Mergers & Acquisitions HDFC-CBOP Final

8/2/2019 Mergers & Acquisitions HDFC-CBOP Final

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MERGERS & ACQUISITIONS

PROF. RAMAKRISHNAN

HDFC-CBOP MERGER ANALYSIS

Amit Kumar-03

Krishnakumar Chirakkal-10

Darshan Joshi -11

Jeevan Prabhu -16

Ajoy Agarwal-31


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Introduction

M&As in banking since 1961

Nationalisation of Banks in 1969, even prior to that about46 amalgamations have taken place.

Initially, the mergers were thrust upon by RBI to take

over a sick bank. In 1998, Narsimham Committee II suggested market

driven mergers as a way to strengthen the IndianBanking Sector

They suggested that banks merge on the basis ofbusiness considerations and strategic fit so as to gainvarious kinds of synergies in the post-merger period

Thus in 1999, the first market driven merger took placebetween HDFC and Times Bank.


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Major Mergers of Last Decade

Year Transferor Bank Transferee Bank

2001 Bank of Madura ICICI Bank Ltd.

2002 Benaras State Bank Ltd. Bank of Baroda

2003 Bank Muscat Centurion Bank of Punjab

2004 Global Trust Bank Oriental Bank of Commerce

2006 Lord Krishna Bank Centurion Bank of Punjab

2007 Sangli Bank ICICI Bank Ltd.

2008 State Bank of Saurashtra State Bank of India

2008 Centurion Bank of Punjab HDFC Bank Ltd.


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Legal Perspective of BankingAmalgamation

Sec 44A of the Banking Regulation Act, 1949 providesfor the procedure for amalgamation of bankingcompanies.

The draft scheme of amalgamation has to be approvedby the shareholders of each banking company by aresolution passed by a majority in number representingtwo-thirds in value.

Any shareholder, who has voted against the scheme ofamalgamation at the meeting or has given notice inwriting shall be entitled to claim from the banking

company, the value in respect of the shares held by him Before convening a meeting of the shareholders for their

approval, the draft scheme of amalgamation needs to beapproved individually by the Board of Directors of eachbank.


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Legal Perspective of BankingAmalgamation

Once the Scheme of amalgamation is approved by therequisite majority of shareholders in accordance to theprovisions of the section, it shall be submitted to theReserve Bank for Sanction

On the sanctioning of the scheme from RBI, the assetsincluding any property thereof will be transferred to thetransferee company

Similarly, the liabilities of the transferor company, shall by

virtue of the sanction, be the virtue of the transfereecompany.

Further, on the receipt of the order the Registrar ofCompanies will strike the name off the transferor.


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A Brief History.

CBOP History

30 June94 - Centurion Bank was incorporated

2003 Acquires Bank Muscat

2005 - Bank of Punjab Merges with Centurion bankto form Centurion Bank of Punjab.

2006 CBOP acquired south-based Lord KrishnaBank

HDFC History August94 Incorporation of HDFC bank

2000- Acquired Times Bank

finally in 2008 Acquired CBOP


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Deal Size and Structure

The merger became effective onMay 23, 2008 as per the order ofReserve Bank of India (RBI) datedMay 20, 2008.

CBoP was valued at $2.63 billion

(Rs. 9510 crores) All stock deal

Swap Ratio 1:29

1 HDFC share swapped with 29shares of CBoP

The swap ratio was based on therecommendations made by jointvaluers Dalal & Shah, a charteredaccounting firm, and Ernst &Young, a consulting Firm

Pooling of interest method was

used for accounting


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BASES FOR DETERMINING EXCHANGERATIO

Market Price Method

Share Exchange Ratio = (Mkt Price of CBoP)/ (Mkt Price of HDFC Bank)

SER = 51 /1475 = 0.03458 i.e. Swap ratio 1:29

EPS Method

SER= (EPS of CBoP /EPS of HDFC Bank )

SER = 0.67/31.6 = 0.021 i.e. Swap ratio 1:48


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Stock Market Reaction

The CAR on the immediate announcement day is 1.01 forCBoP.

The CARs for the day 0 to +10 was -13.89 for CBoP.

The major cause of fall in returns of CBoP may be attributed


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Stock Market Reaction

The reason for the immediate negative market reaction to HDFC Bankcan be that it was a stock-financed merger and also the market felt thatHDFC Bank had paid more price than the real worth of the target bank.

