Consolidation in Banking Industry

CONSOLIDATION IN BANKING INDUSTRY

It is inevitable! In the Indian banking scenario, consolidation is the next step for evolution. A look at the international scene suggests that, size does matter. To put things in perspective; State Bank of India is three times the size of Bank of America (BoA). SBI is reaching 90 to 100 million customers while BoA has 30 million customers. But if you look at assets, BoA has more than a trillion dollar of assets as against SBI's asset size of Rs 4,000 billion. That gives BoA the muscle to cut costs and amplify earnings. The statistics for total loans to GDP ratio also draws a sorry picture of the Indian banking industry. As net interest margins get thinner, the need for more sophisticated products and low-cost technology is felt. The only answer to this is to create synergies by consolidating with complimenting entities To trigger the next phase of consolidation in the banking sector, the Reserve Bank of India is expected to draw a fresh set of guidelines later this month. It is believed that the new draft guidelines will encourage foreign banks to acquire stakes in Indian banks. The government has clearly indicated that more capital from private and foreign banks is needed to make the banking sector robust. There are several foreign banks, which are yet to start their operations in India and are looking at strategic alliances to make their presence felt in India.

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Consolidation in Banking Industry There are 29 private banks in the country. Of these, around 15 are envisaging to raise resources in the near future. Once the government comes out with clear guidelines, these banks will either go in for IPOs, seek strategic alliances or placements with private equity funds. It is also expected that most of the profitable private sector banks will fall prey to a takeover bids by their brawny counterparts also what seems likely is that most of the public sector banks will consolidate in the near future for acquiring pure economies of scale, however how soon and when the consolidation takes place is the news to watch, with consolidation of Times bank and HDFC Bank,ICICI Bank-ICICI-Bank of Madura,IDBI-IDBI Bank in the pipeline the future of consolidation in the Banking sector seems strong, besides strong news of Bank of India and Union bank merger and the in principal approval by RBI also hints at the fact that the government is strongly supporting public sector banks consolidation.

Some possible Banking Consolidations we might see Ahead

The question now is, which are the possible targets for takeover in the public sector banks and what are the likely benefits expected from them? The following analysis seeks to answer this.

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Consolidation in Banking Industry Karu Indu J&K Bank Bank Bank Advances (Rs 80,109 m) Deposits (Rs m) Profitability % ROA ROE Net Profit / 64.2 Spread Net Profit 19.7 margin Quality of Assets % CAR NPA / Net 1.6 Advances Avg cost of 6.3 deposits Avg yield on 9.1 8.0 7.4 7.9 9.1 9.8 8.6 6.9 7.7 7.6 5.3 6.0 5.1 7.1 6.0 6.2 4.9 5.7 4.8 1.5 4.3 2.7 4.2 2.3 6.9 3.0 3.3 2.3 16.5 16.9 12.1 12.8 17.0 17.1 11.3 11.2 13.9 16.3 22.3 9.0 19.7 19.3 22.3 11.4 10.2 13.5 15.2 65.6 48.9 82.7 73.9 54.2 37.8 36.4 47.1 41.1 2.1 31.0 2.1 28.7 0.9 2.1 2.2 25.3 2.4 25.4 1.3 26.4 1.0 22.5 1.3 21.7 1.3 22.5 9 8 2 4 2 52,992 74,059 21,491 24,715 9 13 8 02 9 4 146,74 186,6 85,97 112,0 51,21 59,11 han FY04 sInd Vyasa Rajast as Bank r of Overse Bank Bharat

FY03 FY04 FY03 FY04 FY03 FY04 FY03 FY04 FY03 92,84 53,47 78,12 33,44 40,23

22,212 24,316 11,531 13,915

15.5 37.4

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Consolidation in Banking Industry advances Productivity (Rs m) Income / 37.7 Branch Income/ 2.4 Employee Liquidity Credit Deposit 54.6% 49.8% ratio Borrowings/de 1.5 posits 1.6 2.8 2.1 5.2 1.8 0.3 2.4 2.6 0.7 % 62.2 69.8% 65.3% 68.1% 41.9% 32.8% 53.7% 56.3% 2.7 10.5 7.6 2.3 2.5 1.4 1.6 2.1 2.2 38.3 188.8 218.2 30.3 32.3 17.8 19.2 26.8 28.7 -

Jammu and Kashmir Bank is the first state owned bank of the country and 53% of equity is held by the government of J&K. The bank has a network of 475 branches spread over the country. During FY04, the bank recorded a 23% growth in its total revenues over the previous year. Although divestment on the part of the government is uncertain, the performance ratios of the bank surely make it a good contender for acquisition. IndusInd Bank also is in the same league with an impressive net worth growth (from Rs 3 billion to Rs 8 billion) during the past six years. The total deposits and advances of the bank in FY04 grew by 30% and 46%, respectively, faster than the industry growth rate. has comparatively smaller branch network of 61 and 80 ATMs across the country. But at Shruti Dave 4

Consolidation in Banking Industry the same time, the bank has the highest productivity ratios amongst the Tier II private banks. The Karur Vysya Bank (one of the oldest private sector banks operating in India since 1916) has been ranked as one of the top five banks in the private sector. The bank has a strong hold in the South with a total of 216 branches across the nation. The bank has an impressive capital adequacy ratio and also boasts of a credit deposit ratio to the tune of 68%. Bank of Rajasthan having its network across 12 states, mainly concentrated in the north, has an edge in terms of relatively low cost of deposits. The bank has also successfully cleansed its assets by bringing down the net NPA / advances ratio from 7% in FY03 to 3% in FY04. Bharat Overseas Bank, a fast growing Chennai based bank is unique in the sense that it is promoted by seven other banks, namely, IOB, Bank of Rajasthan, Vyasa Bank, Karur Vyasa Bank, Federal Bank, South Indian Bank and Karnataka Bank. Established to take over from Indian Overseas Bank's Bangkok branch, it is one of the few private banks permitted by the Reserve Bank of India to have a branch outside India and is the only bank to represent India in Thailand. The bank has been able to leverage its overseas presence to access low cost deposits and this is reflected in the fact that its borrowings / deposits ratio have declined from 2.6 times in FY03 to 0.7 times in FY04. The above five banks are just a few of the contenders of the consolidation process. In the long run, they may or may not be part of the M&A activity. Fundamentally, a merger must satisfy its objectives. There needs to be an increment in market share, augmented scale, reduction in expenses and last but not the least, it has to be attractive to Shruti Dave 5

Consolidation in Banking Industry shareholders. The credibility of the acquiring entity and the complimenting benefit offered by the acquired target will together decide the fortunes of the shareholders. According to Ms K.J. Udeshi, Deputy Governor, Reserve Bank of India, mergers and acquisitions in the banking sector are going to be the order of the day as demonstrated by the successful mergers of HDFC Bank and Times Bank, Standard Chartered and ANZ Grindlays. "We are also looking for such signs in respect of a number of old private sector banks, many of which are not able to cushion their NPAs, expand their business and induct technology due to limited capital base," she said. The banking sector is moving away from a regime of "large number of small banks" to "small number of large banks", the new era is going to be one of consolidation around identified core competencies, she added. The Finance Minister, Mr P. Chidambaram, also recently said that the Government is in favour of consolidation in the banking industry to enable banks achieve 'world-class' status. According to Ms Udeshi, the future may usher in large banking institutions, if the development financial institutions opt for conversion into commercial banking in line with the recommendation of the Second Report of the Narasimham Committee.

The Basics of Consolidation Introduction

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Consolidation in Banking Industry Consolidation or Mergers and acquisitions and corporate restructuring--or M&A for short--are a big part of the corporate finance world. Every day consolidation transactions bring together separate companies to make larger ones. When they're not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spin-offs, carve-outs, or tracking stocks. Not surprisingly, these types of actions often make the news. Deals can be worth hundreds of millions or even billions of dollars, and they can dictate the fortunes of the companies involved for years to come. For CEOs, leading consolidations can represent the pinnacle of their careers.

Defining Consolidation
The Main Idea One plus one makes three: this equation is the special alchemy of a consolidation. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies--at least, that's the reasoning behind M&A. This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

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Consolidation in Banking Industry

Distinction between various types of consolidation

Consolidation is synonymous to mergers and acquisitions in the corporate world, although they are often uttered in the same breath and used as though they were synonymous, the terms "merger" and "acquisition" means slightly different things especially in the context of consolidation. When a company takes over another one and clearly becomes the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist and the buyer "swallows" the business, and stock of the buyer continues to be traded, this is also known as hostile consolidation. Friendly consolidation is when, in the pure sense of the term, a merger happens when two firms, often about the same size, agree to go forward as a new single company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered, and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, Daimler Chrysler, was created. In practice, however, actual mergers of equals don't happen very often. Often, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations. By using the term "merger," dealmakers and top managers try to make the takeover more palatable.

