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Project title:

Date of Submission:

Recent reports on banking sector often indicate that India is slowly but surely moving
from a regime of `large number of small banks' to `small number of large banks'. The aim
of this paper is to probe into the various motivations for mergers and acquisitions in the
Indian Banking sector. Thus, literature is reviewed to look into the various motivations
behind a banks’ merger/ acquisition event. The paper also takes us through the
international mergers & acquisitions scenario comparing it with the Indian scene. Given
the increasing role of the economic power in the turf war of nations, the paper looks at
the significant role of the state and the central bank in protecting customer’s interests vis-
à-vis creating players of international size. While, gazing at the mergers & acquisitions in
the Indian Banking Sector both from an opportunity and as imperative perspectives, the
paper also glances at the large implications for the nation.


Through this acknowledgement I express my sincere gratitude towards all those people
who helped me in this project, which has been a learning experience.

I appreciate the co-ordination extended by my friends and also express my sincere

thankfulness to the entire faculty members of Indian Institute of Planning &
Management, Delhi, giving me the opportunity to do this project/study and also assisting
me for the same.


S.No. Topic Page No.

1. Abstract 2

2. Acknowledgment 3

3. Introduction 5

4. Research Objectives and Methodology 8

5. Theoretical Review/Perspective 9

6. Finding and Analysis 32

7. Recommendations 46

8. Conclusion 47

9. Bibliography 48


Generally speaking a bank is an institution dealing in money. The origin of the word bank
is traced to the Italian ‘banca’, ‘banc’ or ‘banque’, which means a bench. It is stated that
in Middle Ages the European money changers and moneylenders displayed their coins on
their benches and conducted their business. Hence the term bank refers to the bench on
which the business of money changing and money lending was conducted. Hence, the
term banking is defined as accepting for the purpose of lending or investment, of deposits
of money from the public repayable on demand or otherwise and withdrawal by cheque,
draft, and order or otherwise. In the recent past, the Indian banking system has been
undergoing major changes that have affected both its structure and the nature of strategic
interaction among banking institutions. Different strategies have been adopted to tackle
the demands of this new operating environment, one such strategy having been
consolidation via mergers and acquisitions. The Government and the Reserve Bank of
India are in favour of this change and consequently arises a desire to study this aspect in
detail. Considering the maturity of certain international markets an attempt would be
made to obtain certain practices from them as well. However the paper takes cognizance
of the fact that Mergers and Acquisitions (M&A) is highly environment dependant and
hence there is a constant focus on this aspect while pertaining to practices. It is observed
that the banking industry is moving from traditional savings-cum-lending functions to
other services as well such as Bank-assurance and securities trading. In recent times,
banks have also diversified their activities to cover a wide range of activities. They
arrange remittance of funds from one place to another, they act as agent of their
customers in certain activities like payment of subscription, and they also act as
guarantors for their customers. Thus banks in India need to change in form and structure
so as to adapt to meet these changing scenarios of being a total financial services provider
and for this a preferred route ought to be inorganic growth due to time advantages and
hence mergers and acquisitions for consolidation. In the recent times, there have been
numerous reports in the media on the Indian Banking Industry. Reports have been on a
variety of topics. The topics have been ranging from issues such as user friendliness of

Indian banks, preparedness of banks to meet the fast approaching Basel II deadline1,
increasing foray of Indian banks in the overseas markets2 targeting inorganic growth.
Reports from the western markets of increased M&A activity have also aroused a deep
sense of keenness in the authors to compare the various aspects of M&A in the Banking
sector in India and the international arena. In the turf war of nations, given the increasing
role of economic power over other types of powers, one can even see that the state, the
regulatory authority, and even the states politicians are keen on playing a role and having
their say. Recently, the finance minister of India had stated that Indian Banks would be
requiring more than Rs. 590 billion3 to sustain their current growth and at the same time
adhere to the new Basel norms. An obvious way to reduce this requirement and meet the
norms would be through industry consolidation. This paper is a short note taking a
holistic approach to compare the rationale behind M&A in India and the international
arena. The approach is non-empirical and draws from a mix of recent literature review
and interpretations of a few recent observations. Relevant observations have been cited at
every stage to reinforce the reasons. While evaluating the various reasons for M&A in the
banking sector we have consciously focussed the discussion on the imperative and the
opportunistic needs for M&A in the banking sector. 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. All our
daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, &
other forms of corporate 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 & Acquisitions. 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 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.



 To identify the impact of merger and acquisition on Indian banking sector


 The research has used the secondary data. We have collected the data from
journals, newspaper, online references and magazines.
 We have also used the case study approach


Mergers, acquisitions and takeovers have been a part of the business world for centuries.
In today's dynamic economic environment, companies are often faced with decisions
concerning these actions - after all, the job of management is to maximize shareholder
value. Through mergers and acquisitions, a company can (at least in theory) develop a
competitive advantage and ultimately increase shareholder value. The said terms to a
layman may seem alike but in legal/ corporate terminology, they can be distinguished
from each other:

 Merger: A full joining together of two previously separate corporations. A true

merger in the legal sense occurs when both businesses dissolve and fold their
assets and liabilities into a newly created third entity. This entails the creation of a
new corporation.
 Acquisition: Taking possession of another business. Also called a takeover or
buyout. It may be share purchase (the buyer buys the shares of the target company
from the shareholders of the target company. The buyer will take on the company
with all its assets and liabilities. ) or asset purchase (buyer buys the assets of the
target company from the target company)

In simple terms, A merger involves the mutual decision of two companies to combine and
become one entity; it can be seen as a decision made by two "equals", whereas an
acquisition or takeover on the other hand, is characterized the purchase of a smaller
company by a much larger one. This combination of "unequals" can produce the same
benefits as a merger, but it does not necessarily have to be a mutual decision. A typical
merger, in other words, involves two relatively equal companies, which combine to
become one legal entity with the goal of producing a company that is worth more than the
sum of its parts. In a merger of two corporations, the shareholders usually have their
shares in the old company exchanged for an equal number of shares in the merged entity.
In an acquisition, the acquiring firm usually offers a cash price per share to the target

firm’s shareholders or the acquiring firm's share's to the shareholders of the target firm
according to a specified conversion ratio. Either way, the purchasing company essentially
finances the purchase of the target company, buying it outright for its shareholders

 Joint Venture: Two or more businesses joining together under a contractual

agreement to conduct a specific business enterprise with both parties sharing
profits and losses. The venture is for one specific project only, rather than for a
continuing business relationship as in a strategic alliance.
 Strategic Alliance: A partnership with another business in which you combine
efforts in a business effort involving anything from getting a better price for goods
by buying in bulk together to seeking business together with each of you
providing part of the product. The basic idea behind alliances is to minimize risk
while maximizing your leverage.
 Partnership: A business in which two or more individuals who carry on a
continuing business for profit as co-owners. Legally, a partnership is regarded as a
group of individuals rather than as a single entity, although each of the partners
file their share of the profits on their individual tax returns.

