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Merger & Acquisition on Banking Sector

Capstone Project

Savio Basimalla

Batch 2013 - 2015

In partial fulfillment of the requirements for



PGDM CAPSTONE PROJECT Kohinoor Business School

I hereby declare that the Capstone Project report entitled “Merger &
Acquisition” is my work submitted in partial fulfillment of the requirement for the
Post Graduate Diploma In Management from KOHINOOR BUSINESS SCHOOL,
KURLA, MUMBAI and not submitted for the award of any degree, diploma,
fellowship or any similar titles or prizes.

Date: Signature: _______________

Place: Mumbai Savio Basimalla

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First of all I would like to take this opportunity to thank my College for having projects as a part
of the Curriculum.

I wish to express my heartfelt gratitude to the following individuals who have played a crucial
role in the research for this project. Without their active cooperation the preparation of this
project could not have been completed within the specified time limit.

The first person I would like to acknowledge is my mentor PROFESSOR. MILIND DALVI, of
Kohinoor Business School, who supported me throughout this project with utmost co-operation
and patience. I am very much thankful to you sir, for sparing your precious and valuable time for
me and for helping me in doing this project.

Finally, to all my friends who helped me in making this project. I want to thank them for all
their help, support, interest and valuable hints.

PGDM CAPSTONE PROJECT Kohinoor Business School

This is to certify that the project entitled “Merger & Acquisition on banking
sector” is successfully completed by “Savio Basimalla” in partial fulfillment of
the Post Graduate Diploma In Management, AICTE Approved , through




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1.1 Executive Summary

1.2 Objective of the study
1.3 Scope of the study

2.1 Merger & types

2.2 Benefits of Merger
2.3 Law affecting takeover, merger & acquisition
2.4 Leverage buyout
2.5 Valuation theory
2.6 Processes in the company

3.1 Research Methodology

3.2 Limitation
3.3 Literature Review
3.4 Case study

4.1 Conclusions
4.2 Bibliography

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Merger & Acquisition refers to the aspects of corporate strategy, corporate finance &
management dealing with the buying, selling, dividing and combining of different companies
and entities or different entities all together that can help an firm to grow rapidly in its sector or a
new fields all together.

The usual form of consideration for a merger is exchange of shares of the acquiring firm with the
shares of the target company. In acquisitions, the consideration may take the form of cash
consideration or loan instrument.

In today’s intense competition the main aim of the company is not only to just survive but also to
produce maximum returns to its shareholders.

This can be achieved by organic growth. Organic growth and Inorganic growth. Organic growth
is when a company archives the above goals by its own over period of time. The second way is
to achieve these goals inorganically, this is when company acquires the need synergy from the
one who already has it. This is when mergers, takeovers and acquisitions come into seen.

Merger in banking sector include human resources which is the major part of asset. A merger in
banking sector can only be successful only when they successfully mix the culture of two
different banks.

The objective of the study is to understand different types of merger & acquisition & its
implications that help companies to deliver value in reference with practical example from
banking sector. I have used secondary data that was collected through the internet & text books.

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1) To understand merger and its legal implication for merger.

2) To study the impact of merger on the merged company.

3) To study the working factors of the company after merger.

4) This study will help in understanding the reasons behind the merger.

5) To evaluate whether the mergers and acquisitions in banking sector create any
shareholder value or not.

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Merger, takeover and acquisition are type of corporate restructuring. These are types of inorganic
growth. In today’s competitive world, banks in India are not only competing against themselves
but also with the banks outside India for keeping the edge they need to grow fast and this is
where M & A comes into play. The project’s main aim is to study the reasons behind the
takeovers or mergers and also to know whether the mergers were successful or not. The Merger
& Acquisition activity in India have been increase in last ten years and banking sector is no
exception to this. So in this project we study the reasons behind these mergers.

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Merger is a combination of two or more companies into one company. In India, we call mergers
as amalgamations, in legal parlance. The acquiring company, (also referred to as the
amalgamated company or the merged company) acquires the assets and the liabilities of the
target company (or amalgamating company). Typically, shareholders of the amalgamating
company get shares of the amalgamated company in exchange for their existing shares in the
target company. Merger may involve absorption or consolidation

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Types of Merger

Horizontal merger
A horizontal merger involves merger of two firms operating and competing in the same kind of
business activity. Forming a larger firm may have the benefit of economies of scale. But the
argument that horizontal mergers occur to realize economies of scale are not true horizontal
mergers is regulated for their potential negative effect on expectation. Many as potentially
creating monopoly power on the part of the combined firm enabling it to engage in
anticompetitive practices also believe horizontal mergers.

Vertical mergers
Vertical mergers occur between firms in different stages of production operation. In oil industry,
for example, distinctions are made between exploration, and production, refining and marketing
to ultimate customer. The efficiency and affirmative rationale of vertical integration rests
primarily in the costliness of market exchange and contracting


A merger between firms that are involved in totally unrelated business activities. There are two
types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with
nothing in common, while mixed conglomerate mergers involve firms that are looking for
product extensions or market extensions.

