A PROJECT REPORT ON MERGERS OF ICICI BANK SUBMITTED TO ALL INDIA MANAGEMENT ASSOCIATION CENTRE FOR MANAGEMENT EDUCATION MANAGEMENT HOUSE, 14 INSTITUTIONAL AREA, LODHI ROAD, NEW DELHI-110003. AUGUST 2008 By SUSMITA GHOSH REGISTRATION NO.750610210 Guided By SRI. JAHAR BHOWMIK FACULTY OF INSTITUTE OF BUSINESS MANAGEMENT For the partial fulfilment of Post Graduate Diploma in Management Acknowledgement I take great pleasure to express my gratitude to my guide, Sri. Jahar Bhowmik, Faculty Member, Institute of Business Management, for his valuable guidance, constant encouragement and critical approaches which led to the completion of this endeavour. I also express my sincere thanks to concerned authorities at Institute of Business Management for giving me this opportunity to undertake this project at their esteemed organization. I remain indebted to all who have poured in constant suggestions and advices and have supported me throughout the period of my project work. (Susmita Ghosh) i List of Figures, Tables and Graphs A. List of Figures 2.1 Submission of Narasimham Committee Report. 5.2 ICICI Bank, Mumbai. 6.3 Mr H.N. Sinor, and Dr K.M. Thiagarajan, at conference in Chennai. 6.5 ICICI Bank Shareholdings. 6.7 Sangli Bank, Mumbai B. List of Tables 6.1 Comparison of financials of ICICI Bank and Bank of Madurai. 6.2 Profile of ICICI Bank and ICICI Ltd at the time of merger. 6.3 Profile of ICICI Bank and Sangli Bank at the time of merger. 7.4 Retail and Financial Services of the Group. 7.5 Individual Strengths of ICICI Ltd and ICICI Bank. 7.6 Revenue Segments. ii C. List of Graphs 8.1 Return on Assets. 8.2 Return on Capital Employed. 8.3 Return on Shareholder’s Equity. 8.4 Earnings per Share. 8.5 Market Price per Share. 8.6 Price to Earnings Ratio. 8.7 Price to Book Value Ratio. 8.8 Capital Adequacy Ratio 8.9 Comparison with other well known banks for the year 2000 8.10 Comparison with other well known banks for the year 2001 8.11 Comparison with other well known banks for the year 2002 8.12 Comparison with other well known banks for the year 2003 8.13 Comparison with other well known banks for the year 2004 8.14 Comparison with Groups’ and All Banks’ Average iii Contents Acknowledgement i List of Figures, Tables and Graphs ii Contents iv 1. Preface 1 2. Introduction 2 2.1 Financial Management 2.2 Mergers and Acquisitions 2.2.1 Types of Merger 2.2.2 Steps in Merger 2.2.3 Reasons for Merger 2.2.4 Mergers in India 2.3 Narasimham Committee Report 2.3.1 Financial System 2.3.2 Banking Sector 3. Research Goals 13 3.1 Key Question 3.2 Objective 4. Research Methodology 14 5. About ICICI Bank 15 6. The Mergers 18 6.1 Merger with Bank of Madurai 6.1.1 Synergies 6.2 Merger with ICICI Ltd 6.2.1 Synergies 6.3 Merger with Sangli Bank 6.3.1 Synergies iv 7. Analysts’ Opinion 29 7.1 Analysts’ meet held on April 26, 2001 7.2Analysts’ meet held on October 25, 2001 7.3 Analysts’ meet held on May 03, 2002 8. Results and Discussion 39 8.1 Ratio Analysis 8.1.1 Return on Assets 8.1.2 Return on Capital Employed 8.1.3 Return on Shareholders’ Equity 8.1.4 Earnings per Share 8.1.5 Market price per Share 8.1.6 Price – Earnings Ratio 8.1.7 Price – Book Value Ratio 8.1.8 Capital Adequacy Ratio 8.2 Comparison with Other Scheduled Banks 9. Conclusion 58 10.Appendices 60 11.References 75 11.1 References from books 11.2 References from Articles 11.3 References from non-print media v 1. Preface A number of reforms have taken place since the recommendations of the Narasimham Committee were tabled. Among them, mergers hold relative significance as they have tremendously impacted the finance sector of the country. Mergers have taken place in the Indian Banking Sectors based on synergies and business specific complementarities. Some of these mergers are Merger of ICICI BANK with Bank of Madura; Merger of HDFC Bank with Times Bank, Merger of ANZ Grindlays with Standard Chartered; United Western Bank (UWB) with Industrial Development Bank of India. More mergers are in the process of consideration, namely Merger of State Bank of India with its associates and Merger of HDFC Bank with Central Bank of Punjab. IFCI Ltd is also in the process of merging with PNB. This project seeks to discuss one such merger which has been the limelight since the inception of the idea – the merger of ICICI Bank with Bank of Madura, ICICI Ltd and Sangli Bank. It looks into the synergies of the merger, gains from consolidation that has benefitted the growth of the company and its shareholders. 