Many mergers are in truth acquisitions. One business actually buys another and
incorporates it into its own business model. Because of this misuse of the term merger,
many statistics on mergers are presented for the combined mergers and acquisitions
(M&A) that are occurring. This gives a broader and more accurate view of the merger

Types of Mergers:

From the perception of business organizations, there is a whole host of different mergers.
However, from an economist point of view i.e. based on the relationship between the two
merging companies, mergers are classified into following:

 Horizontal merger- Two companies that are in direct competition and share the
same product lines and markets i.e. it results in the consolidation of firms that are

direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls
Royce and Lamborghini

 Vertical merger- A customer and company or a supplier and company i.e. merger
of firms that have actual or potential buyer-seller relationship eg. Ford- Bendix,
Time Warner-TBS.
 Conglomerate merger- generally a merger between companies which do not
have any common business areas or no common relationship of any kind.
Consolidated firma may sell related products or share marketing and distribution
channels or production processes. Such kind of merger may be broadly classified
into following:
 Product-extension merger - Conglomerate mergers which involves companies
selling different but related products in the same market or sell non-competing
products and use same marketing channels of production process. E.g. Phillip
Morris-Kraft, Pepsico- Pizza Hut, Proctor and Gamble and Clorox
 Market-extension merger - Conglomerate mergers wherein companies that sell
the same products in different markets/ geographic markets. E.g. Morrison
supermarkets and Safeway, Time Warner-TCI.
 Pure Conglomerate merger- two companies which merge have no obvious
relationship of any kind. E.g. BankCorp of America- Hughes Electronics.

On a general analysis, it can be concluded that Horizontal mergers eliminate sellers and
hence reshape the market structure i.e. they have direct impact on seller concentration
whereas vertical and conglomerate mergers do not affect market structures e.g. the seller
concentration directly. They do not have anticompetitive consequences.

The circumstances and reasons for every merger are different and these circumstances
impact the way the deal is dealt, approached, managed and executed. .However, the
success of mergers depends on how well the deal makers can integrate two companies
while maintaining day-to-day operations. Each deal has its own flips which are
influenced by various extraneous factors such as human capital component and the
leadership. Much of it depends on the company’s leadership and the ability to retain

people who are key to companies on going success. It is important, that both the parties
should be clear in their mind as to the motive of such acquisition i.e. there should be
census- ad- idiom. Profits, intellectual property, costumer base are peripheral or central to
the acquiring company, the motive will determine the risk profile of such M&A.
Generally before the onset of any deal, due diligence is conducted so as to gauze the risks
involved, the quantum of assets and liabilities that are acquired etc.

Legal Procedures for Merger, Amalgamations and Takeovers:

The basis law related to mergers is codified in the Indian Companies Act, 1956 which
works in tandem with various regulatory policies. The general law relating to mergers,
amalgamations and reconstruction is embodied in sections 391 to 396 of the Companies
Act, 1956 which jointly deal with the compromise and arrangement with creditors and
members of a company needed for a merger. Section 391 gives the Tribunal the power to
sanction a compromise or arrangement between a company and its creditors/ members
subject to certain conditions. Section 392 gives the power to the Tribunal to enforce and/
or supervise such compromises or arrangements with creditors and members. Section 393
provides for the availability of the information required by the creditors and members of
the concerned company when acceding to such an arrangement. Section 394 makes
provisions for facilitating reconstruction and amalgamation of companies, by making an
appropriate application to the Tribunal. Section 395 gives power and duty to acquire the
shares of shareholders dissenting from the scheme or contract approved by the majority.
And Section 396 deals with the power of the central government to provide for an
amalgamation of companies in the national interest. In any scheme of amalgamation, both
the amalgamating company or companies and the amalgamated company should comply
with the requirements specified in sections 391 to 394 and submit details of all the
formalities for consideration of the Tribunal. It is not enough if one of the companies
alone fulfils the necessary formalities. Sections 394, 394A of the Companies Act deal
with the procedures and the requirements to be followed in order to effect amalgamations
of companies coupled with the provisions relating to the powers of the Tribunal and the
central government in the matter of bringing about amalgamations of companies.

After the application is filed, the Tribunal would pass orders with regard to the fixation of
the dates of the hearing, and the provision of a copy of the application to the Registrar of
Companies and the Regional Director of the Company Law Board in accordance with
section 394A and to the Official Liquidator for the report confirming that the affairs of
the company have not been conducted in a manner prejudicial to the interest of the
shareholders or the public. Before sanctioning the scheme of amalgamation, the Tribunal
has also to give notice of every application made to it under section 391 to 394 to the
central government and the Tribunal should take into consideration the representations, if
any, made to it by the government before passing any order granting or rejecting the
scheme of amalgamation. Thus the central government is provided with an opportunity to
have a say in the matter of amalgamations of companies before the scheme of
amalgamation is approved or rejected by the Tribunal.

The powers and functions of the central government in this regard are exercised by the
Company Law Board through its Regional Directors. While hearing the petitions of the
companies in connection with the scheme of amalgamation, the Tribunal would give the
petitioner company an opportunity to meet all the objections which may be raised by
shareholders, creditors, the government and others. It is, therefore, necessary for the
company to keep itself ready to face the various arguments and challenges. Thus by the
order of the Tribunal, the properties or liabilities of the amalgamating company get
transferred to the amalgamated company. Under section 394, the Tribunal has been
specifically empowered to make specific provisions in its order sanctioning an
amalgamation for the transfer to the amalgamated company of the whole or any parts of
the properties, liabilities, etc. of the amalgamated company. The rights and liabilities of
the employees of the amalgamating company would stand transferred to the amalgamated
company only in those cases where the Tribunal specifically directs so in its order.