Co-Generic Merger

Co-generic merger is a kind in which two or more companies in association are some way or the
other related to the production processes, business markets, or basic required technologies. It
includes the extension of the product line or acquiring components that are all the way required
in the daily operations. This kind offers great opportunities to businesses as it opens a hue
gateway to diversify around a common set of resources and strategic requirements.

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Benefits of Mergers
It is believed that mergers and acquisions are strategic decisions leading to the
maximization of a company’s growth by enhancing its production and marketing operations.
They have become popular in the recent times because of the enhanced competition, breaking of
trade barriers and globalization of business. A number of reasons are attributed for the
occurrence of merger and acquisitions. For example, it is suggested that mergers and acquisition
are intended to:

1) Limit Competition
2) Achiever diversification
3) Overcome the problem of slow growth and profitability in one’s own industry
4) Utilize under-utilized resources-human and physical and managerial skills.
5) Gain economies of scale and increase.
6) Circumvent government regulations.

A number of benefits of mergers are claimed. All of them are not real benefits. Following are
the motives and advantages of mergers and acquisition.

1) Maintaining or accelerating a company’s growth, particularly when the internal growth is

constrained due to paucity of resources.
2) Enhancing profitability, through cost reduction resulting from economies of scale,
operating efficiency and synergy.

Reducing tax liability because of the provision of setting –off accumulated losses and
unabsorbed depreciation of one company against the profits of another

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Laws affecting Takeovers, Mergers, Acquisition
Term takeover does not find a comprehensive definition in any statue; in fact there is no
explicit reference to that term, though each concerned statute has sought to take one or more
features of a takeover and regulate a transaction that has such features. In brief, the essential
elements of a takeover can be describe by saying that a takeover is gaining of management
control of a company by acquiring controlling interest in it through acquisition of its voting

Here an overview is made of the various statues and provisions, which regulate takeover.
Takeover essentially implies purchase of shares. Hence, it is found fit to analyze such provisions,
which do not have direct or special connection with takeovers.

Acquisition of dominant Undertakings

Section 108A to 1081 deal with provisions relating to acquisition of dominant undertakings. The
types of transactions, which are covered, are specified in section 108G. An aspect to be noted is
that the acquisition envisaged by acquisition of shares and not through outright purchase of the
undertaking. Such transactions cannot be undertaken without the approval of the central

Section 395 – A special provision to regulate certain types of takeovers

Section 395 – Concerns a special type of takeover and basically provided for protection of
minority and small shareholders of the company.

As can be gathered from the section, it provides for the situation when 90% or more of the shares
of a company are bought out by a person.

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SEBI (Substantial Acquisition of shares and takeovers) Regulation 1994 and provisions of
the listing Agreement

For the first time, in India, A statue, which aims to comprehensive cover various aspects relating
to takeover, has been notified. This statue, the SEBI (Substantial Acquisition of shares and
Takeovers) Regulations 1994, provides in detail the steps that have to be taken when a takeover
is sought to be made.

Need for a special set of provision for amalgamations

It is possible for accompany to affect the whole process of amalgamation under the various other
provisions of the Act. However, as can be seen from the following, the whole process becomes
cumbersome and unwieldy:-

1) Approval of the shareholders would have to be taken for disposal of the whole of the
undertaking of the company.

2) Approval of all the lenders would have to be taken who have given loans and particularly
where the loan is a secured one and the assets are being transferred.

3) Approval of all the creditors and other persons to whom money is owed would have to be
taken so that their dues may be assigned to the amalgamated company.

4) The elaborate winding up procedure would have to be followed.

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Banking Regulation Act, 1949

Under banking Regulation Act, there is presently no provision for obtaining approval of the
Reserve Bank of India for any acquisition or merger of any financial business by any banking
institution. In other words, if a banking institution desires to acquire nonbanking finance
company there is no requirement of approval of the Reserve Bank of India. Further, in case of a
merger of an all India financial institution with own subsidiary bank, there was no express
requirement of obtaining the approval of reserve Bank of India for such merger, under the
provisions of the banking regulation Act or the Reserve Bank of India Act. Such approval of the
Reserve Bank of India is required only in the context of relaxation of regulatory norms to be
complied with by a bank.

Reserve Bank’s Review process

RBI will need to examine the reasonableness of financial projection, including business plan and
earning assumptions as well as the effect of the proposed merger on the merged entity’s capital

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Leveraged Buyout

Leveraged buyout (LBO) is a financial engineering product of the takeover and corporate
restructuring wave of 1980’s in the U.S. For domestic acquisition in India, LBO are not
practiced. However Indian companies have been successfully restoring to the LBOs For the
overseas acquisitions.

