PROJECT REPORT
Mergers and Acquisitions in Indian banking sector
IntroductionGenerally speaking, a bank is an institution dealing
in money. The origin of the word bank is traced back to Italian
word banca or banque, which means a bench. It is stated in middle
Ages the European money changers and moneylenders displayed their
coins on their benches and conducted their business. Hence the term
bank refers to the bench on which the business of money changing
and money lending was conducted. Hence, the term banking is defined
as accepting for the purpose of lending or investment, the deposits
of money from the public, repayable on demand or otherwise and
withdrawal by cheque, draft and order or otherwise.In the recent
past, the Indian banking system has been undergoing major changes
that have affected both its structure and nature of interactions
among banking institutions. Different strategies have been adopted
to tackle the demand of this new operating environment, one such
strategy having been consolidation via mergers and acquisitions.It
is observed that banking industry is moving from traditional
savings-cum=lending functions to other services as well, such as
bank assurance and security trading. In recent times banks have
diversified their activities to cover a wide range of activities.
They arrange remittance of funds from one place to another, they
act as agent of their customers in certain activities like payment
of subscription, and they also act as guarantor to their customers.
Thus, banks in India need to change their form and structure so as
to adopt to meet this changing scenario of being a total financial
service provider and for this a preferred route of consolidation
through mergers and acquisitions.Consolidation of banks through
mergers and acquisitions is an important force of change taking
place in the Indian banking sector. These are driven by the
objective of leveraging the synergies arising from the process of
M&A. Due to the financial transformation process, Indian
banking system is witnessing a sea change from controlled to market
driven environment, which has made the industry more competitive.
This competition has forced the banks to look for the restructuring
in the form of M&A.Global market and technological
developments, macroeconomic pressures and banking crises in 1990s
have forced the banking industry and the regulators to change the
old way of doing business and to deregulate the banking industry at
the national level and open up financial markets to foreign
competition. These changes have significantly increased competitive
pressures on banks in the emerging economics and have lead to deep
changes in the structure of the banking industry.
Rationale of studyBanking system occupies an important place in
a nations economy. It plays a pivotal role in the economic
development of a country. Mergers and Acquisitions in the Indian
Banking Sector are going to be the order of the day. India is
slowly but surely moving from a regime of `large number of small
banks' to `small number of large banks'. With the help of mergers
and acquisitions in the banking sector, the banks can achieve
significant growth in their operations and minimize their expenses
to a considerable extent. Another important advantage behind this
kind of merger is that in this process, competition is reduced
because merger eliminates competitors from the banking industry.
Hence, in the preview of the present scenario, it is imperative to
study the cases of mergers and acquisitions in Indian banking
system.
Objective of studyThe following are the objectives of the
research:1. To study the motives for mergers and acquisitions.2. To
study the need for mergers and acquisitions in banking sector.3. To
study the impact of these mergers and acquisitions.
Scope of research
The research has been conducted through the study of banking
sector, in general and cases of merger and acquisition of following
cases, in particular.1. Merger of Centurion Bank of Punjab and HDFC
bank.2. Proposed merger of State Bank of Indore with SBI.
Research methodology
Many different types of methods, tools or techniques are used
for research methodology. It is a path adopted by the researchers
to complete the research process. Hence it plays a vital role,
because without this the project cannot be completed.
The methodology or course of action adopted to fulfill the
objectives was Exploratory Research. The data is mainly collected
from secondary sources like Published reports, websites, various
books and journals.
INTRODUCTIONTOMERGERSANDACQUISITIONS
INTRODUCTION TO MERGER AND ACQUISITION
MERGERSA merger occurs when two or more companies combines and
the resulting firm maintains the identity of one of the firms. One
or more companies may merger with an existing company or they may
merge to form a new company.Usually the assets and liabilities of
the smaller firms are merged into those of larger firms. Merger may
take two forms-1. Merger through absorption2. Merger through
consolidation.AbsorptionAbsorption is a combination of two or more
companies into an existing company. All companies except one lose
their identity in a merger through absorption.ConsolidationA
consolidation is a combination if two or more combines into a new
company. In this form of merger all companies are legally dissolved
and a new entity is created. In consolidation the acquired company
transfers its assets, liabilities and share of the acquiring
company for cash or exchange of assets. ACQUISITIONA fundamental
characteristic of merger is that the acquiring company takes over
the ownership of other companies and combines their operations with
its own operations.An acquisition may be defined as an act of
acquiring effective control by one company over the assets or
management of another company without any combination of
companies.