The assets and liabilities of the amalgamating company automatically gets vested in the
amalgamated company by virtue of the order of the Tribunal granting a scheme of
amalgamation. The Tribunal also make provisions for the means of payment to the
shareholders of the transferor companies, continuation by or against the transferee
company of any legal proceedings pending by or against any transferor company, the

dissolution (without winding up) of any transferor company, the provision to be made for
any person who dissents from the compromise or arrangement, and any other incidental
consequential and supplementary matters to secure the amalgamation process if it is
necessary. The order of the Tribunal granting sanction to the scheme of amalgamation
must be submitted by every company to which the order applies (i.e., the amalgamating
company and the amalgamated company) to the Registrar of Companies for registration
within thirty days.

Motives behind M & A:

These motives are considered to add shareholder value:

 Economies of Scale: This generally refers to a method in which the average cost
per unit is decreased through increased production, since fixed costs are shared
over an increased number of goods. In a layman’s language, more the products,
more is the bargaining power. This is possible only when the companies merge/
combine/ acquired, as the same can often obliterate duplicate departments or
operation, thereby lowering the cost of the company relative to theoretically the
same revenue stream, thus increasing profit. It also provides varied pool of
resources of both the combining companies along with a larger share in the
market, wherein the resources can be exercised.
 Increased revenue /Increased Market Share: This motive assumes that the
company will be absorbing the major competitor and thus increase its power (by
capturing increased market share) to set prices.
 Cross selling: For example, a bank buying a stock broker could then sell its
banking products to the stock brokers customers, while the broker can sign up the
bank’ customers for brokerage account. Or, a manufacturer can acquire and sell
complimentary products.
 Corporate Synergy: Better use of complimentary resources. It may take the form
of revenue enhancement (to generate more revenue than its two predecessor
standalone companies would be able to generate) and cost savings (to reduce or
eliminate expenses associated with running a business).

 Taxes: A profitable can buy a loss maker to use the target’s tax right off i.e.
wherein a sick company is bought by giants.
 Geographical or other diversification: this is designed to smooth the earning
results of a company, which over the long term smoothens the stock price of the
company giving conservative investors more confidence in investing in the
company. However, this does not always deliver value to shareholders.
 Resource transfer: Resources are unevenly distributed across firms and
interaction of target and acquiring firm resources can create value through either
overcoming information asymmetry or by combining scarce resources. Eg:
Laying of employees, reducing taxes etc.
 Improved market reach and industry visibility - Companies buy companies to
reach new markets and grow revenues and earnings. A merge may expand two
companies' marketing and distribution, giving them new sales opportunities. A
merger can also improve a company's standing in the investment community:
bigger firms often have an easier time raising capital than smaller ones.

Advantages of M&A’s:

The general advantage behind mergers and acquisition is that it provides a productive
platform for the companies to grow, though much of it depends on the way the deal is
implemented. It is a way to increase market penetration in a particular area with the help
of an established base. As per Mr D.S Brar (former C.E.O of Ranbaxy pharmaceuticals),
few reasons for M&A’s are:

 Accessing new markets

 maintaining growth momentum
 acquiring visibility and international brands
 buying cutting edge technology rather than importing it
 taking on global competition
 improving operating margins and efficiencies
 developing new product mixes

In real terms, the rationale behind mergers and acquisitions is that the two companies are
more valuable, profitable than individual companies and that the shareholder value is also
over and above that of the sum of the two companies. Despite negative studies and
resistance from the economists, M&A’s continue to be an important tool behind growth of
a company. Reason being, the expansion is not limited by internal resources, no drain on
working capital - can use exchange of stocks, is attractive as tax benefit and above all can
consolidate industry - increase firm's market power.

With the FDI policies becoming more liberalized, Mergers, Acquisitions and alliance
talks are heating up in India and are growing with an ever increasing cadence. They are
no more limited to one particular type of business. The list of past and anticipated
mergers covers every size and variety of business -- mergers are on the increase over the
whole marketplace, providing platforms for the small companies being acquired by
bigger ones.

The basic reason behind mergers and acquisitions is that organizations merge and form a
single entity to achieve economies of scale, widen their reach, acquire strategic skills, and
gain competitive advantage. In simple terminology, mergers are considered as an
important tool by companies for purpose of expanding their operation and increasing
their profits, which in façade depends on the kind of companies being merged. Indian
markets have witnessed burgeoning trend in mergers which may be due to business
consolidation by large industrial houses, consolidation of business by multinationals
operating in India, increasing competition against imports and acquisition activities.
Therefore, it is ripe time for business houses and corporates to watch the Indian market,
and grab the opportunity.

Merger and Acquisition trend in India:

The Indian M&A market has also been revitalized since its financial crisis in, 1997. Three
factors have enhanced the revitalization of the M&A market after the financial crisis. The
first factor is the government’s deregulation concerning M&A related laws. In 1998, the
government abandoned the mandatory TOB (Tender Offer Bid) and the upper limit for
foreign investor’s stock share. With its subsequent deregulation acts in 2004 and 2007,

government has simplified M&A procedures, which has helped to revitalize the domestic
M&A market. Secondly, policymakers have tried to induce more foreign direct
investment to boost the economy after the financial crisis. Government deregulation for
foreign investment laws regarding M&As obviously played an important role for foreign
companies to invest in India through M&A. Finally, privatization and industrial structure
reform also helped the domestic M&A market to expand. In 2007, the domestic M&A
market peaked in the number of deals and value of these deals.

Reasons for the mergers and acquisitions:

 To limit competition,

 To utilize under-utilized market power,

 To overcome the problem of slow growth and profitability in one’s own industry,

 To achieve diversification.

 To establish a transnational bridgehead without excessive start up costs to gain

access to foreign market.

 To utilize under-utilized resources — human and physical and managerial skills.

 To displace existing management.

 To circumvent Government regulations.

 To reap speculative gains attendant upon new security issue or change in PIE

 To create an image of aggressiveness and strategic opportunism, empire building

and to amass vast economic powers of the company.

Due diligence:

Beginning at the start of the process, HR must orchestrate its role in due diligence. Due
diligence is more than a financial evaluation. It's essential to assess the valued human
assets that never show up on a balance sheet, in order to determine the true value of the
deal and its likelihood of success.

Job number 1 is identifying the key people and taking immediate steps to keep them from
walking out of the door the moment the deal is announced. Each function has to be
understood, including the field organization of stores or salespeople if applicable. Often,
what exists in the field is overlooked, yet it's there that the true business of a company is
conducted. Each key individual should be assessed against a set of clearly defined
competencies that are aligned to the needs of the new group.