Leveraged Buyout (LBO) simplistically means mobilizing borrowed funds based on the security
of assets and cash flows of the target company and using those funds to acquire the target
company. The reason to say simplistically is that there are four characteristics / steps in a typical
or classical leveraged buyout, mobilizing funds as above being one of them.

These steps are –

1) Incorporation of a privately / wholly owned company to act as a special purpose vehicle

(SPV) for acquisition of a target company.
2) Mobilization of borrowed funds in the SPV, based on the security of assets and cash flow
of the target company ( before its takeover)
3) Acquisition of the entire or near entire share capital of the target company.
4) Merger of the target company into SPV. This last move, which is also a critical step in
the leveraged buyout.

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1) If the public shareholders get a value higher than the market price they are benefited, at least,
in the short run.

2) The owner – managers and professional managers can run the companies without the fear of
losing control from as hostile takeover

3) LBO’s help to restructure the companies, basically weeding out inefficient and incompetent


1) As a LBO usually result in a very high portion of debt, servicing of the debt becomes a great
financial strain for the company in the post-LBO period.

2) Since the management resorts to assets stripping and jettisoning of the subsidiaries to reduce
the debt burden after and LBO, it might weaken the company in the long run.

3) Continuity and stability will be adversely affected when bankers and stock market experts
start running manufacturing enterprise.

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Valuation Theory
There are many other valid motives for which companies restore to merger and acquisition. This
theory explains the merger and acquisition as being planned and executed by the acquirer who
has better information about the valuation of the target company than the stock market as a
whole and who estimates the real intrinsic value to be much higher than the present market
capitalization of the company. Therefore, such an acquirer is ready to pay premium over the
present market price to acquire control over the target company.

Valuation of Target Company

Valuation of a target company is a very critical step in the process of acquisition. The acquirers
end up valuing and playing for the target companies far more than their intrinsic value.

Concept of value of a company

There are many concepts of the value of a company. In the equity shares of a company or for
deciding the intrinsic value of a target company. There are five concepts of the value of a

1) Book Value
2) Reinstatement or replacement value
3) Liquidation value or break-up value
4) Market value
5) Present value of future cash flow

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1) Book Value –

This is essentially accounting concept. Accounts are written on the basis of historical cost
minus the depreciation on depreciable assets. Even the debt is recorded at its historical
cost and not market value. The concept of Book Value in generic sense means historical
cost as recorded in the books of accounts. This value does not actually reflect value or
worth of shares, but rather reflect its historical cost.

This concept is of no relevance at all from investment perspective or for valuing a target
company. If the book value is more than 2 then it is good for the company.

The calculation of book value comes under the valuation ratio.

2) Reinstatement or replacement value –

This is an amount that a company would be required to spend if it were to replace all its
existing assets by identical capacity in the identical condition as existing assets.

This concept, first of all, is not relevant in non- manufacturing sector where there is no
concept of manufacturing capacity and main assets of the company are intangible assets
like intellectual property, business methods, employee skills, goodwill etc.

3) Liquidation value or break-up value –

This means market value of all assets of a company, if sold piecemeal after the closure of
the business. This concept also ignores the value of intangibles. It rather assumes the
value of intangibles as zero.

This concept assumes the closure of business and therefore is not relevant at all for
valuing a target company, wherein one needs to find out its intrinsic value on a ‘going
concern basis’.

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4) Market value –Market value of an asset or a security is the price at which it is currently
being traded in the market. Market value of a company means number of outstanding
equity shares multiplied by market price of the shares.

5) Present value of future cash flow –

Present value is the net future cash flows discounted at the weighted average cost of its

Net cash flow mean cash flow from operations as adjusted for capital expenditure and
changes in net working capital.

WACC is the weighted average of the specific cost of capital of various funding
components of a firm.

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Factors affecting valuation

1) Transferability of shares –

Shares of private companies and occasionally, public companies may have restrictions placed
on transfer of their shares. The articles of association of private companies state that any
shareholder seeking transfer of their shares should offer them first to the existing shareholders.

It is unarguable that an item, which cannot be sold easily, has a much lesser value than an item
easily realizable. Hence while determining the value of the share it is necessary to consider the
effect of any restrictions on transfer of shares over the value of shares.

2) Asset Base –

It is always kept in mind what is market value of the assets, if realized piecemeal. It is found
that many companies, in spite of having very valuable assets, could not extract adequate returns
from them as could comparably be obtained if these assets are sold off and the amounts invested
elsewhere. An adequate asset base also gives some assurance to the shareholders over the safety
of their investments.

3) Size of Shareholding –

The size of shareholdings affects the value of shares. Small quantity of shares does not give
any power to the holder to influence the management. At the same time small lot of shares find a
wider market and are, hence readily realizable. Larger lot gives scope for involvement in the
policy and working of the company. Corresponding disadvantage is that such quantity of shares
may not find many buyers and may take some time for disposal.

