MERGERS AND ACQUISITIONS IN INDIA

BANKING SECTOR

PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT

OF THE
REQUIREMENTS FOR THE AWARD OF THE MASTER’S DEGREE IN
BUSINESS ADMINISTRATION

TABLE OF CONTENTS

I ABOUT THE PROJECT

1. INTRODUCTION
2. PROBLEM BACKGROUND
3. PROBLEM DEFINITION
4. RESEARCH DESIGN
5. LIMITATIONS

II ABOUT THE TOPIC

1. INDUSTRY PROFILE
2. TYPES OF MERGER
3. MOTIVES BEHIND MERGER
4. ADVANTAGES OF MERGER

III COMPANY ANALYSIS

 1. ANALYSIS OF ICICI & BANK OF MADURA
2. ANALYSIS OF HDFC&TIMES BANK
3. ANALYSIS OF OBC&GTB

IV CONCLUSIONS

V CALCULATIONS PART

VI APPENDIX

VII BIBLIOGRAPHY

DECLARATION

I hereby declare that the project report titled 'MERGERS AND'

ACQUISITIONS IN INDIA BANKING SECTOR” is submitted by
me to 'XXXXX' is bonafide work undertaken by me and is not
submitted to any other university or institution for the award of any
degree / certificate.

Name and address of the signature of the student

student
Date:

ACKNOWLEDGEMENT

I am very thankful to our Director XXX sir for providing all the facilities.
to complete my project.
I, gratefully acknowledge the valuable guidance and support of XXXX,
my project guide, who had been of immense help to me in choosing the
topic and successful completion of the project.

I extend my sincere thanks to all who have either directly or indirectly

helped me for the completion of this project.

EXECUTIVE SUMMARY

Merger is a combination of two or more companies into one company. The acquiring company,
(also referred to as the amalgamated company or the merged company) acquires the assets and the
liabilities of the target company (or amalgamating company). Typically, shareholders of the
amalgamating company get shares of the amalgamated company in exchange for their shares in the
Target Company.

There are two ways a company can grow; one is internal growth and the other one is external.
growth. The internal growth suffers from drawbacks like the problem of raising adequate finances,
longer implementation time of the projects, uncertain etc. in order to overcome these problems a
A company can grow externally by acquiring already existing business firms. This is the route of
mergers and acquisition.

OBJECTIVE

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

RESEARCH TOOLS

Financial ratios, Economic Value Added, and Market Value Added.

SAMPLE DESIGN

A sample of three mergers has been taken and the financial statements of five years had been
analyzed. The five-year period comprises of Pre-merger period and post merger period.
FINDINGS

Shareholders of the target company have benefited more than the acquired.
company.
The post merger analysis is showing the increasing trend in MVA&EVA.
The market price has increased during the merger period of target companies.
All the parameters are showing an increasing trend after the merger period.
The EPS of the acquired companies has increased more than 100% in the post-merger period.

period.

CONCLUSION
My final and ultimate conclusion is, yes, the merger of all these companies has
created value for the shareholders of the target company and the acquired company.
Mergers and acquisitions in India

Mergers and acquisitions aim towards business restructuring and increasing competitiveness.
shareholder value through increased efficiency. In the marketplace, it is the survival of the fittest.

India has witnessed a storm of mergers in recent years. The Finance Act, 1999 clarified many issues.
relating to Business Reorganizations thereby facilitating and making business-restructuring tax
neutral. As per Finance Minister this has been done to accelerate internal liberalization and to
release productive energies and creativity of Indian businesses.
The year 1999-2000 has recorded deals worth over Rs.21000 crore, which is over 1% of India’s GDP.
This level of activity was never seen in the Indian corporate sector. InfoTech, Banking, media,
Pharma, cement, and power are the sectors that are more active in mergers and acquisitions.

Consolidation of banking industry - an overview

HDFC Bank and Times Bank tied the merger knot in year 1999. The coming together of two
likeminded private banks for mutual benefit was a landmark event in the history of Indian
banking.

Many analysts viewed this action as the opening of the floodgates for a spate of mergers and acquisitions.

consolidations among the banks, but this was not to be, it took nearly a year for another merger.
The process of consolidation is a slow and painful process. But the wait and watch game played by
the banks seems to have come to an end. With competition setting in and tightening of the
Prudential norms by the apex bank are leading players in the industry to take turns to merge.
It was the turn of Bank Of Madura to integrate with ICICI Bank. This merger is remarkably different.
from the earlier ones. It is a merger between banks of two different generations. It marks the
beginning of the acceptance of merger with old generation banks, which seemed to be out of place
with numerous embedded problems.
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The markets seem to be in favor of bank consolidation. As in the case of HDFC Bank and Times
Bank, this time also the market welcomed the merger of ICICI Bank and Bank of Madura. Each time a
merger is announced it seems to set out a signal in the industry of further consolidation. The shares
of the bank reached new heights. This time it was not only the turn of the new private sector banks,
but also the shares of old generation private banks and even public sector banks experienced an
buying interest. Are these merger moves a culmination of the consolidation in the industry? Will
Any bank be untouched and which will be left out?

To answer this question let us first glance through the industry and see where the different players
are placed. The Indian banking industry consists of four categories: public sector banks, new
private sector banks and foreign banks. The public sector banks control a major share of the
banking operations. These include some of the biggest names in the industry like Stare Bank of
India and its associate banks, Bank of Baroda, Corporation Bank, etc. their strength lies in their
reach and distribution network. Their problems range from high NPAs to overemployment.
government controls these banks. Most of these banks are trying to change the perception.
government controls these banks. Most of these banks are trying to change the perception. The
Recent thrust on reduction of government stake, VRS and NPA settlement are steps in this.
direction. However, real consolidation can happen if government reduces its stake and changes its
perception on the need of merger. The government’s stand has always been that consolidation
should happen to save a bank from collapsing. The old private sector banks are the banks, which
were established prior to the Banking
Nationalization Act, but could not be nationalized because of their small size. This segment
includes the Bank of Madura, United Western Bank, Jammu and Kashmir Bank; etc. who banks
are facing competition from private banks and foreign banks. They are trying to improve their
margins. Though some of the banks in this category are doing extremely well, the investors and the
markets seem not to reward them adequately. These banks are unable to detach themselves
effectively from the older tag. The new private banks came into existence with the amendment of
Banking Regulation Act in 1993, which permitted the entry of new private sector banks.

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Of the above, the spotlight is on the old generation private banks. The OGPBs can
become easy takeover targets. The sizable portfolios of advances and deposits act as an incentive.
Added to this, these banks have a diversified shareholder base, which inhibits them from launching.
an effective battle against the potential acquirers. The effective shield against takeovers for these
Banks could get into strategic alliances like the Vysya bank model, which has Bank Brussels.
Lambert of the Dutch ING Group as a strategic investor. United Western Bank and Lord Krishna
Banks are already on the lookout for strategic partners. But the problems go beyond the shareholding.
pattern and are deeply rooted. The prudential norms such as the increasing CAR and the minimum net
worth requirements are making the very existence of these banks difficult. They are finding it
difficult. They are finding it difficult to raise capital and keep up with the ever-tightening norms. one
One of the survival strategies for these banks is to merge with another bank.

Mergers: Making sense of it all

In the process of merger, banks will have to give due importance to synergies and complementary.
adhesions. The merger must make sound business sense and reflect in increasing the shareholder
value. It should help increase the bank’s net worth and its capital adequacy. A merger should
expand business opportunity for both banks. The other critical and competitive edge for survival is
the cost of funds, which means stable deposits and risk diversification. Network size is very
important in this perspective because one cannot grow staying in one place because the asset
The market in every place is limited. Unless one prepares the building blocks for growth by looking
Outside one’s area, he either sells out or gets acquired. The features that a bank looks for in its target.
seems to be the distribution network (number of branches and geographical distribution), number
of clients and financial parameters like cost of funds, capital adequacy ratio, NPA and provision
cover.
The merger of strong entities should be encouraged. The reason for the merger should not be to
save a bank from extinction rather the motive must be to go join for the distant advantages of both
combining banks towards a mutual benefit. PS Shenoy, chairman and managing director, Bank of
Baroda said, 'Today a public sector bank can merge with another bank only through a moratorium.'
route.” That means you can take over only a dead and you die yourself and allow to be merged with
a strong bank. Unfortunately this is not the spirit behind the merger and acquisition.
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Time for strategic alliance

It is not only important for banks to merge with banks but also with entities in other businesses.
activities. Strategic partnership could become the trend. Strategic mergers between banks for
using each other’s infrastructure enabling remittance of funds to various centers among the
strategic partner banks can give the account holder the flexibility of purchasing a draft payable at
centers where the strategic tie-up exists. The strategic tie-up could also include a
bank with another specialized investment bank to provide value-added services. Tie-ups
Could also be between a bank and technology firm to provide advanced services. It is these
Strategic tie-ups that are set to increase in the future. These, along with providing value-added benefits,
also help in building positive perceptions in the market.

From a macro perspective, mergers and acquisitions can prove effective in strengthening the Indian
financial sector. Today, while Indian banks have made tremendous strides in extending the reach
Domestically, internationally the Indian system is conspicuous by its absence. There are very few.
catering mostly to India related business. As a result India does not have a presence in
international financial markets. If India has to emerge as an international banking center the
The presence of large banks with foreign presence is essential. With globalization and strategic
alliances Indian banks would grow originally. The would be large banks with international
Presence. Globally, the banking industry is consolidating through cross-border mergers. India
seems to be far behind. The law does not allow the foreign banks with branch network to acquire
Indian banks. But who knows with the pressures of globalization the law of the land could be amended.
paving way for a cross border deal.

While the private sector banks are on the threshold of improvement, the public sector banks
(PSB's) are slowly contemplating automation to accelerate and cover the lost ground. To contend
with new challenges posed by the private sector banks, PSBs are pumping huge amounts to
update their It. but still, it looks like, public sector banks need to shift the gears, accelerate their
movements, in the right direction by automating their branches and providing Internet banking
services.

Private sector banks, in order to compete with large and well-established public sector banks, are
not only entering IT, but also shaking hands with peer banks to establish themselves in the
market. While one of the first initiatives was taken in November 1999, when Deepak Prakesh of
HDFC and S.M. Datta of Times Bank shook hands, created history. It is the first merger in the
Indian banking, signaling that the Indian banking sector joined the mergers and acquisitions
bandwagon. Prior to this private bank merger, there have been quite a few attempts made by the
government to rescue weak banks and synergize the operations to achieve scale economies but
Unfortunately, they were all futile. Presently, the 'size' of the bank is recognized as one of the major
strengths in the industry. And, mergers amongst strong banks can both a means to strengthen the
base, and of course, to face the cutthroat competition.

