M&A11 Final

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s
CONTENTS
“CHAPTER NUMBER” “ NAME”
1 INTRODUTION TO MERGER &

ACQUISITION
2 GOLDEN RULES FOR MERGERS
3 MOTIVES FOR MERGERS AND

ACQUISITION
4 TYPES OF COMBINATION OF MERGER
OR AMALGAMATION
5 TYPES OF MERGERS AND ACQUISITION
6 WHY MEREGER IN BANKING

INDUSTRY?
7 PROCESS OF MERGER AND
ACQUISITION
8 CRITICAL FACTORS OF MERGER AND
ACQUISITION
9 RECOMMENDATIOSNS OF MERGER
AND ACQUISITION
10 RBI GUIDELINES FOR MERGER AND

ACQUISITION
11 INTRODUCTION TO PUNJAB NATIONAL
BANK
1
12 INTRODUCTION TO NEDUNGADI BANK
13 OBJECTIVES
14 URGE TO MERGE
15 FOUNDATION FOR MERGER’S IN INDIA
16 RBI GUIDELINES FOR M&A IN PNB &NB

BANK
17 PROCESS FOLLOWED BY PNB &NB
BANK FOR M&A
18 NEED & REVIEW PROCESS FOR M & A
19 CORPORATION KEY TO M & A PUBLIC

SECTOR BANK
20 TECHNOLOGY – A KEY TO MERGER
21 KEY MESSAGES
22 IMPACT OF MERGERS AND

AQUISITIONS
INTRODUCTION OF MERGERS &

ACQUISITIONS
2
M e r g e r i s t h e c o m b i n a t i o n of t w o o r m or e c o m p a n i e s
into a single company either t hr o u g h absorption or
consolidation. In absorption, one company absorbs another
c o m p a n y w h e r e a s i n c o n s o l i d a t i o n t w o or m o r e c o m p a n i e s t o
f o r m a n e w c o m p a n y . L e g a l l y , m e r g e r s ar e a l s o k n o w n a s
amalgamations.
Merger is also defined as amalgamation. Merger is the

fusion of two or more existing companies. All assets,
liabilities and the stock of one company stand transferred to
T r a n s f e r e e C o m p a n y i n c o n s i d e r a t i o n o f p a y m e n t i n t h e f or m
of:
i) Equity shares in the transferee company,
ii) Debentures in the transferee company,
iii) Cash, or
iv) A mix of the above modes.
➢ AMALGAMATION
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Amalgamation can be defined as the, two

companies lose their individual identity and a new
company comes into existence, is known as
‘Amalgamation’.
T h e w o r d ‘ M E R G E R ’ m a y b e t a k e n a s a n a b br e v i a t i o n ,
which means:
M Mixing
E Entities
R Resources for
G Growth
E Enrichment and
R Renovation
The factors f a v or i n g gr o w t h , e nr i c h m e n t and

renovation should be taken into due consideration
before stepping into the process of M&As so that the
abbreviation truly comes out to be fruitful.
Only then Indian banking industry will be able to stand
r i g h t f o r t h t h e g l o b a l b a n k i n g c o m p e t i t i on h u r r i c a n e .
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➢ ACQUISITION:
An acquisition can be defined as the two or more

companies may remain independent, separate legal
entity, but there may be change in control of
companies.
A n a c q u i s i t i o n , a l s o k n o w n a s a t a k e o v e r , i s t h e b u y i n g of
one company (the ‘target’) by another. An acquisition may
b e f r i e n d l y o r h o s t i l e A c q u i s i t i o n u s u a l l y r e f er s t o a
p u r c h a s e o f a s m a l l e r f i r m b y a l a r g er o n e . S o m e t i m e s ,
h o w e v e r , a s m a l l e r f i r m w i l l a c q u i r e m a n a g e m e n t c o n t r ol o f
a larger or longer established banking company and keep its
name for the combined entity.
Mergers and Acquisitions in the industrial and services

s e c t o r h a v e b r o u g h t n e w l i f e t o t h e s t y l e of d o i n g b u s i n e s s i n
t o d a y ’ s w o r l d . G l o b a l i z a t i o n , t e c h n o l o g i c a l c h a n g e s , m ar k e t
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deregulation and liberalization have driven the M & A wave

a c r o s s t h e w o r l d . W h i l e I n d i a n m a n u f a c t u r er s h a v e a d o p t e d
M&A as their business strategy for growth and have
achieved world standards, the Indian banking industry has
not been moving in tune with Indian businesses and has been
s l o w e r t o r e s p o n d t o t h e h u g e gr o w t h o p p o r t u n i t i e s i n t h e
market.
I n t o d a y ’ s c o n n e c t e d w or l d , b a n k s w i l l h a v e t o b e
competitive in order to face the challenges and leverage the
opportunities. The ultimate goals of a bank are to increase
i t s m a r k e t p o w e r , b e c o m e m or e d i v e r s i f i e d , r e d u c e t h e r i s k
o f e n t e r i n g a n e w b u s i n e s s a n d r e d ef i n e t h e c o m p e t i t i v e e d g e
through acquiring di f f er e n t streams of businesses.
Consolidation will provide banks with new capabilities,
technologies and products, help to overcome entry barriers,
ensure immediate entry into new m ar k e t s and lower
operating costs through consolidation of resources.
M&A in Indian banking is not new and dates back from

Imperial Bank of India, which was f or m e d by the
a m a l g a m a t i o n o f t h e t hr e e p r e s i d e n c y b a n k s – t h e B a n k o f
B e n g a l , t h e B a n k o f B o m b a y a n d t h e B a n k of M a d r a s i n
1 9 2 1 . F e w m e r g e r s h a v e t a k e n p l a c e t h e r e a f t e r – m a i nl y i n
t h e p u b l i c s e c t o r - p r i m ar i l y t o p r o t e c t t h e i n t e r e s t s o f
6
d e p o s i t o r s o f w e a k p r i v a t e b a n k s . T h e m e r g er s w e r e n o t f o r
economic considerations and usually distress mergers.
I n t h e b a n k i n g s e c t o r , i m p o r t a n t m er g e r s a n d a c q u i s i t i o n s i n
I n d i a i n r e c e n t y e a r s i n c l u d e t h e m er g e r b e t w e e n I D B I
(Industrial Development bank of India) and its own
s u b s i d i a r y I D B I B a n k . T h e d e a l w a s w or t h $ 1 7 4 . 6 m i l l i o n
( R s . 7 . 6 b i l l i o n i n I n d i a n c ur r e n c y ) . A n o t h e r i m p o r t a n t
merger was that between Centurion Bank and Bank of
Punjab. Worth $82.1 million (Rs. 3.6 billion in Indian
currency), this merger led to the creation of the Centurion
B a n k o f P u n j a b w i t h 2 3 5 br a n c h e s i n d i f f e r e n t r e g i o n s o f
I n d i a . M e r g e r s a n d a c q u i s i t i o n s ar e e s s e n t i a l l y m e a n t t o
attain greater market share; acquire additional brands;
realize improved infrastructure; create new synergies
capitalize on effiencies and economies of scale or to
globalize in the shorter span of time. It also helps business
capitalize on organizational synergies and thereby reap
significant financial advantages. Banking the world over has
been experiencing large scale mergers and acquisitions,
either between the banks and financial institutions or
between banks and IT companies. All these mergers and
acquisitions are driven by motivations like efficiency gains
through synergies, economies of scale and scope of the risk
mitigation through diversification, cost effectiveness etc.
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Sometimes, non-economic factors like prestige, market

p o w e r o r m a r k e t d o m i n a n c e h a v e a l s o i nf l u e n c e d M & A
a c t i v i t y . T r a d e l i b e r a t i o n , t h e c o n c e p t s o f i n t er n a t i o n a l a n d
Global banking, pervasive effects of technology have also
influenced bank mergers and acquisitions.
M e r g e r i s a t o o l u s e d b y c o m p a n i e s f o r t h e p u r p o s e of
expanding their operations often aiming at an increase of
t h e i r l o n g t e r m p r o f i t a b i l i t y . T h er e ar e 1 5 di f f er e n t t y p e s o f
actions that a company can take when deciding to move
f o r w a r d u s i n g M & A . U s u a l l y m er g e r s o c c u r i n a c o n s e n s u a l
(occurring by mutual consent) setting where executives from
the target company help those from the purchaser in a due
diligence process to ensure that the deal is beneficial to both
parties. Acquisitions can also happen through a hostile
t a k e o v e r b y p u r c h a s i n g t h e m a j or i t y of o u t s t a n d i n g s h a r e s o f
a c o m p a n y i n t h e o p e n m ar k e t a g a i n s t t h e w i s h e s of t h e
target's board.
SOME GOLDEN RULES OF MERGER
8
 Don’t rush the wedding: Do your homework carefully to

prevent surprises.
 Know what you are buying: Not only financials but, maybe
more important, the culture.
 Adopt each other’s best traits: Don’t assume the bigger
company or the acquirer has all the answer.
 Be honest with employees: Start early and communicate
constantly with them.
 Time to do internal recruiting: Ensure the managers you want to
keep, don’t go wandering off to a competitor.
MOTIVES OF MERGER AND

ACQUISITION
➢ GROWTH:
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O n e o f t h e f u n d a m e n t a l m o t i v e s t h a t e n t i c e m er g e r s i s
i m p u l s i v e g r o w t h . O r g a n i z a t i o n s t h a t i nt e n d t o e x p a n d n e e d
to choose between organic growth or acquisitions driven
g r o w t h . S i n c e t h e f o r m er i s v e r y s l o w , s t e a d y a n d r e l a t i v e l y
c o n s u m e s m o r e t i m e t h e l a t t e r i s p r e f er r e d b y f i r m s , w h i c h
a r e d y n a m i c a n d r e a d y t o c a p i t a l i z e o n o p p or t u n i t i e s .
➢ MANAGERIAL EFFICIENCY :
S o m e a c q u i s i t i o n s ar e m o t i v a t e d b y t h e b e l i ef t h a t t h e
acquirer’s management can better manage the target’s
r e s o u r c e s . I n s u c h c a s e s , t h e v a l u e o f t h e t ar g e t f i r m w i l l
rise under the management control of the acquirer.
➢ STRATEGY :
T h e s t r a t e g i c r e a s o n s c o u l d d i f f e r o n a c a s e - t o- c a s e
basis and a deal to the other. At times, if the two firms have
c o m p l i m e n t a r y b u s i n e s s i n t e r e s t s , m er g e r s m a y r e s u l t i n
c o n s o l i d a t i n g t h e i r p o s i t i o n i n t h e m ar k e t .
➢ MARKET ENTRY :
Firms that are cash rich use acquisition as a strategy

t o e n t e r i n t o n e w m ar k e t o r n e w t e r r i t o r y o n w h i c h
they can build their platform
WHY THERE IS THE NECESSITY OF

PUBLIC SECTOR BANK MERGER?
10
The Finance Minister, P. Chidambaram, made it clear that

the United Progressive Alliance Government would go ahead
with its policy decision of encouraging m er g e r s and
a c q u i s i t i o n s f o r c o n s o l i d a t i o n o f p u bl i c s e c t o r b a n k s ( P S B s )
as they were necessary f or competition in the global
financial markets.
I n a u g u r a t i n g a b r a n c h of t h e P u n j a b N a t i o n a l B a n k h e r e , h e
urged the PSB staff to bear in mind that "competition,
c o n v e r g e n c e a n d c o n s o l i d a t i o n w i l l b e t h e k e y dr i v e r s o f t h e
b a n k i n g i n d u s t r y i n t h e f u t ur e . " A n d i n t h i s , t h e b a n k i n g
staff and the management should take the lead in spreading
t h e m e s s a g e a t e v e r y l e v e l a s a m a t t er o f r e s p o n s i b i l i t y , h e
said.” There are unions, associations in each bank. Each one
h a s a r e s p o n s i b i l i t y t o c o m m u n i c a t e a b o u t t h e n e w d r i v er s —
competition, convergence and consolidation — of the
banking industry among the employees and staff."
TYPES OF COMBINATION OF MERGERS &