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Consolidation in Banking Industry A purchase deal will also be called a friendly consolidation when both CEOs agree that joining together in business is in the best interests of both their companies. But when the deal is unfriendly--that is, when the target company does not want to be purchased--it is always regarded as a hostile consolidation or acquisition. So, whether a purchase is considered friendly or hostile consolidation really depends on whether the purchase is merger or acquisition and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

ADVANTAGES OF CONSOLIDATION

Synergy Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:

For the most part, acquirers nearly always pay a substantial premium on the stock market value of the companies they buy. The justification for doing so nearly always boils down to the notion of synergy: a merger benefits shareholders when a company's post-merger share price increases by the value of potential synergy. It would be highly unlikely for rational owners to sell if they would benefit more by not selling. That means buyers will need to pay a premium if they hope to acquire the company, regardless of what pre-merger valuation tells them. For sellers, that premium represents their company's future prospects. For buyers, the premium represents part of

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Consolidation in Banking Industry the post-merger synergy they expect can be achieved. The following equation offers a good way to think about synergy and how to determine if a deal makes sense. The equation solves for the minimum required synergy:

In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action. However, the practical constraints of mergers, which we discuss in part five, often prevent the expected benefits from being fully achieved. Alas, the synergy promised by dealmakers might just fall short.

Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.

Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies--when placing larger orders, companies have a greater ability to negotiate price with their suppliers. With the acquisition of Bank of Madura, ICICI bank became richer by almost 260 branches, 2500 personnel and deposit base of around Rs37bn. Since in most of the southern states, ICICI bank has a low presence, it was able to use its technology in the existing network of BoM. The

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Consolidation in Banking Industry merged entity forms the largest private sector bank with total assets of Rs 16,500 crore, 360 branches and about 4300 employees

Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can keep or develop a competitive edge.

Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones. Another major reason behind mergers is that mergers provide faster way to expand the geographical presence and branch network. In case of the acquisition of GTB which has good presence in South India by OBC operating mainly in north India, the merged entity benefited greatly by geographical spread. That said, achieving synergy is easier said than done--it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes it works in reverse. In many cases, one and one add up to less than two. Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the dealmakers. Where there is no value to be created, the CEO and investment bankers--who have much to gain from a successful M&A deal--will try to build up the image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price.

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Consolidation in Banking Industry

Varieties of Friendly Consolidation

From the perspective of business structures, there are a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:

Horizontal consolidation Two companies that are in direct competition in the same product lines and markets.

Vertical consolidation: A customer and company or a supplier and company. Think of a cone supplier to an ice cream maker.

Market-extension consolidation: Two companies that sell the same products in different markets.

Product-extension consolidation: Two companies selling different but related products in the same market.

Conglomeration: Two companies that have no common business areas.

From the perspective of how the merge is financed, there are two types of mergers: purchase mergers and consolidation mergers. Each has certain implications for the companies involved and for investors: Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another one. The purchase is made by cash or through the issue of some kind of debt instrument, and the sale is taxable. Acquiring companies often prefer this type of merger because it can

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Consolidation in Banking Industry provide them with a tax benefit. Acquired assets can be "written-up" to the actual purchase price, and the difference between book value and purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company
o

Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

Hostile Consolidation
Hostile Consolidation or Acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies, and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another--there is no exchanging of stock or consolidating as a new company. Acquisitions are often congenial, with all parties feeling satisfied with the deal. Other times, acquisitions are more hostile. Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on how well this synergy is achieved.

Valuation in Consolidations
Business valuation is a mix of art and science. The bottom line is, of course, that a business is worth what a buyer will pay for it. However, there are ways of estimating a

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Consolidation in Banking Industry fair price. Several of those methods are described in this section. There are variations of these and there are other methods that apply to specific situations. It is not uncommon to value a business by a number of different methods and use an average (or more likely a weighted average that gives more weight to some methods than to others) of the various methods used.

Dividend growth model: This is the most basic approach where both the price and expected return on a share depend upon expected growth of dividends on the stock, the formula is Ks =D1/P0 +Expected G Thus investors expect to receive a dividend yield D1/P0 plus Expected Capital Gains G for a total expected return of Ks Thus this method of estimating cost of equity is also known as Discounted Cash Flow or DCF method.

Present value and discounting NPV/ IRR: The NPV method relies on the DCF method to implement various techniques, first of all the present values of each cash flow including the inflows as well as outflows discounted at projects cost of capital needs to be found out, the sum of these discounted cash flows is termed as the projects NPV,if this NPV is positive then the project should be accepted else the project should be rejected. IRR or Internal Rate of Return equates the present value of projects expected inflows to its outflows,the IRR is the rate that forces NPV to equal to zero.Thus both the NPVand

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Consolidation in Banking Industry IRR tell us whether a project can be accepted or rejected keeping in mind the payback period and the rate of returns,these are the most elementary methods of valuation.

Capitalized Earning Approach A common method of valuing a business is called the Capitalization of Earnings (or Capitalized Earnings) method. Capitalization refers to the return on investment that is expected by an investor. There are many variations in how this method is applied. However, the basic logic is the same.In this method we assume that the cash inflows continue to arise as the business is a going concern also we assume an expense paid for the working of the business, the buyer would look at this "minimum risk" business earning like treasury bills etc and compare it to other ways of investing his or her money to earn the same amount each year. The higher the perceived risk, the higher the capitalization rate (percentage) that the buyer will use to estimate value. Rates of 20% to 25% are common for small business capitalization calculations. That is, buyers will look for a return on their investment of 20% to 25% in buying a small business. However, as we'll see below, some businesses have value to some buyers for reasons that have little to do with the amount of money they are earning. Finally, it is important to point out that the above example does not include a fair salary for the new business owner. If the owner must devote time working to realize a profit, he or she must, in theory, be paid a fair value for that work. Excess Earning Method This method is similar to the capitalization method described above. The difference is that it splits off return on assets from other earning (the excess earnings). For example,

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Consolidation in Banking Industry let's suppose Mr. Owner runs a business that manufactures novelty products. His company has Tangible Assets of $300,000. Further let's suppose that Mr. Owner pays himself a very reasonable market value salary-- the same amount that he would have to pay a competent manager to do his job. After paying the salary Mr. Owner's business has earnings of $120,000. The financially rational reason for owning business assets is to produce a financial return. Let's say that a reasonable return on Mr. Owner's Tangible Assets is 15% per year. A reasonable number here should be based on industry averages for return on assets adjusted to current economic conditions. For example, Mr. Owner or his advisors may have looked up industry standards for novelty manufacturing shops and found that the current average return on assets was 14%. (An alternative approach to finding an industry appropriate return on asset figure is to use a rate 2 to 3 points above the current bank rate for a small business loan, or about 5 points above the current prime rate). So $45,000 of Mr. Owner's profits are derived from the tangible assets of the business ($300,000 x 15%= $45,000) The other $75,000 ($120,000-$45,000=$75,000) in earnings are the excess earnings). This $75,000 excess earning number is typically multiplied by a factor of 2 to 5 based on such factors as the level of risk involved in the business, the attractiveness of the business and the industry, competitiveness, and growth potential. The higher the factor used, the higher the estimate of the business will be. A typical number is 3 for a solid, profitable company. That is, a good business that is judged to be average in terms of the level of risk involved, the attractiveness of the business, the industry, competitiveness, and

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Consolidation in Banking Industry growth potential would use three as a multiplier. The actual factor used is a mix of opinion, comparison to others in the industry, and industry outlook. Let's suppose that Mr. Owner's business is a bit better than average in these factors and assign a multiplier of 3.6. Therefore, the value of this business can be determined as follows:

A. Fair market value of tangible equipment $300,000 B. Total Earnings $120,000 C. Earnings attributed to Tangible Assets ($300,000 x 15%=$45,000) D. Excess Earnings $75,000 ($120,000 - $45,000=$75,000) E. Value of excess earnings $270,000 ($75,000 x 3.6=$270,000) F. Estimated Total Value (A+E) $570,000 -$45,000

The capitalization methods work for businesses that derive their income primarily from tangible assets such as a utility (such as gas or electric companies). In the case of most small businesses that earn only a small part of their revenues from tangible assets, the excess earning method is probably a better method to use.

Cash Flow Method Buyers often look at a business and evaluate it by determining how much of a loan the cash flow will support. That is, they will look at the profits and add back to profits any expense for depreciation and amortization but also subtract from cash flow an estimated annual amount for equipment replacement. They will also adjust owner's salary to a fair salary or at least an acceptable salary for the new owner. Shruti Dave 17

Consolidation in Banking Industry The adjusted cash flow number is used as a benchmark to measure the firm's ability to service debt. Therefore, when using this method, the value of a company changes with interest rate conditions. It also changes with the terms a buyer can obtain on a business loan. From a buyer's perspective this may make sense, but from a seller's perspective it introduces a sort of arbitrariness into the process.