The appetite for mergers is making a come back among the public sector banking industry.
Instincts are aired openly at various forums and conferences. The bank economist conference.
perhaps set the ball rolling after the special secretary for banking Devi Dayal stressed the
importance of the size as a factor. He pointed out the consolidation through merger and acquisition
was becoming a trend in the global banking scenario wanted the Indian counterparts to think on the
same lines. There is also a feeling threat there are far too many banks. PS Shenoy, chairman and
managing director of Bank of Baroda, said, 'There are too many banks to handle the size of '
business." The pace of mergers will hasten. As the time runs out and the choice of target banks
with complimentary businesses gets reduced there would be a last minute rush to acquire the
remaining banks, which will hasten the process of consolidation.

Recommendations of the Narasimham Committee on Banking Sector Reforms

The Narasimham Committee on banking sector reforms suggested that 'merger should not be
viewed as a means of bailing out weak banks. They could be a solution to the problem of weak
banks but only after cleaning up their balance sheet.' The government has tried to find a solution
on similar lines, and passed an ordinance on September 4, 1993, and took the initiative to merge
New Bank of India (NBI) with Punjab National Bank (PNB). Ultimately, this turned out to be an
unhappy event. Following this, there was a long silence in the market till HDFC Bank successfully
took over Times Bank. Market gained confidence, and subsequently, there were two more mega
mergers. The merger of Bank Of Madura with ICICI Bank, and of Global Trust Bank with UTI
Bank, emerging as a new bank, UTI Bank, emerging as a new bank, UTI-Global Bank.
6

The following are the recommendations of the committee

Globally, the banking and financial systems have adopted information and communications
technology. This phenomenon has largely bypassed the Indian banking system, and the committee
feels that requisite success needs to be achieved in the following areas:
1. Bank automation
2. Planning, standardization of electronic payment systems
3. Telecom infrastructure
4. Data warehousing network
Mergers between banks and DFIs and NBFCs need to be based on synergies and should make a
sound commercial sense. Committee also opines that mergers between strong banks/FIs would
make for greater economic and commercial sense and would be a case where the whole is greater
than the sum of its parts and have a 'force multiplier effect'. It is also opined that mergers should
not be seen as a means of bailing out weak banks.
A weak bank could be nurtured into healthy units. Merger could also be a solution to a weak bank.
but the committee suggests it only after cleaning up their balance sheets. It also says, if there is no
voluntary response to a takeover of their banks, a restructuring, merger, amalgamation, or if not
closure.
The committee also opines that, licensing new private sector banks, the initial capital requirements
need to be reviewed. It also emphasized on a transparent mechanism for deciding the ability of
promoters to professionally manage the banks. The committee also feels that a minimum threshold
Capital for old private banks also deserves attention and mergers could be one of the options.
available for reaching the required threshold capitals. The committee also opined that a promoter
Group couldn’t hold more than 40% of the equity of a bank.

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The Indian banking and financial sector - a wealth creator or a wealth destroyer?

The Indian banking and financial sector (BFS) destroyed 22 paise of market value added (MVA)
for every rupee invested in it, which is really poor compared to the BFS sector in the U.S, which
has created 92 cents of MVA per unit of invested capital. The good news is that the performance of
The wealth creating Indian banks have performed better than that of the wealth creating US banks.

But the sad part is that the banks, which destroy 59 paise of wealth for every rupee invested,
consume about 88% of total capital invested in our BFS sector. As a benchmark, the US economy
invests 83% of its capital in wealth creators.

In the banking and financial sector too. The winners on the MVA scale are different from those on
traditional Size-based measures such as total assets, revenues, and profit after tax and market value
of equity. Indeed, the banks with the most assets such as State Bank of India and Industrial
Development Bank Of India are amongst the biggest wealth destroyers. SBI tops on size-based
measures like revenues, PAT, total assets, market value of equity, but appears among the bottom
ranks for wealth creation. On the other hand, HDFC and HDFC Bank top the MVA rankings even
though they do not appear in the top 10 ranking based on total assets or revenues.

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PROBLEM BACKGROUND

Profitable growth constitutes one of the prime objectives of the business firms. This can be
achieved 'internally' either through the process of introducing/developing new products or by
expanding/enlarging the capacity of existing product(s). Alternatively, growth process can be
facilitated ‘externally’ by acquisition of existing firms. This acquisition may be in the form of
mergers, acquisitions, amalgamations, takeovers, absorption, consolidation, and so on. The internal
Growth is also termed as organic growth while external growth is called inorganic growth.
strengths and weaknesses of both the growth processes. Internal expansion apart from enabling the
A firm to retain control with itself also provides flexibility in terms of choosing equipment, mode of
technology, location, and the like which are compatible with its extraction operations. However
Internal expansion usually involves a longer implementation period and also entails greater
uncertainties particularly associated with the development of new products. Above all, there might be
sometimes the problem of raising adequate finances required for the implementation of various capital
budgeting projects involving expansion. Acquisitions and mergers obviate, in most of the
situations, financing problems as substantial/full payments are normally made in the form of the
shares of the acquiring company. Further it also expedites the pace of growth as the acquired firm
already has the facilities or products and therefore saves time otherwise required in building up
new facilities from scratch as in the case of internal expansion.
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PROBLEM DEFINITION
What is shareholder value?
Value is a very subjective term. There are many factors that influence a person to invest in a
particular company. For some it may be capital appreciation, for some it may be consistency in the
earnings of the company, for some it may be the dividends that the company pays or it may be the
reputation of the company. But normally the market price of the shares is the main motivating factor
behind an investment by an investor.
Hence we can say that a company has created wealth when there is an increase.
in the market price of the shares. Theoretically also, the financial goal of a company is to
maximize the owner's economic welfare. Owner's economic welfare can be maximized when
shareholders' wealth is maximized, which is reflected in the increased market value of the shares.

.
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RESEARCH TOOLS

Financial ratios, Economic Value added and Market Value Added.

The above tools which are used to evaluate whether mergers and acquisitions create any
shareholder value or not signify the following:

The financial ratios that are used in the study are:

Return on capital employed

Return on Net Worth

Return on equity

4. Earnings per share

5. Cash earnings per share

Return on capital employed

ROCE = PBIT / CAPITAL EMPLOYED

PBIT = PBDT + Non-RECURRING EXPENSES - Non-recurring income

CAPITAL EMPLOYED = Net fixed assets + Net Current Assets – fictitious assets
 Return on net worth

RONW = PAT / NETWORTH

profit after tax

net worth = equity share capital + reserves and surplus - fictitious assets
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Earnings per share

Earnings Per Share = Profit After Tax / number of shares

Cash earnings per share

CEPS = ( PAT + DEPRECIATION ) / number of shares

Economic Value Added

Economic value added (EVA) is the after-tax cash flow generated by business minus the cost
of capital it has deployed to generate that cash flow. Representing real profit versus paper
profit, EVA underlies shareholder value, increasingly the main target of leading company’s
strategies. Share holders are the players who invest in the firm with its capital; they invest to gain a
return on that capital.

EVA can be defined as the net operating profit minus the charge of opportunity cost of all the
capital employed into the business. As such, EVA is an estimate of true 'economic profit'.
that means to say the amount that the shareholders or lenders would get by investing in the
securities of comparable risk.

The capital charge is an important and distinctive aspect of EVA. Many times under traditional
Many companies report profits in their accounting systems, but it is not actually the case. According to

Peter F. Drucker said, 'unless a company is earning more than its cost of capital, it is operating at a loss.'
Thus EVA is the profit as shareholders define it. To illustrate it, suppose a person invested
Rs.100 in a company. The company is earning at the rate of 20%, which means the earnings
of the company is Rs 20 while its cost of capital is 15% that means to say that the company has
to pay Rs. 15 to its shareholders. Thus the amount of profit in excess of the cost of capital that
Is Rs. 5(20-15) the EVA?

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Mathematically,
EVA = NOPAT – (capital employed * weighted average cost of capital)
But for the Banking and Financial sector,
EVA=NOPAT - (net worth * cost of equity)
Where,
net operating profit adjusted to taxes

Market value added (MVA)

MVA = market value added, is a measure of the value added by the company’s management
over and above the capital invested in the company by its investors. It is the value added in
excess of economic capital employed.
MVA=market value of the firm-economic capital.
Where,
Market value of the firm = market price * number of shares.
Economic capital = capital employed.
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LIMITATIONS

The major limitation of the project is the time frame. The post merger analysis is just for one
A year and one year is too short a period to judge the effect of a merger.
1. The analysis is based on various ratios hence all the limitations of the ratio analysis become
a part of the limitations of the study.
2. The entire analysis is based on the balance sheets and profit and loss accounts, which is
a secondary data. Hence it suffers from being very reliable.
 3. The cost of equity has been calculated on the basis of the DIVIDEND APPROACH method.
So all the limitations of that method have a place here.

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INTRODUCTION

Merger

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

Takeover

Takeover can be defined as the acquisition of controlling interest in a company by another.

company. It does not lead to the dissolution of the company whose shares are being acquired. It
simply means a change in the controlling interest in a company through the acquisition of its share
by another group.

Horizontal merger

A horizontal merger involves the merger of two firms operating and competing in the same kind of
business activity. Forming a larger firm may have the benefit of economies of scale. But the
The argument that horizontal mergers occur to realize economies of scale is not accurate for true horizontal mergers.

Mergers are regulated for their potential negative effect on expectations. Many are viewed as potentially creating
monopoly power on the part of the combined firm enabling it to engage in anticompetitive
practices also believe in horizontal mergers.

Vertical mergers

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

Conglomerate mergers

Conglomerate mergers involve firms engaged in unrelated business activities. Among

conglomerate mergers, three types have been distinguished:
Product-extension mergers broaden the product lines of the firms. These are the mergers.
between the firms in related businesses and may also be called concentric mergers.
A geographic market extension merger involves two firms whose operations have been
conducted in non-overlapping geographic areas.
Finally, the other conglomerate mergers, which are often referred to as pure conglomerate
mergers involve, unrelated business activities. These would not qualify as either as
product-extension or market-extension.

Two important characteristics that define a conglomerate firm are

First, a conglomerate firm controls a range of activities in various industries that require
different skills in specific managerial functions of research, applied engineering
production, marketing and so on.
Second, primarily external acquisitions and mergers achieve diversification, not by
internal development.

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To utilize under-utilized market power

As a response to shrinking growth and/or profit opportunities in one's own industry
 A desire to diversify.
Economics of scale; a firm can increase its income with less than proportionate investment
Establishing a transnational bridgehead without excessive startup costs to gain access to a
foreign market.
A desire to utilize fully the particular resources or personnel that are controlled by the firm.
particularly in the context of managerial skills.
A desire to displace existing management.
To circumvent government regulations.
An individual owing or controlling a firm may be motivated for a merger with a desire to
create an image of aggressiveness and strategic opportunism, empire building and to amass
vast economic power of the company.