AMALGAMATION; TAKEOVER &
ACQUISITIONS
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There is a great deal of confusion and disagreement

r e g a r d i n g t h e p r e c i s e m e a n i n g o f t er m s r e l a t i n g t o t h e
business combination, v i z . m e r g er , a c q u i s i t i o n , t a k e o v e r ,
amalgamation and consolidation. Sometimes, these terms are
used in broad sense, encompassing most dimensions of
business combination, while sometimes they are defined in a
r e s t r i c t e d l e g a l s e n s e . W e s h a l l d e f i n e t h e s e t er m s k e e p i n g
i n m i n d t h e r e l e v a n t l e g a l f r am e w o r k i n I n d i a .
➢ MERGER OR AMALGAMATION :
A m e r g e r i s s a i d t o o c c u r w h e n t w o or m o r e c o m p a n i e s
combine into one company. One or more companies may
m e r g e w i t h a n e x i s t i n g c o m p a n y or t h e y m a y m er g e t o f o r m a
n e w c o m p a n y . L a w s i n I n di a u s e t h e t e r m a m a l g a m a t i o n f or
m e r g e r . F o r e x a m p l e , s e c t i o n 2 ( 1 A) of t h e i n c o m e t a x a c t ,
1 9 6 1 d e f i n e s a m a l g a m a t i o n a s t h e m er g e r o f o n e or m o r e
c o m p a n i e s w i t h a n o t h e r c o m p a n y o r t h e m er g e r of t w o o r
more companies (called amalgamating company or
companies) to form a new company (called amalgamated
company) in such a way that all assets and liabilities of the
A m a l g a m a t i n g c o m p a n y or c o m p a n i e s b e c o m e a s s e t s a n d
liabilities of the amalgamated company and shareholders
h o l d i n g n o t l e s s t h a n n i n e - t e n t h s i n v a l u e of t h e s h a r e s i n
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the amalgamating company or companies become

shareholders of the amalgamated company.
Merger or amalgamation may take two forms:
● Merger through absorption

● Merger through consolidation
➢ ACQUISITION:
A f u n d a m e n t a l c h a r a c t e r i s t i c o f m e r g e r ( e i t h er
through absorption or consolidation) is that the acquiring
c o m p a n y ( e x i s t i n g o r n e w) t a k e s o v e r t h e o w n e r s h i p of o t h e r
c o m p a n i e s a n d c o m b i n e s t h e i r o p er a t i o n s w i t h i t s o w n
o p e r a t i o n s . A n a c q u i s i t i o n m a y b e d e f i n e d a s a n a c t of
a c q u i r i n g e f f e c t i v e c o n t r o l b y o n e c o m p a n y o v er a s s e t s o r
m a n a g e m e n t o f a n o t h e r c o m p a n y w i t h o u t a n y c o m b i n a t i o n of
c o m p a n i e s . T h u s , i n a n a c q u i s i t i o n t w o or m or e c o m p a n i e s
m a y r e m a i n i n d e p e n d e n t , s e p a r a t e l e g a l e n t i t y , b u t t h er e m a y
be change in control of companies.
➢ TAKEOVER
A t a k e o v e r m a y a l s o b e d ef i n e d a s o b t a i n i n g of
control over management of a company by another. An
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acquisition or take-over does not necessarily entail full,

legal control. A company can have effective control over
another company by holding minority ownership. Under the
monopolies and Restrictive Trade Practices Act, takeover
means acquisition of not less than 25 percent of the voting
power in a company. The investment in shares of other
companies in excess of 10 per cent of the subscribed capital
can result into their takeover.
TYPES OF MERGER AND ACQUISITION
M e r g e r a n d a c q u i s i t i o n d e p e n d s u p o n t h e p ur p o s e f or w h i c h
the target company is acquired. A company will seek to
acquire the other company only when it has arrived at its
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own internal strength. It has to aim at a suitable combination

w h e r e i t c o u l d h a v e o p p or t u n i t i e s t o s u p p l e m e n t i t s f u n d s ;
secure additional financial facilities, eliminate competition
and strengthen its market position. Based on the reason why
f i r m c o m b i n e , m e r g e r s c a n b e d i v i d e d i n t o t hr e e c a t e g o r i e s :
Types of Merger & Acquisition
Horizontal Mergers Vertical Mergers Conglomerate Mergers
( i ) HORIZONTAL MERGERS:
A h o r i z o n t a l m e r g er i n v o l v e s a m e r g e r b e t w e e n
t w o f i r m s o p e r a t i n g a n d c o m p e t i n g i n t h e s a m e ki n d o f
b u s i n e s s a c t i v i t y . T h e m a i n p ur p o s e o f s u c h m er g e r s i s t o
o b t a i n e c o n o m i e s o f s c a l e of pr o d u c t i o n . T h e e c o n o m i e s o f
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s c a l e i s o b t a i n e d b y t h e e l i m i n a t i o n of d u p l i c a t i o n o f
facilities and operations and broadening the product line,
r e d u c t i o n i n i n v e s t m e n t i n w o r k i n g c a p i t a l , e l i m i n a t i o n of
competition in a product, reduction in advertising costs,
i n c r e a s e i n m a r k e t s h a r e , e x e r c i s e of b e t t e r c o n t r o l o n
market, etc.
H o r i z o n t a l m er g e r s r e s u l t i n d e c r e a s e i n t h e
number of firms in an industry and hence such type of
m e r g e r s m a k e i t e a s i e r f o r t h e i n d u s t r y m e m b e r s t o j oi n t
t o g e t h e r f o r m o n o p o l y pr o f i t s . H or i z o n t a l m er g e r s a l s o h a v e
a potential to create monopoly power on the part of the
combined firm enabling it to engage in anticompetitive
practices. Hence, in many countries restrictive business
p r a c t i c e s l e g i s l a t i o n o r , i n o t h er w o r d s , c o m p e t i t i o n l a w ,
looks at enforcing strict regulations on the merging or
i n t e g r a t i o n o f c o m p e t i t o r s . H or i z o n t a l m e r g e r s o f e v e n s m a l l
e n t e r p r i s e s m a y c r e a t e c o n d i t i o n s t r i g g e r i n g c o n c e n t r a t i o n of
economic power and oligopoly.
(II) VERTICAL MERGERS:
A v e r t i c a l m er g e r i n v ol v e s m er g e r b e t w e e n f i r m s
t h a t a r e i n d i f f e r e n t s t a g e s o f pr o d u c t i o n o r v a l u e c h a i n .
T h e y a r e c o m b i n a t i o n of c o m p a n i e s t h a t u s u a l l y h a v e b u y e r -
seller relationships. A company involved in a vertical
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merger usually seeks to merge with another company or

would like to takeover another company mainly to expand its
operations by backward or f or w a r d i n t e gr a t i o n . The
a c q u i r i n g c o m p a n y t h r o u g h m er g e r o f a n o t h e r u n i t a t t e m p t s
to reduce inventories of raw material and finished goods,
implements its production plans as per objectives and
e c o n o m i z e s o n w o r k i n g c a p i t a l i n v e s t m e n t s . I n o t h er w o r d s ,
in vertical combination, the merging company would be
either a supplier or buyer using its product as an
intermediary material for final production.
Firms integrate vertically between various stages

due reasons like technological economies, elimination of
transaction costs, i m pr o v e d planning f or inventory and
p r o d u c t i o n , r e c o n c i l i a t i o n of d i v e r g e n t i n t e r e s t s of p a r t i e s t o
a transaction, etc.
(III) CONGLOMERATE MERGERS :
C o n g l o m e r a t e m e r g er s i n v o l v e m e r g er b e t w e e n
f i r m s e n g a g e d i n u n r e l a t e d t y p e s of b u s i n e s s a c t i v i t y . T h e
basic purpose of such combination is utilization of financial
r e s o u r c e s . S u c h t y p e o f m er g e r e n h a n c e s t h e o v e r a l l s t a b i l i t y
of the acquirer company and creates balance in the
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c o m p a n y ’ s t o t a l p o r t f o l i o o f d i v e r s e pr o d u c t s a n d p r o d u c t i o n
p r o c e s s e s a n d t h e r e b y r e d u c e s t h e r i s k of i n s t a b i l i t y i n t h e
firm’s cash flow.
Conglomerate mergers can be distinguished three
types:
● Product extension mergers

● G e o g r a p h i c m a r k e t e x t e n s i o n m er g e r s a n d
● P u r e c o n g l o m e r a t e m e r g er s .
a) Product extension mergers are merger between firms in

related business activities and mat also be concentric
mergers. These mergers broaden the product line of the
firms.
b ) G e o g r a p h i c m a r k e t e xt e n s i o n m e r g e r s i n v o l v e a m e r g er
between two firms operating in two different geographic
ideas.
c) Pure conglomerate mergers involve merger between two

firms with unrelated business activities. They do not come
under product extension or market extension mergers.
W i t h i n t h e b r o a d e r c a t e g o r y of c o n g l o m e r a t e m e r g e r s ,
two types of conglomerate firms can be distinguished.
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➢ FINANCIAL CONGLOMERATES:
F i n a n c i a l C o n g l o m e r a t e s pr o v i d e a f l o w of f u n d s t o
e a c h s e g m e n t o f t h e i r o p er a t i o n s , e x e r c i s e c o n t r o l a n d a r e
t h e f i n a n c i a l r i s k t a k e r s . T h e y u n d er t a k e s t r a t e g i c p l a n n i n g
but do not participate in operating decisions.
➢ MANAGERIAL CONGLOMERATES:
Managerial Conglomerates transmit the attributes of
f i n a n c i a l c o n g l o m e r a t e s s t i l l f ur t h e r . T h e y n o t o n l y a s s u m e
f i n a n c i a l r e s p o n s i b i l i t y a n d c o n t r o l , b u t a l s o p l a y a r ol e i n
o p e r a t i n g d e c i s i o n s , a n d pr o v i d e s t a f f e x p e r t i s e a n d s t a f f
s e r v i c e s t o t h e o p e r a t i n g e n t i t i e s . B y p r o vi d i n g m a n a g e r i a l
guidance and interactions on decisions, managerial
conglomerates increase the potential for improving
performance.
➢ CONSOLIDATION :
A consolidation is a combination of two or more