When the right questions are asked before a merger, HR isn't left to play catch-up for the
first six months. The key areas of HR due diligence:

 culture
 employee demographics and competency analysis

 key talent analysis

It's important to identify cultural areas of dissonance so that people can dispel
misconceptions and begin creating a culture that's right for the new organization. That's
often left until after the final papers are signed, which is risky because culture
mismatches can be the Achilles' heel of many deals.

How do we identify cultural differences and similarities and learn to leverage them?
Often, the most seemingly inconsequential programs and policies have great symbolic
impact. Practices regarding casual dress, attitudes about long hours, and how offices are
apportioned are deeply ingrained and must be dealt with. One can't consider culture
compatibility without touching on the different views that the acquirer and the acquired
have about the new company. The acquirer assumes that the new company will closely
resemble the original but with greater mass and capabilities. The acquired company

expects that many of its strengths will be crucial to the new company (after all, isn't that
why it was acquired?). During the Arcelor’s-Mittal integration, we found that it was
better to resist the impulse to assume that the way each company does things is best and
instead meld practices.

Integration Planning:

Without a clear plan and timetable, a merger or acquisition can fail. The plan should be
broken down by function: What needs to be done? Who's going to do it? When will it be

The integration effort must be led by a full-time dedicated team. There should be an
integration project manager free from any routine responsibilities, whose sole job is to
manage the overall plan. The integration manager needs a special set of competencies
(including project management), broad experience in the parent business, and specific
functional expertise relevant to the new business. He or she should be willing to make
tough decisions quickly, handle conflict, and work well across functions and management
levels. Skill as a communicator is essential. Fill the integration team with flexible,
creative, and enthusiastic people. Take them completely away from their usual jobs so
they can devote themselves to the team effort. Pick the best people, not just the available
people. Integration leadership should be invested in the continued development of the
new organization and be in for the long haul.

The primary roles of HR during this phase are to

 develop strategies for retaining key people

 examine compensation and benefit programs

 identify barriers to a merged culture

 Create and execute a comprehensive plan for communicating with the new

All of the change-management expertise in the group should be called upon to address
employees' anxieties about the merger.


The need to communicate, communicate, communicate extends well into the latter stages
of the integration but must begin with the first announcements. Often, communication
efforts are fragmented with different messages and information flowing to investors,
employees, managers, and customers. Messages to all stakeholders must be well planned
and consistent. There can never be enough repetition. The message must be heard again
and again to be fully understood.

Accessibility to managers, officers, and directors is critical to satisfying employees'

hunger for information. During our acquisition, we developed an excellent tool, Rumor
Buster, which was produced and distributed weekly to counteract rumors. Sometimes, it's
enough to clarify the message or give more details; other times, it requires a 360-degree
turnaround explanation for people to finally get the right information. Senior managers
must remember that while they may have been involved in the acquisition for months,
employees have only begun to acclimate themselves to the new situation. The
information they're receiving is new to them.

The goal of communications should be not only to inform, but also to engage employees'
hearts and minds. By presenting a clear vision of the future and gaining commitment to it,
the new company begins to build the loyalty that's crucial to survival.

The Synergies:

There are two kinds of synergies that companies seek through a merger or acquisition:
growth and economies of scale.

The role of HR is to identify key human assets in the target company, set up retention
arrangements to keep critical talent, and create development plans for people to prepare
them to achieve the anticipated corporate growth. Other issues needing attention to
maximize the growth synergy are reward and recognition programs, team development,

and integration of benefit and compensation programs--ensuring they are competitive to
attract and retain desirable employees.

When mergers are contemplated, synergy and value often depend on the effective transfer
of knowledge. As knowledge becomes an increasingly important corporate asset, it's
critical to capture the best practices of each company for maximum return. It starts with
the relatively easy task of identifying the people and processes needed to keep the
business operating as usual. It moves to training on systems, specific job skills, and
procedures. Ultimately, it involves capturing the tacit knowledge and informal networks
that enable an organization to get things done.

Economies of scale:

That's often a euphemism for firing people. But to achieve synergies, there must be an
analysis of what the end-game organization will look like and which positions are truly
needed. Once that's clear, assessments must be done to determine who stays and who
goes. Redundancies must be eliminated. Not only do job skills need to be determined, but
also personality and motivational factors must be considered. The fit of a person with the
new team and new culture can greatly affect his or her likelihood of success.

Individual job and career objectives must be discussed, and employees must be informed
of their options for the future. The cost of severance packages and outplacement services
should be factored into the equation. Even issues such as where to house the newly
acquired employees become sensitive and costly. It's essential to have a well-documented
and impartial approach to such issues in order to avoid the appearance of favoritism.

Because people are anxious to know their futures as soon as possible at the start of the
integration process, we created a definitive plan with specific dates and a promise that
each person would be spoken to within week 1 and everyone would know their
alternatives for the future within 30 days.

Retaining key talent:

There is no one way to retain people during a merger or acquisition. They can make
offers to certain people and if they accept and want to stay, that's fine, If they don't, that
may also be fine. By the way, "key people" don’t always mean top executives. Executives
may be key in some respects, but there may be other employees who are more important
to the workings of the enterprise. If they lose them, they can end up spending a lot of
money and still be unsuccessful. Whether they're technology specialists, marketing
people, or top management, they must make certain they'll stay.

Each person must be considered, and a plan must be put together for that person. The
kind of agreement that's drawn up and how far it goes to keep key talent will differ from
organization to organization. But it's best not to give away too much or keep someone
who will never adapt to the new structure, simply because he or she is talented or highly
thought of. They may have to let people go as a tradeoff against disruptive attitudes or
constant conflict. The appropriate fit of any one person in the new culture can be as
critical to success as talent.

A frequently used retention tool is the bonus. Unless they plan to give one to everyone,
they run the risk of having some disenchanted employees feel undervalued. But for the
people who are eligible, a bonus can make them feel special and entice them to stay for
the period covered by the payout. They need to be clear up front regarding how far the
program extends and what levels of payout there will be. That shouldn't be kept secret
and must be perceived as fair and equitable, or it will generate negativity.

The new structure of the merged companies may be different, and certain jobs may not
exist or be available because incumbents are staying, but there is wisdom in keeping the
talent in the top 10 percent of the population, even if their current jobs no longer exist.
Find a place for them, and retrain them if necessary. Talented people tend to welcome the
challenges of a new role, and they enjoy career growth and added responsibility.