Economic motives Personal motives Strategic motives

Marketing economies of scale increase sales pursuit of man increase profitability
power
Risk spreading Managerial challenge Acquisition of a competitor
Increase profitability Respond to market failures Acquisition of inefficient
management
Cost reduction Enhancement manager all prestige Defence mechanism
Acquisition of raw material Create shareholder value
Technical economies of scale
Different valuation of target

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Operating economies

When two companies combine, it may be possible for them to avoid or reduce overlapping.
functions and facilities. The combined firm enables to consolidate a number of managerial
Functions such as purchasing, production, marketing, R&D etc. the logic of operating economies
lies in the concept of synergy.
Diversification
Diversification generally means expansion of operation through the merger of firms in unrelated fields.
lines of business. Such mergers are called conglomerate mergers.
Growth
Growth implies expansion of a firm’s operation in terms of sales, profit, and assets. When a
The company is unable to grow internally because of resource and management constraints, but it can grow.
extremely by taking over operations of another company. Acquisition may yield the desire of
growth faster, easier and cheaper than the internal growth.
Limit competition and exploiting factor markets
A merger can give monopoly power to the merged entity. Thus, by limiting competition, it can earn
super normal profits.
Financing
Sometimes internal growth may not be possible due to financial constraints. Financial and external
growth becomes easy if operations of another company can be acquired through the exchange of
shares.
Taxation
The urge to minimize tax liability, particularly when the managerial tax rate is high, may also
Cause merger of two companies. The carry forward of a tax loss is yet another reason for some of
the merger.
Personal reasons
There may be a number of personal motivations, with or without economic substance, for merger
activity. For example, owners of a closely held firm may like to be acquired by a widely held
company whose shares are well distributed and well traded in the stock market. This enables them
to diversify their portfolio and improve marketability and liquidity of their holdings.

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Bank of Madurai is a profitability, well capitalized, Indian private sector commercial bank.
operating for the last 57 years. The bank has an extensive network of 263 branches, with a
significant presence in the southern states of India. The bank had total assets of Rs. 39.88 billion
and deposits of Rs 33.95 billion as on September 30, 2000, The bank had a capital adequacy ratio
of 15.8% as of March 31, 2000. The bank’s equity shares are listed on the Stock Exchange at
Mumbai and Chennai and National Stock Exchange in India.

ICICI Bank is a leading Indian private sector commercial bank, promoted by ICICI limited
ICICI Bank is one of the leading private sector banks in the country.
had total assets of Rs 120.63 billion and deposits of Rs. 97.28 billion as on September 30, 2000.
The bank’s capital adequacy ratio stood at 17.59% as of September 30, 2000. The bank’s branch
The network including extension counters currently covers 106 locations across India. ICICI Bank is
India’s largest ATM provider with 546 ATMs as of June 30, 2001.
The equity shares of the bank are listed on the Stock Exchange in Mumbai, Calcutta, Delhi.
Chennai, Vadodara and National Stock Exchange in India. ICICI Bank’s American Depository
Shares are listed on the New York Stock Exchange.

The ICICI, one of the largest financial institutions in India, had an asset base of Rs.582 billion.
2000. It is 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 online 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 ICICI’s strong relationships with 1000
corporate entities in India. The bank 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,
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ATMs, telephone call centers, and also through the 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 solutions
provided by the bank is aimed at facilitating online supply chain management for its corporate
clients by linking them with their suppliers and leaders in a closed business loop. The bank is
always ahead in advanced IT, and used as a competitive tool to lure new customers.

In February 2000, ICICI Bank was one of the first few Indian banks to raise its capital through
American Depository Shares in the International market, which has received an overwhelming
response for its issue of $175 million, with a total order of USD 2.2 billion. At the time of filling
the prospectus, with the US Securities and Exchange Commission, the Bank had mentioned that
the proceeds of the issue would be used to acquire a bank

As of March 31, 2000, the bank had a network of 81 branches, 16 extension counters, and 175 ATMs.
The capital adequacy ratio was at 19.64% of risk-weighted assets, a significant excess of 9% over
RBI's benchmark.

ICICI Bank has been scouting for a private banker for a merger, with a view to expand its assets and
client base and geographical coverage. Though it had 21% of stake, the choice of Federal bank,
was not lucrative due to employee size (6600), per employee business is as low as Rs.161 lakh
and a snail pace 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 for ICICI Bank.

ICICI Bank has announced a merger with 57-year old BOM, which has 263 branches, 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% stake in BOM, the chairman
BOM, Mr. K.M Thaigarajan, along with his associates, was holding about 26% stake in Spic.
group has about 4.7%, while LIC and UTI were having marginal

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Holdings. The merger will give ICICI Bank a hold on the south Indian market which has a 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 2%.
And the merger is expected to bring 20% gains in EPS of ICICI Bank. And also the bank’s
The comfortable Capital Adequacy Ratio of 19.64% has declined to 17.6%.

ICICI Bank, the largest private sector bank, took over Bank of Madura in order to expand its
customer base and branch network. When we look at the key parameters such as net worth, total
deposits, advances and NPAs, the ICICI bank is in a much better position. The net worth of the
the former is four times the latter. And in terms of total deposits and advances, the former is three times.
higher than the latter. When we take a look at the NPAs to net advances and the non-performing
assets are fourfold higher in the latter case than in the former. The ICICI Bank which was
looking out for strategic alliances after it received its proceeds from ADS issue, had a tie up with
BOM's only goal to expand its customer base of different categories is a difficult task; one has to wait and watch.

to what extent the alliance will be successful.

The board of directors at ICICI has contemplated the following synergies emerging from
the merger
Financial capability
The amalgamation will enable them to have a stronger financial and operational structure, which is
supposed to be capable of greater resource/deposit mobilization. And ICICI will emerge as one of
the largest private sector banks in the country.
Branch network
The ICICI’s branch network would not only increase by 264, but also increase geographic
coverage as well as convenience to its customers.
Customer base
The emerged largest network 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.

20
Tech edge
The merger will enable ICICI to provide ATMs, phone and internet banking and financial services.
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 microfinance activities through
self-help groups, in its priority sector initiatives through its acquired 87 rural and 88 semi-urban
branches.

The scheme of amalgamation will increase the empty base of ICICI Bank to Rs. 220.36 crore.
ICICI Bank will issue 2.354 million shares of Rs. 10 each to the shareholders of BOM. The merged
The entity will have an increase of asset base over Rs. 160 billion and a deposit base of Rs. 131 billion.
The merged entity will have 360 branches and a similar number of ATMs across the country.
also enable ICICI Bank 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

ICICI's major branches are in major metros and cities, whereas BOM spread its wings mostly in
semi urban and city segments of south India. There is a task ahead lying for the merged entity
to increase dramatically the business mix of rural branches of BOM. On the other hand, due to
geographic location of its branches and level of competition, ICICI Bank will have a tough time to
cope with.

Managing software

Another task, which stands in the way, is technology. While ICICI Bank, which is a fully
The automated entity is using the packages, banks 2000, BOM has computerized 90% of its business.
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% computer literate staff would need
effective retraining which involves a cost. The ICICI Bank needs to invest Rs. 50 crore, for
upgrading BOM's 263 branches.

21

Managing human resources

One of the greatest challenges before ICICI Bank is managing the human resources. When the
The headcount of ICICI Bank is taken; it is less than 1500 employees; on the other hand, BOM.
has over 2500. The merged entity will have about 4000 employed which will make it one of the
largest banks among the new generation private sector banks. The staff of ICICI Bank is drawn
from 75 various banks, mostly young qualified professionals with computer background and prefer
to work in subways or big cities with good remuneration packages.

While under the influence of the trade unions, most of the BOM employees have lower careers.
aspirations. The announcement by H.N.Sinor, CEO and MD of ICICI, that there would be no VRS
or retrenchment, creates a new hope amongst the BOM employees. It is a tough task ahead to
manage. On the other hand, their pay would be revised upwards.
 Crucial parameters

value of Market price Earnings Dividend P/E ratio

the Bank Bank on the day of per share (in%) (in lakh) 1999-2000
day of merger announcement
announcement of merger
t
BOM 183.3 131.60 38.7 55 3 1.73
ICICI 58.0 169.90 5.4 15 - 7.83

Managing client base

The client base of ICICI Bank, after the merger, will be 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 BOM’s clientele, the ICICI Bank needs to redefine
its strategies to suit the new clients. It may be difficult for them to reestablish the relationship.
which could also hamper the image of the bank.

22
Merger of HDFC and Times Bank

The merger deal between Times Bank and HDFC Bank was a successful venture, facilitating the
HDFC Bank to emerge as the largest private sector bank in India. The new entity, HDFC Bank,
now has a customer base of 650,000 to serve and a network of 17 branches. With merger,
HDFC Bank's total deposits touched Rs 6,900 crore and the size of the balance crossed massive
9,000 crore mark. The Bank not only gained from the existing infrastructure but also employee.
work culture.
One more advantage to the bank is the expansion of the branch network. The strategy adopted by
HDFC Bank in setting up branches has been that of incurring lowest cost with about 6-8
employees per branch who will look after both the servicing and marketing functions. Since
Setting up a new branch is a costly affair, acquiring a ready-made branch network is easier.
The merger also had product harmonization as HDFC had the Visa network and Times Bank had Master.
card network. Thus, on account of merger, both the networks would branches (65%) and Times
Bank with more urban branches (43%) overlapping of branches, leading to enlarged potential.
market. Although, the HDFC Bank private sector bank, with a percentage of public sector than
that of a pure private sector bank, the merger between HDFC and Times Bank (relatively less
Stronger bank was a strategic alliance and there are no apparent adverse effects after the merger.

28

Financial standings

HDFC Bank (Rs) Times Bank (Rs)

Business per employee 520,2000 500,000
Profit per employee 1,000,000 722,000
In the takeover of Times Bank (spread 1.66%) by HDFC Bank (spread 3.38%), the pre-deal
HDFC Bank’s business – per – employee was Rs. 520,000 while profit- per-employee was Rs. 1
million. The respective figures for Times Bank were Rs. 500,000 and Rs. 722,000. Times Bank
had a retail base of 150,000 accounts, an added attraction. Post-deal, HDFC Bank’s strength
rose to over 650,000 retail accounts, a network of 107 branches and deposits of Rs.70 billion and
a turnover of about Rs.100 billion, making it the top bank among the foreign and private banks.

Growing organically at 30% or 15,000 to 17,000 new accounts a month, it would have taken two
years for HDFC to gain Times Bank’s 170,000 customers. By acquiring it has become possible in
just six months along with a higher rate of growth in the future.

ANALYSIS OF ICICI & BOM

EPS

If we look at the EPS of ICICI, there is constant growth in EPS from 11.52 rs to
27.35 rs from 2002 year to 2006 year. Which is a good symbol for the shareholders.
the company. The EPS of the BOM is also increasing year by year from 1996 to
In 1996, the EPS of the BOM was Rs 9.59, and by 2000 it increased to 37.5.
The major difference here is that ICICI EPS is after the merger and BOM EPS is before the merger.

we take ICICI EPS 11.52 and 100%. The EPS has increased to 237.4% so it has
A growth of 137.% in the next 4 years is very good on the part of the company.