4) Quality and timing of future earnings –

The quality of the earnings and its timing also affect the final value of the shares. If the
earnings may arise after long time, or if the cash flow is uneven, having larger amounts of profits
in distant periods, the value of the share may accordingly be affected adversely.

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Methods of Valuation of Shares

There is no one method of valuation of shares, which is universally suitable, and as per the facts
of the particular company. Some of these are discussed below.

Assets Method

This method is termed as the break – up value method. This method of valuation is fairly simple.
The market or realizable value of all the assets is determined. From this aggregate value, the total
liabilities, which would have to be paid including selling costs and costs of dissolution, would be
deducted. The resultant figure would have to be allocated on the number of equity shares to get
the value per share.

Yield Method

The yield method lays stress on the dividend return of the shares and is therefore suitable to an
extent to shareholders having small quantity of shares or those who are concerned with the
periodical returns from a share. The yield from the share i.e. the amount of dividend as a
percentage of the market price is worked out. This after due adjustments for factors listed, is
compared with the ruling rate of return on alternative investments. The value of share is
accordingly determined.

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Earning of future maintainable profits

This method is very popularly and widely accepted. The method follows the steps below

1) Estimation of future maintainable profits

The initial step is determination of the amount of profits that may be earned in the future
on a steady basis. Future profits estimation is done on the basis of plan, appropriate
adjustments are made for taxation, dividends on preference shares and according to
certain variants of this method for transfer to reserves.

2) Rate of Capitalization

Benchmark capitalization rate is determined by considering returns from alternative but

safe investments. The alternative rate is the cost of borrowings.

3) Capitalization of future profits

The profits are capitalized by following formula.

(Future profits / rate of capitalization) x 100

4) Value per share

The value determined as per the earlier step is divided by the number of equity shares to
get the value per share. Adjustments are made for partly paid up shares or calls in arrears.

Discounted Cash flow method

This method has also gained some popularity and is also suitable when the cash flows in
the future are uneven. The important advantage of this method is that it takes into account
the time value of money. Another advantage is that it takes into account capital inflows /
outflows also into account. This method involves the following steps.

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1) Determine the number of years.
2) Determine of future cash flows.
3) Determining the end value of the business.
4) Determining of discounting rate
5) Discounting the future cash flows
6) Value of the shares
7) Price / Earning method
8) Determining the future earnings per share
9) Determining the appropriate price.

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Research design or research methodology is the procedure of collecting, analyzing and

interpreting the data to diagnose the problem and react to the opportunity in such a way where
the costs can be minimized and the desired level of accuracy can be achieved to arrive at a
particular conclusion. The methodology used in the study for the completion of the project and
the fulfillment of the project objectives.

Type of Study

The research has been based on secondary data analysis. The study has been exploratory as it
aims at examining the secondary data for analyzing the previous researches that have been done
in the area of fundamental analysis of bank. The knowledge thus gained from this preliminary
study forms the basis for the further detailed Descriptive research.

Sample Design

Case studies on:

ICICI Ltd Merged with ICICI Bank.

Bank of Rajasthan merged with ICICI Bank.

Sample Size

In this project case study has been used to explain the motive of the merger

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The major limitation of the project is the time frame. The post merger analysis is just for one
year and one year is too less period to judge the effect of a merger.

1. The analysis is based on various ratios hence all the limitations of the ratio analysis
become a part of the limitations of the study.

2. Whole of the analysis is based on the balance sheets and profit and loss accounts, which
is a secondary data. Hence it suffers from being very reliable.

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Literature Review

Prasad G. Godbole book in his “Mergers & acquisitions and corporate restructuring” says, it
involves combination of all assets, liabilities, loans and businesses of two or more companies
such that one of them survives. Merger is primarily a strategy of inorganic growth.

In the pure sense of the term, a merger happens when two firms, often of about the same size,
agree to go forward as a single new 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.

Prasad G. Godbole book in his “Mergers & acquisitions and corporate restructuring” says,
Acquisition is an attempt or a process by which a company or companies or an individual or a
group of individuals acquires controlling interest in or control over another company called
‘target company’. Acquiring control can also be defined as acquiring right to appoint majority of
the directors of a company. Acquisition is primarily a strategy of inorganic growth that is very
well accepted and practiced around the world.

There are many ways in which control over a company can be acquired.

1) Purchasing a substantial percentage of the voting capital of the target company.

2) By acquiring control over an investment or holding company, whether listed or unlisted.
3) By acquiring voting rights of the target company through a proxy voting arrangement.

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When one company takes over another and clearly establishes itself as the new owner, the
purchase is called an acquisition. From a legal point of view, the target company ceases to exist,
the buyer “swallows” the business and the buyer’s stock continues to be traded.