DISTINCTION BETWEEN MERGERS AND ACQUISITIONS
Although they are often uttered in the same breath and used as
though they wereSynonymous, the terms merger and acquisition mean
slightly different things.When one company takes over another and
clearly established itself as the new owner, the purchase is called
an acquisition. From a legal point of view, the target company
ceases to exist, the buyer "swallows" the business and the buyer's
stock continues to be traded.
In the pure sense of the term, a merger happens when two firms,
often of about the same size, agree to go forward as a single new
company rather than remain separately owned and operated. This kind
of action is more precisely referred to as a "merger of equals."
Both companies' stocks are surrendered and new company stock is
issued in its place.
In practice, however, actual mergers of equals don't happen very
often. Usually, one company will buy another and, as part of the
deal's terms, simply allow the acquired firm to proclaim that the
action is a merger of equals, even if it's technically an
acquisition. Being bought out often carries negative connotations,
therefore, by describing the deal as a merger, deal makers and top
managers try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs
agree that joining together is in the best interest of both of
their companies. But when the deal is unfriendly - that is, when
the target company does not want to be purchased it is always
regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition
really depends on whether the purchase is friendly or hostile and
how it is announced. In other words, the real difference lies in
how the purchase is communicated to and received by the target
company's board of directors, employees and shareholders.
TYPES OF MERGERS
Mergers are of many types. Mergers may be differentiated on the
basis of activities, which are added in the process of the existing
product or service lines. Mergers can be a distinguished into the
following four types:-
1. Horizontal Merger2. Vertical Merger3. Conglomerate Merger4.
Concentric Merger
Horizontal merger
Horizontal merger is a combination of two or more corporate
firms dealing in same lines of business activity. Horizontal merger
is a co centric merger, which involves combination of two or more
business units related to technology, production process, marketing
research and development and management.
Vertical Merger
Vertical merger is the joining of two or more firms in different
stages of production or distribution that are usually separate. The
vertical Mergers chief gains are identified as the lower buying
cost of material. Minimization of distribution costs, assured
supplies and market increasing or creating barriers to entry for
potential competition or placing them at a cost disadvantage.
Conglomerate Merger
Conglomerate merger is the combination of two or more unrelated
business units in respect of technology, production process or
market and management. In other words, firms engaged in the
different or unrelated activities are combined together.
Diversification of risk constitutes the rational for such merger
moves.
Concentric Merger
Concentric merger are based on specific management functions
where as the conglomerate mergers are based on general management
functions. If the activities of the segments brought together are
so related that there is carry over on specific management
functions, such as marketing research, Marketing, financing,
manufacturing and personnel.
MOTIVES FOR MERGER
1. GROWTH 0R DIVERSIFICATION: - Companies that desire rapid
growth in size or market share or diversification in the range of
their products may find that a merger can be used to fulfill the
objective instead of going through the tome consuming process of
internal growth or diversification. The firm may achieve the same
objective in a short period of time by merging with an existing
firm. In addition such a strategy is often less costly than the
alternative of developing the necessary production capability and
capacity. If a firm that wants to expand operations in existing or
new product area can find a suitable going concern. It may avoid
many of risks associated with a design; manufacture the sale of
addition or new products. Moreover when a firm expands or extends
its product line by acquiring another firm, it also removes a
potential competitor.
2. SYNERGISM: - The nature of synergism is very simple.
Synergism exists when ever the value of the combination is greater
than the sum of the values of its parts. In other words, synergism
is 2+2=5. But identifying synergy on evaluating it may be
difficult; in fact sometimes its implementations may be very
subtle. As broadly defined to include any incremental value
resulting from business combination, synergism in the basic
economic justification of merger. The incremental value may derive
from increase in either operational or financial efficiency.
Operating Synergism: - Operating synergism may result from
economies of scale, some degree of monopoly power or increased
managerial efficiency. The value may be achieved by increasing the
sales volume in relation to assts employed increasing profit
margins or decreasing operating risks. Although operating synergy
usually is the result of either vertical/horizontal integration
some synergistic also may result from conglomerategrowth. In
addition, some times a firm may acquire another to obtain patents,
copyrights, technical proficiency, marketing skills, specific fixes
assets, customer relationship or managerial personnel.
Operating synergism occurs when these assets, which are
intangible, may be combined with the existing assets and
organization of the acquiring firm to produce an incremental value.
Although that value may be difficult to appraise it may be the
primary motive behind the acquisition.