Various faces of HR department during M&A:

Human Resources are one of the areas which can make or break the company. Currently
it is one of the major areas where Arcelor is putting a lot of resources. Also in this
globalised and competitive world, ArcelorMittal are looking for expansion (organic or
inorganic). M&A is one of the routes for expansion by any company. Currently about
50% of the processes of M&A fails and the biggest reason for the same is HR policies
and role. In any of merger and acquisition deal, HR department in Arcelor has to work
longer as they have the following processes to be done. Design of the organization as per
the new entity created after merger or Acquisition. It also includes finalization of top
management of the company which will steer the new entity. HR department has to look
into the resources for the new merged entity. Department in consultation with others have
to deploy and assign critical resources accordingly. One of the major tasks for HR is to
lay off people whose services are not required. Retention of key people in an organization
is a bigger challenge. Appraisal and salary structure for the new entity should be
finalized. Each company has to communicate its decision and further action to all stake
holders. Therefore communications strategy, its development and finally implementation
is the work of HR. Provide required training to employees. At last, important thing to
keep in mind is that HR department has to implement with speed and accuracy.

M&A in the Indian Banking Sector as an Imperative:

Multiple reasons force us to believe that M&A in the Indian Banking Sector is an
imperative. We list them down below:


Fragmentation poses increasing risk in the Indian Banking Sector. During the financial
period 2001-2005, only four banks have been able to cross the market capitalization of
Rs. 50 billion included Bank of Baroda, HDFC Bank, ICICI Bank, and State Bank of
India. Considerable fragmentation exists in the Banking sector for banks with market
capitalization of less than Rs. 50 billion. Moreover the created value is moving away
from the top 5 banks thus indicating fragmentation indeed has increased over the period
of last five years. Shown below are the deposit shares of the Banks operating in India
over the period 2000-2004. Data was drawn from around 45 banks which included state-

controlled public sector banks, private sector banks and even foreign banks operating in
India. It is observed that the share of the top 5 players has eroded and been consumed by
the next fifteen players. Considering that the base of total deposits has been consistently
increasing, consequently the value in deposits gained by the next 15 banks has been

Similar trends are observed in profit after tax, borrowings and interest and non interest
incomes of the banks, thereby hinting at increased levels of fragmentation in the top 20
banks. Though this could be the sign of a competitive bank market with healthy banks
remaining in the market the goal of globally competent banks would be missed. In other
words, while a fragmented Indian banking structure may very well be beneficial to the
customers (given increased competition due to lower market power of existing players),
at the same time this also creates the problem of no player having the critical mass to play
the game at the global banking industry level. This has to be looked at significantly from
the state’s long-term strategic perspective. Furthermore, it is observed that in an
increasing competitive arena the smaller fragmented banks with no economies of scale,
low capabilities to manage risks and poor market power at times end up taking excessive
risks resulting in irreparable loss to their depositors. This also results in affecting the state
and its regulator’s i.e., central bank negatively. Take the following cases of trouble in the
recent past:

 Global Trust Bank: Significant exposure to high risk mid size corporates and an
excessive exposure to capital market operations.
 Madhavpura Mercantile Co-operative Bank: Nineteen customers had unsecured
loans of more than Rs. 10 billion.
 South Indian Co-operative Bank: Non Performing Assets (NPAs) from excessive
lending to small group of clients

 Nedungadi Bank: This bank based in Southern part of India had significant
exposure to plantation industry and had weak credit risk management systems and

Further recent cases (in 2005-06) of two banks in India namely United Western Bank and
Sangli Bank became attractive targets for acquisition by private sector banks because of
their risk profile. The merger with these larger banks is expected to improve the asset
profile, NPA management and protect the depositors at the same time offer the acquiring
private sector banks further reach in terms of branches and customer base.

M&A in the Indian Banking Sector as an Opportunity:

Two prime reasons force us to believe that M&A in the Indian Banking Sector is an

Creation of a Financial Super Market or a Universal Bank: 9, 10, 11

A recent trend is to promote the concept of a financial super market chain, making
available all types of credit and non-fund facilities under one roof under one umbrella
organization (or through specialized subsidiaries). An example of such a financial
supermarket would be the reverse merger of ICICI and ICICI Bank. ICICI Bank today
stands as India’s second largest bank offering its clients both in India and overseas a
product range as varied us retail banking products to exotic investment banking and
treasury solutions. Similarly, IDBI and IDBI Bank treaded the same route. Though one
has to state that consolidated accounting and supervisory techniques would have to
evolve and appropriate fire walls built to address the risks underlying such large
organizations and banking conglomerates.

Technological Expertise:

New entrants in the banking sector are armed with technological expertise while older
players are well equipped with experience in practices. Mergers would thus help both
parties gain an expertise in areas in which they lack. In India, the retail banking market

biased towards the urban markets is growing at a Compounded Annual Growth Rate
(CAGR) of almost 18-20% while the rural market is yet to be fully tapped. Keeping in
focus the population profile, technology would be a major enabler for banking in the
future. A number of state owned banks in India are adopting sophisticated core banking
solutions and these are just the larger ones. For smaller banks to adopt technology
platforms the expenditure may not be sustainable and hence this may be one more reason
for M&A. Growing integration of economies and the markets around the world is making
global banking a reality. The surge in globalization of finance has also gained momentum
with the technological advancements which have effectively overcome the national
borders in the financial services business. Widespread use of internet banking, mobile
banking, and other modern technologies (such as SWIFT) has widened frontiers of global
banking, and it is now possible to market financial products and services on a global
basis. In the coming years globalization would spread further on account of the likely
opening up of financial services under WTO. India is one of the signatories of Financial
Services Agreement (FSA) of 1997. This gives India’s financial sector including banks an
opportunity to expand their business on a quid pro quo basis. An easy way for this is thus
to go through adequate reconstruction to acquire the necessary technology and get an
early mover advantage in globalizing the Indian Banks.