Demerger –
Demerged company means the company whose assets, liabilities, loans and businesses are being
transferred in the process of demerger to another company in case of either spin-off or split-up. It
is also called Transferor Company.

Demerger can take three forms –

1) Spin – off
2) Split – up
3) Split- off

Spin - off

Spin off involves transfer of all or substantially all the assets, liabilities, loans and business of
one of the business divisions or undertaking to another company whose shares are allotted to the
shareholders of the transferor company on a proportionate basis.

Split – up

Split- up involves transfer of all or substantially all assets, liabilities, loans and businesses of the
company to two or more companies in which again like spin – off , the shares in each of the new
companies are allotted to the original shareholders of the company on a proportionate basis.

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Split- off

Split –off is a spin-off with the difference that in split-off, all the shareholders of the transferor
company do not get the shares of the transferee company in the same proportion in which they
hold the shares in the transferor company.


Takeover implies acquisition of control of a company which is already registered through the
purchase or exchange of shares. A takeover is an offer to purchase enough share of a company to
overtake the current majority shareholders. an act of assuming control of something, especially
the buying out of one company by another.

Takeover main purpose to make bigger or larger company from a small company.

Types of takeover -

1) Friendly Takeover –
When a bidding company attempts to buy the majority shares without informing the
board of directors first. This is considered friendly takeover.

2) Hostile Takeover –

When the board rejects the friendly takeover offer, the bidder may choose to continue
pursuing shareholders without the input of the board of directors.

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Case study
ICICI Ltd Merged with ICICI Bank

Second largest Bank in India is now formally in place. RBI has given approval for the reverse
merger of ICICI Ltd with its banking arm ICICI Bank. ICICI Bank with Rs 1 lakh crore asset
base banks is second only to State Bank of India, which is well over Rs 3 lakh crore in size. RBI
also cleared the merger of two ICICI subsidiaries, ICICI Personal Financial Services and ICICI
Capital Services with ICICI Bank. The merger is effective from the appointed dated of March
30, 02, and the swap ratio has been fixed at two ICICI shares for one ICICI Bank share.

Reserve Bank, approval is subject to the following conditions:

(i)Compliance with Reserve Requirements the ICICI Bank Ltd. would comply with the Cash
Reserve Requirements (under Section 42 of the Reserve Bank of India Act, 1934) and Statutory
Liquidity Reserve Requirements (under Section 24 of the Banking Regulation Act, 1949) as
applicable to banks on the net demand and time liabilities of the bank, inclusive of the liabilities
pertaining to ICICI Ltd. from the date of merger. Consequently, ICICI Bank Ltd. would have to
comply with the CRR/SLR computed accordingly and with reference to the position of Net
Demand and time liabilities as required under existing instruction

(ii) Other Prudential Norms ICICI Bank Ltd. will continue to comply with all prudential
requirements, guidelines and other instructions as applicable to banks concerning capital
adequacy, asset classification, and income recognition and provisioning, issued by the Reserve
Bank from time to time on the entire portfolio of assets and liabilities of the bank after the

(iii) Conditions relating to Swap Ratio as the proposed merger is between a banking company
and a financial institution, all matters connected with shareholding including the swap ratio, will
be governed by the provisions of Companies Act, 1956, as provided. In case of any disputes, the
legal provisions in the Companies Act and the decision of the Courts would apply.

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(iv) Appointment of Directors the bank should ensure compliance with Section 20 of the
Banking Regulation Act, 1949, concerning granting of loans to the companies in which directors
of such companies are also directors. In respect of loans granted by ICICI Ltd. to companies
having common directors, while it will not be legally necessary for ICICI Bank Ltd. to recall the
loans already granted to such companies after the merger, it will not be open to the bank to grant
any fresh loans and advances to such companies after merger. The prohibition will include any
renewal or enhancement of existing loan facilities. The restriction contained in Section 20 of the
Act ibid, does not make any distinction between professional directors and other directors and
would apply to all directors.

(v) Priority Sector Lending considering that the advances of ICICI Ltd. were not subject to the
requirement applicable to banks in respect of priority sector lending, the bank would, after
merger, maintain an additional 10 per cent over and above the requirement of 40 per cent, i.e., a
total of 50 per cent of the net bank credit on the residual portion of the bank's advances. This
additional 10 per cent by way of priority sector advances will apply until such time as the
aggregate priority sector advances reaches a level of 40 per cent of the total net bank credit of the
bank. The Reserve Bank’s existing instructions on sub-targets under priority sector lending and
eligibility of certain types of investments/funds for reckoning as priority sector advances would
Apply to the bank.