RONW
There are fluctuations in RNOW of ICICI Bank from 2002-2007-1stthree years
it was in increasing order and the last two years it has come down. In 2002 it was
0.085 and in 2006 it is 0.1079 though there are fluctuations in RNOW but it is better
compared to 1styear. The same is the case with BOM for the 1stIn 2 years, it is increasing by 3.rd
year it has decreased by 1styear it is 0.109 and in 2ndear it is 0.208 and in 3rdyear it is
again came down to 0.179 and the year it has come down to 0.139 but again in 5th
year i.e in 2000 it has increased to 0.178. so there are many fluctuations in RNOW
of Both the companies. B this we can say that it is in satisfactory position but not
that much safe to the companies.
25

ROCE

This is also facing a fluctuation period, but compared to 1996, it is better in 2000.
In 1996 it is 5.89 whereas in 2000 it is 6.75. In 1997 it has grown up to 8.9 which is
safe symbol on side of the company i.e BOM but again in 1998 it has come down to
5.52 after fluctuations the growth of ROCE has increased by 115% the same is the case
with ICICI it is in fluctuation position but from 2002 to 2006. the growth rate of the
ROCE has increased hugely, i.e., by 796%. It has increased from 1.89 to 15.05.
shows the excellence in performance of the company. Though ROCE of both the
Companies are changing; it will not affect the company's position.

CEPS

The cash earning price of ICICI shares has been in a good position for the last five years.

There is a continuous increase in CEPS of ICICIC since 2005. In 2005 there is

slightly decrease in CEPS but it has recovered its loans in 2006 and it has increased
its CEPS to 34.39 in 2006. BOM records are also showing good cash position from
last five years. In 1996 it was 21.64 whereas in 200 its position is 52.63 so it has
increased its position more than 150% in five years comparing both companies
Both the companies have performed well in their finances for the last 5 years.
periods so we can say that CEPS position is good.
26

MVA

After the merger in 2002, the MVA position of ICICI Bank is 5090.07 and after
that again it has recovered its position its MVA was 2345.1 in 2003 which is showing
the company's high efficiency. And it has increased in the year 2004 i.e its MVA
was 16068.7 its position has increased from 2002 to 2006 which is excellent
situation from companies point of view. In 2005 it is 25742.6 and in 2006 it has
increased to 52036.08 which is approximately more than double as far as MVA
The position of the company is excellent.

EVA

The EVA is 467.89 in 2002 whereas it is 1396.98 in 2003 which is showing

198% growth rate in one year. If we observe the trends of determining EVA i.e. VOPAT.
COE of NETWORKING has increased if we look at the overall view of the EVA from
2002-2005 it has created value to the companies i.e from 467.89 to 3567.58 which is
more than 600% what a company wants more than thus which adds value to the
shareholders of the company and at the same time maintaining borrowings which
leads to payment of cost of capital. From 2004 to 2005 the EVA has increased to
20% i.e from 2971.13 to 3567.58 the reason for constant growth of EVA may be
continuous growth rate of VOPT.

27
ANALYSIS OF HDFC & TIMES BANK

EPS

The EPS trend of HDFC Bank is showing an increase from 2002 to 2006.
EPS of the company is 10.56 in 2002 and 27.04 in 2006. The EPS growth rate has
increased by 256% in five years which is happy analysis for the shareholders of the
HDFC Bank. The same trend is maintained by TIMES BANK; it is showing continuous
increase in EPS for the last 5 years before merger. Its EPS growth has increased by
1426% which is showing a good position of the company. But comparing HDFC Bank
and TIMES BANK EPS TIMES Bank EPS is showing better position than HDFC
Bank.

RONW

The RONW trend of HDFC Bank is showing the fluctuations. In 2002 it was
0.153 whereas in 2003 it has increased to 0.168 and in 2006 it has come down to
0.1597. These fluctuations may be due to an increase in the capital employed and slow.
growth rate of PAT. The best performance of HDFC Bank is in 2004 in this year its
RONW is 0.184. TIMES BANK is also showing the same changes in RONW.
In 1995 it was 0.0183 and in it was 0.1584. It has decreased. But this analysis is on pre-merger.
analysis of Target Company and post merger analysis of acquired company. So we
can’t exactly compare these two figures. But the performance of HDFC is better than
TIMES BANK as far as RONW concerned.

30
ROCE

The HDFC BANK is showing growth in ROCE from 2002 to 2005 and a
slight decrease in 2006 i.e from 15.62 to 13.49. But comparing to 2002 it has grown
up tremendously. i.e., it has increased by 14125% in the last five years. Which is a good sign.
for the company to invest in many investment alternatives and can do expansion of
the business.
The TIME BANK ROCE position has been poor in the last 4 years during the pre-merger period.

is showing the decreasing trend that is from 11.51 to 4.202 which is a bad signal for
company. This may be one of the reasons for TIMES BANK to take decision to
merge with HDFC BANK.

CEPS

If we look at cash earnings of the TIMES BANK it is in increasing order i.e

from 0.194 per share to 3.367 per share. It may be because of the high increase rate
of PAT. But this is not that satisfactory to the shareholders. Face value of
Shares are 10 rs and CEPS is 3.367 in 1999, so it is not good for the company.
bolder will lose faith in the company.

HDFC bank is showing a good increasing trend in CEFS. In 2002 it is 13.01 which is
more than trace value and in 2006 it had increased to 32.74 i.e the growth rate of the
CEPS is 251.65% which is good to retain the shareholders trust on the Bank. By this
we can say that HDFC BANK has added value to the city after merger.
31
MVA

This is the analysis by which we can decide the performance of the company.
in the market position. The MVA of HDFC BANK has increased tremendously. In
In 2002 it was 2787.12 and it has increased to 16447.3 by the end of 2006.
we can say the market position of HDFC BANK is extraordinary. The growth rate of
MVA is 590% in five years. This growth may be because of the growth rate of MPS.
of the HDFC BANK and nowadays the Indian market is booming like anything. It has
The Sensex has crossed the 10,000 points mark, recording an all-time high.
conclude that share value of the bank has increased.

EVA

Economic value added of HDFE BANK is showing continuous increase from

2002 to 2005 i.e from 354.08 to 768.08 which is post merger period. Any
A company's payable capacity can be expected by looking at its EVA.
NOPAT increased definitely there will be increase in EVA.

Because NOPAT is one of the determinants to calculate EVA. HDFC BANK has
performed well in this regard. It has created value for third shareholders after
merging with times bank also comparing one other parameter HDFC Bank has
performed extraordinary. The trends of all the parameters are more one less equal
but with slight changes in their respective growth rates.
 32

ANALYSIS OF OBC & GTB MERGER

EPS
An overview of EPS of the OBC from the past 4 years is showing
increasing order. In 2002 it is 16.65 and it has grown up to 37.29 in 2005 and there
four years are pre-merger period. In 2005 only this merger has taken place. In 2006
the EPS has decreased to 21.61. The EPS of the GTB from 1999 to 2003 is coming
down constantly and in 2003 its EPS has become nil and also in negatives. This is
not at all good to the company. The shareholders of the company will definitely
loose trust on company performance in this situation. This may be one of the
reasons. That GTB has taken the decision to merge with OBC.

RONW

The RONW of the GTB bank is showing a decline, from 0.2008.

in 2000 to -111.76 in 2003. Which is not good for the company If the same situation
Continuous, we can say that the company is in insolvency position. And the shareholders.
will try to withdraw their shareholding from the company.

The RONW of the OBC has shown an increase from 2002 to 2005 i.e from 0.1979 to
0.2158. this is per merger period. In 2006 it has decreased to 0.1046. but we cant say
that it is not a good position because the merger took place just 1 year ago.
one year it is not possible to decide on merger performance.
37
ROCE

The ROCE of the OBC is showing an increase from 2002 to 2003 i.e from
10.35 to 19.58 for these three years the position of the ROCE was satisfactory. But
In 2005, it decreased to 10.43 and again in 2006 it increased to 10.71.
because of the combination of both the companies.
The GTB bank is showing the same as EPS and RNOW, that is, its position has come.
down from 13.99 to -22.46 from 2000 to 2003 years. By this we can say that the
the position of the OBC bank is much better than the position of the GTB as far as
ROCE concerned. This can be one of the reasons for merger.

CEPS

Same like EPS, RONW and ROCE, the CEPS position of the GTB is having
continuous decreasing order, i.e. from 12.19 to -18.79 from 2000 to 2003. by all these
calculated analysis we can confirm that GTB is in insolvency position and it has no
future.
Similar to EPS, RONW, and ROCE, the CEPS position of the OBC is showing
continuous increasing order that is from 18.68 to 42.11 which is more than double.
And after the merger, it has slightly come down to 24.62 but it is still in a good position.
Companies GTB and OBC. OBC's position is much better than GTB in all ways.
In one year, a decrease cannot be considered a decrease; we should take the average.

38

MVA
 This is not the same as all the above calculated analysis; it is showing fluctuating.
situation that is in 2002 it is showing -2725 and in 2003 It is showing -1434.8 and in
In 2004 it has recovered and has an MVA of 2035.06 for the first three years, it is showing
increasing order though the results are in negative figures. But after merger it is
showing decrease in MVA in 2005 it is -1867.1 and in 2006 it has shown slight
increased result i.e 2.4359. by seeing all these figures. We can conclude that overall
MVA is not that much better but also not in a risky position it is in creating year by year.
year

EVA

As it is like that the merger of OBC and GTB has taken place in 2005 and we
are calculating the analysis up to 2006 only so we can't exactly analyze whether
The company has added value economically, but still, if we look at the EVA of the
OBC from 2002 to 2005 has increased its EVA from 262.24 to 767.71 which is
good to the company and helpful to retain the customers and shareholders.
The growth rate of EVA from 02 to 05 is 192%, which showcases the best performance.
the bank as far as concluding that the bank has added value to its shareholders.

39

The mergers have definitely created value for the shareholders.

The shareholders of the target company have benefited the most. As far as the
acquiring company shareholders are concerned they have not benefited as
Much as the target company shareholders, there has definitely been value.
addition.
The value created for the Bank of Madura shareholders is evident from the fact
that they have become the shareholders of a company with 2500 creor-market
capitalization form the owners of company with just 100 core-market
capitalization.
The same is the case with the shareholders of Times Bank.
Market price has increased from Rs 24 to Rs 241.
The market price has increased enormously during the merger period.
For instance, the market price has increased from Rs. 69 to Rs. 177 during the
merger period in case of ICICI Bank and Bank of Madura merge. Well this
might be because of the success of the HDFC Bank and Times Bank merger in
1999. The investors might have attached positive hopes with this merger also.
There is a constant increase in the market price of HDFC after the merger.
period whereas in the case of ICICI Bank the market price has decreased in the
post merger period. One of the reasons might be that the expectations attached
with the ICICI Bank and Bank of Madura merger were high owing to the
success of the former merger that is merger of HDFC Bank and Times bank
meager. But according to the law of averages, after a huge unnecessary
increase into the market price the market is bound to correct as a result of
which there is a fill in the market price both shares after that. The same was
the case with ICICI Bank and Bank of Madura merge. The market over
estimated the value of the firm which it was bound to be correct, the result of
which is the fall in market prices.
In a nutshell, if we take into consideration all the parameters including the
market price of the shares, we can see that in the post merger period all have
shown a positive result that means to say all have increases in absolute terms.
 DECLARATION

I hereby declare that the project report titled “MERGERS AND

ACQUISITIONS IN INDIA BANKING SECTOR is submitted by
me to “XXXX” is bonafide work undertaken by me and is not
submitted to any other university or institution for the award of any
degree / certificate.

