to Federal bank. While all these
factors sound good, a cultural integration would be a tough task ahead
for ICICI Bank.
ICICI Bank has announced a merger with 57-year-old Bank of

Madure, with 263 branches, out of which 82 of them are in rural
- 67 –
areas, with most of them in southern India. As on the day of

announcement of merger) 09-12-00), Kotak mahindra group was
holding about 12 percent stake in BOM, the Chairman BOM,
Mr.K.M. Thaiagarajan, along with his associates was holding about
26 percent stake, Spic groups has about 4.7 percent, while LIC and
UTI were having marginal holdings. The merger will give ICICI
Bank a hold on South India market, which has high rate of economic
development.
The board of Director at ICICI has contemplated the following

synergies emerging from the merger:
Financial Capability: The amalgamation will enable them to have a

stronger financial and operational structure, which is supposed to be
capable of greater resourger/deposit mobilization. And ICICI will
emerge a one of the largest private sector banks in the country.
- 68 –
Branch network: The ICICI’s branch network would not only 264,
but also increases geographic coverage as well as convenience to its
customers.
Customer base: The emerged largest customer base will enable the
ICICI bank to offer banking financial services and products and also
facilitate cross-selling of products and services of the ICICI groups.
Tech edge: The merger will enable ICICI to provide atms, Phone and
the Internet banking and finical services and products and also
facilitate cross-selling of products and services of the ICICI group.
Focus on Priority Sector: The enhanced branch network will enable

the Bank to focus on micro-finance activities through self-help
groups, in its priority sector initiatives through its acquired 87 rural
and 88 semi-urban branches.
Source: Report submitted at EGM on January 19, 2001.
- 69 –
THE SWAP RATIO:
The swap ratio has been approved in the ratio of 1:2 – two shares of
ICICI Bank for every one share of Bank of Madera.
The deal with Bank of Madera is likely to dilute the current equity
capital by around 12 percent. And the merger is expected to bring 20
percent gains in EPS of bank.
And also the bank’s comfortable capital Adequacy Ratio (CAR) of

19.64 percent has declined to 17.6 percent.
- 70 –
Chapter 14: Reasons behind the recent trend of merger in

Banking Sector
The question on top everybody’s mind is

Are banks and bankers on the road to redundancy?
First consider the reasons who one does not need banks in large
numbers any more
 A depositor today can open a cheque account with a money market

mutual fund and obtain both higher returns and greater and greater
flexibility. Indian mutual funds are queuing up to offer this facility.
 After can be drawn or a telephone bill paid easily through credit

cards.
 Even if a bank is just a safe place to put away your savings, you
need not go to it. There is always an ATM you can do business
with.
- 71 –
 If you are solvent and want to borrow money, you can do so on

your credit card- with far fewer hassles.
 A ‘AAA’ corporate can directly borrow from the market through

commercial papers and get better rates in the bargain. In fact the
banks may indeed be left with dad credit risk or those that cannot
access the capital market. This once again makes a shift to non-
fund based the activities all the more important.
Chapter 15: Case Studies
Case study I
IDBI – UNITED WESTERN MERGER BANK (Merger)
The merger that was announced on , 2006 between Deutsche

Bank and Dresdner Bank, Germany’s largest and the third largest
- 72 –
bank respectively was considered as Germany’s response to

increasingly tough competition markets.
The merger was to create the most powerful banking group in

the world with the balance sheet total of nearly 2.5 trillion marks and
a stock market value around 150 billion marks. This would put the
merged bank for ahead of the second largest banking group, U.S.
based citigroup, with a balance sheet total amounting to 1.2 trillion
marks and also in front of the planned Japanese book mergers of
Sumitomo and Sukura Bank with 1.7 trillion marks as the balance
sheet total.
The new banking group intended to spin off its retail banking
which was not making much profit in both the banks and costly,
extensive network of bank branches associated with it.
The merged bank was to retain the name Deutsche Bank but
adopted the Dresdner Bank’s green corporate color in its logo. The
future core business lines of the new merged Bank included
investment Banking, asset management, where the new banking
- 73 –
group was hoped to outside the traditionally dominant Swiss Bank,

Security and loan banking and finally financially corporate clients
ranging from major industrial corporation to the mid-scale
companies.
With this kind of merger, the new bank would have reached the
no.1 position of the US and create new dimensions of aggressiveness
in the international mergers.
But barely 2 months after announcing their agreement to form the
largest bank in the world, had negotiations for a merger between
Deutsche and Dresdner Bank failed on April 5, 2000.
The main issue of the failure was Dresdner Bank’s investment

arm, Kleinwort Benson, which the executive committee of the bank
did not want to relinquish under any circumstances.
In the preliminary negotiations it had been agreed that Kleinwort