B a n k i n g c o m p a n i e s i n t o a n e w c o m p a n y . I n t h i s f or m of
merger, all companies are legally dissolved and a new entity
is created. In a consolidation, the acquired company
transfers its assets, liabilities and shares to the acquiring
c o m p a n y f o r c a s h o r e x c h a n g e of s h a r e s .
19
MERITS OF CONSOLIDATION
➢ Revenue enhancement : C o n s o l i d a t i o n c a n l e a d t o
increased revenues through its effects on firm size,
firm scope (through either product or geographic
d i v e r s i f i c a t i o n ) , or m a r k e t p o w e r . R e s e a r c h s u g g e s t s
that mergers may pr o v i d e some o p p o r t u ni t i e s for
revenue enhancement either from efficiency gains or
from increased market power. However, many indicated
that revenue enhancement due to increased size was a
moderately important factor motivating consolidation.
The merger of ICICI Ltd. And ICICI Bank clearly
demonstrates in the Indian context that consolidation
can lead to increased revenue.
➢ Efficiencie s in operations : M & A s c a n l e a d t o

reduction in costs for a variety of reasons. The existing
research literature, which focuses on cost savings
attributable to economies of scale, economies of scope,
or more efficient allocation of resources, fails to find
much evidence suggesting that cost savings constitute
an important outcome of M&As. However many pointed
20
to economies of scale as a very important motivating

factor for consolidations.
➢ Ability to spread fixed costs over a larger

customer base: N e w t e c h n o l o g i c a l d e v e l o p m e n t s
h a v e e n c o u r a g e d c o n s o l i d a t i o n b e c a u s e of t h e i r h i g h
fixed costs and the need to spread these costs across a
large customer base. At the same time, dramatic
improvements in the speed and quality of
c o m m u n i c a t i o n s a n d i n f or m a t i o n p r o c e s s i n g h a v e m a d e
i t p o s s i b l e f o r f i n a n c i a l s e r v i c e p r o v i d er s t o of f e r a
b r o a d e r a r r a y o f p r o d u c t s a n d s e r v i c e s t o l ar g e n u m b e r
of clients over wider geographic areas than had been
feasible in the past.
➢ Diversification of income from both products

and geographic area : The one ar e a where
consolidation seems most likely to reduce firm risk is
the potential for diversification gains, although even
here the possibilities are complex. Such gains are most
likely to arise due to asset d i v er s i f i c a t i o n across
geographies; some gains may also d er i v e f r om
21
geographic diversification on the liabilities side of the

balance sheet. In addition, diversification gains may
r e s u l t f r o m c o n s o l i d a t i o n a c r o s s f i n a n c i a l pr o d u c t s a n d
services. On the other hand after consolidation some
firms shift t o w ar d s riskier asset portfolios and
consolidation may increase o p er a t i n g risks and
m a n a g e r i a l c o m p l e x i t i e s . F or e x a m p l e , or g a n i z a t i o n a l
diseconomies may occur as financial institutions
b e c o m e l a r g e r a n d m or e c o m p l e x i f s e n i o r m a n a g e m e n t
t e a m s s t r a y f a r f r o m t h e i r ar e a s of c o r e c o m p e t e n c y .
More broadly there is no guarantee that cost savings or
efficiency gains will be realized.
➢ Stabilization of asset quality : S m a l l s i z e d b a n k s

with weaker assets would find it difficult to survive in
the long run as they need to meet the additional capital
requirements. The exit route for such banks will be to
get absorbed by the banks with strong asset quality.
22
DEMERITS OF CONSOLIDATION
➢ Customer service : Merger of two Banking

c o m p a n i e s m a y r e s u l t i n d i l ut i o n o f c o m p e t i t i o n i n
t h e m a r k e t , a d v e r s e l y af f e c t i n g c u s t o m e r s ’ i n t e r e s t s .
In banking industry the same may lead to monopoly
affecting the customer services. The larger
23
undertaking, consequent on merger, may exercise a

market power to the detriment of its customers and
suppliers.
➢ Elimination of competition : In a
merger/amalgamation, an individual undertaking, be
it an actual or potential competitor, may get
e l i m i n a t e d . O r , a l a r g e u ni t m a y t a k e i n t o i t s f o l d a n
efficient and growing medium or small-sized
undertaking.
➢ Depositors interests : Af t e r t h e c o l l a p s e of a
m a j o r p r i v a t e s e c t o r b a n k , a n d i t s s u b s e q u e n t m e r g er
in July 2004 with a public sector bank, depositors of
p r i v a t e b a n k h e a v e a c o l l e c t i v e s i g h o f r e l i e f .: t h e i r
money is safe. Authorities say that in the past,
d e p o s i t o r s h a v e n e v e r l o s t m o n e y af t e r b a n k r u n s
that led to mergers and amalgamations. Is the claim
correct? Not really. However it has been reported in
t h e p a s t t h a t m a n y d e p o s i t o r s of t h e e r s t w h i l e
Benares State Bank Ltd. (BSBL), which was
amalgamated with bank of Baroda in June 2002,
have not got back all their money. People who have
deposits worth more than rs.1 lakh have got back at
24
most 85.15%. This raises two very important

q u e s t i o n s : j u s t h o w s a f e ar e t h e r s . 1 5 9 3 0 0 0 cr o r e
worth of bank deposits ion India? And who is really
responsible for ensuring safety of bank deposits?
I n m o s t o f t h e c a s e s , t h o u g h m e r g e r s of b a n k s a r e
o b j e c t e d t o w a r d s s a f e g u a r d i n g o r pr o t e c t i n g t h e i n t e r e s t
o f t h e d e p o s i t o r s , o n e w a y o r ot h e r , i n m o s t o f t h e
cases, depositors have suffered in the amalgamation
process. The depositors of the BSBL were adversely
affected in the amalgamation.
These adverse features may or may not be
o u t w e i g h e d b y t h e p o s i t i v e f e a t ur e s of m er g e r s s u c h a s
e c o n o m i e s o f s c a l e , s t a b i l i t y t hr o u g h d i v e r s i f i c a t i o n ,
u t i l i z a t i o n o f i d l e f u n d s , n ur s i n g a s i c k u ni t o r b e t t e r /
optimal utilization of capacity.
WHY MERGERS IN BANKING INDUSTRY?

We have earlier seen that value maximization is the key
r a t i o n a l e f o r M & A i n b a n k s . A s I m e n t i o n e d e a r l i e r , t hi s c a n
be achieved through a reduction in ‘cost’ or an increase in
‘revenue’. Let us see how consolidation could help to
achieve these objectives:
25
➢ ACHIEVING COST REDUCTION:
a) Cost reduction through economy of Scale -

Consolidation helps in scaling in up operations, there by
reducing per unit cost
b) Cost reduction through economy of Scope - T h i s i s

achieved through synergy i n v o l v e d i n t h e a b i l i t y t o o f f er
m u l t i p l e p r o d u c t s u s i n g t h e s a m e i n f r a s t r u c t ur e .
E x a m p l e : B a n k s c a n o f f e r i n s u r a n c e a n d i n v e s t m e n t pr o d u c t s
u s i n g t h e i r b r a n c h n e t w o r k a n d t h e r e b y a c h i e v e e c o n o m y of
scope
c)Cost reduction through rationalization of man

power : T h e m e r g e d e n t i t y w i l l b e a b l e t o i d e n t i f y t h e r i g h t
p e r s o n s t o m a n c r i t i c a l f u n c t i o n s f r om a l ar g e r p o ol o f
human resources.
d) Reduction in risk . T h e m e r g e d e n t i t y w i l l b e a b l e t o
reduce credit risk t hr o u g h spreading it across wider
geographies or product range.
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e) Cost reduction t hr o u g h possible reduction in tax

obligations
f ) C h e a p e r s o u r c i n g of i n p u t s w i t h i n c r e a s e d b a r g a i n i n g
power with vendors and suppliers
g) Ability to enter new business areas with reduced initial

cost as compared to a new set up.
➢ Increasing Revenue :
a) A bigger entity will be able to serve a large customer

better. By offering more services and taking bigger share in
the business of the customer the bank will be able to
increase the revenue per customer
b) Product diversification will facilitate ‘one stop shopping’

by the bank’s customers.
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c ) A l a r g e r c u s t o m e r b a s e w i l l g e n e r a t e m or e r e v e n u e
d) Greater visibility in the market place will enhance the

ability to attract new customers.
e) A bigger size and share in the market will boost the
bank’s ability to raise pr o d u c t prices w i t h o ut losing
customers
f ) T h e m e r g e d e n t i t y w i l l b e a b l e t o t a k e b i g g er r i s k a n d
reap its rewards.
PROCESS OF M&As
Generally, the merger transaction includes the following
steps:
➢ Screening and investigation of merger
proposal : When t h er e is an intention of
a c q u i s i t i o n o r m e r g e r of o t h e r b u s i n e s s u n i t , t h e
primary step is that of screening and motive needs
to be judged against three strategic criteria i.e.
business fit management and financial strength.
28
O n c e t h e p r o p o s a l f i t i n t o t h e s t r a t e g i c m ot i v e of
t h e a c q u i r e r , t h e n t h e p r o p o s e d a c q u i r er w i l l c o l l e c t
all relevant i n f or m a t i o n relating to the target
company about share price movements, earnings,
dividends, market share, management, shareholding
pattern, gearing, financial position, benefits from
proposed acquisition etc. this form of investigation
w i l l b r i n g o u t t h e s t r e n g t h s a n d t h e w e a k n e s s e s of
both one’s own company and the perspective merger
candidate. The acquirer company should not only
c o n s i d e r t h e b e n e f i t s t o b e o bt a i n e d b u t a l s o b e
careful about the attendant risks. If the proposal is
v i a b l e a f t e r t hr o u g h a n a l y s i s f r o m a l l a n g l e s , t h e n
t h e m a t t e r w i l l b e c a r r i e d f u r t h er .
➢ Negotiation stage : The negotiation is an
important stage in which the bargain is made in
o r d e r t o s e c u r e t h e h i g h e s t pr i c e b y t h e s e l l e r a n d
t h e a c q u i r e r k e e n t o l i m i t t h e pr i c e of t h e b i d .
Before the negotiations start, the seller needs to
d e c i d e t h e m i n i m u m pr i c e a c c e p t a b l e a n d t h e b u y e r
needs to decide the maximum he is ready to pay.
After the consideration is decided then the payment
t e r m s a n d e x c h a n g e r a t i o of s h a r e s b e t w e e n t h e
companies will be decided the exchange ratio is an
29
important factor in the process of amalgamation.

T h i s h a s t o b e w o r k e d o u t b y v a l u i n g t h e s h a r e s of
t h e b o t h , t r a n s f e r or a n d t r a n s f e r e e c o m p a n y a s p e r
t h e n o r m s a n d m e t h o d s o f v a l u a t i o n of s h a r e s .
A p p r o v e d v a l u er o r a f i r m o f C h a r t e r e d A c c o u n t a n t s
will evaluate the shares on t h e b a s i s of a u d i t e d
accounts as on the transfer date.
➢ Approval of proposal by Board of Directors :
Deciding upon the consideration of the deal and
terms of payment, then the proposal will be put for
t h e B o a r d o f D i r e c t o r ’ s a p pr o v a l . T h e R B I h a s
s t i p u l a t e d t h a t m er g e r o f b a n k s s h o u l d h a v e t h e
c o n s e n t o f t w o - t h i r d m a j or i t y o f t h e m e m b er s o n t h e i r
boards and not just those present at the board meeting
alone.
➢ Approval of shareholders : T w o - t h i r d m a j or i t y
o f t h e s h a r e h o l d e r s of e a c h b a n k s h o u l d a p p r o v e t h e
d r a f t s c h e m e o f m er g e r , a f t e r n e c e s s a r y c l e a r a n c e s
b y t h e i r b o a r d of d i r e c t o r s .
➢ Approval of RBI : A p p r o v a l s f r o m t h e R B I i s m u s t
b e f o r e t h e m e r g er a s R B I i s t h e a p e x b o d y i n c a s e
of banking sector.
30
➢ Approval of respective high court (s):

Approval of respective high court of seller and
acquirer, confirming the scheme of amalgamation is
r e q u i r e d . T h e c o u r t s h a l l i s s u e o r d er s f o r w i n d i n g
up of the amalgamating company without
d i s s o l u t i o n o n r e c e i p t o f t h e r e p or t s f r o m t h e
o f f i c i a l l i q u i d a t or a n d t h e R e g i o n a l d i r e c t o r t h a t t h e
affairs of the amalgamating company have not been
c o n d u c t e d i n a m a n n e r pr e j u d i c i a l t o t h e i n t e r e s t s o f
its members or to public interest.
➢ Approval of central government : D e c l a r a t i o n

of the central government on the recommendation
➢ made by the specified Authority under section 72A
of the income tax act, if applicable.
➢ Integration stage : T h e s t r u c t u r a l a n d c u l t ur a l
aspects of the two organizations, if carefully
integrated in the new organization will lead to the
successful merger and ensure that expected benefits
of merger are realized.
31
CRITICAL FACTORS FOR MERGERS AND

ACQUISITIONS
WHY DO MERGERS FAIL?