(vi) Equity Exposure Ceiling of 5% the investments of ICICI Ltd. acquired by way of project
finance as on the date of merger would be kept outside the exposure ceiling of 5 per cent of
advances towards exposure to equity and equity linked instruments for a period of five years
since these investments need to be continued to avoid any adverse effect on the viability or
expansion of the project. The bank should, however, mark to market the above instruments and
provide for any loss in their value in the manner prescribed for the investments of the bank. Any
incremental accretion to the above project-finance category of equity investment will be
reckoned with in the 5 percent ceiling for equity exposure for the bank

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(vii) Investments in Other Companies the bank should ensure that its investments in any of the
companies in which ICICI Ltd. had investments prior to the merger are in compliance with
Section 19 (2) of Banking Regulation Act, 1949, prohibiting holding of equity in excess of 30
per cent of the paid-up share capital of the company concerned or 30 per cent of its own paid-up
Share capital and reserves whichever is less

(viii) Subsidiaries (a) While taking over the subsidiaries of ICICI Ltd. after merger, the bank
should ensure that the activities of the subsidiaries comply with the requirements of permissible
activities to be undertaken by a bank under Section 6 of the Banking Regulation Act,1949 and
section 19(1) of the act ibid.

(b) The takeover of certain subsidiaries presently owned by ICICI Ltd. by ICICI Bank Ltd. will
be subject to approval, if necessary, by other regulatory agencies, viz., IRDA, SEBI, NHB, etc.

(ix) Preference Share Capital Section 12 of the Banking Regulation Act, 1949 requires that
capital of a banking company shall consist of ordinary shares only (except preference share
issued before 1944). The inclusion of preference share capital of Rs. 350 crore (350 shares of
Rs.1 crore each issued by ICICI Ltd. prior to merger), in the capital structure of the bank after
merger is, therefore, subject to the exemption from the application of the above provision of
Banking Regulation Act, 1949, granted by the Central Government in terms of Section 53 of the
act for a period of five years.

x) Valuation and Certification of the Assets of ICICI Ltd & ICICI Bank Ltd. should ensure that
fair valuation of the assets of the ICICI Ltd. is carried out by the statutory auditors to its
satisfaction and that required provisioning requirements are duly carried out in the books of
ICICI Ltd. before the accounts are merged. Certificates from statutory auditors should be
obtained in this regard and kept on record.

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 Forward leap in the hierarchy of Indian Banks.

 A discontinuous jump in size and scale.

 Achieve size and scale of operations.

 Leverage ICICI’s capital and client base to increase fee income.

 Higher profitability by leveraging on technology and low cost structure.

 Offer a complete product suit with immense cross-selling opportunities.

 ICICI’s presence in retail finance, insurance, investment banking and venture capital.

 Access to the ICICI group’s talent pool improved ability to further diversify asset

portfolio and business revenues lower funding costs.

 Ability to accept / offer checking accounts.

 Availability of float money due to active participation in the payments system.

 Ability to offer all banking products.

PGDM CAPSTONE PROJECT Kohinoor Business School
Data Analysis:

Balance Sheet of ICICI Bank

Mar '02 Mar '01

12 months 12 months
Capital and Liabilities: Rs in Cr.
Total Share Capital 220.36 196.82
Equity Share Capital 220.36 196.82
Share Application Money 742.67 23.54
Preference Share Capital 0 0
Reserves 5,635.54 1,092.26
Revaluation Reserves 0 0
Net Worth 6,598.57 1,312.62
Deposits 32,085.11 16,378.21
Borrowings 49,218.66 1,032.79
Total Debt 81,303.77 17,411.00
Other Liabilities & Provisions 16,207.58 1,012.97
Total Liabilities 104,109.92 19,736.59
Mar '02 Mar '01

12 months 12 months
Cash & Balances with RBI 1,774.47 1,231.66
Balance with Banks, Money at Call 11,011.88 2,362.03
Advances 47,034.87 7,031.46
Investments 35,891.08 8,186.86
Gross Block 4,494.29 589.68
Accumulated Depreciation 254.94 208.55
Net Block 4,239.35 381.13
Capital Work In Progress 0 19.23
Other Assets 4,158.28 524.23
Total Assets 104,109.93 19,736.60
Contingent Liabilities 37,707.48 12,561.10
Bills for collection 3,062.52 2,516.71
Book Value (Rs) 265.74 65.5

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Profit & Loss account of ICICI Bank

Mar '02 Mar '01

12 months 12 months
Income Rs in Cr.
Interest Earned 2,151.93 1,242.13
Other Income 589.26 220.34
Total Income 2,741.19 1,462.47
Interest expended 1,558.92 837.67
Employee Cost 147.18 51.71
Selling and Admin Expenses 203.85 109.3
Depreciation 64.09 36.76
Miscellaneous Expenses 499.69 255.46
Preoperative Exp Capitalized 0 0
Operating Expenses 613.42 324.15
Provisions & Contingencies 301.39 129.08
Total Expenses 2,473.73 1,290.90