Benson would be integrated into the merged bank. But from the
- 74 –
outset these considerations encountered resistance from the asset

management division, which was Deutsche Bank’s investment arm.
Deutsche Bank’s asset management had only integrated with

London’s investment group Morgan Grenfell and the American
Banker’s trust. This division alone contributed over 60% of Deutsche
Bank’s profit. The top people at the asset management were not ready
to undertake a new process of integration with Kleinwort Benson. So
there was only one option left with the Dresdner Bank i.e. To sell
Kleinwort Benson completely. However Walter, the chairman of the
Dresdner Bank was not prepared for this. This led to the withdrawal
of the Dresdner Bank from the merger negotiations.
In economic and political circles, the planned merger was

celebrated as Germany’s advance into the premier league of the
international financial markets. But the failure of the merger led to
the disaster of Germany as the financial center.
- 75 –
Case study II
- 76 –
MERGER OF ICICI BANK WITH SANGLI BANK
COMING TOGETHER: The regional office of Sangli Bank in Mumbai.
The merger that was announced on APRIL 18, 2007 between ICICI Bank and
SANGLI Bank.All branches of Sangli Bank functions as branches of ICICI
Bank from April 19, said the Reserve Bank of India.
Sangli Bank is an unlisted private bank headquartered at Sangli in

Maharashtra. As on March 31, 2006, Sangli Bank had deposits of Rs. 2,004
crore, advances of Rs. 888 crore, net NPA (non-performing assets) ratio of 2.3
per cent and capital adequacy of 1.6 per cent. Its loss at the end of 2005-06
amounted to Rs. 29 crore.
- 77 –
It has 198 branches and extension counters, including 158 branches in

Maharashtra and 31 branches in Karnataka.
About 50 per cent of the total branches are located in rural and semi-urban
areas and 50 per cent in metropolitan and urban centres. The bank has about
1,850 employees. ICICI Bank is the second largest bank in India and the
biggest in terms of market capitalisation.
As on September 30, 2006, ICICI Bank had total assets of Rs. 282,373 crore.
In the six months ended September 30, 2006, it made a net profit of Rs. 1,375
crore.
It had 632 branches and extension counters and 2,336 ATMs as on that date,
and is in the process of setting up additional branches and ATMs pursuant to
authorisations granted by the RBI. It has about 31,500 employees.
ICICI Bank offers a wide range of financial products and services directly and
through subsidiaries in the areas of life and general insurance, asset
management and investment banking.
Its shares are listed on the Bombay Stock Exchange Limited and the National
Stock Exchange of India Limited and its American Depositary Shares are
listed on the New York Stock Exchange
- 78 –
- 79 –

Mergers and Acquisitions - by Asif Aghadi

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Mergers and Acquisitions - by Asif Aghadi

Hochgeladen von

Copyright:

Verfügbare Formate

We have been learning about the companies coming together to

With recession taking toll of many Indian businesses and the

In this context, it would be essential for us to understand what

All our daily newspapers are filled with cases of mergers,

restructuring. Thus important issues both for business decision and

To opt for a merger or not is a complex affair, especially in

Merger is defined as combination of two or more companies

Merger is also defined as amalgamation. Merger is the fusion of

one company stand transferred to Transferee Company in

• Equity shares in the transferee company,

b) Purchase of shares in open market;

A ‘takeover’ is acquisition and both the terms are used

De-merger or corporate splits or division:

De-merger or split or divisions of a company are the

Purpose of Mergers & Acquisitions

The purpose for an offeror company for acquiring another

decide the specific objectives to be achieved through acquisition. The

Other possible purposes for acquisition are short listed below: -

(1) Procurement of supplies:

1. To safeguard the source of supplies of raw materials or

(2) Revamping production facilities:

1. To achieve economies of scale by amalgamating production

3. Market and aiming at consumers satisfaction through

(3) Market expansion and strategy:

1. To eliminate competition and protect existing market;

3. To obtain new product for diversification or substitution of

(4) Financial strength:

(5) General gains:

1. To improve its own image and attract superior managerial

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror company’s

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level

(A) Vertical combination:

A company would like to takeover another company or seek its

The following main benefits accrue from the vertical

1. It gains a strong position because of imperfect market of the

2. Has control over products specifications.

(B) Horizontal combination:

It is a merger of two competing firms which are at the same

(C) Circular combination:

Companies producing distinct products seek amalgamation to

enlargement. The acquiring company obtains benefits in the form of

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated

Mergers and takeovers are permanent form of combinations

Mergers and acquisitions are caused with the support of

(1) From the standpoint of shareholders

Investment made by shareholders in the companies

One or more features would generally be available in each

(2) From the standpoint of managers

Managers are concerned with improving operations of the

(3) Promoter’s gains

Mergers do offer to company promoters the advantage of

(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect

The economic gains realized from mergers are passed on to

(b) Workers community