1. Excessive premium
In a competitive bidding situation, a company may tend to
p a y m o r e . O f t e n h i g h e s t b i d d e r i s o n e w h o o v er e s t i m a t e s
value out of ignorance. Though he emerges as the winner, he
h a p p e n s t o b e i n a w a y t h e u nf o r t u n a t e w i n n e r . T h i s i s c a l l e d
winners curse hypothesis. When the acquirer fails to achieve
the synergies required compensating the price, the M&As
32
fails. More you pay for a company, the harder you will have
t o w o r k t o m a k e i t w o r t h w h i l e f o r y o ur s h a r e h o l d e r s . W h e n
the price paid is too much, how well the deal may be
executed, the deal may not create value.
2. Size Issues
A mismatch in the size between acquirer and target has been
found to lead to poor acquisition performance. Many
a c q u i s i t i o n s f a i l e i t h e r b e c a u s e of ' a c q u i s i t i o n i n d i g e s t i o n '
t h r o u g h b u y i n g t o o b i g t ar g e t s or f a i l e d t o g i v e t h e s m a l l e r
acquisitions the time and attention it required.
3. Lack of research
A c q u i s i t i o n r e q u i r e s g a t h er i n g a l o t o f d a t a a n d i n f or m a t i o n
and analyzing it. It requires extensive research. A carelessly
carried out research about the acquisition causes the
destruction of acquirer's wealth.
4. Diversification
Very few firms have the ability to successfully manage the
d i v e r s i f i e d b u s i n e s s e s . U n r e l a t e d d i v er s i f i c a t i o n h a s b e e n
a s s o c i a t e d w i t h l o w e r f i n a n c i a l p e r f or m a n c e , l o w er c a p i t a l
p r o d u c t i v i t y a n d a h i g h e r d e gr e e o f v a r i a n c e i n p e r f or m a n c e
33
f o r a v a r i e t y o f r e a s o n s i n c l u d i n g a l a c k o f i n d u s t r y or
geographic knowledge, a lack of focus as well as perceived
inability to gain meaningful synergies. U nr e l a t e d
a c q u i s i t i o n s , w h i c h m a y a p p e a r t o b e v er y p r om i s i n g , m a y
turn out to be big disappointment in reality.
5. Previous Acquisition Experience
While previous acquisition experience is not necessarily a
requirement for future acquisition success, many
unsuccessful acquirers usually have little previous
acquisition experience. Previous experience will help the
a c q u i r e r s t o l e a r n f r o m t h e pr e v i o u s a c q u i s i t i o n m i s t a k e s a n d
h e l p t h e m t o m a k e s u c c e s s f u l a c q u i s i t i o n s i n f ut u r e . I t m a y
a l s o h e l p t h e m b y t a k i n g a d v i c e i n or d e r t o m a x i m i z e
chances of acquisition success. Those serial acquirers, who
p o s s e s s t h e i n h o u s e s k i l l s n e c e s s a r y t o p r o m ot e a c q u i s i t i o n
success as well trained and competent implementation team,
are more likely to make successful acquisitions.
6. Poor Cultural Fits
C u l t u r a l f i t b e t w e e n a n a c q u i r e r a n d a t ar g e t i s o n e of t h e
m o s t n e g l e c t e d a r e a s o f a n a l y s i s p r i o r t o t h e c l o s i n g of a
deal. However, cultural due diligence is every bit as
important as careful financial analysis. Without it, the
chances are great that M&As will quickly amount to
misunderstanding, confusion and conflict. Cultural due
34
d i l i g e n c e i n v o l v e s t e p s l i k e d e t er m i n i n g t h e i m p o r t a n c e o f
c u l t u r e , a s s e s s i n g t h e c u l t u r e o f b o t h t ar g e t a n d a c q u i r e r . I t
i s u s e f u l t o k n o w t h e t a r g e t m a n a g e m e n t b e h a v i or w i t h
respect to dimensions such as centralized versus
decentralized decision making, speed in decision making,
time horizon for decisions, level of team work, management
of conflict, risk orientation, openness to change, etc. It is
n e c e s s a r y t o a s s e s s t h e c u l t ur a l f i t b e t w e e n t h e a c q u i r e r a n d
t a r g e t b a s e d o n c u l t u r a l pr o f i l e . P o t e n t i a l s o u r c e s o f c l a s h
must be managed. It is necessary to identify the impact of
cultural gap, and develop and execute strategies to use the
i n f o r m a t i o n i n t h e c u l t ur a l p r of i l e t o a s s e s s t h e i m p a c t t h a t
the differences have.
7. Poor Organization Fit

Organizational fit is described as "the match between
a d m i n i s t r a t i v e p r a c t i c e s , c u l t u r a l pr a c t i c e s a n d p e r s o n n e l
characteristics of the target and acquirer. It influences the
ease with which two organizations can be integrated during
i m p l e m e n t a t i o n . M i s m a t c h o f or i g i n a t i o n f i t l e a d s t o f a i l u r e
of mergers.
8. Faulty evaluation
35
A t t i m e s a c q u i r e r s d o n o t c a r r y o u t t h e d e t a i l e d d i l i g e n c e of
the target company. They make a wrong assessment of the
b e n e f i t s f r o m t h e a c q u i s i t i o n a n d l a n d u p p a y i n g a h i g h er
price.
9. Incomplete and Inadequate Due Diligence

L a c k o f d u e d i l i g e n c e i s l a c k of d e t a i l e d a n a l y s i s of a l l
important features like finance, management, capability,
physical assets as well as intangible assets results in failure.
I S P AT S t e e l i s a c o r p o r a t e a c q u i r er t h a t c o n d u c t s M & A
a c t i v i t i e s a f t e r e l a b o r a t e d u e di l i g e n c e .
10. Merger between Equals

M e r g e r b e t w e e n t w o e q u a l s m a y n o t w or k . T h e D u n l o p
P i r e l l i m e r g e r i n 1 9 6 4 , w h i c h cr e a t e d t h e w or l d ' s s e c o n d
largest tier company, ended in an expensive d i v or c e .
Manufacturing plants can be integrated easily, human beings
c a n n o t . M e r g e r o f e q u a l s m a y a l s o cr e a t e e g o c l a s h .
11. Over Leverage
36
Cash acquisitions results in the acquirer assuming too much

d e b t . F u t u r e i n t e r e s t c o s t c o n s u m e s t o o gr e a t a p or t i o n o f t h e
a c q u i r e d c o m p a n y ' s e a r n i n g s ( B u s i n e s s I n d i a 2 0 0 5) .
1 2 . Incompatibility of Partners
Alliance between two strong companies is a safer bet than
between two weak p ar t n e r s . Frequently many strong
c o m p a n i e s a c t u a l l y s e e k s m a l l p ar t n e r s i n o r d e r t o g a i n
control while weak companies look for stronger Banking
Company.
1 3 . L a c k o f P r o p e r C o m m u n i c a t i on
Lack of proper communication after the announcement of
M&As will create lot of uncertainties. Apart from getting
down to business quickly companies have to necessarily talk
to employees and constantly. Regardless of how well
e x e c u t i v e s c o m m u n i c a t e d ur i n g a m e r g e r or a n a c q u i s i t i o n ,
uncertainty will never be completely eliminated. Failure to
manage communication results in inaccurate perceptions,
l o s t t r u s t i n m a n a g e m e n t , m or a l e a n d pr o d u c t i v i t y p r o b l e m s ,
s a f e t y p r o b l e m s , p o o r c u s t o m e r s e r v i c e , a n d d e f e c t i o n of k e y
p e o p l e a n d c u s t o m e r s . I t m a y l e a d t o t h e l o s s of t h e s u p p o r t
of key stakeholders at a time when that support is needed the
most.
37
14. Failure of Leadership Role

Some of the role leadership should take seriously are
modeling, quantifying strategic benefits and building a case
for M&A activity and articulating and establishing high
standard for value creation. Walking the talk also becomes
very important during M&As.
Research Shows That In Most Cases Mergers Fail To Deliver Against

Their Expectations, Whatever The Rationale
Poor deal
• Unrealistic synergies
• Price too high
• Competitor reactions
30
70
38
Good deal poorly implemented
60-70 failed • Poor integration management
• Failure to address cultural

differences
• Customer losses
60-70 • Poor communication
• Poor tracking
RECOMMENDATIONS FOR A SUCCESSFUL

MERGER
P e o p l e i n v o l v e d i n a n M & A d e a l e n d u p w i t h t o n s of d e a l
fees and bonuses. They also frequently find their name in the
newspapers, particularly if the merging companies are big
e n o u g h . T o b e c o m e a s u c c e s s f u l M & A b a n k er y o u s h o u l d
have qualities like communication skills, a pleasing
personality, a head for relationships, the knowledge of law
of the land (especially the legislations p er t a i n i n g to
39
takeovers, share transfers and buybacks) and sound

analytical skills.
➢ COMMUNICATION SKILL
As a banker you might have to do tough negotiations in

o r d e r t o b r i n g a b o u t t h e d e a l . T h i s r e q u i r e s g o o d or a l
c o m m u n i c a t i o n a b i l i t i e s a n d a c l e a r t hi n k i n g . I n t h e pr o c e s s
o f n e g o t i a t i o n s , n u m e r o u s of f er s a n d c o u n t e r - of f er s w o u l d
be made. Deep analytical skills and quick thinking are
n e e d e d t o i m m e d i a t e l y u n d er s t a n d t h e i m p l i c a t i o n s o f a l l
such terms. Strong mental abilities and personality is
necessary for quick decision-making. The work also entails
good deal of diplomacy and patience so that the deal doesn’t
f a i l d u e t o t h e i m p e r t i n e n c e o f t h e i nt e r m e d i a r y .
➢ TEAM WORK
O n e s h o u l d a l s o b e a g o o d t e a m w o r k er . A p a r t f r o m
t h e m e m b e r s o f y o u r o w n or g a n i z a t i o n , y o u a l s o n e e d
to work with the executives/management of the client.
While working out the details of the deal, one also has
t h e o t h e r c o m p a n y ’ s of f i c i a l s o n t h e t e a m . M o r e o v e r ,
t h e b a n k e r h a s t o w o r k w i t h s i m i l a r b a n k e r s of o t h e r
i n v e s t m e n t b a n k s w h o m i g h t b e r e pr e s e n t i n g b o t h t h e
companies.
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➢ FINANCIAL SKILLS
Sound financial skills are required as many aspects

of the merger are numerical in nature. You might even
h a v e t o i d e n t i f y t h e s y n e r g i e s i n v o l v e d i n t h e m e r g er
(the theory of synergy says 2 + 2 = 5, not just four).
Legal knowledge, documentation skills and taxation
k n o w l e d g e a r e h i g h l y w e l c o m e . F or o r i g i n a t i n g d e a l s ,
strategic thinking and creativity in identifying business
s y n e r g i e s a r e e s s e n t i a l . A d d i t i o n a l l y , a l l o t h er a b i l i t i e s
like working for long hours, flying from an airport to
another (sometimes i n t er n a t i o n a l l y ) , sustaining on
p a t h e t i c d e s k t o p l u n c h e s e t c . , w o u l d a l s o b e h e l p f ul .
➢ EFFECTIVE PLANNING
“Success in m er g e r s and acquisitions correlates

directly with the level of planning that goes into them.”
C a r e f u l a n d e a r l y p l a n n i n g h a s b e e n s h o w n t o i nf l u e n c e
the success of a merger. Plans need to include realistic
goals and reasonable timeframes, and should cover all
t h e k e y a s p e c t s o f a n or g a n i z a t i o n i n c l u d i n g p e o p l e ,
systems and organizational processes. Effective
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planning leads the way to a smoother implementation

p r o c e s s a n d m a x i m i z e s t h e c h a n c e s of s u c c e s s o f t h e
merging organization.
➢ RETAINING KEY PEOPLE
T h e r e t e n t i o n of a t a l e n t e d w or k f or c e , w h i c h i s
often a major reason behind the decision to merge,
s h o u l d t a k e p r i o r i t y d u r i n g t h e m e r g er pr o c e s s , a n d
management needs to adopt measures to improve the
retention rate of the best people in the merging
companies.
➢ MANAGING CULTURAL DIFFERENCES
Companies that are merging need to be aware of

cultural differences between them and need to find
practical ways of reconciling those differences. With an
increasing trend towards global m er g e r s , language
barriers also need to be taken into consideration, and
companies should consider providing language training
t o t h e i r e m p l o y e e s i f t h i s c a n b e n e f i t t h e i nt e g r a t i o n
42
p r o c e s s . S u c c e s s f u l l y i n t e g r a t i n g t h e t w o c u l t ur e s of
t h e m e r g i n g c o m p a n i e s i s a n e s s e n t i a l s t e p t o w ar d s
achieving a successful partnership. In order to do this,
c u l t u r a l a w a r e n e s s a n d s e n s i t i v i t y a r e cr u c i a l t o a v o i d
potential clashes and misunderstandings between the
people in the two companies
RBI GUIDELINES ON MERGERS &

