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About Mergers and Acquisitions in Banking Sector An Assignment on MERGERS & ACQUISITIONS IN INDIAN BANKING INDUSTRY Under the Guidance of Mr. Prakash Misal Visiting Faculty (PUMBA) as part of the partial fulfillment of Internal Exam Requirements of Advanced Banking and Insurance Course 5th Trimester MBA++ Submitted by: SR.NO ROLL NO. NAME 1 9209 Neelesh Chavan 2 9212 Ankul Chowdhary 3 9213 Siddharth Dhende 4 9221 Somnath Ghorpade 5 9224 Virendra Gupta 6 9225 Hemant Gurav 7 9228 Kushal Jain 8 9230 Girish Jaiswal Advanced Banking and Insurance TABLE OF CONTENTS Sr. No. Topic Page No. 1 Mergers and Acquisitions 3 2 Banking Sector Mergers (Regulatory guidelines) 6 3 Strategic Implications 10 4 Financial Implications 14 5 Impact on the Economy 17 6 Need for M&A in Indian Banking 19 7 Synergy and Value Proposition 21 8 Banking M&A Cases in India 23 8.1 Centurion Bank of Punjab with HDFC Bank 24 8.2 Acquisitions by ICICI Bank 25 8.3 Global Trust Bank with Oriental Bank of Commerce 26 8.4 United Western Bank with IDBI Bank 26 8.5 Suvarna Sahakari Bank with Indian Overseas Bank 27 8.6 Acquisitions by State Bank of India 27 9 Conclusions and the Way Forward 28 10 Annexure 29 10.1 Financials of SBI 29 10.2 Financials of ICICI Bank 30 10.3 Financials of IDBI Bank 31 11 References /Bibliography 32 2 Department of Management Sciences (PUMBA), University of Pune Advanced Banking and Insurance CHAPTER 1 MERGERS AND ACQUISITIONS 1. Acquisition An acquisition, also known as a takeover, is the buying of one company (the „target‟) by another. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. Types of acquisitions: i. Friendly takeover: Before a bidder makes an offer for another company, it usually first informs the company's board of directors. If the board feels that accepting the offer serves shareholders better than rejecting it, it recommends the offer be accepted by the shareholders. ii. Hostile takeover: A hostile takeover allows a suitor to take over a target company's management unwilling to agree to a merger or takeover. A takeover is considered "hostile" if the target company's board rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer without informing the target company's board beforehand. iii. Back flip takeover: A back flip takeover is any sort of takeover in which the acquiring company turns itself into a subsidiary of the purchased company. This type of a takeover rarely occurs. iv. Reverse takeover: A reverse takeover is a type of takeover where a private company acquires a public company. This is usually done at the instigation of the larger, private company, the purpose being for the private company to effectively float itself while avoiding some of the expense and time involved in a conventional IPO 2. Merger In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Classification of Mergers: i. Horizontal mergers: It takes place where the two merging companies produce similar product in the same industry. ii. Vertical mergers: They occur when two firms, each working at different stages in the production of the same good, combine. 3 Department of Management Sciences (PUMBA), University of Pune Advanced Banking and Insurance iii. Congeneric merger/concentric mergers : They occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Example: Prudential's acquisition of Bache & Company. iv. Conglomerate mergers : It takes place when the two firms operate in different industries. v. Accretive mergers: These are those in which an acquiring company's earnings per share (EPS) increase. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E. vi. Dilutive mergers: It is the opposite of above, whereby a company's EPS decreases. The company will be one with a low P/E acquiring one with a high P/E A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO. 3. Distinction between Mergers and Acquisitions When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. 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. Both companies' stocks are surrendered and new company stock is issued in its place. 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. 4. Important Terms in M&A Lexicon i. Back-end: A back-end plan is a type of poison pill arrangement. In such a plan, current shareholders of a targeted company receive a rights dividend which allows for exchange of shares of stock (including voting rights) for senior securities or cash equivalent to the back-end price established by the targeted firm. As a result of this strategy, a takeover bidder is unable to both exercise this right and easily deter a rise in acquisition price. ii. Bankmail: In a bankmail engagement, the bank of a target firm refuses financing options to firms with takeover bids. This takeover tool serves multiple purposes, which include a) Thwarting merger acquisition through financial restrictions, b) Increasing the transaction costs of competitor‟s firm to find other financial options, c) To permit more time for the target firm to develop other strategies or resources. iii. Golden Parachute: A golden parachute is an agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. Sometimes, certain 4 Department of Management Sciences (PUMBA), University of Pune Advanced Banking and Insurance conditions, typically a change in company ownership, must be met, but often the cause of termination is unspecified. These benefits may include severance pay, cash bonuses, stock options, or other benefits. iv. Greenmail: Greenmail or greenmailing is the practice of purchasing enough shares in a firm to threaten a takeover and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover. v. Poison Pill: A shareholder rights plan, colloquially known as a "poison pill", or simply "the pill" is a kind of defensive tactic used by a corporation's board of directors against a takeover. In the field of mergers and acquisitions, shareholder rights plans were devised in the early 1980s as a way for directors to prevent takeover bidders from negotiating a price for sale of shares directly with shareholders, and instead forcing the bidder to negotiate with the board. vi. White Knight: In business, a white knight, or "friendly investor" may be a corporation, or a person that intends to help another firm. There are many types of white knights. Alternatively, a grey knight is an acquiring company that enters a bid for a hostile takeover in addition to the target firm and first bidder, perceived as more favorable than the black knight (unfriendly bidder), but less favorable than the white knight (friendly bidder). 5. M&A Life Cycle 5 Department of Management Sciences (PUMBA), University of Pune Advanced Banking and Insurance CHAPTER 2 BANKING SECTOR M&A (REGULATORY GUIDELINES) 1. Introduction One of the principal objectives behind the mergers and acquisitions in the banking sector is to reap the benefits of economies of scale. With the help of mergers and acquisitions in the banking sector, achieve significant growth in their operations and Minimize their expenses to a considerable extent. Competition is reduced because merger eliminates competitors from the banking industry. Mergers and acquisitions in banking sector are forms of horizontal merger because the merging entities are involved in the same kind of business or commercial activities. Sometimes, non-banking financial institutions are also merged with other banks if they provide similar type of services. Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in the banking sector. They also try to enhance their customer base. Growth achieved by taking assistance of the mergers and acquisitions in the banking sector may be described as inorganic growth. In many countries, global or multinational banks are extending their operations through mergers and acquisitions with the regional banks in those countries. These mergers and acquisitions are named as cross-border mergers and acquisitions in the banking sector or international mergers and acquisitions in the banking sector. By doing this, global banking corporations are able to place themselves into a dominant position in the banking sector, achieve economies of scale, as well as garner market share. Mergers and acquisitions in the banking sector have the capacity to ensure efficiency, profitability and synergy. They also help to form and grow shareholder value. In some cases, financially distressed banks are also subject to takeovers or mergers in the banking sector and this kind of merger may result in monopoly and job cuts. Deregulation in the financial market, market liberalization, economic reforms, and a number of other factors have played an important function behind the growth of mergers and acquisitions in the banking sector.
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