1 2. Introduction 2.1 Financial Management Financial management is an integral part of the overall management. It refers to its relationship with closely related fields of economics and accounting. In the words of J.C. Van Horne, “Financial management is concerned with the acquisition, financing, and management of assets with some overall goals in mind.” The functions of financial management go beyond the accounts of figures and aptly fit the words of Archer and Ambrosio, “Financial management is the application of planning and control functions of the finance functions.”1Corporate restructuring falls under the purview of Financial Management. A firm may decide to restructure when it finds that its present structure is not maximising the wealth of its shareholders. The restructuring may take place through expansion, contraction and change in ownership and control. Firms can grow both internally and externally. In internal growth, the firm expands its existing activities by upgrading capacities or by bringing in new resources. However, internal growth can sometimes lead to different problems and companies resort to growth through external arrangements like mergers. 2.2 Mergers and Acquisitions Mergers and Acquisitions refer to the outright purchase of a company already in operation by another company, where there is only one company existing after the transaction. Acquisitions are the quickest way to diversify in to a new business, as managers get to buy established brands, production facilities, trained and experienced employees, and distribution channels in one deal. 2 2.2.1 Types of mergers Mergers can be of different types. Milford B. Green has put them into four categories. They are: 1. Horizontal Merger – It is the combination of two competing firms belongs to the same industry and is at the same stage of business cycle. These mergers are aimed at achieving Economies of Scale in production eliminating duplication of facilities and operations and broadening the product line, reducing investment in working capital, eliminating competition through product concentration, reducing advertising costs, increasing market segments and exercising better control over the markets. The merger of Tata Industrial Finance Ltd with Tata Finance Ltd is an example. 2. Vertical Merger - It involves merger between firms that are in different stages of production or value chain. They are combinations of companies that usually have buyer – seller relationship. It can be Backward Integration where it merges with its suppliers or Forward Integration when it merges with its customers. Merger of Reliance Petrochemicals Ltd, with Reliance Industries Ltd. is one such example. 3. Concentric Merger – It is the merger between two firms belonging to different but related industries. The merger of ICICI Ltd with ICICI Bank can be cited as an example which has helped in cross selling of products. 4. Conglomerate Merger – It is one where companies belong to different or unrelated lines of business. The motive is to reduce risk through diversification and utilization of financial resources. The acquisition of Ahmadabad Electric Company and Surat Electric Company by Torrent group in order to diversify the risk of its existing line of Pharmaceuticals business is an example. 3 2.2.2 Steps in merger As suggested by Donald Depamphilis, the process of mergers and acquisition consists of: 1) Developing a strategic plan for the business. 2) Developing an acquisition plan related to the strategic plan. 3) Looking for companies which can be acquired. 4) Screening and prioritizing the companies. 5) Initiating contact with the target companies. 6) Refine the valuations, structuring the deals, perform due diligence and develop financial plans. 7) Develop plan for integrating the acquired process. 8) Obtaining all necessary approvals, resolve post-closing issues and implement closing. 9) Implement post-closing integration. Conduct the post closing evaluation of the acquisition. 2.2.3 Reasons for merger In consolidation, a new firm is created after the merger, and both acquiring firm and target firm stockholders receive stock in this firm. Hence, the synergy becomes one of the most important reasons for acquisitions. Synergy can be said to be the potential additional value arrived at from combining two firms. There are two types of synergies, operating and financial. Operating synergies are those synergies that allow firms to increase their operating income or increase growth or both. It can be of four categories, namely, economies of scale, greater pricing power, combination of different functional strengths, and higher growth in existing markets. Operating synergies can affect margins and growth. Whereas in financial synergies, the payoff can take the form of either higher cash flows or a lower cost of capital or discounted rate. These may include a combination of firms with excess cash or cash slack, debt capacity and tax benefit. 4 Synergy is a stated motive in many mergers and acquisitions. Bhide (1993) who examined the motives behind 77 acquisitions in 1985 and 1986 reported that operating synergy was the primary motive in one-third of these takeovers.