Financial synergism: - Among these are incremental values
resulting from complementary internal funds flows more efficient
use of financial leverage, increase external financial capability
and income tax advantages.
a) Complementary internal funds flow
Seasonal or cyclical fluctuations in funds flows sometimes may
be reduced or eliminated by merger. If so, financial synergism
results in reduction of working capital requirements of the
combination compared to those of the firms standing alone.
b) More efficient use of Financial Leverage
Financial synergy may result from more efficient use of
financial leverage. The acquisition firm may have little debt and
wish to use the high debt of the acquired firm to lever earning of
the combination or the acquiring firm may borrow to finance and
acquisition for cash of a low debt firm thus providing additional
leverage to the combination. The financial leverage advantage must
be weighed against the increased financial risk.
c) Increased External Financial Capabilities
Many mergers, particular those of relatively small firms into
large ones, occur when the acquired firm simply cannot finance its
operation. Typical of this is the situations are the small growing
firm with expending financial requirements. The firm has exhausted
its bank credit and has virtually no access to long term debt or
equity markets. Sometimes the small firm has encountered operating
difficulty. In this type of situation a large firms with sufficient
cash and credit to finance the requirements of smaller one probably
can obtain a good buy bee, making a merger proposal to the small
firm. The only alternative the small firm may have is to try to
interest 2 or more large firms in proposing merger to introduce,
competition into those bidding for acquisition.
d) The Income Tax Advantages
In some cases, income tax consideration may provide the
financial synergy motivating a merger, e.g. assume that a firm A
has earnings before taxes of about rupees ten crores per year and
firm B now break even, has a loss carry forward of rupees twenty
crores accumulated from profitable operations of previous years.
The merger of A and B will allow the surviving corporation to
utility the loss carries forward, thereby eliminating income taxes
in future periods.
3. INCREASED MANAGERIAL SKILLS :-
Occasionally a firm will have good potential that is finds it
unable to develop fully because of deficiencies in certain areas of
management or an absence of needed product or production
technology. If the firm cannot hire the management or the
technology it needs, it might combine with a compatible firm that
has needed managerial, personnel or technical expertise. Of course,
any merger, regardless of specific motive for it, should contribute
to the maximization of owners wealth.
4. ACQUIRING NEW TECHNOLOGY:-
To stay competitive, companies need to stay on top of
technological developments and their business applications. By
buying a smaller company with unique technologies, a large company
can maintain or develop a competitive edge.
NEEDFORMERGERSANDACQUISITIONS
NEED FOR MERGER AND ACQUISITION
The earlier economic turmoil in several developing nations
demonstrated that strong banking system is critical. Throughout the
world, banking industry has been transformed from highly protected
and regulated to competitive and deregulated. Globalization coupled
with technological development has shrinked the boundaries. Trade
has become transactional from international. Due to this, there is
no difference between domestic and foreign currency. As a result
innovations and improvement assumed greatest significance in
institutional performance. This trend of global banking has been
marked by twin phenomena of consolidation and convergence.The trend
towards consolidation has been driven by the need to attain
meaningful balance sheet size and market share in the face of
intensified competition. The trend towards convergence is driven by
a move across industry to provide most of the financial services
under one roof. Indian banking experienced wide ranging reforms in
the last decade and these reforms have contributed to a great
extent in enhancing their competitiveness. The issue of bank
restructuring assumes significance from the point of view of making
Indian banking strong and sound apart its growth and development to
become suitable.International evidence also strongly indicates
greater gains to banking industries after the restructuring
process. With the impending capital account convertibility, cross
border movement of financial capital would become a reality. Such a
scenario would lead to the alignment of various structures with the
international Indian banks for that matter almost all the banks in
Asia, especially in small emerging countries are at disadvantage on
all fonts- size, technology, capital base, cost of fund,
availability of highly trained personnel to deal in international
market, worldwide networking and freedom of actions. If we cannot
consolidate our size, it is rather difficult to find reasons that
could prevent Indian banks from being swallowed by the powerful
foreign banks in the long run, under the free for all environments.