ACQUISITIONS OF BANKS
With a view to facilitating consolidation and emergence
o f s t r o n g e n t i t i e s a n d pr o v i d i n g a n
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.
43
Although the Banking Regulation Act, 1949 does not

empower Reserve Bank to formulate a scheme with
r e g a r d t o m e r g e r a n d a m a l g a m a t i o n of b a n k s , t h e S t a t e
G o v e r n m e n t s h a v e i n c o r p or a t e d i n t h e i r r e s p e c t i v e A c t s
a p r o v i s i o n f o r o b t a i n i n g p r i o r s a n c t i o n i n wr i t i n g , of
RBI for an order, inter-alia, for sanctioning a scheme
of amalgamation or reconstruction.
The request for m e r g er can emanate from banks
registered under the same State Act or from banks
registered under the Multi State Co-operative Societies
A c t ( C e n t r a l A c t ) f or t a k e o v e r o f a b a n k / s r e g i s t e r e d
under State Act. While the State Acts specifically
p r o v i d e f o r m e r g e r of c o - o p e r a t i v e s o c i e t i e s r e g i s t e r e d
u n d e r t h e m , t h e p o s i t i o n w i t h r e g a r d t o t a k e o v e r of a
co-operative bank registered under the State Act by a
c o - o p e r a t i v e b a n k r e g i s t e r e d u n d e r t h e C E NT R A L .
Although there are no specific provisions in the State
A c t s o r t h e C e n t r a l A c t f o r t h e m er g e r of a c o - o p e r a t i v e
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
p r o p o s a l s o n m e r i t s l e a v i n g t h e q u e s t i o n of c o m p l i a n c e
w i t h r e l e v a n t s t a t u t e s t o t h e a d m i n i s t r a t or s o f t h e A c t s .
44
In other words, Reserve Bank will confine its

examination only to financial aspects and to the
i n t e r e s t s o f d e p o s i t o r s a s w e l l a s t h e s t a b i l i t y of t h e
financial system while considering such proposals.
Valuates the banks on the basis of its share capital,
market capital, assets and liabilities, its reach and
a n t i c i p a t e d g r o w t h a n d s e n d s i t s r e p or t t o t h e r e s p e c t i v e
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
a n d o t h e r r e g u l a t or y b o d i e s s u c h S e c u r i t y & e x c h a n g e
b o a r d o f I n d i a ( S E B I ) f o r t h e i r a p pr o v a l .
DETAILED CASE STUDY OF “PUNJAB

NATIONAL BANK” & “NEDUNGADI BANK”
PUNJAB NATIONAL BANK
Introduction:
Punjab National Bank (PNB) was established in 1895 at

L a h o r e . P N B h a s t h e d i s t i n c t i o n of b e i n g t h e f i r s t I n d i a n
45
bank to have been started solely with Indian capital. In

1969, Punjab National Bank was nationalized along with 13
other banks
P u n j a b N a t i o n a l B a n k s e r v e s o v e r 3 . 5 cr o r e c u s t o m e r s a n d
h a s t h e l a r g e s t b r a n c h n e t w o r k i n I n d i a - 4 0 6 2 br a n c h e s a n d
4 4 7 e x t e n s i o n c o u n t e r s s p r e a d a l l o v er t h e c o u n t r y . P u n j a b
National Bank has achieved many awards and distinctions.

Major among them are:
Ranked 21st amongst top 500 companies by the leading
financial daily, Economic Times.
Ranked as 323rd biggest bank in the world by Bankers
Almanac (January 2006), London.
Earned 9th place among India's Most Trusted top 50 service
b r a n d s i n E c o n o m i c T i m e s - A . C N i e l s o n S ur v e y .
Ranked 368 amongst the top 1000 banks in the world
according to "The Banker" London.
Golden Peacock Award for Excellence in Corporate

Governance - 2005 by Institute of Directors.
46
F I C C I ' s R u r a l D e v e l o p m e n t A w a r d f or E x c e l l e n c e i n R u r a l
Development - 2005.
The Company decided to expand its capital base & came

w i t h a n I P O o f R s 3 . 5 c r o r e s h a r e s a t a n o f f e r p r i c e of R s
3 0 / - p e r s h a r e a g g r e g a t i n g R s 1 0 5 c r or e i n J u l y 2 0 0 0 . T h i s
increased the paid up capital of the Company to Rs 135.01
c r o r e s a n d r e d u c e d t h e h o l di n g o f P u n j a b N a t i o n a l B a n k t o
74.07%.
NEDUNGADI BANK
It is a Kerala-based bank paving the way for the Delhi-

based bank’s expansion in the southern state. On Feb.
1 . T h e P u n j a b N a t i o n a l B a n k t o d a y t o o k o v er t h e
47
Nedungadi Bank Limited (NBL), the oldest private

sector bank in Kerala, with all its 174 branches
working as PNB branches. Announcing the takeover,

t h e P N B C h a i r m a n , S . S . K o h l i , a s s u r e d f u l l pr o t e c t i o n
to the customers and depositors
E A S T A N D W e s t m a y n o t r e a d i l y m e e t , b u t a m er g e r of
north and south is on the cards. K e r a l a- b a s e d
Nedungadi Bank has announced that it is ready for the
merger with Punjab National Bank.
“The Board has approved the merger of Nedungadi
Bank with PNB. We have to do the due diligence now,”
PNB chairman S S Kohli.
T h e m e r g e r m o v e f o l l o w s t h e R e s e r v e B a n k n o t i f yi n g
t h e d r a f t s c h e m e of a m a l g a m a t i o n o f N e d u n g a d i B a n k
w i t h P N B o n N o v e m b er 1 4 .
The RBI had placed the K er a l a - b a s e d bank under
moratorium up to February 1, 2003, and restricted
d e p o s i t o r s f r o m w i t h dr a w i n g m or e t h a n R s 5 , 0 0 0 i n t h i s
period.
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The probable objectives behind m er g e r s and

acquisitions may be highlighted as given below:
1 ) T o o v e r c o m e t h e p r o b l e m of s l o w p a c e of gr o w t h a n d
profitability due to widening of banking industry.
2) To revive a loss-making bank as it may not be able to
restore the Non Performing Assets (NPAs) on its own.
49
3 ) T o u t i l i z e t h e u n d e r u t i l i z e d m a r k e t p o w e r i n t er m s of
regional or geographical coverage in the best possible
manner.
4 ) T o a c h i e v e s o m e s o r t o f d i v e r s i f i c a t i o n .( t h i s h a p p e n s
w h e n t h e m e r g e r i s v e r t i c a l o r c o n g l o m e r a t e)
5 ) T o l i m i t c o m p e t i t i o n a n d pr e v e n t o v e r cr o w d i n g a n d
mushrooming up of many banks.
6) To gain economies of scale and increase in income in
proportion to less amount of investment.
7) To utilize under utilized resources. The resources include
human, physical or managerial skills.
8) To carve a niche for oneself as a strategic empire builder
amass vast economic power
URGE TO MERGE
I n t h e r e c e n t p a s t t h e r e h a s b e e n a l o t of t a l k a b o u t I n d i a n
Banks lacking in scale and size. This is the only bank from
India to make it to the list of Top 100 banks, globally. Most
o f t h e P S B s a r e e i t h e r l o o k i n g t o p i c k u p a s m a l l e r b a n k or
w a i t i n g t o b e p i c k e d u p b y a l ar g e r b a n k .
The central government also seems to be game about the

issue and is seen to be encouraging PSBs to merge or acquire
other banks. Global evidence seems to suggest that even
50
though there is great enthusiasm when companies merge or

g e t a c q u i r e d , m a j o r i t y o f t h e m e r g er s / a c q u i s i t i o n s d o n o t
really work.
S o i n t h e z e a l t o m e r g e w i t h or a c q u i r e a n o t h e r b a n k t h e
PSBs should not let their common sense take a back seat.
B e f o r e a m e r g e r i s c a r r i e d o u t c u l t ur a l i s s u e s s h o u l d b e
l o o k e d i n t o . A b a n k b a s e d p r i m ar i l y o u t o f N or t h I n d i a m i g h t
w a n t t o a c q u i r e a b a n k b a s e d pr i m a r i l y o u t o f S o u t h I n d i a t o
i n c r e a s e i t s g e o g r a p h i c a l p r e s e n c e b u t t h e i r c u l t ur e s m i g h t
b e v e r y d i f f e r e n t . S o t h e i n t e g r a t i o n pr o c e s s m i g h t b e c o m e
v e r y d i f f i c u l t . T e c h n o l o g i c a l c o m p a t i b i l i t y i s a n o t h er i s s u e
t h a t n e e d s t o b e l o o k e d i n t o i n d e t a i l s b ef o r e a n y m e r g e r or
acquisition is carried out.
The banks must not just merge because everybody around

t h e m i s m e r g i n g . A s K e y n e s wr o t e ,
"Worldly wisdom teaches us that it's better for reputation

t o f a i l c o n v e n t i o n a l l y t h a n s u c c e e d u n c o n v e n t i o n al l y " .
Banks should avoid falling into this trap.
Merger of unequals
Nedungadi Bank
PNB
(as a % of PNB)
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Networth 3,216.24 cr Negative

Branches 3,870 4.5
Deposits 64,123 cr 2.2
Advances 34,369 cr 2.2
Net NPAs 1,810 cr 13.2
Income 7,734 cr 2.9
Profit 562 cr 0.2
as of FY02
PRICE FOR ACQUISITION WOULD LARGELY

DEPEND UPON:
a) Strength of selling company

b) Number of bidders
c) P o s s e s s i o n o f i n s i d e i n f or m a t i o n
d) Motives of buyers
e) Macro economic realities and conditions
UNCERTAIN BLOCKS IN M & A :
1 . I n a c c u r a t e e s t i m a t i o n of m a r k e t p o t e n t i a l
2. Overestimation of synergies
3. Valuation pitfalls
4. Hidden Liabilities
52
5. Size mismatch
6. Cultural differences
7. Implementation delays
8. Poor public relations
9. Conflict of Interest
10. “What you see is not what you get”
POSITIVE ASPECTS OF MERGERS AND

ACQUISITIONS
● Enhance entity value

● Increase leveraging capability
● Lower cost of capital
● Cash in-flows
● Cheaper working capital
● Tax benefits
NEGATIVE ASPECTS OF MERGERS AND

ACQUISITONS
● Valuation pitfalls
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● Hidden liabilities
● Size mismatch
● Limited funding options
● Unviable transaction cost
FOUNDATION FOR MERGERS IN

INDIA
W e w i l l n o w e x a m i n e s o m e of t h e u n d e r l y i n g f a c t o r s
behind the wave of mergers and acquisitions in India in
recent times.
➢ DIVERSIFICATION
D i v e r s i f i c a t i o n a f or m of i n o r g a n i c gr o w t h m a y b e
a c h i e v e d b y b u y i n g t h e f i r m s a l r e a d y s e r v i n g t h e t ar g e t
markets (acquisition) or by establishing new facilities
i n t h e t a r g e t a r e a s . D i v er s i f i c a t i o n c a n b e u s e d a s a t o o l
to hedge risk.
➢ ECONOMIES OF SCALE
54
When the industry reaches the maturity stage