Cross Border M&A in Banks:

One more reason for M&A which has sprung up in the recent years is Indian Banks
seeking international presence. In the last two decades, there has been a jump in the
Indian diaspora working abroad. A new recent trend is the increase in the interest of
foreign expats to work in India. Both these communities seek banking products in
remittances and other cross border retail products. Further firms are looking for funds
overseas for various purposes ranging from capital expenditure to leveraged M&A
financing. Hence, Indian banks are setting up branches and subsidiaries overseas and
foreign banks are expanding their operations in India. These bank branches (set up
abroad) further target the local population to be profitable and hence target local
acquisitions. Evidently, this results in an M&A opportunity for Foreign Banks to acquire
an Indian Bank and also Indian Banks to acquire foreign banks. For example, ICICI Bank

has made an acquisition of a bank in Europe in 2006 to establish itself in a geographical

Possible impact of mergers and Acquisitions:

Impacts on Employees:

Mergers and acquisitions may have great economic impact on the employees of the
organization. In fact, mergers and acquisitions could be pretty difficult for the employees
as there could always be the possibility of layoffs after any merger or acquisition. If the
merged company is pretty sufficient in terms of business capabilities, it doesn't need the
same amount of employees that it previously had to do the same amount of business..
Due to the changes in the operating environment and business procedures, employees
may also suffer from emotional and physical problems.

Impact on Management:

The percentage of job loss may be higher in the management level than the general
employees. The reason behind this is the corporate culture clash. Due to change in
corporate culture of the organization, many managerial level professionals, on behalf of
their superiors, need to implement the corporate policies that they might not agree with. It
involves high level of stress.

Impact on Shareholders:

Impact of mergers and acquisitions also include some economic impact on the
shareholders. If it is a purchase, the shareholders of the acquired company get highly
benefited from the acquisition as the acquiring company pays a hefty amount for the
acquisition. On the other hand, the shareholders of the acquiring company suffer some
losses after the acquisition due to the acquisition premium and augmented debt load.

Impact on Competition:

Mergers and acquisitions have different impact as far as market competitions are
concerned. Different industry has different level of competitions after the mergers and
acquisitions. For example, the competition in the financial services industry is relatively
constant. On the other hand, change of powers can also be observed among the market


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. With the help of M & A in the banking sector, the banks can achieve significant growth
in their operations and minimize their expenses to a significant level Competition is
reduced because merger eliminates competitors from the banking industry.
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 strengthens 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.

The Banking Scenario Has Been Changing at Fast Place

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.
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.

Procedure for 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.
 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

 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 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 acquisition agreement is
signed by the bank

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.
 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 cooperative 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 proposals.

Information & Documents to be Furnished by the Acquirer of Banks

1. Draft scheme of amalgamation as approved by the Board of Directors of the acquirer

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 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:-

· Tier I Capital

· Tier II Capital
· Risk-weighted Assets
· Gross and Net npas
· Ratio of Tier I Capital to Risk-weighted Assets
· Ratio of Tier II Capital to Risk-weighted Assets
· Ratio of Total Capital to Risk-weighted Assets
· Tier I Capital to Total Assets
· Gross and Net npas to Advances
· Cash Reserve Ratio
· 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
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.

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 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
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 microfinance activities through self-help groups, in its priority sector initiatives
through its acquired 87 rural and 88 semi-urban branches.

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.

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 that 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.
 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.

Case study I

Agrees to amalgamate Bank of Rajasthan:

ICICI Bank has entered into an agreement with certain shareholders of Bank of Rajasthan
(BoR) to amalgamate BoR, with a tentative share exchange ratio of 1:4.72 (25 shares of
ICICI Bank for 118 shares of BoR). The final exchange ratio will be based on due
diligence and independent valuation reports. Assuming a share swap ratio of 1:4.72, the
deal values BoR at Rs30.4b and will lead to ~3% equity dilution for ICICI Bank.

Branch addition, stronger North India network are key positives:

The key positives for ICICI Bank will be a 23% increase in the number of branches and a
stronger network in North India. Over 60% of BoR’s 463 branches are in the state of
Rajasthan and ~70% are in North India. BoR’s biggest competitors in the state of
Rajasthan are SBI’s subsidiary, State Bank of Bikaner and Jaipur (~750 branches), Bank
of Baroda (~350 branches) and Punjab National Bank (~310 branches).

Deal at a significant premium; Improvement in deposit franchisee will be key value

The implied valuation of BoR at 4.8x trailing book value appears expensive, as the book
needs to be adjusted for the re-assessment of BoR’s NPAs by ICICI Bank. The key near-
term challenges for ICICI Bank will be assessment of BoR’s asset quality, rationalization
and re-positioning of BoR’s branches, and possible regulatory issues. We will review our
target price for ICICI Bank post the merger details. Maintain Buy.

Valuing BoR at Rs66m/branch

While BoR’s asset base is just 5% of ICICI Bank’s, its 463 branches will result in a ~23%
increase in ICICI Bank’s existing network of 2,000 branches. A share swap ratio of 1:4.72
(25 shares of ICICI Bank for 118 shares of BoR) implies a valuation of Rs66m per
branch and 0.2x the deposit base for BoR. It is noteworthy that ICICI Bank has opened
580 new branches (1.3x BoR’s branch network) since March 2009 at a cost of Rs8m-10m
per branch. However, it takes almost two years for a new branch to break even.

Comparison of BOR and ICICI

Implied price per branch lower than last deal in the sector:

In the last deal in the sector, HDFC Bank had valued CBoP at Rs285m per branch and
0.5x the deposit base. ICICI Bank had acquired Sangli Bank at Rs3.5b, valuing Sangli
Bank at ~Rs18m per branch. While the price that ICICI Bank is paying is in line with the
valuations of other old private sector banks, it is significantly lower than the CBoP deal.

Details of Last Few Deals in the Sector

Benefit of Merger for ICICI Bank:

 The proposed amalgamation would substantially enhance ICICI Bank’s branch

network, already the largest among Indian private sector banks, and especially
strengthen its presence in northern and western India.
 The rationale for the merger, according to the ICICI Bank management, is that it
would have taken the bank three years to build the kind of low-cost current
account and savings account (CASA) relationship; it gets to build upon now with

the latest move. ICICI Bank has had its sights set firmly on expanding its share of
CASA deposits.
 Adds 25% to their branch network.


Present Status of State Bank of India:

 State Bank of India is the largest state-owned banking and financial services
company in India, by almost every parameter - revenues, profits, assets, market
capitalization, etc.
 SBI has 21000 ATM’s, 26500 branches including the branches of its associate
 The bank has 131 overseas offices spread over 32 countries. It has branches of the
parent in Colombo, Dhaka, Frankfurt, Hong Kong, Johannesburg, London and
environs, Los Angeles, Male in the Maldives, Muscat, New York, Osaka, Sydney,
and Tokyo.