The core objective of restructuring is to maintain long term
profitability and strengthen the competitive edge of banking
business in the context of changes in the fundamental market
scenario. Restructuring can have both internal and external
dimensions.The pace of change in the financial market world over
and in the external economic environment, in which we work, shows
no sign of slowing down. Commercial banks now have to think global
to service the requirements of the highly sophisticated
multinationals that are increasingly dominated the industrial
world. The development of a global market place has accelerated
through the deregulation of domestic markets and the removal of
barriers to cross border trade. Even on the merger front, we have
witnessed an increasing number of cross border alliances. As per
the recent guidelines, the overall ceiling for foreign direct
investment in private sector banks has also been enhanced. In the
changed scenario, it has now become extremely important for Indian
banks to remain competitive for surviving. Universally there is a
move towards consolidation and convergence. The bank merger process
should be primarily market driven and such proposals should come
voluntarily from the banks themselves, depending on the
organizational synergy and the market share. If you look at our
banks in global context, we do not really feature high in the list
of large banks. In the top 1000 list only 20 Indian banks feature
and in the top 200 only one bank gets listed. Even smaller
countries like Taiwan has larger than the largest Indian
bank.Certainly, there is need for us to pause and seriously think
this issue out. Today banking is a competitive field, something
which was not really conceivable a decade back. Niche players could
play out for a while, but would put pressure on banks to reach
critical sizes of mass to succeed in business. Further, the
pressure of capital would tend to surround the management of banks,
which in turn requires enough clout to access markets. As is true,
only the best or largest would survive. Bank mergers would be the
rule rather than exception in times to come and there is a need for
banks to check their premises before embanking on their future
plans. There are synergies to be leveraged through consolidation
where factors such as size, spread, technology, human resource and
capital can be reconciled. We could hence think of a situation
where we have 4-5 global players which are really large, a handful
of regional banks which will gradually set to merger and some other
players which will get to acquire special niche to serve limited
market. But it involves the sorting of various issues such as
legal, regulatory, procedural etc. This is statement of SH. V.
Leeladhar, chairman, IBA on 28th August, 2004.History has improved
beyond doubt that strong banking systems are critical for sound
economic growth. It is important to improve the comprehensiveness
and quality of the banking system to bring efficiency in the
performance of the real sector in India.Throughout the world,
banking industry has been transferred from a highly protected and
regulated situation to competitive and deregulated. Globalization
coupled with technological development has shrinked the boundaries.
Financial services and products are being provided to the customers
across the length and breadth of the globe.Due to this, domestic
and foreign currency, banking and non banking financial services
are getting closer. Correspondingly innovations and improvements
assumed greater significance in institutional performance. This
trend of global banking has been marked by twin phenomena of
consolidation and convergence. The trend towards consolidation has
been driven by the need to attain meaningful balance sheet size and
market share in the face of intensified competition. The trend
towards convergence is driven by a move across industry to provide
most of the financial service viz., banking, insurance, investment
etc, to the customers in one roof. Consolidation of banking
industry is critical from several aspects. The factors inducing
mergers and acquisition include technological progress, excess
capacity, emerging opportunities and deregulation of geographic,
functional and product restrictions. It may also bring the
performance of public sector banks to a remarkable level without
variation between banks in public sector.
MERGERS ANDINDIANBANKINGSECTOR
MERGER AND INDIAN BANKING SECTOR
Mergers and acquisitions encourage banks to gain global reach
and better synergy and allow large banks to acquire the stressed
assets of weaker banks. Merger in India between weak/unviable banks
should grow faster so that the weak banks could be rehabilitated
providing continuity of employment with the working force,
utilization of the assets blocked up in the weak/unviable banks and
adding constructively to the prosperity of the nation through
increased flow of funds.The process of merger and acquisition is
not a new happening in case of Indian Banking, Grind lay Bank
merged standard charted Bank, Times Bank with HDFC Bank, bank of
Madura with ICICI Bank, Nedungadi Bank Ltd. With Punjab National
Bank and Global Trust Bank merged with Oriental Bank of Commerce.
The small and medium sized banks are working under threats from
economic environment which is full of problem for them, viz.
inadequacies of resources, outdated technology, on systemized
management pattern, faltering marketing efforts and weak financial
structure. Their existence remains under challenge in the absence
of keeping pace with growing automation and techniques obsolescence
and lack of product innovations. These banks remain, at times,
under threat from large banks. Their reorganization through
consolidation/merger could offer succor to re-establish them in
viable banks of optimal size with global presence.Merger and
amalgamation in Indian banking so far has been to provide the
safeguard and hedging to weak bank against their failure and too at
the initiative of RBI, rather than to pay the way to initiate the
banks to come forward on their own record for merger and
amalgamation purely with a commercial view and economic
consideration.As the entire Indian banking industry is witnessing a
paradigm shift in systems, processes, strategies, it would warrant
creation of new competencies and capabilities on an ongoing basis
for which an environment of continuous learning would have to be
created so as to enhance knowledge and skills.There is every reason
to welcome the process of creating globally strong and competitive
banks and let big Indian banks create big thunders internationally
in the days to come.In order to achieve the INDIAN VISION 2020 as
envisaged by Honble president of India Sh. A.P.J.Addul Kalam much
requires to be done by banking industry in this regard. It is
expected that the Indian banking and finance system will be
globally competitive. For this the market players will have to be
financially strong and operationally efficient. Capital would be
key factor in the building a successful institution. The Banking
and finance system will improve competitiveness through a process
of consolidation either through mergers and acquisitions or through
strategic alliances. There is need to restructure the banking
sector in India through merger and amalgamation in order to makes
them more capitalized, automated and technology oriented so as to
provide environment more competitive and customer friendly.