Name and address of the signature of the student

student
Date:

ACKNOWLEDGEMENT

I am very thankful to our DirectorXXXXsir for providing all the

facilities to complete my project.
I, gratefully acknowledge the valuable guidance and support of XXXX,
my project guide, who had been of immense help to me in choosing the
topic and successful completion of the project.

I extend my sincere thanks to all who have either directly or indirectly

helped me for the completion of this project.

EXECUTIVE SUMMARY

Merger is a combination of two or more companies into one company. The acquiring company,
(also referred to as the amalgamated company or the merged company) acquires the assets and the
liabilities of the target company (or amalgamating company). Typically, shareholders of the
amalgamating company get shares of the amalgamated company in exchange for their shares in the
Target Company.

There are two ways a company can grow; one is internal growth and the other is external.
growth. The internal growth suffers from drawbacks like the problem of raising adequate finances,
longer implementation time of the projects, uncertain etc. in order to overcome these problems a
company can grow externally by acquiring the already existing business firms. This is the route of
mergers and acquisition.

OBJECTIVE

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

RESEARCH TOOLS

Financial ratios, Economic Value added and market Value Added.

SAMPLE DESIGN

A sample of three mergers has been taken and the financial statements of five years had been
analyzed. The five-year period comprises of Pre-merger period and post merger period.
FINDINGS

6. Shareholders of the target company have benefited more than the acquired
company.
7. The post-merger analysis is showing the increasing trend in MVA&EVA.
The market price has increased during the merger period of target companies.
All the parameters are showing an increasing trend after the merger period.
10. EPS of the acquired companies has increased more than 100% in post merger
period.

CONCLUSION
My final and ultimate conclusion is, yes, the merger of all these companies has
created value to the shareholders of the target company and acquired company.
Mergers and acquisitions in India

Mergers and acquisitions aim towards business restructuring and increasing competitiveness.
shareholder value via increased efficiency. In the marketplace, it is the survival of the fittest.

India has witnessed a storm of mergers in recent years. The Finance Act, 1999 clarified many issues.
relating to Business Reorganizations thereby facilitating and making business-restructuring tax
neutral. As per Finance Minister this has been done to accelerate internal liberalization and to
release productive energies and creativity of Indian businesses.
The year 1999-2000 has recorded deals over Rs.21000 crore which is over 1% of India’s GDP.
This level of activity was never seen in the Indian corporate sector. InfoTech, Banking, media,
Pharma, cement, and power are the sectors that are more active in mergers and acquisitions.

Consolidation of banking industry-an overview

HDFC Bank and Times Bank tied the merger knot in the year 1999. The coming together of two
likeminded private banks for mutual benefit was a landmark event in the history of Indian
banking.

Many analysts viewed this action as the opening of the floodgates to a spate of mergers and acquisitions.

consolidations among the banks, but this was not to be, it took nearly a year for another merger.
The process of consolidation is a slow and painful process. But the wait and watch game played by
The banks seem to have reached their limit. With competition increasing and tightening of the
Prudential norms by the apex bank show that players in the industry seem to be taking turns to merge.
It was the turn of Bank Of Madura to integrate with ICICI Bank. This merger is remarkably different.
from the earlier ones. It is a merger between banks of two different generations. It marks the
beginning of the acceptance of merger with old generation banks, which seemed to be out of place
with numerous embedded problems..
 2

The markets seem to be in favor of bank consolidation. As in the case of HDFC Bank and Times
Bank, this time also market welcomed the merger of ICICI Bank and Bank of Madura. Each time a
The merger is announced, it seems to set out a signal in the industry of further consolidation. The shares
of the bank reached new heights. This time it was not only the turn of the new private sector banks,
but also the shares of old generation private banks and even public sector banks experienced an
buying interest. Are these merger moves a culmination of the consolidation in the industry? Will
Which bank will remain untouched and which will be left out?

To answer this question let us first glance through the industry and see where the different players
are placed. The Indian banking industry consists of four categories: public sector banks, new
private sector banks and foreign banks. The public sector banks control a major share of the
banking operations. These include some of the biggest names in the industry like Stare Bank of
India and its associate banks, Bank of Baroda, Corporation Bank, etc. their strength lies in their
reach and distribution network. Their problems range from high NPAs to overemployment. The
government controls these banks. Most of these banks are trying to change the perception. The
government controls these banks. Most of these banks are trying to change the perception.
Recent efforts to reduce government stake, voluntary retirement schemes, and non-performing asset settlements are steps in this.

direction. However, real consolidation can happen if the government reduces its stake and changes its
perception on the need of merger. The government’s stand has always been that consolidation
should happen to save a bank from collapsing. The old private sector banks are the banks, which
were established prior to the Banking
Nationalization Act, but could not be nationalized because of their small size. This segment
includes the Bank of Madura, United Western Bank, Jammu and Kashmir Bank; etc. who banks
are facing competition from private banks and foreign banks. They are trying to improve their
Margins. Though some of the banks in this category are doing extremely well, the investors and the
markets seem not to reward them adequately. These banks are unable to detach themselves
effectively from the older tag. The new private banks came into existence with the amendment of
Banking Regulation Act in 1993, which permitted the entry of new private sector banks.

3
Of the above, the spotlight is on the old generation private banks. The OGPBs can
become easy takeover targets. The sizable portfolios of advances and deposits act as an incentive.
Added to this, these banks have a diversified shareholder base, which inhibits them from launching.
an effective battle against the potential acquirers. The effective shield against takeovers for these
Banks could consider entering into strategic alliances similar to the Vysya Bank model, which has the Brussels bank.

Lambert of the Dutch ING Group as a strategic investor. United Western Bank and Lord Krishna
Banks are already on the lookout for strategic partners. But the problems go beyond shareholding.
pattern and are deeply rooted. The prudential norms such as the increasing CAR and the minimum net
worth requirements are making the very existence of these banks difficult. They are finding it
difficult. They are finding it difficult to raise capital and keep up with the ever-tightening norms.
One of the survival routes for these banks is to merge with another bank.

Mergers: Making sense of it all

In the process of merger, banks will have to give due importance to synergies and complementary.
adhesions. The merger must make sound business sense and reflect in increasing the shareholder
value. It should help increase the bank’s net worth and its capital adequacy. A merger should
expand business opportunity for both banks. The other critical and competitive edge for survival is
the cost of funds, which means stable deposits and risk diversification. Network size is very
important in this perspective because one cannot grow staying in one place because the asset
the market in every place is limited. Unless one prepares the building blocks for growth by looking
outside one’s area he either sells out or gets acquired. The features, which a bank looks in its target
seems to be the distribution network (number of branches and geographical distribution), number
of clients and financial parameters like cost of funds, capital adequacy ratio, NPA and provision
cover.
The merger of strong entities should be encouraged. The reason for the merger should not be to
save a bank from extinction rather the motive must be to go join for the distant advantages of both
combining banks towards a mutual benefit. PS Shenoy, chairman and managing director, Bank of
Baroda said, 'today a public sector bank can merge with another bank only through a moratorium.'
route." That means you can take over only a dead and you die yourself and allow to be merged with
a strong bank. Unfortunately this is not the spirit behind the merger and acquisition.
4

Time for strategic alliance

It is not only important for banks to merge with banks but also with entities in other businesses.
activities. Strategic partnership could become the trend. Strategic mergers between banks for
using each other’s infrastructure enabling remittance of funds to various centers among the
strategic partner banks can give the account holder the flexibility of purchasing a draft payable at
centers where the strategic tie-up exists. The strategic tie-up could also include a
partner with another specialized investment bank to provide value-added services. Collaborations
Could also be between a bank and technology firm to provide advanced services. It is these
Strategic tie-ups that are set to increase in the future. These, along with providing value-added benefits,
also help in building positive perceptions in the market.

From a macro perspective, mergers and acquisitions can prove effective in strengthening the Indian.
financial sector. Today, while Indian banks have made tremendous strides in extending the reach
Domestically and internationally, the Indian system is conspicuous by its absence. There are very few.
catering mostly to India related business. As a result, India does not have a presence in
international financial markets. If India has to emerge as an international banking center the
The presence of large banks with foreign presence is essential. With globalization and strategic
Indian banks would grow originally. They would be large banks with international
presence. Globally, the banking industry is consolidating through cross-border mergers. India
seems to be far behind. The law does not allow the foreign banks with branch network to acquire
Indian banks. But who knows with the pressures of globalization, the law of the land could be amended.
paving way for a cross border deal.

While the private sector banks are on the threshold of improvement, the public sector banks
(PSB's) are slowly contemplating automation to accelerate and cover the lost ground. To contend
with new challenges posed by the private sector banks, PSBs are pumping huge amounts to
update their It. but still, it looks like, public sector banks need to shift the gears, accelerate their
Movements, in the right direction by automating their branches and providing Internet banking.
services.

Private sector banks, in order to compete with large and well-established public sector banks, are
not only foraying into IT, but also shaking hands with peer banks to establish themselves in the
market. While one of the first initiatives was taken in November 1999, when Deepak Prakesh of
HDFC and S.M. Datta of Times Bank shook hands, created history. It is the first merger in the
Indian banking, signaling that the Indian banking sector has joined the mergers and acquisitions.
bandwagon. Prior to this private bank merger, there have been quite a few attempts made by the
government to rescue weak banks and synergize the operations to achieve scale economies but
unfortunately they were all futile. Presently 'size' of the bank is recognized as one of the major
strengths in the industry. And, mergers amongst strong banks can both a means to strengthen the
base, and of course, to face the cutthroat competition.

The appetite for mergers is making a comeback among the public sector banking industry.
instincts are aired openly at various forums and conferences. The bank economist conference
perhaps set the ball rolling after the special secretary for banking Devi Dayal stressed the
importance of the size as a factor. He pointed out the consolidation through merger and acquisition
was becoming a trend in the global banking scenario wanted the Indian counterparts to think on the
same lines. There is also a feeling of threat that there are far too many banks. PS Shenoy, chairman and
managing director of Bank of Baroda, said, “There are too many banks to handle the size of
business.” The pace of mergers will hasten. As time runs out and the choice of target banks
with complimentary businesses getting reduced, there would be a last minute rush to acquire the
remaining banks, which will hasten the process of consolidation.