Tangible Assets(Balance Sheet) Method In some instances, a business is worth no more than the value of its tangible assets. This would be the case for some (not all) businesses that are losing money or paying the owner(s) less in total than a fair market compensation. Selling such a business is often a matter of getting the best possible price for the equipment, inventory, and other assets of the business. It is generally best to approach other firms in the same business that would have direct use for such assets. Also, a company in the same business might be interested in taking over your facility. This would mean your leasehold improvements (modifications to space, etc.) would have value and the equipment would have value as "in place" plant and equipment. In place value is higher than the value on a piece-bypiece basis such as at a sale by auction.

Cost To Create Approach(Leap Frog Start-Up) Sometimes companies or individuals will purchase a company just to avoid the difficulties of starting from scratch. The buyer will calculate his or her start up needs in terms of dollars and time. Next he or she will look at your business and analyze what it has and what it may be missing relative to the buyer's start up plan. The buyer will

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Consolidation in Banking Industry calculate value based on his or her projected costs to organize personnel, obtain leases, obtain fixed assets, and cost to develop intangibles such as licenses, copyrights, contracts, etc.). A reasonable premium of above the sum of projected start up costs may be offered because of the effort and time being saved by the buyer. The more difficult, expensive, and/or time-consuming startup is likely to be, the higher the value would be based upon this method.

Rule of Thumb Methods One of the most common approaches to small business valuation is the use of industry rules of thumb. While most financial analysts cringe at the use of these approaches, they do have their place, which we believe to be as adjuncts to other methods. One industry rule of thumb says an Internet Service Provider company is worth $75 to $125 per subscriber plus equipment at fair market value. Another says that small weekly newspapers are worth 100% of one year's gross income. The problem with these and all rule of thumb formulas is that they are statistically derived from the sale of many businesses of each type. That is, an organization might compile statistics on perhaps 100 small weekly newspapers that were sold over a twoyear period. They will then average all the selling prices and calculate that the average paper sold for 100% of one year's gross income. The rule of thumb is thus created. However, some newspapers may have sold for twice one year's gross while other may have sold for half of one year's gross.

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Consolidation in Banking Industry The rule of thumb averages may be accurate for those businesses whose performances are right about at the average. The business with expenses and profits that are right on target with industry averages may well sell for a price in line with the rule of thumb formula. Others will vary. To apply the rule of thumb to a business that varies significantly from the average is not appropriate.

Value of Specific Intangible Assets This is an often-overlooked approach to valuation. Yet in some cases it is the only appropriate approach that will result in a sale. The approach is based upon the buyer's buying a wanted intangible asset versus creating it. Many times buying can be a cost efficient and time saving alternative. A common application of this method is the acquisition of a customer base. Customers with a high likelihood of being retained are valuable in most industries. Examples of industries where companies are bought and sold based upon the value of the customer base include insurance agencies, advertising agencies, payroll services, and bookkeeping services. There are also many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but dealmakers employ a variety of other methods and tools when assessing a target company. Here are just a few of them: 1. Comparative Ratios The following are two examples of the many comparative metrics on which acquirers may base their offers:

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Consolidation in Banking Industry

P/E (price-to-earnings) ratio With the use of this ratio, an acquirer makes an offer as a multiple of the earnings the target company is producing. Looking at the P/E for all the stocks within the same industry group will give the acquirer good guidance for what the target's P/E multiple should be.

EV/Sales (price-to-sales) ratio With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of 3the P/S ratio of other companies in the industry.

2. Replacement Cost: In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets--people and ideas--are hard to value and develop. 3. Discounted Cash Flow (DCF): A key valuation tool in M&A, discounted cash flow analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (operating profit + depreciation + amortization of goodwill capital expenditures cash taxes - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method.

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Consolidation in Banking Industry However there is no surefire way to value a company for buying and selling purposes. The true value is the perceived value to a buyer who is ready, willing, and able to buy it. However, there are a number of approaches to estimate value; some of those are discussed above. It is not unusual for a buyer to ask for the logic behind an asking price. Having a good answer to that question will enhance your chances of selling your firm for the desired price. Investors in a company that is aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth. Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company as high as possible, while the buyer will try to get the lowest price possible. When a firm acquires another entity, there usually is a predictable short-term effect on the stock price of both companies. In general, the acquiring company's stock will fall while the target company's stock will rise. The reason the target company's stock usually goes up is that the acquiring company typically has to pay a premium for the acquisition: unless the acquiring company offers more per share than the current price of the target company's stock, there is little incentive for the current owners of the target to sell their shares to the takeover company. The acquiring company's stock usually goes down for a number of reasons. First, as we mentioned above, the acquiring company must pay more than the target company is currently worth to make the deal go through. Beyond that, there are often a number of Shruti Dave 22

Consolidation in Banking Industry uncertainties involved with acquisitions. Here are some of the problems the takeover company could face during an acquisition:

A turbulent integration process: problems associated with integrating different workplace cultures.

Lost productivity because of management power struggles. Additional debt or expenses that must be incurred to make the purchase. Accounting issues that weaken the takeover company's financial position, including restructuring charges and goodwill.

However what we've discussed here does not touch on the long-term value of the acquiring company's stock. If an acquisition goes smoothly, it will obviously be good for the acquiring company in the long run.

What to Look For during Consolidation..

It's hard for investors to know when a deal is worthwhile. The burden of proof should fall on the acquiring company. To find mergers that have a chance of success, investors should start by looking for some of these simple criteria:

A reasonable purchase price - A premium of, say, 10% above the market price seems within the bounds of level-headedness. A premium of 50%, on the other hand, requires synergy of stellar proportions for the deal to make sense. Stay away from companies that participate in such contests.

Cash transactions - Companies that pay in cash tend to be more careful when calculating bids, and valuations come closer to target. When stock is used as the currency for acquisition, discipline can go by the wayside.

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Sensible appetite An acquirer should be targeting a company that is smaller and in businesses that the acquirer knows intimately. Synergy is hard to create from companies in disparate business areas. And, sadly, companies have a bad habit of biting off more than they can chew in mergers.

Mergers are awfully hard to get right, so investors should look for acquirers with a healthy grasp of reality.

Doing the Deal

Start with an Offer When the CEO and top managers of a company decide they want to do a merger or acquisition, they start with a tender offer. The process typically begins with the acquiring company carefully and discreetly buying up shares in the target company, building a position. Once the acquiring company starts to purchase shares in the open market, it is restricted to buying 5% of the total outstanding shares before it must file with the SEC. In the filing, the company must formally declare how many shares it owns and whether it intends to buy the company or keep the shares purely as an investment. Working with financial advisors and investment bankers, the acquiring company will arrive at an overall price that it's willing to pay for its target in cash, shares, or both. The tender offer is then frequently advertised in the business press, stating the offer price and the deadline by which the shareholders in the target company must accept (or reject) it. The Target's Response

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Consolidation in Banking Industry Once the tender offer has been made, the target company can do one of several things:

Accept the terms of the offer - If the target firm's top managers and shareholders are happy with the terms of the transaction, they will go ahead with the deal.

Attempt to negotiate - The tender offer price may not be high enough for the target company's shareholders to accept, or the specific terms of the deal may not be attractive. In a merger, there may be much at stake for the management of the target--their jobs, in particular. So, if they're not satisfied with the terms laid out in the tender offer, the target's management may try to work out more agreeable terms that let them keep their jobs or, perhaps even better, send them off with a nice, big compensation package. Not surprisingly, highly sought-after target companies that are the object of several bidders will have greater latitude for negotiation. And managers have more negotiating power if they can show that they are crucial to the merger's future success.

Execute a poison pill or some other hostile takeover defense a target company can trigger a poison pill scheme when a hostile suitor acquires a predetermined percentage of company stock. To execute its defense, the target company grants all shareholders--except the acquirer--options to buy additional stock at a dramatic discount. This dilutes the acquirer's share and intercepts its control of the company.

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Find a white knight - As an alternative, the target company's management may seek out a friendlier potential acquirer, or white knight. If a white knight is found, it will offer an equal or higher price for the shares than the hostile bidder.

Mergers and acquisitions can face scrutiny from regulatory bodies. Closing the Deal Finally, once the target company agrees to the tender offer and regulatory requirements are met, the merger deal will be executed by means of some transaction. In a merger in which one company buys another, the acquirer will pay for the target company's shares with cash, stock, or both. A cash-for-stock transaction is fairly straightforward: target-company shareholders receive a cash payment for each share purchased. This transaction is treated as a taxable sale of the shares of the target company. If the transaction is made with stock instead of cash, then it's not taxable. There is simply an exchange of share certificates. The desire to steer clear of the taxman explains why so many M&A deals are carried out as cash-for-stock transactions. When a company is purchased with stock, new shares from the acquirer's stock are issued directly to the target company's shareholders, or the new shares are sent to a broker who manages them for target-company shareholders. Only when the shareholders of the target company sell their new shares are they taxed. When the deal is closed, investors usually receive a new stock in their portfolio--the acquiring company's expanded stock. Sometimes investors will get new stock identifying a new corporate entity that is created by the M&A deal.