RISKS ASSOCIATED WITH MERGER
There are several risks associated with consolidation and few of
them are as follows: -1) When two banks merge into one then there
is an inevitable increase in the size of the organization. Big size
may not always be better. The size may get too widely and go beyond
the control of the management. The increased size may become a drug
rather than an asset.2) Consolidation does not lead to instant
results and there is an incubation period before the results
arrive. Mergers and acquisitions are sometimes followed by losses
and tough intervening periods before the eventual profits pour in.
Patience, forbearance and resilience are required in ample measure
to make any merger a success story. All may not be up to the plan,
which explains why there are high rate of failures in mergers.3)
Consolidation mainly comes due to the decision taken at the top. It
is a top-heavy decision and willingness of the rank and file of
both entities may not be forthcoming. This leads to problems of
industrial relations, deprivation, depression and demotivation
among the employees. Such a work force can never churn out good
results. Therefore, personal management at the highest order with
humane touch alone can pave the way.4) The structure, systems and
the procedures followed in two banks may be vastly different, for
example, a PSU bank or an old generation bank and that of a
technologically superior foreign bank. The erstwhile structures,
systems and procedures may not be conducive in the new milieu. A
thorough overhauling and systems analysis has to be done to
assimilate both the organizations. This is a time consuming process
and requires lot of cautions approaches to reduce the frictions.5)
There is a problem of valuation associated with all mergers. The
shareholder of existing entities has to be given new shares. Till
now a foolproof valuation system for transfer and compensation is
yet to emerge.6) Further, there is also a problem of brand
projection. This becomes more complicated when existing brands
themselves have a good appeal. Question arises whether the earlier
brands should continue to be projected or should they be submerged
in favor of a new comprehensive identity. Goodwill is often towards
a brand and its sub-merger is usually not taken kindly.ORGANISED
BANKING STRUCTURE IN INDIA
MERGEROFHDFC BANKANDCENTURIONBANK OF PUNJAB
MERGER OF HDFC BANKANDCENTURION BANK OF PUNJAB
ABOUT HDFC BANK
Housing Development Finance Corporation Limited, more popularly
known as HDFC Bank Ltd, was established in the year 1994, as a part
of the liberalization of the Indian Banking Industry by Reserve
Bank of India (RBI). It was one of the first banks to receive an
'in principle' approval from RBI, for setting up a bank in the
private sector. The bank was incorporated with the name 'HDFC Bank
Limited', with its registered office in Mumbai. The following year,
it started its operations as a Scheduled Commercial Bank. Today,
the bank boasts of around 1500 branches and over 4700 ATMs across
India.Promoted in 1995 by Housing Development Finance Corporation
(HDFC), India's leading housing finance company, HDFC Bank is one
of India's premier banks providing a wide range of financial
products and services to its over 11 million customers across over
three hundred cities using multiple distribution channels including
a pan-India network of branches, ATMs, phone banking, net banking
and mobile banking. Within a relatively short span of time, the
bank has emerged as a leading player in retail banking, wholesale
banking, and treasury operations, its three principal business
segments.The bank's competitive strength clearly lies in the use of
technology and the ability to deliver world-class service with
rapid response time. Over the last 13 years, the bank has
successfully gained market share in its target customer franchises
while maintaining healthy profitability and asset quality.
About Centurion Bank of Punjab
Centurion bank of Punjab is a new generation private bank
offering a wide spectrum of retail, SME and corporate banking
products and services. It has been among the earliest banks to
offer a technology enabled customer interface that provides easy
access and superior customer service.Centurion Bank of Punjab has a
nationwide reach through its network of 241 branches and 389 ATMs.
The bank aims to serve all the banking and financial needs of its
customers through multiple delivery channels, each of which is
supported by state of the art technology architecture. Centurion
Bank of Punjab was formed by the merger of Centurion Bank and Bank
of Punjab, both of which had strong retail franchises in their
respective markets. Centurion Bank had a well managed and growing
retail assets business, including leadership positions in two
wheeler loans and commercial vehicles loans and a strong capital
base. Bank of Punjab brings with it a strong retail deposit
customer base in North India in addition to a sizable SME and
agriculture portfolio. The shares of the bank are listed on the
major stock exchanges in India and also on the Luxembourg Stock
exchange. Among centurion bank of Punjabs greatest strengths is the
fact that it is a professionally managed bank with a globally
experienced and capable management team. Centurion Bank of Punjab
now operates on a strong nationwide franchise of 394 branches and
452 ATMs in 180 locations across the country, supported by employee
base of over 7,500 employees.