12 months 12 months
Net Profit for the Year 267.45 171.57
Extraordinary Items 0 0
Profit brought forward 0.83 0.8
Total 268.28 172.37
Preference Dividend 0 0
Equity Dividend 44.07 44.07
Corporate Dividend Tax 4.5 4.5
Per share data (annualized)
Earning Per Share (Rs) 12.14 8.72
Equity Dividend (%) 20 20
Book Value (Rs) 265.74 65.5
Transfer to Statutory Reserves 191 112.5
Transfer to Other Reserves 0 0
Proposed Dividend/Transfer to Govt 48.57 48.57
Balance c/f to Balance Sheet 19.56 0.83
Total 259.13 161.9

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Ratios :

RATIOS 2001 2002

EPS 8.72 12.14
CAR 11.57 11.44
DEBT-EQUITY 12.71 5.48

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Data Interpretation

EPS is calculated by dividing the net profit by the number of share. EPS helps in determining
price of equity share of the company. In the year 2001 the EPS of the company was 8.72 and in
the year 2002 it was 12.14. There was an increase in the EPS, which means company is more
sufficient to pay dividends to its shareholders as compare to after merger.

RONW helps to know whether the company is able to use its equity sh. Capital effectively with
compare to the other companies. In the year 2001 RONW was 13.94 and in the year 2002 it was
6.76. There is a decrease in RONW which means in the year 2001 company had more
competition than compare to in the 2002.

Debt Equity ratio measures of owners stock in the business. In the year 2001 the company had
more debt i.e. 12.71 than compare to in the year 2002 i.e. 5.48. It means in the year 2001
company had less owners stock.

Current ratio is also called working capital ratio. In the year 2001 C.R. was 0.03 and in 2002
C.R. 0.10. It means in 2001 the bank was lesser efficient to pay liabilities compare to the 2002.

Asset turnover ratio is the ratio of a company's sales to its assets. It is an efficiency ratio which
tells how successfully the company is using its assets to generate revenue. In the year 2001 assets
turnover ratio was 2.47 and in the 2002 it was 0.60Asset turnover ratio is the ratio of a
company's sales to its assets. It is an efficiency ratio which tells how successfully the company is
using its assets to generate revenue.

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Capital adequacy ratios are a measure of the amount of a bank's capital expressed as a percentage
of its risk weighted credit exposures. In 2001 CAR was 11.57 & in 2002 i.e. after merger is
11.44 which is pretty good balance of CAR.

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to
how efficient management is at using its assets to generate earnings. In 2001 ROA was 1.8 &
after merger is also 1.8 which indicates ICICI has managed their assets even after merger.

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Bank of Rajasthan merged with ICICI Bank

Bank of Rajasthan which was one of the oldest private bank in India merger with the largest
bank by market capitalization. This merger happened in the year 2010. This merger added the
strength of the acquirer bank. ICICI bank the largest private bank by market capitalization
acquired Bank of Rajasthan in 2010.

The two had proposed a share ratio 1:4.72, which means BOR shareholders, will gain one share
of ICICI Bank for every 4.72 shares of BOR. ICICI Bank –Bank of Rajasthan merger is the
seventh voluntary merger in Indian banking sector, u/s 44A of the Banking Regulation Act,
1949. This is the ICICI Bank’s fourth acquisition after Sangli Bank. The background of the
merger can be traced to the regulatory intervention of SEBI and RBI on Bank of Rajasthan. 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. Between
2000 and 2010, the size of the largest bank in the world has grown near to fourfold by it’s assets
from about US $0.64 trillion to US $2.2 trillion which is almost double the size of GDP of India.
Synergies arising from geographical diversification, increased efficiency, cost savings and
economies of scale are the motivation drivers behind bank 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.

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Reason for Merger

1) The merger offers a strategic fit, as it adds to our network in north and western India.
2) It saved ICICI Bank about three years time to market.
3) This is really a voluntary merger that we have initiated and not done under any pressure.
4) Market Capitalization per branch on an average is Rs.6.5 cr. and that’s what we have
5) It added to the network of ICICI Bank.
6) It helped the acquirer to increase its network in south and western reason.
7) ICICI Bank did due diligence on the bank’s books and it had given ICICI Bank a pretty
satisfactory report.
8) ICICI Bank guarantees that NPA percentage will go up after the merger.