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Consolidation in Banking Industry

Types of Consolidation
Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today's dynamic economic environment, companies are often faced with decisions concerning these actions - after all, the job of management is to maximize shareholder value. Through mergers and acquisitions, a company can develop a competitive advantage and ultimately increase shareholder value. There are several ways that two or more companies can combine their efforts. They can partner on a project, mutually agree to join forces and merge, or one company can outright acquire another company, taking over all its operations, including its holdings and debt, and sometimes replacing management with their own representatives. Its this last case of dramatic unfriendly takeovers that is the source of much of M&As colorful vocabulary.

Hostile Takeover This is an unfriendly takeover attempt by a company or raider that is strongly resisted by the management and the board of directors of the target firm. These types of takeovers are usually bad news, affecting employee morale at the targeted firm, which can quickly turn to animosity against the acquiring firm. Grumblings like, Did you hear they are axing a few dozen people in our finance department can be heard by the water cooler. While there are examples of hostile takeovers working, they are generally tougher to pull off than a friendly merger. Dawn Raid Shruti Dave 27

Consolidation in Banking Industry This is a corporate action more common in the United Kingdom; however it has also occurred in the Unites States. During a dawn raid, a firm or investor aims to buy a substantial holding in the takeover-target companys equity by instructing brokers to buy the shares as soon as the stock markets open. By getting the brokers to conduct the buying of shares in the target company (the victim), the acquirer (the predator) masks its identity and thus its intent. The acquirer then builds up a substantial stake in its target at the current stock market price. Because this is done early in the morning, the target firm usually doesn't get informed about the purchases until it is too late, and the acquirer now has controlling interest. In the U.K., there are now restrictions on this practice.

Saturday Night Special This is a sudden attempt by one company to take over another by making a public tender offer. The name comes from the fact that these maneuvers used to be done over the weekends. This too has been restricted by the Williams Act in the U.S., whereby acquisitions of 5% or more of equity must be disclosed to the Securities Exchange Commission Takeovers are announced practically everyday, but announcing them doesn't necessarily mean everything will go ahead as planned. In many cases the target company does not want to be taken over. What does this mean for investors? Everything! There are many strategies that management can use during M&A activity, and almost all of these strategies are aimed at affecting the value of the target's stock in some way. Let's take a

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Consolidation in Banking Industry look at some more popular ways that companies can protect themselves from a predator. These are all types of what is referred to as "shark repellent".

Golden Parachute This measure discourages an unwanted takeover by offering lucrative benefits to the current top executives, who may lose their job if their company is taken over by another firm. Benefits written into the executives contracts include items such as stock options, bonuses, liberal severance pay and so on. Golden parachutes can be worth millions of dollars and can cost the acquiring firm a lot of money and therefore act as a strong deterrent to proceeding with their takeover bid.

Greenmail A spin-off of the term "blackmail", greenmail occurs when a large block of stock is held by an unfriendly company or raider, who then forces the target company to repurchase the stock at a substantial premium to destroy any takeover attempt. This is also known as a "bon voyage bonus" or a "goodbye kiss".

Macaroni Defense This is a tactic by which the target company issues a large number of bonds that come with the guarantee that they will be redeemed at a higher price if the company is taken over. Why is it called macaroni defense? Because if a company is in danger, the redemption price of the bonds expands, kind of like macaroni in a pot! This is a highly

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Consolidation in Banking Industry useful tactic, but the target company must be careful it doesn't issue so much debt that it cannot make the interest payments.

Takeover-target companies can also use leveraged recapitalization to make themselves less attractive to the bidding firm.

People Pill Here, management threatens that in the event of a takeover, the management team will resign at the same time en masse. This is especially useful if they are a good management team; losing them could seriously harm the company and make the bidder think twice. On the other hand, hostile takeovers often result in the management being fired anyway, so the effectiveness of a people pill defense really depends on the situation.

Poison Pill With this strategy, the target company aims at making its own stock less attractive to the acquirer. There are two types of poison pills. The 'flip-in' poison pill allows existing shareholders (except the bidding company) to buy more shares at a discount. This type of poison pill is usually written into the companys shareholder-rights plan. (To learn more about these and other shareholders rights, see Knowing Your Rights as a Shareholder.) The goal of the flip-in poison pill is to dilute the shares held by the bidder and make the takeover bid more difficult and expensive. The 'flip-over' poison pill allows stockholders to buy the acquirer's shares at a discounted price in the event of a merger. If investors fail to take part in the poison pill by

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Consolidation in Banking Industry purchasing stock at the discounted price, the outstanding shares will not be diluted enough to ward off a takeover. An extreme version of the poison pill is the "suicide pill" whereby the takeover-target company may take action that may lead to its ultimate destruction.

Sandbag With this tactic the target company stalls with the hope that another, more favorable company (like a white knight) will make a takeover attempt. If management sandbags too long, however, they may be getting distracted from their responsibilities of running the company. White Knight This is a company (the good guy) that gallops in to make a friendly takeover offer to a target company that is facing a hostile takeover from another party (a black knight). The white knight offers the target firm a way out with a friendly takeover.

Alternatives to Consolidation
Break-Ups As mergers capture the imagination of many investors and companies, the idea of getting smaller might seem counterintuitive. But corporate break-ups or de-mergers can be very attractive options for companies and their shareholders.

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Consolidation in Banking Industry Advantages The rationale behind a spin off, tracking stock, or carve-out is that "the parts are greater than the whole." These corporate restructuring techniques, which involve the separation of a business unit or subsidiary from the parent, can help a company raise additional equity funds. A break-up can also boost a company's valuation by providing powerful incentives to the people who work in the separating unit, and help management of the parent focus on core operations. Most importantly, shareholders get better information about the business unit because it issues separate financial statements. This is particularly useful when a company's traditional line of business differs from the separated business unit. With separate financial disclosure, investors are better equipped to gauge the value of the parent corporation. The parent company might attract more investors and ultimately more capital. Also, separating a subsidiary from its parent can reduce internal competition for corporate funds. For investors, that's great news: it curbs the kind of negative internal wrangling that can compromise the unity and productivity of a company. For employees of the new separate entity, there is a publicly traded stock to motivate and reward them. Stock options in the parent often provide little incentive to subsidiary managers, especially since their efforts are buried in the overall firm performance. Disadvantages That said, de-merged firms are likely to be substantially smaller than their parents, possibly making it harder to tap credit markets and costlier finance that may be affordable Shruti Dave 32

Consolidation in Banking Industry only for larger companies. And the smaller size of the firm may mean it has less representation on major indexes, making it more difficult to attract interest from institutional investors. Meanwhile, there are the extra costs that the parts of the business face if separated. When a firm divides itself into smaller units, it may be losing the synergy that it had as a larger entity. For instance, the division of expenses such as marketing, administration and R&D into different business units may cause redundant costs without increasing overall revenues. Restructuring Methods There are several restructuring methods: doing an outright sell-off, doing an equity carveout, spinning off a unit to existing shareholders, or issuing tracking stock. Each has advantages and disadvantages for companies and investors. All of these deals are quite complex. Sell-Offs A sell-off, also known as a divestiture, is the outright sale of a company subsidiary. Normally, sell-offs are done because the subsidiary doesn't fit into the parent company's core strategy. The market may be undervaluing the combined businesses due to a lack of synergy between the parent and subsidiary. Management and the board therefore decide that the subsidiary is better off under different ownership. Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be used to pay off debt. In the late 1980s and early 1990s, corporate raiders would use debt to

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Consolidation in Banking Industry finance acquisitions, and then after making a purchase they would sell-off its subsidiaries to raise cash to service the debt. The raiders' method certainly makes sense if the sum of the parts is greater than the whole. When it isn't, deals are unsuccessful. Equity Carve-Outs More and more companies are using equity carve-outs to boost shareholder value. A parent firm takes a subsidiary public through an initial public offering (IPO) of shares, amounting to a partial sell-off. A new publicly-listed company is created, but the parent keeps a controlling stake in the newly traded subsidiary. A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is growing faster and carrying higher valuations than other businesses owned by the parent. A carve-out generates cash because shares in the subsidiary are sold to the public, but the issue also unlocks the value of the subsidiary unit and enhances the parent's shareholder value. The new legal entity of a carve-out has a separate board, but in most carve-outs, the parent retains some control. In these cases, some portion of the parent firm's board of directors may be shared. Since the parent has a controlling stake, meaning both firms have common shareholders, the connection between the two will likely be strong. That said, sometimes companies carve-out a subsidiary not because it's doing well, but because it is a burden. Such an intention won't lead to a successful result, especially if a carved-out subsidiary is too loaded with debt, or had trouble even when it was a part of the parent, lacking an established track record for growing revenues and profits.