Financial Performance OF STATE BANK OF INDIA


 On August 26, 2010, State Bank of Indore was officially merged with State Bank
of India.
 State Bank of Indore was formerly named as Bank of Indore Ltd. It was
established under a special charter of His Highness Maharaja Tukojirao Holker-
III, the then ruler of Malwa region.
 It became a subsidiary of State Bank of India on 1 January 1960, under the State
Bank of India Subsidiary Banks Act, 1959.
 In the following year (1962), State Bank of Indore took over the business of The
Bank of Dewas Ltd.

 In 1965, State Bank of Indore took over The Dewas Senior Bank Ltd. as well.
 State Bank of Indore was upgraded to class 'A' category bank in 1971.
 The business turnover of the Bank crossed Rs.47000 Crore at the end of
December 2008.
 It has emerged as the premier bank of Madhya Pradesh due to its steady progress.
 The SBI with the sanction of Govt. of India entered into negotiations with State
Bank of Indore for the acquisition on Oct 8, 2009.
 The Board of Directors of State Bank of Indore On October 31, 2009, approved
the Scheme of Acquisition of State Bank of Indore (SBIN) by SBI, under Section
35 of the SBI Act, 1955.
 SBI has already announced a share swap ratio of 34:100 for the merger. That
means, SBI would give its 34 shares for every 100 shares of State Bank of Indore
held by minority shareholders.
 For this purpose, SBI would issue up to over 1.16 lakh shares of face value Rs 10
each to minority shareholders of State Bank of Indore.
 After the merger, the issued capital of SBI would increase from Rs 634.96 crore
up to a maximum of Rs 635.08 crore.
 Both the banks separately and independently appointed M/s Haribhakti &
company (qualified chartered accountants and M/s Axis Bank ltd. (Category 1
merchant bankers) as the independent valuers.
 M/s Kotak Mahindra capital company ltd.(Category 1 merchant bankers) was
appointed by both the banks independently to provide a fairness opinion to
valuation of the independent valuers.
 After the merger, SBI will be left with five associate banks, State Bank of Bikaner
and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore
and State Bank of Hyderabad. Among these, the State Banks of Bikaner and
Jaipur, Mysore and Travancore are listed companies.

Case study 3

The merger that was announced on, 2006 between Deutsche Bank and Dresdner Bank,
Germany’s largest and the third largest 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 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 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.

Case Study 4:

Private Banks are taking to the consolidation route in a big way. Bank of Punjab (BoP)
and Centurion Bank (CB) have been merged to form Centurion Bank of Punjab (CBP).
RBI has approved merger of Centurion Bank and Bank of Punjab effective from October
1, 2005. The merger is at a swap ratio 9:4 and the combined bank is will be called
Centurion Bank of Punjab. The merger of the banks will have a presence of 240 branches
and extension counters, 386 ATMs, about 2.2 million customers. As on March 2005, the
net worth of the combined entity is Rs 696 crore and the capital adequacy ratio is 16.1 per
cent In the private sector, nearly 30 banks are operating. The top five control nearly 65%
of the assets. Most of these private sector banks are profitable and have adequate capital
and have the technology edge. Due to intensifying competition, access to low-cost
deposits is critical for growth. Therefore, size and geographical reach becomes the key
for smaller banks. The choice before smaller private banks is to merge and form bigger

and viable entities or merge into a big private sector bank. The proposed merger of Bank
of Punjab and Centurion Bank is sure to encourage other private sector banks to go for
the M&A road for consolidation.

Highlights of the merger-Centurion Bank and Bank of Punjab

Bank of Punjab will be merged into Centurion Bank.

New entity will be named 'Centurion Bank of Punjab'.

Centurion Bank's chairman Rana Talwar will take over as the chairman of the merged
Centurion Bank's MD Shailendra Bhandari will be the MD of the merged entity.
KPMG India Pvt Ltd and NM Raiji & Co are the independent valuers and Ambit
Corporate Finance was the sole investment banker to the transaction.
Swap ratio has been fixed at 4: 9, that is, for every four shares of Rs 10 of Bank of
Punjab, its shareholders would receive nine shares of Rs 1 of Centurion Bank.
There has been no cash transaction in the course of the merger; it has been settled through
the swap of shares.
There will no downsizing via the voluntary retirement scheme.

Financials of the merged entity- Centurion Bank of Punjab:

The cost of deposit of Bop were lower than Centurion, while Centurion had a net interest
margin of around 5.8%,. The net interest margin of the merged entity will be at 4.8%. The
combined entity will have net non performing assets (NPAs) of about 3.6 per cent as per
Performa March 2005 data. Centurion banks net NPAs as on 31 March 2005 stood at 2.49
per cent while for Bank of Punjab the figure stood at 4.6 per cent. The combined entity
will have adequate capital adequacy of 16.1 per cent to provide for its growth plans.
Centurion banks capital adequacy on a standalone basis stood at 23.1 per cent while for
Bank of Punjab the figure stood at 9.21per cent. The Performa net worth of combined
entity as at March 2005 stood at Rs 696 crore with Centurion's net worth at Rs 511 crore
and Bank of Punjab's net worth at Rs 181 crore, and the combine entity (Centurion Bank

of Punjab) will have total asset 9,395 crore, deposit 7,837crore and operating profit 43
crore. The merged entity will have a paid up share capital of Rs 130 cr and a net worth of
Rs 696 cr. The merged entity will have 235 Branches & extension counters, 382 ATMs
and 2.2 million customers.
Gains from the merger:

Combined entity the Punjab-centurion bank would be the among the top 10 private sector
banks in the country. Merged entity would benefit from the fact that centurion bank had
recently written of its bad loans against equity. Branch network of the two banks will
complement each other. The combined entity will have a nationwide reach. Centurion
Bank is strong in South India, Maharashtra and Goa whereas Bank of Punjab is strong in
Punjab, Haryana and Delhi. While Centurion Bank has 82 per cent of its business coming
from retail, Bank of Punjab is strong in the Small and Medium Enterprises (SMEs)
segment and agricultural sector. The book value of the bank would also go up to around
Rs 300 crore. The higher book value should help the combine entity to mobilize funds at
lower rate. The combined bank will be full-service commercial bank with a strong
presence in the Retail, SME and Agricultural segments.