PROFILE OF BIDDER BANK (HDFC)
Capital Adequacy Ratio (%)13.1
Net Profit After Tax (cr)1143.5
Deposits (cr)68297.9
Advances (cr)46944.8
Balance sheet size (cr)91235.6
Equity share Price Before merger (Rs)1474.9
Net NPA (%)0.4
Number Of branches1100.0
Number Of employees21477.0
PROFILE OF TARGET BANK (CBOP)
Capital Adequacy Ratio (%)11.1
Net Profit After Tax (cr)121.4
Deposits (cr)14863.7
Advances (cr)11221.4
Balance sheet size (cr)18482.8
Equity share Price Before merger (Rs)56.4
Net NPA (%)1.3
Number Of branches394.0
Number Of employees7500.0
MERGER POSITIONOn May 23, 2008, the amalgamation of Centurion
Bank of Punjab with HDFC Bank was formally approved by Reserve Bank
of India to complete the statutory and regulatory approval process.
As per the scheme of amalgamation, shareholders of CBoP received 1
share of HDFC Bank for every 29 shares of CBoP.The merged entity
has a strong deposit base of around Rs. 1, 22,000 crore and net
advances of around Rs. 89,000 crore. The balance sheet size of the
combined entity was over Rs. 1, 63,000 crore. The amalgamation
added significant value to HDFC Bank in terms of increased branch
network, geographic reach, and customer base, and a bigger pool of
skilled manpower.
HDFC PerspectiveWhile the swap ratio of 1:29 for HDFC-CBOP
merger turned out to be more favorable for HDFC Bank than expected
by the market, the merger appears to be long-term positive on
market cap to branch basis.
The market cap to branch ratio of HDFC Bank is Rs.721m where the
same for CBOP is Rs. 238m. Hence, HDFC Bank has been able to buy
the franchisee of CBOP at almost one-third of what the market is
currently giving to its own franchisee. HDFC Bank has managed to
improve the productivity of these branches to even half the levels
of HDFC Bank branches; the merger has become positive in longer
term.It is expected that HDFC Bank has taken a one-time charge of
~Rs3.5bn to be netted off against reserves in order to clean up
CBoPs balance sheet at the time of the merger and to account for
the merger related expenses.
CBoP Perspective
The bank has been valued at 4.7x FY08E BV. Given the fact that
the profitability ratios of CBoP are quite low, this looks an
expensive proposition for HDFC in the short run. Thus the deal is a
profitable deal for CBoP who in all probabilities would have sold
out to a foreign player past 2009.
Positives from the Merger
HDFC get an access to 394 branches of CBoP and an increased
presence in southern and northern states. At present, 170 of CBoPs
branches lie in the North, concentrated in the National Capital
Region (NCR, 55), Punjab (78), Haryana (28); 150 of its branches
are situated in the South, mainly in Kerala (91). The merger has
provided the HDFC Bank with greater access to the North (Punjab and
Haryana) as well as the South (particularly Kerala), thereby
strengthening its presence in those regions.Apart from the strong
retail focus of both the banks, CBoPs strong SME relationship has
complemented HDFC bias towards highly rated corporate thus
expanding HDFCs base.The merger has resulted in the creation of
Indias 7th largest bank, just behind public giants like Bank of
Baroda, Bank of India. An important gain for HDFC Bank is induction
of a strong and capable management team with extensive industry
experience and proven capabilities.
ASSET SIZE OF 7 LARGEST BANKS OF INDIA
Post Merger Scenario
Retail segment is the main focus for the combined entity and is
the crucial growth driver. Due to an influx of 394 branches from
CBoP, there is a significant increase in the number of branches for
HDFC. There is significant scope for improvement in utilization of
the branch network, as branch/ employee productivity is still way
below that for the peer group. As the combined entity leverages the
CBoPs branch network, the opex to average asset has continued to
trend down. The opex to average asset is expected to decline from
3.4% in FY08 to 3.28% in FY10.CBoP had a weaker asset profile with
net NPAs of 1.6% as against 0.4% for HDFC Bank. Going forward, HDFC
Bank (combined entity) has maintained its NPA profile at these
levels, which has required a charge of ~Rs2bn. In addition, it is
expected that HDFC Bank has provided for another Rs1.5bn towards
any potential NPAs.
In the opinion of the Board of Directors of HDFC bank the
following are amongst others, the benefits that have accrued to the
members from the proposed scheme:(a) Financial Capability: The
amalgamation has enabled the merge entity to have a stronger
financial and business profile, which has been synergized to both
for resources and mobilization and asset generation.(b) Branch
Network: As a result of the amalgamation, the branch network of the
merged entity has increased to 394 branches, providing increased
geographic coverage, particular in the northern India and Kerala,
giving it a larger national foot print as well as convenience to
its customers.(c) Retail Customer Base: The amalgamation has
enabled the merged entity to increase its retail customer base.