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Consolidation in Banking Industry Carve-outs can also create unexpected friction between the parent and subsidiary. Problems can arise as managers of the carved-out company must be accountable to their public shareholders as well as the owners of the parent company. This can create divided loyalties. Spin-offs A spin-off occurs when a subsidiary becomes an independent entity. The parent firm distributes shares of the subsidiary to its shareholders through a stock dividend. Since this transaction is a dividend distribution, no cash is generated. Thus, spin-offs are unlikely to be used when a firm needs to finance growth or deals. Like the carve-out, the subsidiary becomes a separate legal entity with a distinct management and board. Like carve-outs, spin-offs are usually about separating a healthy operation. In most cases, spin-offs unlock hidden shareholder value. For the parent company, it sharpens management focus. For the spin-off company, management doesn't have to compete for the parent's attention and capital. Set free, managers can explore new opportunities. Investors, however, should beware of throw-away subsidiaries the parent created to separate legal liability or to off-load debt. Once spin-off shares are issued to parent company shareholders, some shareholders may be tempted to quickly dump these shares on the market, depressing the share valuation. Tracking Stock

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Consolidation in Banking Industry A tracking stock is a special type of stock issued by a publicly held company to track the value of one segment of that company. The stock allows the different segments of the company to be valued differently by investors. Let's say a slow-growth company trading at a low P/E happens to have a fast growing business unit. The company might issue a tracking stock so the market can value the new business separately from the old one and at a significantly higher P/E rating. Why would a firm issue a tracking stock rather than spinning-off or carving-out its fast growth business for shareholders? The company retains control over the subsidiary; the two businesses can continue to enjoy synergies and share marketing, administrative support functions, a headquarters, and so on. Finally, and most importantly, if the tracking stock climbs in value, the parent company can use the tracking stock it owns to make acquisitions. Still, shareholders need to remember that tracking stocks are class B, meaning they don't grant shareholders the same voting rights as those of the main stock. Each share of tracking stock may have only a half or a quarter of a vote. In rare cases, holders of tracking stock have no vote at all.

Why Consolidation may Fail

It's no secret that plenty of mergers don't work.Experience also suggests that as high as 60% of the consolidation concluded in the 1990s have failed in capturing the expected values. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the Shruti Dave 36

Consolidation in Banking Industry price of supplies, and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry. Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. Motivations behind mergers can be flawed and efficiencies from economies of scale may prove elusive. And the problems associated with trying to make merged companies work are all too concrete.Let us analyze some of the main reasons why mergers fail Flawed Intentions For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempts to imitate: somebody else has done a big merger, which prompts top executives to follow suit. A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later. On the other side of the coin, mergers can be driven by generalized fear. Globalization, or the arrival of new technological developments, or a fast-changing economic landscape Shruti Dave 37

Consolidation in Banking Industry that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world. Issues involved in mergers and acquisitions: While merging banks should keep in mind the inherent strengths and weaknesses of a taken over bank, fundamental features like product Portfolio, NPA levels, capital adequacy, technology levels and staff issues should be closely considered when planning for a merger. Mergers have a lot to do with organizational culture and technology. The merger of ICICI bank with Bank of Madura was not very smooth because of diverse organizational culture. The merging banks should be comparable in terms of culture and technology.

Retrenchment of staff is another key issue. Employees from both banks, who do not fit in the scheme of things, will face prospects of retrenchment. Already the members of the United Forum of Bank Unions (UBFU), which represents over 10 lakh bank employees and officers, has conveyed its strong resentment over the issue of mergers and acquisitions of public sector banks on several occasions.

Shareholders consent is another issue. The shareholders should approve the swap ratio of the shares of the merging banks. A miscalculated swap ratio could result in advantage of one banks shareholders at the cost of other banks shareholders.

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The Obstacles of Making it Work Coping with a merger can make top managers spread their time too thinly, neglecting their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal. The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that people issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity. More insight into the failure of mergers is found in the highly acclaimed study from the global consultancy McKinney. The study concludes that companies often focus too intently on cutting costs following mergers, while revenues and, ultimately, profits suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders. However not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. But the promises

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Consolidation in Banking Industry made by dealmakers demand the careful scrutiny of investors. The success of mergers depends on how realistic the dealmakers are and how well they can integrate two companies together while maintaining day-to-day operations. Exercising Due Diligence Warren Helman, former CEO of Lehman Brothers, suggests that so many mergers fail because of lack of appropriate due diligence. Due diligence involves a comprehensive analysis of all important target firms characteristics to include its financial condition, management capability, physical assets and intangible assets relevant to the acquisition. In the conduct of due diligence it is important to detect potential liabilities arising from acquisition. Liabilities that are undetected prior to acquisition can create significant financial problems after acquisition is consummated. The purpose of due diligence process is not to discover why a deal should not proceed. Rather it is to obtain more clear understanding of financial, operating, human, and legal implication among others of mergers and acquisition. Companies that are able to execute due diligence to the full are able to vault to leadership position in the industry. A case in the point is Ispat steel a corporate acquirer that conducts its mergers and acquisition activities after elaborate due diligence. ISPAT was a relatively less known Indian steel company with one steel mill in Indonesia. Today, thanks to the successful acquisition, it is now one of the worlds leading steel company. Financing

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Consolidation in Banking Industry Acquisitions are financed through a cash purchase, an exchange of stock, or a combination of cash and stock. Among these three alternatives, cash is by far the preferred medium of exchange. But lately debt has gained a larger importance and a few studies done by KPMG in this regard in 1997 of highly successful & unsuccessful acquisitions show that debt was the only factor important to both groups. 83% of the successful acquisitions had low to moderate debt while 92% of the unsuccessful acquisitions we studied had large or extraordinary debt. Some of the unsuccessful acquisitions compiled truly extraordinary debt. For e.g., Ecolab increased its total debt 265% in its $500,000 purchase of Chemlawn. After the purchase, Ecolab had a debt-toequity ratio of 2.13, which led to dismal financial performance for several years. Interest costs associated with acquisition-related debt reduce potential gains from the combination of companies. In addition, the fund used to service debt may be diverted away from activities with long-term payoffs such as research & development. Acquisitions are an expensive and high-risk strategy. However organizations with sufficient slacks and low level of debts are more likely to enjoy performance increase through acquisition than are highly leveraged firms. Looking for complementary resources The experiences of companies and the work of those studying merger and acquisition success indicate that the melding of complementary rather than highly similar resources between firms involved in a merger or an acquisition increases the probability that economic value will be created. A key reason for this is that firms with highly similar resources also have highly similar strategic capabilities & vulnerabilities in the

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Consolidation in Banking Industry marketplace. Thus, a merger or acquisition that combines highly similar resources can result in a newly created firm that will encounter larger quantities of virtually the same environmental opportunities & threats that they faced as independent entities. Given this evidence, it is economically rational for firms in the pursuit of competitive advantages & marketplace success to seek combinations of complementary instead of highly similar or even identical resources. Friendliness Successful acquisitions require thoughtful selection, diligent planning, and appropriate financing, but these actions are not enough. Success requires cooperation. Merging two companies is complicated and requires much work by many people such that an uncooperative spirit in the target firm can lead to disastrous results. There simply are too many things that can go wrong. Dennis Kozlowski, CEO of Tyco International and a major dealmaker, says, "Its like landing a plane at an airport with uncooperative air traffic controllers and ground crew." Achieving Integration and Synergy "Integration decisions are often justified by the synergies they create. Synergies exist when assets are worth more when used in conjunction with each other than separately. Synergies of some form are essential for integration to be successful. Integration offers little or no potential benefits when they do not exist." -T.N. HUBBARD

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Consolidation in Banking Industry Mergers take place when there is anticipation of economic gains from merging resources of two units or firms. In free-market economies, the main interest of the firms decisions should be to enhance the value of shareholders. Synergy is merely a possibility of competitive advantage & value creation until appropriate & effective actions are taken. Actual synergies result in the creation of a competitive advantage for the firm over its rivals. Such value-enhancing synergies can be sound in the latest merger of Reliance Industries Limited (RIL) and Reliance Petroleum Limited (RPL). With the merger the group will become a fully diversified single entity and also the first private sector Fortune Global 500 Indian company, RIL. The merged entity will benefit from economies of scale, cost efficiency, and productivity gains. The move also aims at maximizing share holder value. Integration process It is necessary to properly integrate acquisitions into the firms current operations if synergy is to be created & competitive advantage and additional shareholder value are to result. One of the objectives of integration processes is to uncover potential problems that could prevent the newly formed firm from operating in ways that create competitive advantage and value and to determine actions to take that prevent other integrationrelated difficulties. The success of GE Caps has achieved with respect to integration processes has resulted in a core competence. Executives have had practice with acquisition-integration processes, in that GE Caps is a financial conglomerate with 27 separate businesses, more than 50,000 employees worldwide, and businesses that range from private-label credit-card Shruti Dave 43