Bank Merger to Affect on Insurance Sector

Feb 26 (IANS) Bank mergers in India are likely to impact the insurance sector as many
insurers have select banks as their banc assurance partners. Banc assurance is the sale of
life, pension and investment products through the branch network of a bank. The recent
merger announcement of HDFC Bank and Centurion Bank of Punjab Ltd is expected to
impact the business of Aviva Life Insurance Co Ltd and ICICI Lombard General
Insurance Co Ltd. Centurion Bank is the banc assurance partner for these two insurers.
The arrangements might be discontinued because HDFC Bank sells life and non-life
insurance policies of group companies HDFC Standard Life Insurance Co Ltd and HDFC
General Insurance Co Ltd. After the opening up of the insurance sector, banks have come
to occupy an important role in insurance distribution, particularly for private life insurers.
Banks procure nearly 40 percent of the fresh business for life insurers. It is not surprising
therefore to have life insurers whose very lifeline is their banking partners. Insurers find

recruiting and training individual agents a time-consuming and costly process. There are
also issues like agency attrition and small-sized policies procured by agents. For new
private life insurers who want to achieve fast revenue growth, banks are the only source
of business. Banks also find that selling life insurance products is a lucrative activity.
Normally banc assurance deals are for three years and each bank can represent only one
insurer as a corporate agent. Realizing their vital role, banks are now dictating the terms
of the banc assurance deals. In some cases banks are demanding commission and other
fees totaling nearly 70 percent of the first year premium on a policy, say industry experts
However, new private life insurers are finding it difficult to sign up a banking partner to
sell their products as early entrants have already inked distribution agreements with them.
Some banks have started representing a new life insurer at regular intervals. For instance,
Aviva Life had recently inked a banc assurance deal with the Bank of Rajasthan, which
has switched life insurance partners in recent times. Initially, the bank vended policies of
Birla Sun Life Insurance Co Ltd. It changed over to Life Insurance Corp of India (LIC)
before signing up with Aviva Life. V. Srinivasan, chief financial officer of Bharti Axa
Life Insurance Co Ltd, said that the one bank-one insurer concept was not right and
would lead to skewed scenario. “A bank has a wide variety of customers. No single
insurer can satisfy the needs of all the bank customers. A bank should be allowed to be a
broker and sell the policies of different insurers


Mergers and Acquisitions (M&A) have immensely evoked and still continue to capture
scholars’ interests. More so, M&A in the banking sector evokes high interest simply for
the fact that after decades of strict regulations, easing of the ownership & control
regulations has led to a wave of M&A in banking industry throughout the world. We
started this work to look into the motives behind M&A in Indian banking sector.
Considering the changed environment conditions, we believe that M&A in the Indian
Banking are an important necessity. The reasons include (a) fragmented nature of the
Indian banking sector resulting in poor global competitive presence and position; (b)
large intermediation costs and consequent probability in increasing its risk profile; and (c)
meet the new stringent international regulatory norms. While a fragmented Indian
banking structure may very well be beneficial to the customers (given increased
competition due to lower market power of existing players), at the same time this also
creates the problem of not having any critical mass to play the game at the global banking
industry level. This has to be looked at significantly from the state’s long-term strategic
perspective. Given that economic power is increasingly used as a tool by nations to
defend their position, to signal power, to signal intent, and to establish their supremacy
over others hence owning and managing large powerful global banks would be an
obvious interest for every country. Additionally, given the recent advances in electronic
technology (especially wireless) makes the traditional occupation of land theory
redundant, increasing the importance for the state to intervene and create large sized
banks using the M&A route. Hence, it is imperative for the state to create a few large
sized banks even at the cost of hurting its other stakeholders including customers.


One of the most common reasons for mergers and acquisitions is the belief that
"synergies" exist, allowing the two companies to work more efficiently together than
either would separately. Such synergies may result from the firms' combined ability to
exploit economies of scale, eliminate duplicated functions, share managerial expertise,
and raise larger amounts of capital. Another reason for banks to move towards merger is
that they are motivated by a desire for greater market power. The 'human factor' is a
major cause of difficulty in making the integration between two companies work
successfully. If the transition is carried out without sensitivity towards the employees
who may suffer as a result of it, and without awareness of the vast differences that may
exist between corporate cultures, the result is a stressed, unhappy and uncooperative
workforce - and consequently a drop in productivity Decision to carry out a merger or
acquisition should consider not only the legal and financial implications, but also the
human consequences - the effect of the deal upon the two companies' managers and
employee Almost 60 -70% mergers and acquisitions and the reason for the failure is
cultural differences, flawed intentions, and sometimes decisions are taken without
properly analysis the future of the merger. Merger of BoR an old private sector bank with
India's 2nd largest private sector bank will definitely help both of this parties as ICICI
Bank can extend it activities as it total number branches will go up by 25% and BoR will
also get new direction as it already witness the share price of BoR in BSE is almost
doubled after the announcement of the merger


 Ayadi, Rym; Mergers and acquisitions in European banking: Overview, prospects

and future research, Paris Dauphine University; Centre for European Policy
Studies (CEPS), May 2004
 Business Standard, Banking Sector may see M&As as Basel II Deadline nears, 8
August 2005
 Business Standard, SBI eyes four foreign banks for acquisition, 26 July 2005
 Cavallo, L. and S P Rossi; “Scale and scope economies in the European banking
systems”, cited in: Caruso, A. and F Palmucci, Measuring value creation in bank
mergers and acquisitions, Journal of International Money and Finance, Vol. 31,
2005, pp. 1-32. FICCI, Presentation on M&A in Banks, 2005
 Focarelli, D. F. Panetta and C Salleo; “Why do banks merge?” Journal of Money,
Credit, and Banking; Vol. 34(4); 2002, pp. 1047-1066.
 Hannan, Timothy H. and Steven J. Pilloff; ‘Acquisition targets in the banking
industry’, Finance and Economics Discussion Series, Federal Reserve Board,
Washington, Paper # 2006-40, September 2006.
 Hindu Business Line, Banks may need Rs.60,000cr more capital, 24 October
 International Herald Tribune, U.S. Banking Industry Finds Salvation in Merger
Binge, By John J. Duffy
 Machiraju, H R; Modern Commercial Banking; Vikas Publishing House; New
Delhi; 2005.
 RBI, Deputy Governor, V Leeladhar’s speech on March 11, 2005 to the Kanara
Chamber of commerce and Industry, Mangalore
 Saunders, Anthony, A and Walter Ingo, Universal Banking in the United States,
Oxford University Press, New York, 1994