( w h e r e t h e g r o w t h i s s t a g n a t e d ) or i s i n r e c e s s i o n , t h er e
is consolidation in the industry to cut costs. This
happens by means of fragmented players being acquired
by big firms or some big firms merging together.
➢ EARLY ENTRY AND MARKET

PENETRATION
An early mover strategy can reduce the lead time

taken in establishing the facilities and distribution
channels. So, acquiring companies with good
m a n u f a c t u r i n g a n d d i s t r i b u t i o n n e t w o r k s or f e w b r a n d s
o f a c o m p a n y g i v e s t h e a d v a n t a g e of a r a p i d m a r k e t
share. ICICI, which has positioned itself from a
wholesale lender to a financial supermarket, has
acquired ITC Classic Finance and Anagram Finance in a
bid to penetrate the retail market. These acquisitions
h a v e h e l p e d I CI C I t o o b t a i n q u i c k a c c e s s t o a w e l l
dispersed distribution network.
➢ TAX ADVANTAGES
55
Some acquisitions are made with the sole intention

t o g e t a t a x s h i e l d . T h i s i s m or e s o i n c a s e o f a c q u i r i n g
of sick banking companies where the acquirer gets the
tax shield in the form of unclaimed depreciation and
carry forward losses.
➢ REGULATORY CONSIDERATIONS
I n d i a n g o v e r n m e n t , i n a b i d t o pr o t e c t t h e d o m e s t i c
i n d u s t r y , d i d n o t e n c o ur a g e t h e f o u n d a t i o n o f f u l l y - o w n e d
subsidiaries by foreign firms. So, looking at the
d i s a d v a n t a g e s a s s o c i a t e d w i t h t h e f or m a t i o n o f s u b s i d i a r i e s ,
f o r e i g n f i r m s h a v e g e n e r a l l y l o o k e d a t j o i n t v e n t u r e s or
acquisitions of majority stakes in the Indian firms. This can
also be a quick entry strategy.
➢ SIZE
I n t h e g l o b a l b u s i n e s s , s i z e h a s b e c o m e o n e of t h e
important parameters for competition. Take the example of
l e n d i n g b u s i n e s s i n I n d i a w h e r e F l s a n d b a n k s ar e c o m p e t i n g
with each other by entering into each other's business. There
has been some consolidation to increase the size. An attempt
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t o a c h i e v e g l o b a l e c o n o m i e s of s c a l e c a n b e s e e n i n t h e
merger of SCICI with ICICI.
RULES FOR SUCCESFUL MERGER:
According to Peter Drucker (1981),

e c o n o m i c a l l y s e n s i b l e m er g e r s m u s t f o l l o w f i v e r u l e s . T h e
D r u c k e r f i v e c o m m a n d m e n t s f or s u c c e s s f u l a c q u i s i t i o n s a r e :
1. Acquirer must contribute something to the acquired.
2. A common core of unity is required.
3. Acquirer must respect the business of the acquired firm.
4. Acquiring company must be able to provide the top

management to the acquired company.
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5 . W i t h i n t h e f i r s t y e a r of m e r g e r , m a n a g e m e n t i n b o t h t h e
c o m p a n i e s s h o u l d r e c e i v e pr o m o t i o n a c r o s s t h e e n t i t i e s .
RBI Guidelines for “PUNJAB NATIONAL

BANK ”
AND “NEDUNGADI BANK ”
T HE R e s e r v e B a n k o f I n d i a t o d a y u n v e i l e d t o
p u b l i c a d r a f t s c h e m e t o m er g e t h e K e r a l a - b a s e d N e d u n g a d i
Bank with Punjab National Bank (PNB). The scheme would
be available to the public from both the banks.
T h e p r o p o s e d s c h e m e o f a m a l g a m a t i o n o f f e r s f u l l pr o t e c t i o n
o f a l l p u b l i c d e p o s i t s i n t h e o l d pr i v a t e s e c t o r b a n k . T h e R B I
said in a notification that it had got several requests from
depositors of Nedungadi Bank to allow them to withdraw in
e x c e s s o f R s 5 , 0 0 0 f o r v a r i o u s p er s o n a l a n d o t h e r r e a s o n s
and that it would consider these requests on a case-to-case
basis depending on the genuineness.
58
➢ All the Employees of the Nedungadi Bank will

become the Employee of the Punjab National Bank
on the same pay and terms.
➢ E n t i r e p a i d – u p c a p i t a l of t h e N e d u n g a d i B a n k w i l l
be treated as the bad and doubtful debts and
➢ Depreciation.
➢ All the assets, liabilities, powers, claims and

d e m a n d w i l l b e t r a n s f e r r e d t o P u nj a b N a t i o n a l B a n k
from data to be notified by the RBI.
➢ The books of the Nedungadi Bank will be closed

a n d t h e b a l a n c e d b a l a n c e s h e e t p r e p ar e d a s o n
November 2,2002.
➢ The d r a f t m e r g e r pr o p o s a l m i g h t r e q u i r e t h e
Intervention to minimise the possible loss that
could result Punjab National Bank.
59
THE MERGER AND ACQUISITION PROCESS
The M&A process can be divided into a planning stage and

a n i m p l e m e n t a t i o n s t a g e . T h e p l a n n i n g s t a g e c o n s i s t s of t h e
d e v e l o p m e n t o f t h e b u s i n e s s a n d t h e a c q u i s i t i o n s pl a n s . T h e
implementation stage consists of the search, screening
contacting the target, negotiation, integration and the
e v a l u a t i o n a c t i v i t i e s . I n s h o r t t h e pr o c e s s of a c q u i s i t i o n c a n
be summarized in the following steps:
60
MERGER & ACQUISITIONS PROCESS
Business Plan
Acquisition Plan
Search
Screen
First Contact
61
Negotiation
Integrating Plan
Closing
Integration
Evaluation
➢ DEVELOPING THE BUSINESS PLAN
D e c i s i o n o n a m er g e r or a n a c q u i s i t i o n i s a
strategic choice. The acquisition strategy should fit the
b a n k i n g c o m p a n y ’ s s t r a t e g i c g o a l s of i n c r e a s i n g t h e n e t
cash flow and reduce risk. A business plan
c o m m u n i c a t e s o r v i s i o n f or t h e f i r m a n d a s t r a t e g y f o r
achieving that mission.
➢ BUILDING THE ACQUISITION PLAN
After a proper analysis of the various available

options if it is determined that a merger or an
62
a c q u i s i t i o n p r o c e s s i s a p p r o pr i a t e t o i m p l e m e n t t h e
business strategy, then an acquisition plan is prepared.
➢ THE SEARCH PROCESS

After the firm has developed a viable business plan that
a c q u i r e s a n a c q u i s i t i o n r e a l i z e t h e f i r m ’ s s t r a t e g i c di r e c t i o n
and an acquisition plan, the search for the right candidate
for acquisition begins.
➢ THE SCREENING PROCESS
T h e s c r e e n i n g p r o c e s s s t a r t s w i t h t h e r e d u c t i o n of t h e
initial list of potential candidates identified by using the
primary criteria such as the size and the type of industry. In
addition to the p r i m ar y criteria employed, secondary
s e l e c t i o n c r i t e r i a i n c l u d e a s p e c i f i c m ar k e t s e g m e n t w i t h i n
t h e i n d u s t r y o r a s p e c i f i c p r o d u c t l i n e w i t hi n t h e m ar k e t
s e g m e n t . O t h e r m e a s u r e s l i k e t h e f i r m ’ s pr o f i t a b i l i t y , t h e
market share etc are also used in the screening process.
➢ First Contact
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T h e c o n t a c t p h a s e of t h e p r o c e s s i n v o l v e s m e e t i n g
the acquisition candidate and p ut t i n g forward the
proposal of acquisition.
➢ NEGOTIATION
The negotiation phase of the acquisition process

consists of many activities conducted simultaneously
b y t h e v a r i o u s m e m b er s of t h e a c q u i s i t i o n t e a m . T h e
actual purchase consideration is determined during this
p h a s e . T h i s i s d i f f e r e n t f r om t h e pr e l i m i n a r y v a l u a t i o n
of the target company made when the first contact is
m a d e . I m p r o v i n g t h e pr e l i m i n a r y v a l u a t i o n b a s e d o n
n e w i n f o r m a t i o n r e v e a l e d d ur i n g d u e d i l i g e n c e pr o v i d e s
t h e s t a r t i n g p o i n t f or n e g o t i a t i n g t h e a g r e e m e n t of
purchase and sale.
O n e o f t h e i m p or t a n t a c t i v i t i e s i n t h e n e g o t i a t i o n
phase is to develop a financing plan. This activity is a
k e y i n p u t i n d e t e r m i n i n g t h e p ur c h a s i n g p r i c e , a s i t
h e l p s i n i d e n t i f y i n g a p r a c t i c a l l i m i t o f t h e a m o u n t of
the purchase price the buyer can offer the seller.
➢ Integration Plan:
Making the combined firm perform in line with the

e x p e c t a t i o n s i s a d i f f i c u l t t a s k . F or t h e r e s u l t t o b e i n l i n e
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w i t h e x p e c t a t i o n s , p r o p er p l a n n i n g i s n e d d e d b e f o r e t h e
agreement of purchase and sale is signed. Without adequate
p l a n n i n g , i n t e g r a t i o n i s u n l i k e l y t o pr o v i d e t h e s y n e r g i e s
a n t i c i p a t e d b y , a t t h e c o s t i n c l u d e d i n , a n d w i t hi n t h e t i m e
provided in the acquisition plan.
➢ CLOSING:
C l o s i n g i s t h e f i n a l l e g a l pr o c e d u r e w h e r e t h e b a n k i n g
company changes hands. It consists of all necessary
shareholder, regulatory and third party consents. All the
necessary legal approvals are attained at this stage.
Proper care must be exercised to ensure that all the
necessary filings required by law have been made.
➢ INTEGRATION:
T h i s i s t h e m o s t i m p or t a n t i n t e g r a t i o n p h a s e i n t h e
acquisition process.
➢ EVALUATION:
65
The post-closing evaluation is done to determine if the

a c q u i s i t i o n i s m e e t i n g e x p e c t a t i o n s , t o d e t er m i n e , c o r r e c t i v e
actions if necessary , to identify what was done and what
should be done to avoid making the same mistakes in the
future acquisitions.
Success of the merger can be measured by evaluating the
a c t u a l p e r f o r m a n c e o f t h e f i r m af t e r t h e m e r g e r a g a i n s t t h e
performance anticipated in the acquisition plan. Only a few
a c q u i r i n g f i r m s c l o s e l y m o n i t o r t h e p er f o r m a n c e o f t h e
acquisition according to the plan. Many firms commonly
o v e r l o o k t h i s p h a s e a n d f a i l o u t t h e e f f e c t i v e n e s s of t h e
acquisition process. The lessons can sometimes be
embrassing, but help not to commit the same mistakes in the
future acquisitions.
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T h e m e r g e r p r o c e s s w i l l n o d o u b t c h a n g e i n t h e n e ar f u t u r e ,
a s d y n a m i c t e c h n o l o g i e s a l l o w f or t h e d e v e l o p m e n t o f a
more streamlined marketplace which manages to protect the
privacy of interested companies while linking up ideal
candidates for a merger.
NEED FOR A MERGER REVIEW PROCESS
Banks play a vital role in the payment and settlement system