Consolidation in Banking Industry services to commercial real-estate financing. Those managing GE that completed over 100 acquisitions during the 5-yr pd. between 1993 and 1997, are thought to have superior skills in terms of their ability to create synergy through the integration of each additional acquisition into the firm. In recent times, the intention of GE Caps managerial personnel has been to use its acquisition integration competitive advantage as an important means for the companys continuing growth. Organizational fit Organizational fit, "occurs when two organizations or business units have similar management processes, cultures, systems, and structures." As a foundation to synergy creation, organizational fit means that firms are characterized by a reasonably high degree of compatibility. Thus, organizational compatibility facilitates resource sharing, enhances the effectiveness of communication patterns, and improves the companys capability to transfer knowledge and skills. The absence of organizational fit stifles and sometimes prevents the integration of an acquired unit. The best acquisitions, says Harvard's Porter, involve ``gap-filling,'' including those in which one company buys another to strengthen its product line or expand its territory. Leading Indian term lender, ICICI Ltd. and the ICICI Bank who agreed to merge to create country's first universal bank, a one-stop shop for financial services with total assets of Rs 950 billion, are second only to the state-owned State Bank of India, which has assets of Rs 3.16 trillion. The merged institution, which married ICICI's strength of corporate banking and project finance with the retail reach of ICICI Bank, is set to become a one-stop provider of virtually all types of financial services. The combined

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Consolidation in Banking Industry entity has emerged as the largest private sector bank in the country marking a new era in Indian banking, adding considerable strength to the Indian financial system. Learning from experience Learning from the past deals whether they are successful or a miserable failure teaches lessons which no management guru or consultancy firm can give leads to a core competency in matters of mergers. Development of core competencies has been described by Prahalad and Hamel as "collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple teams of technologies." Skill in making acquisitions is a core competence in companies such as GE. GE, through frequent acquisitions, has built a portfolio of businesses ranging from financial services to medical systems to aerospace. In 1998 alone, GE completed 47 acquisitions, making it the most active acquirer of the year. When Jack Welch, the former CEO of GE, was asked how he created wealth for his shareholders, he responded, "I would say that our whole thrust here was to go into the right businesses, find businesses with growth, get an organization that could respond to change quickly, and get as much out of the capital we employed as we possibly could." Rodney Gott: "There is a legitimate analogy between a corporation with a new company acquisition and a family with a new baby requires patient adjustment to the new relationships between everyone concerned." Thus even if the current upward trend in mergers and acquisition activities flatten over the next few years,they will remain an important strategic approach to firm growth. Although success in these type activities is difficult to obtain, it is not impossible. We have identified in this paper how mergers and Shruti Dave 45

Consolidation in Banking Industry acquisition can, and have lead to an enhancement of shareholders value along with the attributes that facilitate their success. Consolidation of ICICI Bank and Bank of Madura ICICI Bank, one of largest financial institutions in India with an asset base of Rs.582 bn in 2000. It has an integrated wide spectrum of financial activities, with its presence in almost all the areas of financial services, right from lending, investment and commercial banking, venture capital financing, consultancy and advisory services to on-line stock broking, mutual funds and custodial services. In July 1998, to synergize its group operations, restructuring was designed, and as a result ICICI Bank has emerged. On April 1, 1999, in order to provide a sharp focus, ICICI Bank restructured its business into three SBUs namely, corporate banking, retail banking and treasury. This restructured model enabled the bank to provide cross-selling opportunities through ICICIs strong relationships with 1000 corporate entities in India. The bank has pioneered in taking initiatives and providing one stop financial solutions to customers with speed and quality. In a way to reach customers, it has used multiple delivery channels including conventional branch outlets, ATMs, telephone call-centers and also through Internet. The bank also ventured into a number of B2B and B2C initiatives in the last year to maintain its leadership in India. The B2B solution provided by the bank is aimed at facilitating on-line supply chain management for its corporate clients by linking them with their suppliers and dealers in a closed business loop. The bank is always ahead in advanced IT, and used as a competitive tool to lure new customers. Shruti Dave 46

Consolidation in Banking Industry In February 2000, ICICI Bank was one of the first few Indian banks to raise its capital through American Depository Shares (ADS) in the international market, which has received an overwhelming response for its issue of $175 mn, with a total order book of USD 2.2 bn. At the time of filling the prospectus, with the US Securities and Exchange Commission, the Bank had mentioned that the proceeds of the issue will be used to acquire a bank. As on March 31, 2000, bank had a network of 81 branches, 16 extension counters and 175 ATMs. The capital adequacy ratio was at 19.64 percent of risk-weighted assets, a significant excess of 9 percent over RBIs benchmark. ICICI Bank had been scouting for a private banker for merger, with a view to expand its asset and client base and geographical coverage. Though it had 21 percent of stake, the choice of Federal bank, was not lucrative due to the employee size (6600), per employee business is as low at Rs.161 lakh and a snail pace of technical up gradation. While, BOM had an attractive business per employee figure of Rs.202 lakh, a better technological edge and had a vast base in southern India when compared to Federal bank. While all these factors sound good, a cultural integration would be a tough task ahead for ICICI Bank. ICICI Bank had announced a merger with 57-year-old Bank of Madura, with 263 branches, out of which 82 of them are in rural areas, with most of them in southern India. As on the day of announcement of merger (09-12-00), Kotak Mahindra group was holding about 12 percent stake in BOM, the Chairman BOM, Mr. K.M. Thaiagarajan, along with his associates was holding about 26 percent stake, Spic group has about 4.7

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Consolidation in Banking Industry percent, while LIC and UTI were having marginal holdings. The merger will give ICICI Bank a hold on South Indian market, which has high rate of economic development. The swap ratio has been approved in the ratio of 1:2 two shares of ICICI Bank for every one share of BOM. The deal with BOM is likely to dilute the current equity capital by around 12 percent. And the merger is expected to bring 20 percent gains in EPS of ICICI Bank. And also the banks comfortable Capital Adequacy Ratio (CAR) of 19.64 percent has declined to 17.6 percent.

Financial Standings of ICICI Bank and Bank of Madura (Rs. in crore) Parameters ICICI Bank Bank of Madura 199919991998-99 1998-99 2000 2000 Net worth 1129.90 308.33 247.83 211.32 Total Deposits 9866.02 6072.94 3631.00 3013.00 Advances 5030.96 3377.60 1665.42 1393.92 Net profit 105.43 63.75 45.58 30.13 Share capital 196.81 165.07 11.08 11.08 Capital Adequacy Ratio 19.64% 11.06% 14.25% 15.83% Gross NPAs/ Gross 2.54% 4.72% 11.09% 8.13% Advances Net NPAs /Net Advances 1.53% 2.88% 6.23% 4.66% Source: Compiled from Annual reports (March 2000) of ICICI Bank and BOM The board of Directors at ICICI had contemplated the following synergies emerging from the merger:

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Consolidation in Banking Industry Financial Capability: The amalgamation will enable them to have a stronger financial and operational structure, which is suppose to be capable of greater resource/deposit mobilization. And ICICI will emerge as one of the largest private sector banks in the country. Branch network: The ICICIs branch network would not only increase by 264, but also increases geographic coverage as well as convenience to its customers. Customer base: The emerged largest customer base will enable the ICICI bank to offer banking and financial services and products and also facilitate cross-selling of products and services of the ICICI group. Tech edge: The merger will enable ICICI to provide ATMs, Phone and the Internet banking and financial services and products to a large customer base, with expected savings in costs and operating expenses. Focus on Priority Sector: The enhanced branch network will enable the Bank to focus on micro-finance activities through self-help groups, in its priority sector initiatives through its acquired 87 rural and 88 semi-urban branches.

Problems that ICICI encountered

The Generation Gap The merger of 57-year old BOM, south based old generation bank with a fast growing tech savvy new generation bank, help the latter? For sure, the stock merger is likely to Shruti Dave 49

Consolidation in Banking Industry bring cheer to shareholders and bank employees of BOM, and some amount of discomfort and anxiety to those of ICICI Bank. The scheme of amalgamation has increased the equity base of ICICI Bank to Rs. 220.36 cr. ICICI Bank has issued 235.4 lakh shares of Rs.10 each to the share- holders of BOM. The merged entity will have an increase of asset base over Rs.160 bn and a deposit base of Rs.131 bn. The merged entity will have 360 branches and a similar number of ATMs across the country and also enable the ICICI to serve a large customer base of 1.2 million customers of BOM through a wider network, adding to the customer base to 2.7 million. Managing rural branches ICICIs major branches are in major metros and cities, whereas BOM spread its wings mostly in semi urban and city segments of south India. Thus the synergy that the merger provides will be excellent. On the other hand, due to geographic location of its branches and level of competition, ICICI Bank will have a tough time to cope with development of the rural credit. Managing Software: Another task, which posed a bit of a problem was technology. While ICICI Bank, which is a fully automated entity is using the package, Banks 2000, BOM has computerized 90 percent of its businesses and was conversant with ISBS software. The BOM branches are supposed to switch over to Banks 2000. Though it is not a difficult task, with 80 percent computer literate staff would need effective retraining which involves a cost. ICICI Bank however needed to invest Rs.50 crore, for upgrading BOMs 263 branches.