Recommendations of Narasimham Committee on Banking Sector Reforms

The Narasimham Committee on banking sector reforms suggested that 'merger should not be
viewed as a means of bailing out weak banks. They could be a solution to the problem of weak
banks but only after cleaning up their balance sheet.’ The government has tried to find a solution
on similar lines, and passed an ordinance on September 4, 1993, and took the initiative to merge
New Bank of India (NBI) with Punjab National Bank (PNB). Ultimately, this turned out to be an
unhappy event. Following this, there was a long silence in the market till HDFC Bank successfully
took over Times Bank. Market gained confidence, and subsequently, there were two more mega
mergers. The merger of Bank Of Madura with ICICI Bank, and of Global Trust Bank with UTI
Bank, emerging as a new bank, UTI Bank, emerging as a new bank, UTI-Global Bank.
6

The following are the recommendations of the committee

Globally, the banking and financial systems have adopted information and communications.
technology. This phenomenon has largely bypassed the Indian banking system, and the committee
feels that requisite success needs to be achieved in the following areas:
5. Bank automation
6. Planning, standardization of electronic payment systems
7. Telecom infrastructure
8. Data warehousing network
Mergers between banks and DFIs and NBFCs need to be based on synergies and should make a
sound commercial sense. Committee also opines that mergers between strong banks/FIs would
make for greater economic and commercial sense and would be a case where the whole is greater
than the sum of its parts and have a 'force multiplier effect'. It is also opined that mergers should
not be seen as a means of bailing out weak banks.
A weak bank could be nurtured into healthy units. Merger could also be a solution to a weak bank.
but the committee suggests it only after cleaning up their balance sheets. It also says, if there is no
voluntary response to a takeover of their banks a restructuring, merger amalgamation, or if not
closure.
The committee also opines that, licensing new private sector banks, the initial capital requirements
need to be reviewed. It also emphasized a transparent mechanism for deciding the ability of
promoters to professionally manage the banks. The committee also feels that a minimum threshold
Capital for old private banks also deserves attention and mergers could be one of the options.
available for reaching the required threshold capitals. The committee also opined that a promoter
group couldn’t hold more than 40% of the equity of a bank.

7
The Indian banking and financial sector - a wealth creator or a wealth destroyer?

The Indian banking and financial sector (BFS) destroyed 22 paise of market value added (MVA)
for every rupee invested in it, which is really poor compared to the BFS sector in the U.S, which
has created 92 cents of MVA per unit of invested capital. The good news is that the performance of
The wealth-creating Indian banks have performed better than the wealth-creating US banks.

But the sad part is that the banks, which destroy 59 paise of wealth for every rupee invested,
consume about 88% of total capital invested in our BFS sector. As a benchmark, the US economy
invests 83% of its capital in wealth creators.

In the banking and financial sector too. The winners on the MVA-scale are different from those on
traditional Size-based measures such as total assets, revenues, and profit after tax and market value
of equity. Indeed, the banks with most assets such as State Bank of India and Industrial
Development Bank Of India are amongst the biggest wealth destroyers. SBI tops on size-based
measures like revenues, PAT, total assets, market value of equity, but appears among the bottom
ranks for wealth creation. On the other hand, HDFC and HDFC Bank top the MVA rankings even
though they do not appear in the top 10 ranking based on total assets or revenues.

8
PROBLEM BACKGROUND

Profitable growth constitutes one of the prime objectives of the business firms. This can be
achieved ‘internally’ either through the process of introducing/developing new products or by
expanding/enlarging the capacity of existing product(s). Alternatively, growth process can be
facilitated 'externally' by acquisition of existing firms. This acquisition may be in the form of
mergers, acquisitions, amalgamations, takeovers, absorption, consolidation, and so on. The internal
growth is also termed as organic growth while external growth is called inorganic growth There are
strengths and weaknesses of both the growth processes. Internal expansion apart from enabling the
firm to retain control with itself also provides flexibility in terms of choosing equipment, mode of
technology, location, and the like which are compatible with its extraction operations. However
Internal expansion usually involves a longer implementation period and also entails greater
uncertainties particularly associated with the development of new products. Above all, there might be
Sometimes there is a problem of raising adequate finances required for the implementation of various capital.
budgeting projects involving expansion. Acquisitions and mergers obviate, in most of the
situations, financing problems as substantial/full payments are normally made in the form of the
shares of the acquiring company. Further it also expedites the pace of growth as acquired firm
already has the facilities or products and therefore saves time otherwise required in building up
new facilities from scratch as in the case of internal expansion.
 9

PROBLEM DEFINITION
What is shareholder value?
Value is a very subjective term. There are many factors that influence a person to invest in a
particular company. For some it may be capital appreciation, for some it may be consistency in the
earnings of the company, for some it may be the dividends that the company pays or it may be the
reputation of the company. But normally the market price of the shares is the primary motivation factor
behind an investment by an investor.
Hence we can say that a company has created wealth when there is an increase.
in the market price of the shares. Theoretically also, the financial goal of a company is to
maximize the owner's economic welfare. Owner's economic welfare can be maximized when
Shareholders' wealth is maximized, which is reflected in the increased market value of the shares.

.
 10

RESEARCH TOOLS

Financial ratios, Economic Value added and Market Value Added.

The above tools which are used to evaluate whether mergers and acquisitions create any
shareholder value or not signify the following:

The financial ratios that are used in the study are:

Return on capital employed

Return on Net worth

8. Return on equity

9. Earnings per share

10. Cash earnings per share

Return on capital employed

PBIT / Capital Employed

PBIT = PBDT + Non-RECURRING EXPENSES – Non-recurring income

CAPITAL EMPLOYED = Net fixed assets + Net Current Assets – fictitious assets
 Return on net worth

Return on Net Worth

PAT = profit after tax

equity share capital + reserves and surplus - fictitious assets

11

Earnings per share

Earnings Per Share = Profit After Tax / number of shares

Cash earnings per share

CEPS = ( PAT + DEPRECIATION ) / number of shares

Economic Value Added

Economic value added (EVA) is the after-tax cash flow generated by business minus the cost
of capital it has deployed to generate that cash flow. Representing real profit versus paper
profit, EVA underlies shareholder value, increasingly the main target of leading companies
strategies. Shareholders are the players who invest in the firm with its capital; they invest to gain a
return on that capital.

EVA can be defined as the net operating profit minus the charge of opportunity cost of all the
capital employed into the business. As such, EVA is an estimate of true 'economic profit'
that means to say the amount that the shareholders or lenders would get by investing in the
securities of comparable risk.

The capital charge is an important and distinctive aspect of EVA. Many times under traditional
Many companies report profits in their accounting systems, but that's not actually the case. According to

Peter F. Drucker: "Unless a company is earning more than its cost of capital, it is operating at a loss."
Thus EVA is the profit as shareholders define it. To illustrate it, suppose a person invested
Rs.100 in a company. The company is earning at the rate of 20%, which means the earnings
of the company is Rs 20 while its cost of capital is 15% that means to say that the company has
to pay Rs. 15 to its shareholders. Thus the amount of profit in excess of the cost of capital that
Is Rs. 5(20-15) the EVA?

12

Mathematically,
EVA = NOPAT – (capital employed * weighted average cost of capital)
But for Banking and Financial sector,
EVA = NOPAT - (net worth * cost of equity)
Where,
net operating profit adjusted to taxes

Market value added (MVA)

MVA = market value added, is a measure of the value added by the company’s management.
over and above the capital invested in the company by its investors. It is the value added in
excess of economic capital employed.
MVA = market value of the firm - economic capital.
Where,
Market value of the firm = market price * number of shares.
Economic capital = capital employed.
 13

LIMITATIONS

The major limitation of the project is the time frame. The post merger analysis is just for one
A year and one year is too short a period to judge the effect of a merger.
4. The analysis is based on various ratios hence all the limitations of the ratio analysis become
a part of the limitations of the study.
5. The entire analysis is based on the balance sheets and profit and loss accounts, which is
a secondary data. Hence it suffers from being very reliable.
 6. The cost of equity has been calculated on the basis of the DIVIDEND APPROACH method.
So all the limitations of that method have a place here.

14

INTRODUCTION

Merger

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

Takeover

Takeover can be defined as the acquisition of controlling interest in a company by another.

company. It does not lead to the dissolution of the company whose shares are being acquired. It
simply means a change in the controlling interest in a company through the acquisition of its share
by another group.

Horizontal merger

A horizontal merger involves the merger of two firms operating and competing in the same kind of business.

business activity. Forming a larger firm may have the benefit of economies of scale. But the
the argument that horizontal mergers occur to realize economies of scale is not true horizontal.
Mergers are regulated for their potential negative effect on expectations. Many are seen as potentially creating
monopoly power on the part of the combined firm enabling it to engage in anticompetitive
practices also believe in horizontal mergers.

Vertical mergers

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

Conglomerate mergers

Conglomerate mergers involve firms engaged in unrelated business activities. Among

conglomerate mergers, three types have been distinguished:
Product-extension mergers broaden the product lines of the firms. These are the mergers
between the firms in related businesses and may also be called concentric mergers.
A geographic market extension merger involves two firms whose operations have been
conducted in non-overlapping geographic areas.
Finally, the other conglomerate mergers, which are often referred to as pure conglomerate
mergers involve, unrelated business activities. These would not qualify as either as
product-extension or market-extension.

Two important characteristics that define a conglomerate firm are

First, a conglomerate firm controls a range of activities in various industries that require
different skills in specific managerial functions of research, applied engineering
production, marketing and so on.
Second, mainly external acquisitions and mergers achieve the diversification, not by
internal development.

15

To utilize under-utilized market power

As a response to shrinking growth and/or profit opportunities in one’s own industry
 A desire to diversify.
Economies of scale; a firm can increase its income with less than proportionate investment
Establishing a transnational bridgehead without excessive startup costs to gain access to a
foreign market.
A desire to fully utilize the particular resources or personnel that are controlled by the firm,
particularly in the context of managerial skills.
A desire to displace existing management.
To circumvent government regulations.
An individual owing or controlling a firm may be motivated for a merger with a desire to
create an image of aggressiveness and strategic opportunism, empire building and to amass
vast economic power of the company.