This larger customer base has provided the merged entity enhanced
opportunities for offering banking and financial services and
products and facilitate cross selling of products and services.(d)
Use of Technology: Post amalgamation, the merged entity has been
able to provide through its branches, ATMs, phone and the internet
banking and financial services and products to a larger customer
base, with expected savings in costs and operating expenses.(e)
Larger Size: The larger asset base of the merged entity has put the
merged entity amongst the bigger players in the private sector
banking space.
PROPOSEDMERGEROFSTATE BANK OF INDIAANDSTATE BANK OF INDORE
PROPOSED MERGER OFSTATE BANK OF INDIAAND STATE BANK OF
INDOREABOUT STATE BANK OF INDIA
State Bank of India is the nation's largest and oldest bank.
Tracing its roots back some 200 years to the British East India
Company (and initially established as the Bank of Calcutta in
1806), the bank operates more than 15,000 branches within India,
where it also owns majority stakes in six associate banks. State
Bank of India (SBI) has more than 80 offices in nearly 35 other
countries, including multiple locations in the US, Canada, and
Nigeria. The bank has other units devoted to capital markets, fund
management, factoring and commercial services, credit cards, and
brokerage services. The Reserve Bank of India owns about 60% of
State Bank of India.
The corporate center of SBI is located in Mumbai. In order to
cater to different functions, there are several other
establishments in and outside Mumbai, apart from the corporate
center. The bank boasts of having as many as 14 local head offices
and 57 Zonal Offices, located at major cities throughout India. It
is recorded that SBI has about 10000 branches, well networked to
cater to its customers throughout India. SBI surpassed market
expectations and posted a 10.19 per cent growth in net profit to Rs
2,490 crore for the quarter ended September 2009. Punters expected
nine to 10 per cent growth in net profit during the quarter.The Six
Banking Subsidiaries Of SBI Are: State Bank of Bikaner and Jaipur
(SBBJ) State Bank of Hyderabad (SBH) State Bank of Indore (SBIR)
State Bank of Mysore (SBM) State Bank of Patiala (SBP) State Bank
of Travancore (SBT)ABOUT STATE BANK OF INDORE
One of the nationalized banks in India, State Bank of Indore was
formerly named as Bank of Indore Ltd. It was established under a
special charter of His Highness Maharaja Tukojirao Holker-III, the
then ruler of Malwa region. The Bank is also known as Indore Bank
in Malwa region. It became a subsidiary of State Bank of India on 1
January 1960, under the State Bank of India Subsidiary Banks Act,
1959. Bank of Indore Ltd. and came to be known as State Bank of
Indore, after its association with SBI.State Bank of Indore was
upgraded to class 'A' category bank in 1971. Over the years, the
Bank has been making significant growth in terms of its business.
The business turnover of the Bank crossed Rs.47000 Crore at the end
of December 2008. It has emerged as the premier bank of Madhya
Pradesh due to its steady progress. The Bank aims to be the premier
financial institution of Indore and wants to secure its position as
a prominent part of the State Bank group.
Apart from general banking operations, State Bank of Indore has
undertaken multi-faceted banking activities too. It has also
succeeded to great extent in reaching the rural sectors, especially
agricultural segment in the country. In the process, the Bank has
provided many useful services to its customers, such as credit and
loans to the farmers. Schemes such as Kisan Gold Card Scheme and
the Kisan Credit Card Scheme are part of the efforts taken by State
Bank of Indore to reach its customers in the rural areas of the
country. State Bank of Indore posted a 25.69 per cent year-on-year
rise in net profit at Rs 78.62 crore for the second quarter ended
September 30, as total income rose to Rs 776.39 crore. It has over
500 branches, located mainly in the central parts of India.
MERGER POSITION
The Government has granted sanction to State Bank of India
(SBI), under Section 35(1) of the State Bank of India Act, 1955,
vide Department of Financial Services letter dated 08.10.2009 for
proceeding with the negotiation with State Bank of Indore for
acquiring its business. Consequently, the scheme of acquisition of
State Bank of Indore by the State Bank of India has been approved
by Board of both the Banks. The Government keeps in view the
interest of all the stakeholders including employees of the merging
banks. It was supposed that the merger would be completed by
December.
This is the second subsidiary to be merged with SBI. As part of
consolidating its operations, SBI had merged the State Bank of
Saurashtra with itself last fiscal. Due to the opposition of the
bank unions, the proposed merger could not be materialized on
time.