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Consolidation in Banking Industry Managing Human resources: One of the greatest challenges before ICICI Bank was managing human resources. When the head count of ICICI Bank is taken, it was less than 1500 employees; on the other hand, BOM has over 2500. The merged entity had about 4000 employees, which will make it one of the largest banks among the new generation private sector banks. The staff of ICICI Bank are drawn from 75 various banks, mostly young qualified professionals with computer background and prefer to work in metros or big cities with good remuneration packages. Under the influence of trade unions most of the BOM employees had low career aspirations. The announcement by H.N. Sinor, the then CEO and MD of ICICI, that there would be no VRS or retrenchment, created a new hope amongst the BOM employees. It is a tough task ahead to manage. On the other hand, their pay would be revised upwards. It was a Herculean task managing the different work cultures of the two banks.

Crucial Parameters: How they stand Book value of Market price Name of the Bank Bank on the on the day of Earnings Dividend P/E ratio day of merger announcement per share paid (in %) announcement Bank of 183.0 Madura ICICI Bank Global 58.0 28.0 131.60 169.90 98.40 38.7 5.4 10.4 55% 15% 22% 3% 9% of merger

Profit per employee (in lakh) 1999-2000 1.73 7.83 12.00 6.91

Trust Bank UTI Bank 53.8 18.00 3.9 12% Source: Business Line, December 10, 2000and January 28, 2001.

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Consolidation in Banking Industry Managing Client base: The client base of ICICI Bank, after merger, was as big as 2.7 million from its past 0.5 million, an accumulation of 2.2 million from BOM. The nature and quality of clients is not of uniform quality. The BOM has built up its client base for a long time, in a hard way, on the basis of personalized services. In order to deal with the BOMs clientele, ICICI Bank needs to redefine its strategies to suit to the new clientele. If the sentiments or a relationship of small and medium borrowers is hurt, it may be difficult for them to reestablish the relationship, which could also hamper the image of the bank, however ICICI bank with its excellent service at the time was able to rope in great customer satisfaction for the bank which obviously worked in its advantage. Stock Price hammering For almost 1 year after ICICI bank over took Bank of Madura ICICIs stock price took hammering as the investors did not give it a high value however later on the banks EPS improved on the positive outlook of the stock market for ICICI.

IDBI-IDBI Bank Consolidation

INDUSTRIAL Development Bank of India (IDBI) chairman M. Damodaran had, outlined a plan to turn around the development finance institution (DFI) - with a bit of a booster from the government.

At his first meeting with the IDBI Employees Union since he took charge of the institution in September, Damodaran said IDBI's commercial banking subsidiary, IDBI Bank, would be merged into the parent by the end of 2004. Shruti Dave 52

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He added that IDBI would not be converted into a commercial bank but would undertake commercial banking activities in addition to its DFI functions, which will remain the "bread and butter" activity. Till the merger, IDBI Bank would remain an independent operation, but afterwards, its 99 branches would come into IDBI's network.

OBJECTIVES
Elaborating on the finance minister's Budget statement about IDBI continuing to be India's 'lead' DFI, Damodaran said the Rs 50,000 crore allocated for infrastructure in the Union Budget would be routed through the organization. All banking activities development and commercial - would be done under the IDBI Limited umbrella. IDBI would go in for commercial banking primarily to raise low-cost funds.

What is more, after the IDBI-IDBI Bank merger, employees who want to shift to the retail banking operations would be allowed to do so after they are put through a training programme. Damodaran convinced employees about the need for taking up commercial banking as it will allow IDBI to provide a complete range of services under one roof. Access to low-cost funds will help the DFI compete with commercial banks, which have eaten into IDBI's term-lending market share. Over time, IDBI has lost a number of its good clients to them and uses most of its meager earnings to provide for bad assets. Damodaran said it was time IDBI changed the perception that it was "a costly, slow and unwilling lender".

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Consolidation in Banking Industry To that end, he has streamlining the operations. For instance, three committees - credit committee, empowered committee and the high-powered committee - that used to go over every investment proposal are being merged. The merged panel will meet every 10 days and the meeting dates would be given out for a year to ensure that the schedule is maintained and business is done faster.

Damodaran wants IDBI to be the largest banking outfit in the country within the next two years, second only to the State Bank of India. Perhaps with the merger of another commercial bank (later), it could even become India's No. 1 bank in about five years. He also stressed that irrespective of which PSU bank it merges with - Bank of Baroda or any other bank - IDBI will not lose its identity. Challenging one of the most aggressive banks in the country i.e. ICICI Bank in the retail space and gaining market share is no mean task! But IDBI Bank, post its merger with parent company IDBI, seems to be gearing up to achieve this feat. A scrutiny of the fundamentals of the two merging entities (i.e. IDBI and IDBI Bank), suggests that both the entities will be equal beneficiaries of the synergy. The merger ratio, which reflects their respective bargaining powers, will also gives an indication of the valuations to be assigned to the merged entity. The following is an estimation of the said valuations in two different scenarios, this is calculated to have an understanding in the valuations even though the actual merger has already taken place. IDBI Bank merges with IDBI... FY04 IDBI Merger ratio 3:1 Merger ratio 2:1

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Consolidation in Banking Industry IDBI Bank No. of shares (Rs m) No of shares held by IDBI in IDBI Bank (Rs m) No. of shares post merger (Rs m) EPS (Rs) 5.8 6.3 684 7.48 700 7.31 653 120 214 Consolidated Entity Consolidated Entity

In this case the synergies will act in favour of shareholders of IDBI, as their upside in terms of EPS will be higher than the IDBI Bank shareholders.

Reverse merger of IDBI with IDBI Bank... Merger ratio 1:3 IDBI FY04 No. of shares (Rs m) No of shares held by IDBI in IDBI Bank (Rs m) No. of shares post merger (Rs m) EPS (Rs) 5.8 6.3 312 16.4 326.5 15.7 IDBI 653 120 Bank 214 Consolidated Entity Merger ratio 1:2 Consolidated Entity

In this case the IDBI Bank shareholders will be the undisputed beneficiaries of the merger, as every share of IDBI (current market price Rs 97) will then be valued at Rs 25 or lesser (i.e. 74% cheaper than the market price!).

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Consolidation in Banking Industry Post its reverse merger in FY02, ICICI Bank has emerged as the strongest entity in Indian private sector banking. The investments and advances of the bank have augmented by 19% and 32% respectively over the last 3 years, while the deposits have grown by a whopping 112%. This gives a clear indication of the momentum that the bank gained, post its merger. Are we looking at a similar story in case of IDBI? Our estimations of the financials of the merged entity present the following picture.

SWOT ANALYSIS for IDBI-IDBI Bank

Strength

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Consolidation in Banking Industry THE merger of IDBI with its subsidiary, IDBI Bank, has created a bank with a deposits and borrowing base of about Rs 60,000 crore. The combined entity would still be smaller than banks such as Punjab National Bank, Canara Bank, Bank of Baroda and Bank of India. In terms of market value, the combined capitalization of IDBI and IDBI Bank at Rs 5,500 crore is now higher than that of all these banks barring Punjab National Bank. The higher market value is attributable to the higher net worth of the combined entity. At nearly Rs 8,000 crore, the net worth of the bank is only marginally smaller than that of ICICI Bank, the second largest bank in the country. The restructuring of IDBI and its conversion into a universal bank, the incentives given by the Government and now the merger are steps taken to set right this anomaly. What does the merger do for IDBI? The merger increases the portfolio of clean advances for IDBI. IDBI is set to transfer Rs 9,000 crore of bad loans to a stressed assets stabilization fund. The merger with IDBI Bank would bring in about Rs 9,000 crore of almost squeakyclean assets. Overnight, IDBI's portfolio of about Rs 50,000 crore of assets, with bad loans of about 10 per cent, is transformed into a Rs 50,000 crore portfolio with virtually zero bad loans. IDBI Bank's portfolio of assets and liabilities also earn better than that of IDBI. The merger would, therefore, increase the profitability of IDBI after merger.