o f a n e c o n o m y . P o o r l y c o n c e i v e d or b a d l y e x e c u t e d b a n k
m e r g e r s w h i c h l e a d t o s u b s e q u e n t f a i l ur e o f t h e m er g e r
entity can present risks to the entire economy as a stable
b a n k i n g s y s t e m i s a p r er e q u i s i t e f o r a h e a l t h y e c o n o m y .
T h e r e f o r e w h i l e c o n s i d e r i n g a n y pr o p o s a l f o r t h e m e r g er o f
b a n k s , i t w i l l b e n e c e s s a r y t o e v a l u a t e t h e i m p a c t of t h e
merger on the safety and the soundness of the banking
s y s t e m . I n o r d e r t o m i t i g a t e t h e r i s k of a f a i l u r e o f a l a r g e
merger banking organization there is a definite need to
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develop a merger review process and also to identify the

a u t h o r i t y t h a t w i l l b e r e s p o n s i b l e f o r c o n d u c t i n g t h e m e r g er
review process.
S i n c e R B I i n i t s c a p a c i t y o f t h e pr i m a r y r e g u l a t o r a n d
s u p e r v i s o r o f t h e b a n k i n g s y s t e m h a s i nf o r m a t i o n o n t h e
present functioning of all the banks in India, the RBI is best
suited to undertake the m er g e r review process. While
undertaking the merger review process, RBI will need to
examine the proposal for m e r g er from a prudential
perspective to gauge the impact on stability and financial
well being of the merger applicants and on the financial
system. In addition to the assessment of the impact of the
p r o p o s e d m e r g e r o n t h e c o m p e t i t i v e n e s s a n d s t a b i l i t y of t h e
financial system, RBI will also need to examine the
implications on regional development, impact on society,
etc. as a result of the merger since banks in India also have
to fulfill various social obligations.
The assessment will i n v ol v e a r e vi e w of the m e r g er
applicants’ implementation and integration plans, as well as
examination of their completeness and reasonableness and
any challenges that might be posed. The RBI will need to
examine the reasonableness of financial p r oj e c t i o n s ,
i n c l u d i n g b u s i n e s s p l a n s a n d e ar n i n g s a s s u m p t i o n s a s w e l l a s
t h e e f f e c t o f t h e p r o p o s e d m e r g er o n t h e m e r g e d e n t i t y ’ s
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capital position. Finally, RBI will have to consider potential

changes to risk profiles and the capacity of merger
a p p l i c a n t s r i s k m a n a g e m e n t s y s t e m s , p a r t i c u l ar l y t h e e x t e n t
t o w h i c h t h e l e v e l o f r i s k w o u l d c h a n g e a s a r e s u l t of t h e
proposed merger and the merger entity’s ability to measure,
monitor and manage those risks.
“CORPORATISATION – A KEY TO MERGER

OF PUBLIC SECTOR BANKS”
T HE Indian Banks Association is of the view that

` c o r p o r a t i s a t i o n ' o f p u bl i c s e c t o r b a n k s m a y b e t h e k e y t o
f a c i l i t a t i n g t h e m e r g e r b e t w e e n P S U b a n k s i n t h e f u t ur e .
Since public sector banks are governed by the `Bank
Nationalization Act' and the `Banking Regulation Act,' it
would be necessary to c or p o r a t i s e them and get them
registered under the `Companies Act,' according to an IBA
source. Alternatively, any amalgamation plan between two
p u b l i c s e c t o r b a n k s w o u l d r e q u i r e P ar l i a m e n t a r y a p p r o v a l
and this might lead to long delays, he said.
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In the case of private sector banks, amalgamations have been

relatively easier as they are governed by the `Companies
Act.' Here the decision to merge is taken by shareholders
w i t h t h e a p p r o v a l o f t h e R e s e r v e B a n k o f I n di a , a n d t h e
process is relatively quicker, according to sources.
TECHNOLOGY’S THE KEY TO A MERGER
“Technology increasingly lies at the heart of a

modern bank
and it is a critical issue that can make or break
a merger.”
S o r t i n g o u t t h e i n f o r m a t i o n t e c h n o l o g y ( I T ) i s s u e s a f t er a
bank merger is a massive exercise, and usually leads to
paralysis for one to two years while the
IT departments try to work things out.
I t ’ s a b s o l u t e l y e s s e n t i a l , t h e r e f or e , t o
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carefully consider p r i or to the merger whether the

t e c h n o l o g y p l a t f o r m s a r e s i m i l a r or a t l e a s t c a p a b l e of
t a l k i n g t o e a c h o t h e r , w h a t t h e o v er l a p p i n g t e c h n o l o g y c o s t s
a r e a n d w h a t t h e c o s t o f pr o c e s s i n t e gr a t i o n i s . .
W h a t d o e s I T i n t e g r a t i o n r e a l l y i n v ol v e ? E a c h b a n k h a s i t s
own data centre. By consolidating data centre, an enormous
amount of costs can be saved. There could be cases where
both banks have different hardware, different networks,
different database vendors, use different technologies for

scanning cheques and they may not even speak the same
computer language.
“So while they may be handling the same fundamental

banking functions like deposits, withdrawals, interest
calculations, and all that a bank is for the customer,
implementation is vastly different,” says an IT consultant
w h o h a s s e e n o n e m e r g er f r o m c l o s e q u a r t e r s . “ J u s t a s
miracles cannot happen o v er n i g h t , the snap of the
c h a i r m a n ’ s f i n g e r s c a n n o t m e r g e t h e r e c o r d s o f m i l l i o n s of
customers in one database”, he says.
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What’s more, with IT vendors ensuring their

indispensability, mergers between two banks that work on
different platforms could be difficult. For instance, should
Bank A which is working on SAP decide to acquire Bank B
w h i c h i s o n t h e O r a c l e p l a t f or m , t h e m a n a g e m e n t w o u l d n e e d
t o e i t h e r m o d u l a t e o n e o f t h e t w o or s c r a p o n e . “ U s u a l l y
bank officials are not competent to decide which IT platform
would be better.
KEY MESSAGES
➢ M&A in the Indian banking sector is an opportunity

and an essential.
➢ M&A has to be based on a banking foundation and
e f f e c t i v e e x e c u t i o n – t h e r e i s n ot e n o u g h t r a c k
record of that in the Indian banking sector.
➢ India may have to follow a managed transition
model to ensure a stronger banking sector.
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LEVERS OF VALUE IN M&A

Key source of value for the acquirer
1 Collections Ability to maximise the speed and recovery of NPAs
2 Processes Ability to redesign processes
3 Distribution Ability to integrate and rationalise branches and other

Cost channels
savings
4 Infrastructure
Ability to combine corporate/regional infrastructure
5 IT Ability to upgrade overall technology
6 Operations Ability to quickly centralise operations
Product
Revenue 7 Ability to upgrade product range and increase cross-sell
Segments
enhance-
ment
8 Geographies Ability to ensure geographic growth and synergy
Treasury 9 Cost of funds Ability to reduce cost of funds

improve-
ment
10 Trading income Ability to leverage scale and improve trading income
IMPACT OF MERGERS &

ACQUISITIONS
➢ IMPACT ON EMPLOYEES:
The consideration of public i n t er e s t gr o u n d s ,

particularly the employment in the merger review
process in South Africa, provides useful insight into
the manner in which dealmakers view employees. We
have noticed that , generally, very little consideration
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i s g i v e n t o t h e f at e of e m p l o y e e s i n m e r g er s a n d
a c q u i s i t i o n s . I t i s i n f a c t a c c e p t e d t h a t t h er e s h o u l d b e
j o b l o s s e s a s a r e s u l t of a m e r g e r . A c c o r d i n g t o t h e
m e r g i n g p a r t i e s t h i s i s d o n e i n o r d er t o r e d u c e c o s t s
and other duplications once the firms have merged.
C o m p e t i t i o n l a w e nf o r c e m e n t i n S o u t h A f r i c a p r o v i d e s
for merging parties to consider the impact that a
particular merger will have on employment. In other
words, if a pro-competitive merger will result in
m a s s i v e j o b l o s s e s , t h a t m e r g er m a y b e p r o h i b i t e d o n
that basis alone, because public interest issues justify
that it be prohibited. This highlights the strength of the
competition regulatory environment/framework in that
it takes into account the issues affecting employees
directly affected by a particular transaction. It must,
however, be noted that we have never turned down a
p r o - c o m p e t i t i v e m er g e r o n t h e g r o u n d s o f j o b l o s s .
The critical issue is that in mergers and acquisitions, the
t i m e h a s c o m e t o r e v i e w t h e i m p a c t t h a t t h e s e m e r g er s m a y
h a v e o n e m p l o y e e s . S i n c e m o s t m e r g er s e v e n t u a l l y f a i l t o
a c h i e v e t h e p r o m i s e s m a d e , i t i s i m p or t a n t t o m e a s u r e s u c h
f a i l u r e a g a i n s t t h e c o s t s o f l o s s o f j o b s f or e m p l o y e e s .
Employees should not be considered as merely ‘collateral
d a m a g e ’ i n m e r g e r s a n d a c q u i s i t i o n s . F i r m s m u s t t a k e i nt o
74
a c c o u n t t h e s o c i a l a n d o t h er i m p a c t s t h a t o c c u r a s a r e s u l t of
t h e s e m e r g e r s , w i t h w o r k er s s u d d e n l y b e c o m i n g u n e m p l o y e d .
➢ IMPACT OF M&AS ON THE HUMAN
RESOURCE-DEVELOPMENT-
EMPLOYEES :
Human resource is another sensitive issues on the

r o a d t o c o n s o l i d a t i o n . T h e E ur o p e s u r v e y e s t i m a t e s t h a t
130000 jobs have been lost in the last 10 years as a
result of mergers and takeovers alone. In India about
11% of the over 800000 strong bank employees opted
for the first ever voluntary retirement scheme in the
s t a t e r u n b a n k i n g i n d u s t r y . T h e c o n s o l i d a t i o n dr i v e w i l l
make more employees redundant, a political time boom
t i c k i n g a w a y . B e s i d e s , i t w i l l a l s o c a l l f or l a r g e- s c a l e
redeployment of employees.
Traditionally, employees in public sector banks
a r e l o a t h t o m o v e f r o m o n e t a b l e t o a n o t h er o f s a m e
branch. Now, the trade union seems to be willing to
a l l o w m o b i l i t y f or e m p l o y e e s w i t h i n a d i s t r i c t . B u t
mergers will force them to move from one state to
another state., this is the major bottleneck in the
mergers and acquisition phase. So the frequent
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rationalization of staff deployment will not be

successful.
M e r g e r s o f t e n l e a d t o h i g h er w or k l o a d s b e i n g
placed on remaining staff, with companies requiring
g r e a t e r f l e x i b i l i t y , i n t er m s o f w o r k i n g h o u r s m o t i l i t y
and skills excellent and highly motivated employees of
t h e m e r g e d e n t i t y m a y f e e l f r u s t r a t e d a n d m a y r e s i g n or
t h e y m a y n o t g i v e t h e i r b e s t t o t h e or g a n i z a t i o n w h i c h
they were expected to. It is very relevant especially for
the service industry like banking.
Bank employees response to VRS offer

Name of the bank Total VRS optees Percentage
strength
SBI 237000 35000 13.89
Allahabad Bank 22345 1571 7.03
Andhra Bank 14603 1758 12.04
Bank of Baroda 47054 3200 6.80
Bank of 16098 2700 16.77
Maharashtra
Bank of India 51962 7700 14.82
Canara Bank 55363 8600 15.53
Dena Bank 14412 3710 25.74
Indian Bank 25935 3988 15.38
Indian Overseas 28008 3944 14.08
Bank
Oriental Bank of 14398 800 5.56
of Commerce
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Punjab National 65705 5800 8.83