The SBI board approved a swap ratio of 34 SBI shares for every
100 shares of State Bank of Indore.. SBI is learnt to have argued
that the merger will help avoid duplication and also benefit the
employees of State bank of Indore. The bank said that it would be
issuing 1.16 lakh shares to theminority shareholdersof State Bank
of Indore. The face value of each share will be Rs. 10.Talking
about this, SBI said in a statement that the Central Bank had
approved thismerger during the Board meeting which took place on
March 26. The statement further added that as per the current
situation, post-mergerthe issued capital of SBI would rise to Rs.
635.08 crore as against the current level of Rs. 634.69 crore. But,
this is still subject to approval from the government.
On March 25, SBI chairman OP Bhatt said, The proposal for the
merger of State Bank of Indore with SBI is on track. The bank is
waiting for the government approval," adding it may happen in the
first quarter of next fiscal and that the bank is procedural issue
which is being looked into.Post-merger, the SBI will be left with
five associate banks State Bank of Bikaner and Jaipur, State Bank
of Travancore, State Bank of Patiala, State Bank of Mysore and
State Bank of Hyderabad. Among these, State Banks of Bikaner and
Jaipur, Mysore and Travancore are listed banks.
FUTURE SCENARIO
The future outlook of the Indian banking industry is that a lot
of action is set to be seen with respect to M & As, with
consolidation as a key to competitiveness being the driving force.
Both the private sector banks and public sector banks in India are
seeking to acquire foreign banks. As an example, the State Bank of
India, the largest bank of the country has major overseas
acquisition plans in its bid to make itself one of the top three
banks in Asia, and among the top 20 globally over next few
years.
Some of the PSU banks are even planning to merge with their
peers to consolidate their capacities. In the coming years we would
also see strong cooperative banks merging with each other and weak
cooperative banks merging with stronger ones.
While there would be many benefits of consolidation like size
and thereby economies of scale, greater geographical penetration,
enhanced market image and brand name, increased bargaining power,
and other synergies; there are also likely to be risks involved in
consolidation like problems associated with size, human relations
problems, dissimilarity in structure, systems and the procedures of
the two organizations, problem of valuation etc which would need to
be tackled before such activity can give enhanced value to the
industry.
CONCLUSION
Growth is always essential for the existence of a business
concern. A concern is bound to die if it does not try to expand its
activities. The expansion of a concern may be in the form of
enlargement of its activities or acquisition of ownership and
control of other concerns. Internal expansion results gradual
increase in the activities of the concern. External expansion
refers to business combination where two or more concerns combine
and expand their business activities.The undercurrent of thinking
is that the larger the bank the higher its competitiveness and
better its prospects of survival. This argument implies that Indian
banks are not in a position to compete for business internationally
in terms of funds mobilization, credit disbursal, investments and
rendering of financial services essentially because of their
relatively small size.As the entire Indian banking industry is
witnessing a paradigm shift in systems, processes, strategies, it
would warrant creation of new competencies and capabilities on an
ongoing basis for which an environment of continuous learning would
have to be created so as to enhance knowledge and skills.There is
every reason to welcome the process of creating globally strong and
competitive banks and let big Indian banks create big thunders
internationally in the days to come.
The Banking and finance system will improve competitiveness
through a process of consolidation through mergers and
acquisitions. There is need to restructure the banking sector in
India through merger and amalgamation in order to makes them more
capitalized, automated and technology oriented so as to provide
environment more competitive and customer friendly.
SUGGESTIONSWhen we look at the cases of past mergers in Indian
banking sector, we find that that these mergers have always proved
to be beneficial for both the banks, as well as for the banking
sector as a whole. Hence, it can be suggested that:-1. The banking
sector in India should be restructured through merger and
amalgamation in order to makes them more capitalized, automated and
technology oriented.2. Given the successful merger of SBI with one
of its associate bank, State bank of Saurashtra, it can be
suggested that SBI should merger its another associate bank, State
bank of Indore as well.
BIBLIOGRAPHY
1.FINANCIAL MANAGEMENT, THEORY CONCEPTS AND PROBLEMS------ R.P.
RUSTAGI2.FINANCIAL MANAGEMENT, PRINCIPLES AND PRACTICES------ G.
SUDARSHAN REDDY3.RESEARCH METHODOLOGY------ C.R. KOTHARI4.THE
INDIAN JOURNAL OF COMMERCE, JULY-SEPTEMBER 2009
WEBLIOGRAPHYwww.banknetindia.comwww.financialexpress.comwww.thehindubusinessline.comwww.topnews.in/sbi
beta.profit.ndtv.com
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