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Balance Sheet of ICICI Bank
Rs. In cr.
Mar '11 Mar '10

Capital and Liabilities:

Total Share Capital 1,151.82 1,114.89
Equity Share Capital 1,151.82 1,114.89
Share Application Money 0.29 0
Preference Share Capital 0 0
Reserves 53,938.82 50,503.48
Revaluation Reserves 0 0
Net Worth 55,090.93 51,618.37
Deposits 225,602.11 202,016.60
Borrowings 109,554.28 94,263.57
Total Debt 335,156.39 296,280.17
Other Liabilities & Provisions 15,986.35 15,501.18
Total Liabilities 406,233.67 363,399.72

Cash & Balances with RBI 20,906.97 27,514.29
Balance with Banks, Money at Call 13,183.11 11,359.40

Advances 216,365.90 181,205.60

Investments 134,685.96 120,892.80
Gross Block 4,744.26 7,114.12
Accumulated Depreciation 0 3,901.43
Net Block 4,744.26 3,212.69
Capital Work In Progress 0 0
Other Assets 16,347.47 19,214.93
Total Assets 406,233.67 363,399.71
Contingent Liabilities 931,651.64 694,948.84
Bills for collection 0 38,597.36
Book Value (Rs) 478.31 463.01

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Profit and loss account of ICICI Bank
Rs. In cr.
Mar '11 Mar '10

Interest Earned 25,974.05 25,706.93
Other Income 6,647.89 7,292.43
Total Income 32,621.94 32,999.36
Interest expended 16,957.15 17,592.57
Employee Cost 2,816.93 1,925.79
Selling and Admin Expenses 0 6,056.48

Depreciation 483.52 619.5

Miscellaneous Expenses 7,212.96 2,780.03

Preoperative Exp Capitalised 0 0

Operating Expenses 6,617.24 10,221.99

Provisions & Contingencies 3,896.17 1,159.81

Total Expenses 27,470.56 28,974.37

Mar '11 Mar '10

Net Profit for the Year 5,151.38 4,024.98

Extraordinary Items 0 -0.09

Profit brought forward 3,464.38 2,809.65

Equity Dividend 1,612.58 1,337.86
Corporate Dividend Tax 202.28 164.04
Per share data (annualised)
Earnings Per Share (Rs) 44.73 36.1

Equity Dividend (% ) 140 120

Book Value (Rs) 478.31 463.01

Transfer to Statutory Reserves 1,782.45 1,867.22
Transfer to Other Reserves 0.26 1.04
Proposed Dividend/Transfer to Govt 1,814.86 1,501.90
Balance c/f to Balance Sheet 5,018.18 3,464.38
Total 8,615.75 6,834.54

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Ratios 2010 2011

EPS 36.1 44.73
RETURN ON ASSETS 460.12 480.15


CAR 19.41 19.54
DEBT- EQUITY 4.71 4.69

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Data Interpretation

The above given are the balance sheet of the ICICI bank and BOR before merger and balance
sheet of ICICI bank after the merger, here we can see that there is a growth in the ICICI bank.

By looking at the balance sheet we can see that deposits tremendously we can also see increase
in its performance.

The EPS has gone up from 36 to 44 which is a huge growth. Also we can see that asset turnover
has reduced and also debt equity ratio has also gone up. There is no major impact on the current
and quick ratio.

Capital adequacy ratios are a measure of the amount of a bank's capital expressed as a percentage
of its risk weighted credit exposures. In 2010 CAR was 19.41 & in 2011 i.e. after merger is
19.54 which is pretty good balance of CAR.

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1) Performance of ICICI Bank. After merger with ICICI LTD being effective in comparison
of other bank. It increases their performance.
2) Most of customer is satisfied by the services provided by the ICICI Bank after merger. It
increases the value of the bank in their customers.
3) Merger of ICICI BANK & ICICI LTD. are provide a multitude of ways to increase
efficiency ICICI BANK LTD.
4) ICICI BANK LTD. provides the facility as per the expectations of their customer.
5) This merger successfully faces the competition of other bank.
6) Merger of ICICI BANK with ICICI Ltd. increases the share value of ICICI BANK LTD.
7) Merging of BOR with ICICI helps to increase its network in south and western reason.

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EPS- Earning Per Share

RONW-Return on Net Worth

C.R- Current Ratio

CAR- Capital Adequacy Ratio

NPA- Non Performing Asset

GDP- Gross Domestic Product

BOR- Bank of Rajasthan

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Mergers and acquisition has become very popular over the years especially during the
last two decades owing to rapid changes that have taken place in the business environment.
Business Firms now have to face increased Competition not only from firms within the country
but also from international business giants thanks to globalization, liberalization, technological
changes and other changes. Generally the objective of M&A is wealth maximization of
shareholders by seeking gains in terms of synergy, economies of scale, better financial and
marketing advantages, diversification and reduced earnings volatility, improved inventory
management, increase in domestic market share and also to capture fast growing international
markets abroad.

While valuation of shares, though is not entirely scientific exercise, is based on some sound
methods of valuation, but very often the value so determined is ignored in the process of making
the deal and the importance of winning the deal has been often found to be the deciding factor.

If success is to be achieved in M&A cohesive, well integrated and motivated workforce is

required who is willing to take on the challenges that arise in the process of M&A and there
should be proper organization among employees and they should be provided with proper
working conditions.

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Merger, Acquisition and corporate Restructuring (By Prasad Godbole)

Mergers and Acquisitions (By A.P.Dash)


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