HDFC Banks shares recover two days after the announcement on theexpectation of huge economic and managerial synergies that themerged entity would enjoy.


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Challenges to the Merger

Expensive Acquisition

HDFC bank had paid a sum of 2.68 Cr whereas cost of setting up anew

branch is 0.3 Cr Sub-optimal locations of 50-100 CBOP branches

Low Quality Assets

Inferior asset quality of CBOP

Ratio of NPA to total assets = 0.43% for HDFC, whereas 1.31% forCBOP Declining share of low cost deposits at CBOP

Risky Loan Profile

SME loans are prone to high default rates


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Challenges to the Merger

Integration Issues

Both HDFC Bank and CBoP have worked in a union-free

environment

Trade union culture at Lord Krishna bank

Ongoing agitation by unions of public sector banks

Competency and perception mapping of employees

Dilution in ROE

After merger shareholding of HDFC promoters is going to

reduce from 23% to 19%


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Opportunity in every Difficulty

Expensive deal Time machine taking HDFC 2.5yrs ahead. Also it has saved itself from thehassles it would have to face for getting freshbranch licenses from RBI

Integration - Top brass of the managementsshared a good chemistry, strengtheningmanagement bandwidth

Different technology platforms - Yet there are no

data legacy issues as the two are alreadytechnology oriented. Dilution of equity Convertible warrants to

promoters of HDFC


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Operating Synergy

Economies of Scope

Addition of 394 of CBoPs branches resulted in thecombined entity having 1148 branches. With themerger, HDFC Banks metro branches will increase by

44% in one shot, while its non metro branches willincrease by 57%.

Similar business model and philosophy underlined bya thrust on branch network expansion and retail

assets. Transform in the largest branch distribution network for

a private bank in India.

Both banks have senior managements of high calibrewho have worked with Citigroup at some point in their

career.


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Operating Synergy

Economies of Scale

Scope to enhance productivity CBoPs cost to income ratio is high at 63%. There is also scope for improvement in utilization

ratios with improvement in branch and employeeproductivity to near HDFC Banks levels. Improvement in productivity levels will help HDFC

Bank lower CBoPs cost to income ratio over themedium term.

Complementary Overlay With the merger, CBoPs ability to grow its loan book

will complement HDFC Banks deposit franchise. On the product portfolio side, both the banks have a

strong foothold in vehicle financing, which is a naturals ner .


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Operating Synergy

Boost to International Operations: HDFC had a representative office in Dubai and had

obtained licenses to operate branches in Bahrain and HongKong, whereas CBoP had one branch in Canada.

The merged entity may also explore the opportunity ofacquiring banks in foreign markets.

Managerial Synergies: HDFC Bank had been growing at over 40% annually and to

sustain this growth, it needs massive managementbandwidth.

The merger with CBoP would bring with it the top-notchmanagement team that would help the merged entity inmeeting its future manpower requirements.

The merged entity would be leveraging the expertise of thisstar-studded management team for managing its domestic

as well as international operations.


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Post Merger Scenario

Impact on Growth


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The size of merged entity expanded by 23%.

The merged entity moved up from 10th to 7thposition.

The merger immediately provided hugeadvantage to the merged entity in terms of size,

deposits, customers, business and profitability.

Impact on Growth


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Impact on Profitability

Ahead of its peer as well as the rival bank even aftermerger in terms of various profitability ratios, though thesewould decline compared to the stand-alone performance

of HDFC Bank.


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Impact on Efficiency

Except for the ratio of operating cost/total assets, all otherefficiency ratios were better for the merged entity as compared tothat of the stand-alone entity, its peer and the rival banks. So, themerger improved the efficiency with immediate effect.


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Impact on Productivity - Branch

Branch productivity of the merged bank deteriorated interms of all ratios as compared to the stand-aloneperformance of HDFC Bank as well as when compared tothe performance of its peer and rival bank.


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Impact on Productivity - Employee

Results similar to those of branch productivity -decreased


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From analysis of various ratiosMerged HDFC Bank gain size, scale and businessreach along with the improvement in the profitabilityand efficiency with immediate effect.

Branch productivity as well as employee productivitydeteriorate as a result of the merger.

1. Proper branch and employee rationalization.(more products and services being pushed throughthe

enlarged branch network and workforce).2. Realization of potential synergies in the form of

economies of scale and scope

Requirement


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Thank You

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Mergers & Acquisitions HDFC-CBOP Final

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