Bank
Punjab and Sind 12192 2000 16.40
Bank
Syndicate Bank 33883 7157 21.12
UCO Bank 31223 5479 17.55
Union Bank of 30834 4303 13.96
India
Union Bank of 21316 3000 14.07
India
Vijaya Bank 13646 2400 17.59
➢ IMPACT ON SHAREHOLDERS:
Increasing shareholder value is generally held to

b e t h e p a r a m o u n t o b j e c t i v e of m o s t M & A s t o d a y .
However, experience from most M&As in the mid of
1980s is not very encouraging in this regard. At that
time, many newly merged banks and insurance
companies found their cost structures increased,
r e s u l t i n g i n d u p l i c a t i o n of s t r u c t ur e a n d c o s t s r a t h e r
than predicted savings. The much slower growth in the
1990s and the high p r e m i um s usually paid to
shareholders of target companies, mean that the
restructuring needed to achieve satisfactory cost saving
from mergers can only be obtained with much deeper
cost cutting, i m p er i l i n g the ability of m er g e d
c o m p a n i e s t o a c h i e v e t h e h i g h er l e v e l s o f s a l e s r e v e n u e
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r e q u i r e d t o r e p a y m er g e r r e l a t e d d e b t a n d i n c r e a s e
shareholder value.
T h e E u r o p e a p p o i n t s t hr e e e x e c u t i v e s t o s u r v e y
the impact of M&As on shareholder. Their studies
r e v e a l s h a r e p r i c e of t h e t a r g e t c o m p a n y i s p o s i t i v e .
W h i l e o n t h e s h a r e p r i c e of t h e a c q u i r i n g c o m p a n y i s
n e g a t i v e i n t h e m e d i u m a n d l o n g t er m a f t e r t h e
merger announcement.
A large US study showed that acquired companies,

w h i c h d i d w e l l p r i o r t o t h e m er g e r , d e t e r i o r a t e d af t e r
the event. Acquired companies which did badly in
a d v a n c e o f m e r g e r w e n t f r o m b a d t o w o r s e f u r t h er m o r e ,
i t i s f o u n d t h a t b e t w e e n 1 9 . 4 7% o f a r e a c q u i s i t i o n s
were disinvested within 10 years of acquisition. Over
the years, academic studies have consistently shown
that only 15% of mergers are successful and over 60%
have negative results.
➢ IMPACT ON CUSTOMERS:
A n u m b e r o f pr o d u c t s a r e of f e r e d i n t h e M & A s
phase by banks. While looking at the impact of M & As
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o n p r o d u c t p r o v i s i o n , c h o i c e a n d t h e c o s t of pr o d u c t s ,
it is argued that in general, the number of products in
the market has increased significantly in the recent
years, offering more choices at the reduced prices, as
most new market entrants are seeking to compete on the
basic of price. They are able to do this because new
information and communication technology allows them
t o s a v e c o s t b y o p er a t i n g w i t h f e w e r br a n c h e s o r
without a traditional br a n c h n e t w or k . New

p r o d u c t a n d p r o v i d er s a r e a l s o a r g u e d t o of f e r m a n y
clients more time flexibility, as they no longer have to
rely on branch opening hours to conduct their business.
T r a d i t i o n a l p r o v i d e r s h a v e r e s p o n d e d t o t h i s t r e n d- i n
order to meet consumer needs, but also to cut running
costs-by closing branches.
It is argued that recent trends in the financial

services, including mergers and acquisitions have had a
v a r y i n g i m p a c t o n d ef e r e n t c l i e n t s . W h i l e t h e m a j o r i t y
of larger, wealthy and “standard” clients, (i.e. without
problems of bad credit histories) have benefited from
the increase in the product choice and the proliferation
o f i n f o r m a t i o n a n d c o m m u ni c a t i o n t e c h n o l o g y b a s e d
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service (such as i n t er n e t banking) a significant

minority of individuals are detrimentally affected by
this trend as they lack access to the required
information and communication technology or the
knowledge to use while at the same thing losing access
to local branches.
Branch closures and the loss of many o t h er

b a c k r o o m f u n c t i o n s a s a r e s u l t o f pr o l i f er a t i o n o f
information and communication technology have led to
significant job losses. While job losses w er e in
e v i d e n c e p r i o r t o t h e c u r r e n t m e r g e r w a v e . I n m a j or i t y
of cases, a m er g e r accelerates branch closures
programmer and the transfer of backroom functions. As
a r e s u l t t h e l e v e l of p h y s i c a l , l o c a l s e r v i c e pr o v i s i o n i s
r e d u c e d , r e q u i r i n g c o n s u m e r s t o t r a v e l gr e a t e r d i s t a n c e
to receive a personal service. While a significant
number of consumers welcome the ability to conduct
t h e i r f i n a n c i a l b u s i n e s s a t a n y t i m e o f d a y , t h r o u g h f or
e . g . , c a l l c e n t e r or I n t er n e t s e r v i c e , o t h e r s r e g r e t t h e
loss of more personal, local face-to-face interaction.
Such consumers argue that recent developments have
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lowered the quality of financial service provision by

bringing degradation of the relationship with the
f i n a n c i a l s e r v i c e pr o v i d e r . I n c r e a s i n g m e r g er a c t i v i t y i s
s e r v i n g o r e s t r i c t c o m p e t i t i o n a n d w i l l t h e r e f or e i n t h e
long run be a disbenefit to consumers.
BANK MERGERS AND ACQUISITIONS

SINCE NATIONALIZATION
Year Bank/NBFC Merged with

1989-90 United Industrial Allahabad Bank
Bank
1989-90 Bank of Tamilnad Indian overseas
Bank
1989-90 Bank of Thanjayur Indian Bank
1989-90 Parur Central Bank B a n k o f I n di a
1990-91 Purbanchal Bank Central bank of
India
1993-94 N e w B a n k of I n d i a Punjab national
bank
1993-94 Bank of Karad B a n k o f I n di a
1995-96 K a s i n a t h S et h B a n k S B I
1996 SCICI I CI C I
1997 ITC Classic I CI C I
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1997 Bari doab Bank Or i e n t a l Bank of

commerce
1997 Punjab C o - Or i e n t a l B a n k of
operative Bank commerce
1998 Anagram finance I CI C I
1999 Bareilly Bank of Baroda
C o r p or a t i o n B a n k
1999 20th century Centurion Bank
Finance
C o r p or a t i o n
1999 British bank of HSBC
Middle East
1999 S i k ki m B a n k l t d . Union Bank
2000 Times Bank HDFC Bank
2001 Bank of Madura I CI C I
2002 Benaras State Bank Bank of Baroda
2003 Nedungadi Bank Punjab National
bank
2004 S o u t h G u j ar a t Bank of Baroda
L o c a l Ar e a B a n k
2004 Global Trust Bank Or i e n t a l bank of
commerce
82
“The future is not going to be built brick by brick
but it will be of the instant variety”
M & A s h a v e b e c o m e v er y p o p u l ar o v e r t h e y e a r s e s p e c i a l l y
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
w i t h i n t h e c o u n t r y b u t a l s o f r om i n t e r n a t i o n a l b u s i n e s s
giants thanks to globalization,
liberalization, technological
changes, etc. Generally the
objective of M&As is wealth
maximization of shareholders
by seeking gains in terms of synergy, economies of scale,
b e t t e r f i n a n c i a l a n d m a r k e t i n g a d v a n t a g e s , d i v er s i f i c a t i o n
and reduced earnings volatility, improved inventory
management, increase in domestic market share and also to
c a p t u r e f a s t g r o w i n g i n t e r n a t i o n a l m ar k e t s a b r o a d . B u t
83
a s t o n i s h i n g l y , t h o u g h t h e n u m b er a n d v a l u e o f M & A s a r e
growing rapidly, the results of the studies on the impact of
m e r g e r s o n t h e p e r f o r m a n c e f r o m t h e a c q u i r er s ' s h a r e h o l d e r s
p e r s p e c t i v e h a v e b e e n hi g h l y d i s a p p o i n t i n g . I n t h i s p a p e r a n
a t t e m p t h a s b e e n m a d e t o d r a w t h e r e s u l t s o f o n l y s o m e of
the earlier studies while analyzing the causes of failure of
majority of the mergers. Making the m e r g er s work
s u c c e s s f u l l y i s n o t t h a t e a s y a s h er e w e ar e n o t o nl y j u s t
p u t t i n g t h e t w o o r g a n i z a t i o n s t o g e t h e r b u t a l s o i n t e gr a t i n g
people of two organizations with different cultures, attitudes
a n d m i n d s e t s . M e t i c u l o u s p r e- m e r g e r p l a n n i n g i n c l u d i n g
conducting proper due diligence, effective communication
during the integration, committed and competent leadership,
s p e e d w i t h w h i c h t h e i n t e g r a t i o n p l a n i s i n t e gr a t e d a l l t h i s
p a v e f o r t h e s u c c e s s of M & A s . W h i l e m a k i n g t h e m er g e r
d e a l s , i t i s n e c e s s a r y n ot o n l y t o m a k e a n a l y s i s of t h e
financial aspects of the acquiring firm but also the cultural
a n d p e o p l e i s s u e s o f b o t h t h e c o n c e r n s f o r pr o p e r p o s t -
acquisition integration.
84
FIELD STUDY
Bank Details
Name Of The Bank: PNB BANK ( COLABA Branch)
Person Vistied: Mr.B.G.PINTU

(HRD MANAGER)
Purpose Of Questionnaire: Project Report
TOPIC: “MERGER & ACQUISITION IN THE

PUBLIC SECTOR BANKS.”
85

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MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s

“CHAPTER NUMBER” “ NAME”

1 INTRODUTION TO MERGER &

3 MOTIVES FOR MERGERS AND

5 TYPES OF MERGERS AND ACQUISITION

6 WHY MEREGER IN BANKING

10 RBI GUIDELINES FOR MERGER AND

12 INTRODUCTION TO NEDUNGADI BANK

15 FOUNDATION FOR MERGER’S IN INDIA

16 RBI GUIDELINES FOR M&A IN PNB &NB

19 CORPORATION KEY TO M & A PUBLIC

22 IMPACT OF MERGERS AND

INTRODUCTION OF MERGERS &

Merger is also defined as amalgamation. Merger is the

Amalgamation can be defined as the, two

The factors f a v or i n g gr o w t h , e nr i c h m e n t and

An acquisition can be defined as the two or more

one company (the ‘target’) by another. An acquisition may

a larger or longer established banking company and keep its

name for the combined entity.

Mergers and Acquisitions in the industrial and services

deregulation and liberalization have driven the M & A wave

M&A in Indian banking is not new and dates back from

Sometimes, non-economic factors like prestige, market

SOME GOLDEN RULES OF MERGER

 Don’t rush the wedding: Do your homework carefully to

MOTIVES OF MERGER AND

Firms that are cash rich use acquisition as a strategy

WHY THERE IS THE NECESSITY OF

The Finance Minister, P. Chidambaram, made it clear that

TYPES OF COMBINATION OF MERGERS &

There is a great deal of confusion and disagreement

the amalgamating company or companies become

Merger or amalgamation may take two forms:

● Merger through absorption

acquisition or take-over does not necessarily entail full,

TYPES OF MERGER AND ACQUISITION

own internal strength. It has to aim at a suitable combination

Types of Merger & Acquisition

Horizontal Mergers Vertical Mergers Conglomerate Mergers

(II) VERTICAL MERGERS:

merger usually seeks to merge with another company or

Firms integrate vertically between various stages

(III) CONGLOMERATE MERGERS :

● Product extension mergers

a) Product extension mergers are merger between firms in

c) Pure conglomerate mergers involve merger between two

A consolidation is a combination of two or more

➢ Efficiencie s in operations : M & A s c a n l e a d t o

to economies of scale as a very important motivating

➢ Ability to spread fixed costs over a larger

➢ Diversification of income from both products

geographic diversification on the liabilities side of the

➢ Stabilization of asset quality : S m a l l s i z e d b a n k s

➢ Customer service : Merger of two Banking

undertaking, consequent on merger, may exercise a

most 85.15%. This raises two very important

WHY MERGERS IN BANKING INDUSTRY?

➢ ACHIEVING COST REDUCTION:

a) Cost reduction through economy of Scale -

b) Cost reduction through economy of Scope - T h i s i s

c)Cost reduction through rationalization of man