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Consolidation in Banking Industry IDBI Bank's network of 95 branches, 302 ATMs and nearly a million customers will come in handy for IDBI to scale up its retail banking business. Higher yielding retail advances would be less than 10 per cent of the total advances of the combined entity. Similarly, low cost deposits - savings and current deposits - too would be less than 10 per cent of total deposits. The combination of clean portfolio of advances and a scalable branch network is only the beginning. IDBI will seek to utilize the advantages to increase the proportion of retail assets and liabilities. That is necessary to enhance the profitability of the merged entity to levels comparable to that of its peers. The shareholders of IDBI Bank will get 100 shares of IDBI for every 142 shares held by them.IDBI will transfer 2.5 per cent of its shareholding in IDBI Bank to a trust in order to give value to IDBI's shareholders, said M Damodaran, chairman, IDBI. IDBI will extinguish the balance shares held by it in IDBI Bank. The central government holding in the merged entity will be at 51.4 per cent..IDBI's holding in the bank at the end of December 2004 quarter was 55.33 per cent, while SIDBI held 13.83 per cent. The amalgamation was with retrospective effect from October 1, 2004, and the process is expected to be completed by March 31, 2005

Weakness

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Consolidation in Banking Industry Though the prospect of an increase in the net interest margins of IDBI is encouraging, that alone may not be sufficient to convert IDBI into a bank earning super profits. The past performance of IDBI is not so good. The return on net worth of IDBI is less than 6%,because of the incidence of non-performing assets. Though according to Damodaran the net NPA level of IDBI Ltd. Will be less than 1% post-merger the NPA however needs to maintain and reduce in the near future

Opportunities IDBI Bank: Well-defined growth trajectory

Known for optimizing its retail franchise as a bulwark for high quality growth, IDBI Bank is now poised to embark on an aggressive expansion path. Besides expanding its retail network across 15 new cities, the bank is envisaging two strategic business units, post its merger with IDBI. While one SBU (erstwhile IDBI) will focus on development finance (corporate banking), the other SBU (the current IDBI Bank folio) will cater to commercial banking needs, the stress being on retail. Through its conservative provisioning norms and focus on low cost deposits (low cost deposits as a percentage of total deposits was 43.3% in FY04, as against 34.9% in FY03), the bank has sketched an enviable growth route over the past few years. With a combination of clean portfolio of advances and a well spread branch network, the bank has achieved a CAGR of 33% on its Net Interest Income (NII) over the last 5 years.

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Consolidation in Banking Industry The spurt in the number of primary market issues in the last few years has also contributed to the banks profitability. It has become one of the largest collecting bankers to IPOs and made significant strides in IPO Finance. The impending merger with parent company IDBI raises several issues regarding IDBI Banks operational efficiency and valuations. A look at the banks performance across various parameters over the last 5 years answers this and more

FY01 Mkt. Price (Rs) (as on Dec 1) P/E (x) P/ Adj BV (x) ROA Credit / Deposit Ratio NPA to advances Business/employee (Rs m) Business / branch (Rs m) Profits/employee (Rs m) NIM Div. Yield 22.8 16.3 1.8 0.4% 5.2% 68.0 0.3 2.3%

FY02 18.4 5.0 1.1 0.9% 2.2% 69.0 0.4 2.7%

FY03 25.0 4.9 1.2 0.8% 1.2% 71.3 0.5 3.0%

FY04 FY05E 32.7 5.2 1.2 1.3% 0.8% 108.0 0.8 3.3% 2.8% 47.6 4.9 1.4 1.4% 79.9% 0.1% 134.3 1.1 3.1% 2.4%

49.1% 59.2% 71.7% 73.6%

992.2 1,111.2 1,035.7 1,517.1 1,704.4

2.8% 3.3% 4.5% Source: Annual reports

The bank has achieved a commendable feat of augmenting its Credit - Deposit ratio (Advances/ Deposits) at a CAGR of 10% over the last 5 years, at the same time bringing its Net NPA /Advance ratio close to that of industry benchmarks like HDFC Bank. This can be attributed to the banks rigorous assessment of asset quality and appropriate provisioning for the same.

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Consolidation in Banking Industry

Given the fact that the proposed merger will be beneficial to both the entities (IDBI will have access to low cost deposits and retail network, and the combined entity will now claim to be the 2nd largest bank replacing ICICI Bank), what remains to be seen is the all decisive merger ratio. At the current price of Rs 52, IDBI Bank is trading at a price to book value of 1.6 times its FY05 expected numbers, while at a price of Rs 97, IDBI is trading at a price to book value of 0.8 times its FY05 expected numbers. While it is difficult to pinpoint on the merger ratio between the two, the facts in the table given below, are indicating that the merger ratio may be in favour of IDBI. A comparative study... (Rs bn) Advances Investments Deposits Net NPA to advances No. of branches ATMs No. of employees No. of shares outstd. IDBI IDBI Bank 451.1 98.8 49.8 2.5% 101 NA 1,400 652.8 74.0 39.1 100.5 0.1% 92 298 1,700 214.2

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Consolidation in Banking Industry Stake held by IDBI in IDBI Bank 56.2% -

No. of shares held by IDBI in IDBI Bank 120.4

*Figures pertain to FY04. For IDBI the numbers are reasonable estimates for 18 month period ending September 2004 Lets also not forget the fact that IDBI Bank is a 56% subsidiary of IDBI. But please note, that this is just a direction and the ultimate result may differ than the actual.

Threat
ICICI Bank ICICI Bank (Pre mergerFY01) ROA Investments (Rs in m) Advances (Rs in m) Deposits (Rs in m) Net NPAs (Rs m) Net NPA to advances Credit / Deposit Ratio No. of Branches ATMs No. of Employees Business/employee (Rs m) Business / branch (Rs m) Profits/employee (Rs m) Profit after Tax (Rs m) No. of shares outstanding Shruti Dave 0.40% 358,911 470,349 320,851 26,292 5.50% 146.60% 540 1,000 7,700 103 1,465 4.8 4,249 613.0 1.40% 0.60% 1.30% 39,100 74,000 623 0.80% 73.60% 92 298 1,700 108.0 1,517 0.8 1,326 214.2 62 0.95% 137,900 525,100 150,300 11,867 2.26% 349% 193 298 3,100 108 1,517 3.5 5,115 427,429 98,800 620,955 451,100 14,226 11,244 2.20% 91.20% 413 1675 13,609 95.7 3,152 39.6 3,788 616.0 2% 85% 101 NA 1,400 2.7 3,789 652.8 FY 04 FY 04 IDBI IDBI Bank FY 04 Consolidated Entity FY 04

681,086 49,800 100,500

Consolidation in Banking Industry (m) No of shares held by IDBI in IDBI Bank (m) No. of shares outdg post merger (m) EPS (Rs) 4.2 26.6 5.8 6.3 7.48 684.2 120.0

The above comparison is intended to give investors, a futuristic view of the strength of the merged entity, as well as the figures that the entity should benchmark against, to achieve its goal of replicating ICICI Banks success. As the figures suggest, we are likely to witness a head to head collision between ICICI Bank and IDBI Bank in terms of corporate financing. But when it comes to retail, it is evident that, IDBI has a long way to go. Nevertheless, IDBI scores immensely in terms of its efficiency ratios. In spite of having one third the number of employees and half the number of branches, the merged entity (IDBI) is likely to outperform its prospective retailing rival (see the business per employee and business per branch ratios of ICICI Bank and merged IDBI).The combined profit of IDBI and IDBI Bank in the 12-month period ended March 2004 is, however, anomalously one-fourth that of ICICI Bank. However, the caveat in this case is the true quality of the assets. Although IDBI has been successful in pruning its Net NPA ratio to 2.4% in FY04 as against 14.2% in FY03, thanks to the Rs 90 bn government bailout package, 37% of the restructured loans still have a high probability of slippage in future.

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Consolidation in Banking Industry At the current price of Rs 364, ICICI Bank is trading at a price to book value ratio of 2.7, while at Rs 97 and Rs 51, IDBI and IDBI Bank are trading at price to book value ratios of 0.7 and 2.0 respectively. The ICICI-Bank of Madura consolidation was taken up to get a view of how large banks have to adjust in order to consolidate with smaller banks while the IDBI-IDBI Bank merger was taken up in order to get a view in the present day financial institution and banks consolidation in order to get a holistic picture of the consolidation process which we may see in the near future.

Conclusion
One size doesnt fit all. Many companies find that the best route forward is expanding ownership boundaries through consolidation. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, consolidation create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a consolidation will deliver enhanced market power. By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives. Additional capital can fund growth organically or through consolidation. Meanwhile, investors benefit from the improved information flow from de-merged companies.

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Consolidation in Banking Industry Consolidation comes in all shapes and sizes, and investors need to consider the complex issues involved in consolidation. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals. In todays fiercely competitive world, Indian banks have little choice but to follow the route of consolidation to survive. But the road is still bumpy and needs a lot of initiative from government, RBI and banking industry as a whole. The Indian Banking industry is entering a new era of mega-mergers where a lot of support and backing, guidance and help will be required from the government in order to be both domestically and globally competitive in the world.

Bibliography
1)Mergers and Acquisitions by Shiva Ramu 2) Mergers and Acquisitions by 3) Mergers et all by Ramakrishnan 4)Treasury magazine of September 2004 to September 2005 5)Investments by Sharpe 6)Financial Management by Brearly Myers 7)www.rbi.com

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