Economic motives Personal motives Strategic motives

Marketing economies of scale increase sales, pursuit of man increases profitability.
power
Risk spreading Managerial challenge Acquisition of a competitor
Increase profitability Respond to market failures Acquisition of inefficient
management
Cost reduction Enhancement manager, all prestige defense mechanism
Acquisition of raw material Create shareholder value
Technical economies of scale
Different valuation of target

16

Operating economies

When two companies combine, it may be possible for them to avoid or reduce overlapping.
functions and facilities. The combined firm enables the consolidation of a number of managerial
Functions such as purchasing, production, marketing, R&D etc. the logic of operating economies
lies in the concept of synergy.
Diversification
Diversification generally means expansion of operation through the merger of firms in unrelated.
lines of business. Such mergers are called conglomerate mergers.
Growth
Growth implies expansion of a firm’s operation in terms of sales, profit and assets. When a
The company is unable to grow internally due to resource and management constraints, but it can grow.
extremely by taking over operations of another company. Acquisition may yield the desire of
growth faster, easier and cheaper than the internal growth.
Limit competition and exploiting factor markets
Merger can give monopoly power to the merged entity. Thus by limiting competition, it can earn
super normal profits.
Financing
Sometimes internal growth may not be possible due to financial constraints. Financial and external
growth becomes easy if operations of other company can be acquired through the exchange of
shares.
Taxation
The urge to minimize tax liability, particularly when the managerial tax rate is high, may also
cause merger of two companies. The carry forward of a tax loss is yet another reason for some of
the merger.
Personal reasons
There may be a number of personal motivations, with or without economic substance, for merger
activity. For example, owners of a closely held firm may like to be acquired by a widely held
company whose shares are well distributed and well traded in the stock market. This enables them
to diversify their portfolio and improve marketability and liquidity of their holdings.

17
Bank of Madurai is a profitability, well-capitalized, Indian private sector commercial bank.
operating for the last 57 years. The bank has an extensive network of 263 branches, with a
significant presence in the southern states of India. The bank had total assets of Rs. 39.88 billion
and deposits of Rs 33.95 billion as on September 30, 2000, The bank had a capital adequacy ratio
of 15.8% as of March 31, 2000. The bank’s equity shares are listed on the Stock Exchange at
Mumbai and Chennai and National Stock Exchange in India.

ICICI Bank is a leading Indian private sector commercial bank, promoted by ICICI limited.
ICICI Bank is one of the leading private sector banks in the country.
had total assets of Rs 120.63 billion and deposits of Rs. 97.28 billion as on September 30, 2000.
The bank’s capital adequacy ratio stood at 17.59% as on September 30, 2000. The Bank’s branch
network including extension counters presently covers 106 locations across India. ICICI Bank is
India’s largest ATM provider with 546 ATMs as of June 30, 2001.
The equity shares of the bank are listed on the Stock Exchange in Mumbai, Calcutta, Delhi.
Chennai, Vadodara and National Stock Exchange in India. ICICI Bank’s American Depository
Shares are listed on the New York Stock Exchange.

The ICICI, one of the largest financial institutions in India, had an asset base of Rs.582 billion in
2000. It is 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 online 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 ICICI’s strong relationships with 1000
corporate entities in India. The bank 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,
 18

ATMs, telephone call centers, and also through the 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 solutions
provided by the bank is aimed at facilitating online supply chain management for its corporate
clients by linking them with their suppliers and leaders in a closed business loop. The bank is
always ahead in advanced IT, and used as a competitive tool to lure new customers.

In February 2000, ICICI Bank was one of the first few Indian banks to raise its capital through
American Depository Shares in the International market, which has received an overwhelming
response for its issue of $175 million, with a total order of USD 2.2 billion. At the time of filing
the prospectus, with the US Securities and Exchange Commission, the Bank had mentioned that
the proceeds of the issue would be used to acquire a bank

As of March 31, 2000, the bank had a network of 81 branches, 16 extension counters, and 175 ATMs.
The capital adequacy ratio was at 19.64% of risk-weighted assets, a significant excess of 9% over
RBI's benchmark.

ICICI Bank has been scouting for a private banker for a merger, with a view to expand its assets and
client base and geographical coverage. Though it had 21% of stake, the choice of Federal bank,
was not lucrative due to employee size (6600), per employee business is as low at Rs.161 lakh
and a snail pace 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 for ICICI Bank.

ICICI Bank has announced a merger with 57-year old BOM, 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% stake in BOM, the chairman
BOM, Mr. K.M Thaigarajan, along with his associates was holding about 26% stake, Spic
group has about 4.7%, while LIC and UTI were having marginal

19
Holdings. The merger will give ICICI Bank a hold on the south Indian market which has a 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 2%.
And the merger is expected to bring 20% gains in EPS of ICICI Bank. And also the bank’s
The comfortable Capital Adequacy Ratio of 19.64% has declined to 17.6%.

ICICI Bank, the largest private sector bank, took over Bank of Madura in order to expand its presence.

customer base and branch network. When we look at the key parameters such as net worth, total
deposits, advances and NPAs, the ICICI bank is in a much better position. The net worth of the
The former is four times the latter. And in terms of total deposits and advances, the former is three times.
higher than the latter. When we take a look at the NPAs to net advances and the non-performing
assets are fourfold higher in the latter case than in the former. The ICICI Bank which was
looking out for strategic alliances after it received its proceeds from ADS issue, had a tie up with
Expanding BOM's customer base across different sectors is a challenging task; one must wait and watch.
to what extent the alliance will be successful.

The board of directors at ICICI has contemplated the following synergies emerging from
the merger
Financial capability
The amalgamation will enable them to have a stronger financial and operational structure, which is
supposed to be capable of greater resource / deposit mobilization. And ICICI will emerge as one of
the largest private sector banks in the country.
Branch network
The ICICI's branch network would not only increase by 264, but also expand geographically.
coverage as well as convenience to its customers.
Customer base
The emerged largest network 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.

20
Tech edge
The merger will enable ICICI to provide ATMs, phone and 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.

The scheme of amalgamation will increase the empty base of ICICI Bank to Rs. 220.36 crore.
ICICI Bank will issue 2.354 million shares of Rs. 10 each to the shareholders of BOM. The merged
The entity will have an increase of asset base over Rs. 160 billion and a deposit base of Rs. 131 billion.
The merged entity will have 360 branches and a similar number of ATMs across the country.
also enable ICICI Bank 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

ICICI's major branches are in major metros and cities, whereas BOM spread its wings mostly in
semi-urban and city segments of South India. There is a task ahead for the merged entity.
to increase dramatically the business mix of rural branches of BOM. 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.

Managing software

Another task, which stands in the way, is technology. While ICICI Bank, which is a fully
The automated entity is using the packages; banks 2000, BOM has computerized 90% of its business.
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% computer literate staff would need
effective retraining which involves a cost. The ICICI Bank needs to invest Rs. 50 crore, for
upgrading BOM’s 263 branches.

21

Managing human resources

One of the greatest challenges before ICICI Bank is managing the Human resources. When the
The head count of ICICI Bank is taken, it is less than 1500 employees; on the other hand, BOM
has over 2500. The merged entity will have about 4000 employed which will make it one of the
largest banks among the new generation private sector banks. The staff of ICICI Bank is 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.

While under the influence of the trade unions, most of the BOM employees have lower career.
aspirations. The announcement by H.N.Sinor, CEO and MD of ICICI, that there would be no VRS
or retrenchment, creates a new hope amongst the BOM employees. It is a tough task ahead to
On the other hand, their pay would be revised upwards.
 Crucial parameters

Value of Market Price Earnings Dividend P/E ratio Profit per employee
the Bank Bank on the day of per share paid (in%) (in lakh) 1999-2000
day of merger announcement
announcement of merger
t
BOM 183.3 131.60 38.7 55 3 1.73
ICICI 58.0 169.90 5.4 15 - 7.83

Managing client base

The client base of ICICI Bank, after the merger, will be 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 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 BOM’s clientele, the ICICI Bank needs to redefine
its strategies to suit the new clients. it may be difficult for them to reestablish the relationship,
which could also hamper the image of the bank.

22
Merger of HDFC and Times Bank

The merger deal between Times Bank and HDFC Bank was a successful venture, facilitating the
HDFC Bank to emerge as the largest private sector bank in India. The new entity, HDFC Bank,
now has a customer base of 650,000 to serve and a network of 17 branches. With merger,
HDFC Bank's total deposits touched Rs 6,900 crore and the size of the balance crossed massive
9,000 crore mark. The Bank not only gained from the existing infrastructure but also employee
work culture.
One more advantage to the bank is the expansion of the branch network. The strategy adopted by
HDFC Bank in setting up branches has been that of incurring the lowest cost with about 6-8
employees per branch who will look after both the servicing and marketing functions. Since
Setting up a new branch is a costly affair; acquiring a ready-made branch network is easier.
The merger also involved product harmonization as HDFC had the Visa network and Times Bank had Master.
card network. Thus, as a result of the merger, both networks would branch (65%) and Times
Bank with more urban branches (43%) overlapping of branch, leading to enlarged potential
market. Although, the HDFC Bank private sector bank, with a percentage of public sector than
that of a pure private sector bank, the merger between HDFC and Times Bank (relatively less
Stronger bank was a strategic alliance and there are no apparent adverse effects after the merger.

28

Financial standings

Rs Times Bank (Rs)

Business per employee 520,2000 500,000
Profit per employee 1,000,000 722,000
In the takeover of Times Bank (spread 1.66%) by HDFC Bank (spread 3.38%), the pre-deal
HDFC Bank's business per employee was Rs. 520,000 while profit per employee was Rs. 1.
million. The respective figures for Times Bank were Rs. 500,000 and Rs. 722,000. Times Bank
had a retail base of 150,000 accounts, an added attraction. Post-deal, HDFC Bank’s strength
rose to over 650,000 retail accounts, a network of 107 branches and deposits of Rs. 70 billion and
a turnover of about Rs.100 billion, making it the top bank among the foreign and private banks.

Growing organically at 30% or 15,000 to 17,000 new accounts a month, it would have taken two
Years for HDFC to gain Times Bank’s 170,000 customers. By acquiring it has become possible in
just six months along with a higher rate of growth in the future.

29
RONW

RONW = PAT / NET WORTH

PROFIT AFTER TAX

ICICI BANK

2002 :- PAT258.30 - 4.50 = 253.8

NW = 6595.96 6594.96

RONW= 0.0384 00.385 //

-PAT = 1206.18-58.91 = 1147.27

NW = 962.66+6320.65+0= 7283.31
 RONW 0.157 = 0.1575

2004 :- PAT = 1637.11 - 69.71

= 1567.4

NW = 966.40 + 7394.16-0 = 8360.56

RONW 0.1875 0.1875

PAT = 2005.20 – 90.10 = 1915.1

NW = 1086.76 - 11813.1 - 12899.96

0=

RONW= 1915.1 / 12899.96 = 0.1484

2006 2540.07 – 106.50 = 2433.57

NW = 1239.83 - 21316.16 = 22555.99

2433.57 / 22555.99 = 0.1079

BANK OF MADURA

96 :- PAT = 11.13 - 0 = 11.13

NW 11.61 + 90.41 = 102.02

11.13 / 102.02 = 0.109

97 25.77 - 0 = 25.77

NW = 11.61 + 112.13= 123.74

RONW= 25.77 / 123.74 = 0.208

98 PAT 33.60 = 33.6

188.07

33.6 / 188.07 = 0.179 //

99 30.13 - 0.59 = 29.54

NW = 11.77 + 199.56 = 211.33

RONW= 29.54 / 211.33 = 0.139

2000 :- PAT 15.58 - 1.43 = 44.15

NW = 11.77 - 203.94 +32.13= 247.84

RONW= 44.15 - 247.84 = 0.178

HDFC

2002 PAT 297.04 - 0 = 297.04

NW = 1942.27 1942.28

RONW= 297.04 / 194.28 = 0.153

2003 PAT 38.76 - 10.88 = 376.72

NW = 282.05 + 1962.78 = 2244.83

376.72 / 2244.83 = 0.168

2004 PAT 509.50 - 12.82 = 496.68

NW = 284.79 + 2407.09 = 2691.88

RONW 496.68 / 2691.88 = 0.184

2005 PAT 665.56 - 19.64 = 645.92

NW = 309.88 + 4209.07 = 4518.95

0.143 = 0.143

2006 PAT 870.78 - 24.16 = 846.62

NW = 313.14 + 4986.39 = 5299.53

RONW 846.62 / 52.99.53 = 0.1597

TIMES BANK

95 :- PAT 1.87 - 0 = 1.87

NW = 100 + 1.87 = 101.87

RONW= 1.87 / 101.87 = 0.0183

96 :- PAT 7.61 - 0 = 7.61

NW = 109.48 = 109.48

RONW= 7.61 / 109.48 = 0.0693

98 :- PAT 23.45 - 0 = 23.45

NW = 143.71 = 143.71

RONW= 23.45 / 143.71 = 0.1632

99 :- PAT 27.06 - 0 = June 27

NW 100 + 70.79 = 170.79

RONW 0.158 0.1584

OBC

2002 PAT 320.55 - 0 = 320.55

NW = 192.54 + 1427.19 = 1619.73

RONW= 320.55 / 1619.73 = 0.1979

2003 PAT 445.85 445.85

NW 192.54 + 1916.8 = 2109.34

RONW 445.85 / 2109.34 = 0.2113 //

2004 PAT 686.07 - 12.34 = 673.73

NW = 192.54 + 2484.26 = 2676.8

0.2512 0.2516

2005 PAT 717.97 = 717.97

NW = 506.01 3327.01

RONW 717.97 / 3327.01 = 0.2158

2006 PAT = 557.16 - 15.81 = 541.35

NW = 5170.78 = 5170.78

RONW= 541.35 / 5170.78 = 0.1046

GTB

2000 :- PAT 108.62 - 2.52 = 106.1

NW = 121.36 + 406.78 = 528.14

RONW 0.2007 0.2008

2001 :- PAT 80.33 - 1.86 = 78.47

NW = 121.36 + 467.05 = 588.41

RONW 0.133 0.1333

2002 PAT 40.26 - 0 = 40.26

NW = 121.36 + 272.96 = 394.32

RONW 0.102 0.1020

2003 PAT 272.70 - 0 = 272.70

NW = 121.3 + ( - 118.92 ) = 2.44

RONW= -272.70 / 2.44 = -111.76

CEPS (PAT + DEPRECIATION) / NO. OF

SHARES

ICICI

2002 :- CEPS 253.8 + 64.10 / 22.036

 = 14:43

2003 CEPS 1147.2 + 505.94 / 61.266

= 26.98

2004 :- CEPS = 156.74 + 539.44 / 61.64

= 34.18

2005 CEPS = 1915.1 + 590.36 / 73.676

= 34.01

2006 CEPS = 2433.57 + 623.79 / 88.893

= 34.39

BANK OF MADURA

96 :- CEPS = 25.13 / 1.161

= 21.64 //

97 :- CEPS = 25.77 + 20.67 / 1.161

= 40
98 :- CEPS 33.6 + 25.22 / 1.177

= 49.97

99 :- CEPS = 29.54 + 30.60 / 1.177

= 51.09

00 :- CEPS = 44.15 + 17.80 / 1.177

= 52.63

HDFC

2002 CEPS = 297.04 + 69.02 / 28.137

= 13.01

2003 CEPS 376.72 + 3.77

= 17.12
2004 CEPS 496.68 + 125.72 / 28.479

= 21.85

2005 CEPS = 645.92 + 144.07 / 30.988

= 25.49

2006 CEPS 846.62 + 178.59 / 31.314

= 32.74

TIMES

95 :- CEPS = 1.94 / 10

= 0.194

96 :- CEPS 7.61 + 0.77 / 10

= 0.838

98 :- CEPS = 28.68 / 10

= 2.868
99 :- CEPS = 33.67 / 10

= 3.367

OBC

2002 CEPS 320.55 + 39.11 / 19.254

= 18.68

2003 CEPS = 445.85 + 41.6 / 19.254

= 25.32

2004 CEPS 673.73 + 50.42 / 19.254

= 37.61

2005 CEPS = 717.97 + 92.79 / 19.254

 = 42.11

2006 CEPS = 541.35 + 3.01

= 24.62

GTB

2000 :- CEPS 106.1 + 41.89 / 12.136

= 12.19 //

]
2001 :- CEPS = 78.47 + 46.03 / 12.136

= 10.26 //

2002 CEPS 40.26 + 51.24 / 12.136

= 7.54

2003 CEPS = -272.70 + 44.62 / 12.136

= -18.79
 ICICI

ROCE = PBIT / CAPITAL EMPLOYED

PBIT = PBDT + NON REC EXP - NON REC INCOME

C.E = NET. FA + NET C.A - FICTITIOUS ASSETS.

2002 PBIT = 258.3 + 64.1 + 0 - 0 = 322.4

C.E = 4239.34 + 12786.35

= 17025.69

ROCE = 322.4 17025.69

 = 0.0789 * 100 = 1.89

2003 :- PBIT = 1712.12 = 1712.12

C.E = 4060.73 + 6489 = 10549.73

ROCE = 1712.12 / 10549.73 = 0.1622

100 = 16.22

2004 :- PBIT = 2176.55 = 2176.55

C.E = 4056.41 + 847.064 = 12527.05

ROCE = 0.1735 = 0.1737

17.37

2005 PBIT 2005.20 + 590.36 = 2595.5616967.04

C.E 4.038.04 + 12929 = 16967.04

ROCE = 2595.56 / 16967.04 = 0.1529 = 15.29

2006 PBIT 2540.07 + 623.79 = 3163.86

C.E = 3980.71 + 17040.22 = 21020.9

ROCE = 3163.86 / 21020.9 = 0.1505

= 15.05 //

BANK OF MADURA

96 :- PBIT 11.13 + 14 + 0 - 0 = 25.13

 CE = 81.11 + 345.05 = 426.16

ROCE = 0.0588 0.0589 = 5.89

97 :- PBIT 25.77 + 20.67 + 0 - 0 = 46.44

CE = 122.88 + 398.66 = 521.54

ROCE = 0.089 8.90

98 :- PBIT 34.19 + 25.22 + 0 - 0 = 59.41

CE = 1076.18 1076.18

ROCE = 59.41 / 1076.18 = 5052

99 :- PBIT 30.13 + 30.60 = 60.73

CE = 993.13 993.13

ROCE = 60.73 / 993.13 = 6.11

00 :- PBIT 45.58 + 17.80 + 0 - 0 = 63.38

CE = 938.00 938

ROCE = 63.38 / 938 = 6.75

HDFC
2002 :- PBIT 297.04 + 69.02 + 0 – 0 = 366.06

CE = 371.1 + 3458.19 = 3829.29

ROCE = 0.0957 9.55 //

2003 :- PBIT = 387.6 + 106.14 + 0 - 0 = 493.74

CE = 528.58 + 3169.22 = 3697.8

ROCE = 0.1335 13.35

2004 PBIT = 509.5 + 125.72+ 0-0 = 635.21

CE = 616.91 + 3550.9 = 4167.8

ROCE = 0.1525 15.24

2005 PBIT = 665.56 + 144.07 + 0 - 0 = 809.63

5182.32 =

ROCE = 809.63 / 5182.32 = 15.62

2006 PBIT 870.78 + 178.59 +0-0 = 1049.37

CE = 855.08 + 6919 = 7774.08

ROCE = 0.135 13.49

 TIMES

99 :- PBIT 1.94 = 1.94

CE = 16.86 = 16.86

ROCE = 1.94 / 16.86 = 11.51

40
 ICICI

Partic 2002 2003 2004 2005 2006

ulars
EPS 11.52 18.73 25.43 25.99 27.35
RONW 0.0385 0.1575 0.1875 0.1484 0.1079
ROCE 1.89 16.22 17.37 15.29 15.05
CEPS 14.43 26.98 34.18 34.01 34.39
MVA - - 5712.2 11987. 31412.
14293. 2343.2 5 3
2 3
EVA 467.89 1396.9 2971.1 3567.5 ----
8 3 8
 23

BOM

Particular 1996 1997 1998 1999 2000

s
EPS 9.59 22.2 28.55 25.1 37.5
RONW 0.109 0.208 0.179 0.139 0.178
ROCE 5.89 8.9 5.52 6.11 6.75
CEPS 21.64 40 49997 51.09 52.63
MVA ---- ---- ---- ---- ----
EVA ---- ---- ---- ---- ----
 24

HDFC

Particular 2002 2003 2004 2005 2006

s
EPS 10.56 13.36 17.44 20.84 April 27
RONW 0.153 0.168 0.184 0.143 0.1597
ROCE 9.55 13.35 15.24 15.62 13.49
CEPS 13.01 17.12 21.85 25.49 32.74
MVA 2787.12 2895.11 66007.2 11682.8 16447.3
2 9
EVA 354.08 422.03 521.47 768.08 ----
 33

TIMES

Particulars 1995 1996 1998 1999

EPS 0.19 0.76 2.35 2.71
RONW 0.0183 0.0695 0.1632 0.1584
ROCE 11.51 6.09 5.81 4.22
CEPS 0.194 0.838 2.868 3.367
MVA ---- ---- ---- ----
EVA ---- ---- ---- ----

34
 OBC

Particular 2002 2003 2004 2005 2006

s
EPS 16.65 23.16 34.99 37.29 21.61
RONW 0.1979 0.2113 0.2516 0.2158 0.1046
ROCE 10.35 18.69 19.58 10.43 10.71
CEPS 18.68 25.32 37.61 42.11 24.62
MVA -2725 -14348 2035.06 -1867.1 2.4359
EVA -262.24 453.31 579.53 767.71 ----

35
 GTB

Particular 1999 2000 2001 2002 2003

s
EPS 6.61 8.74 6.47 3.32 0.00
RONW ---- 0.2008 0.1333 0.1020 -111.76
ROCE ---- 13.99 12.73 10.98 -22.46
CEPS ---- 12.19 10.26 7.54 -18.79
MVA ---- ---- ---- ---- ----
EVA 55.72 27.41 -99.22 -354.06 ----

36