M&A - icici bom

8/9/2019 M&A - icici bom

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Merger & Acquisition: ICICI Bank & B ank of Madura

National Institute of Financial Management 1

CONTENTS

SECTION TITLE PAGE NO

I EXECUTIVE SUMMARY 2

II

MERGER AND ACQUISITION

Mergers

Acquisitions

Distinction between Merger and Acquisition

Types of Mergers

Benefits of Merger

3 - 9

III

MERGER IN INDIAN BANKING SECTOR

Background

Reasons of Banking Merger

Evolution of Take over Code

Legal Procedure

10 - 16

IV

MERGER OF ICICI BANK & BANK OF MADURA

Bank of Madura

ICICI Bank

The Merger

Financial Parameters

Post Merger Issues

Disadvantages

17 - 23

VCONCLUSION

Future of M&A in Indian Banking24 - 25

VI REFERENCES 26


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EXECUTIVE SUMMARY

Mergers and acquisitions have become the most frequently used

methods of growth for companies in the twenty first century. They

present a company with a potentially largermarket share and open it up

to a more diversified market. Amerger is considered to be successful, if it

increases the acquiring firms value; most mergers have actually been

known to benefit both competition and consumers by allowing firms to

operate more efficiently. However, it has to be noted thatsome mergers

and acquisitions have the capacity to decrease competition in variousways.

The merger between ICICI bank and Bank of Madura presented

ICICI Bank with the opportunity to expand its perspective through having

access to retail banking markets and clientele in the regions where its

previous exposure had been virtually inexistent. The merger gave the firm

that extra growth and competitive edge that it was looking for to compete

with HDFC Bank, SBI and other rivals.

Research has shown, that due to increasing advances intechnology

and banking processes, which make transactions,among other aspects of

business, more effective and efficient, mergers and acquisitions have

become more frequenttoday than ever before.


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MERGER AND ACQUISITION

MERGERS

1.1 A 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:-

Merger through absorption

Merger through consolidation.

1.2 Absorption. Absorption is a combination of two or more

companies into an existing company. All companies except one loose their

identify in a merger through absorption.

1.3 Consolidation. A consolidation is a combination of 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.

ACQUISITION

1.4 A 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.


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DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

1.5 Although they are often uttered in the same breath and used as

though they were synonymous, the terms merger and acquisition meanslightly 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.

1.6 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.

1.7 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.

1.8 A purchase deal will also be called a merger when both owners

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.


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TYPES OF MERGERS

1.9 Mergers are of many types. Mergers may be differentiated on the

basis of activities, which are added in the process of the existing productor service lines. Mergers can be a distinguished into the following four

types:-

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


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on specific management functions. Such as marketing research,

Marketing, financing, manufacturing and personnel.

BENEFITS OF MERGERS

1.10 The major benefits from a merger are enumerated in succeeding

paragraphs.

1.11 Growth or 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 fulfil 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. Moreover when a firm expands or extends its

product line by acquiring another firm, it also removes a potential

competitor.

1.12 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. 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


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profit margins or decreasing operating risks. Although operating

synergy usually is the result of either vertical/horizontal integration

some synergistic also may result from conglomerate growth. 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.

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.

Complementary internal funds flows. 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.

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.

Increased External Financial Capabilities. Many mergers,

particular those of relatively small firms into large ones, occur


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when the acquired firm simply cannot finance its operation.

When a 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, and the bank hasserved notice that its loan will not be renewed? 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 acquisition

of a cash rich firm whose operations have matured may provide

additional financing to facilitate growth of the acquiring firm. In

some cases, the acquiring may be able to recover all or parts of

the cost of acquiring the cash rich firm when the merger is

consummated and the cash then belongs to it.

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.

1.13 Counter Synergism. Certain factors may oppose the synergistic

effect contemplating from a merger. Often another layer of overhead cost

and bureaucracy is added. Sometimes the acquiring firm agrees to long

term employments contracts with managers of the acquiring firm. Such

often are beneficial but they may be the opposite. Personality or policy

conflicts may develop that either hamstring operations or acquire buying

out such contracts to remove personal position of authority. Particularly in

conglomerate merger, management of acquiring firm simply may not


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have sufficient knowledge of the business to control the acquired firm

adequately. Attempts to maintain control may induce resentment by

personnel of acquired firm. The resulting reduction of the efficiency may

eliminate expected operating synergy or even reduce the post mergerprofitability of the acquired firm.

1.14Purchase of Assets at Bargain Prices.Mergers may be explained

by opportunity to acquire assets, particularly land mineral rights, plant

and equipment, at lower cost than would be incurred if they were

purchased or constructed at the current market prices. If the market price

of many stocks have been considerably below the replacement cost of the

assets they represent, expanding firm considering construction plants,

developing mines or buying equipments often have found that the desired

assets could be obtained where by heaper by acquiring a firm that already

owned and operated that asset. Risk could be reduced because the assets

were already in place and an organization of people knew how to operate

them and market their products.

1.15 Increased Managerial Skills or Technology. 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.

1.16 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.


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MERGER IN INDIAN

BANKING SECTORS

BACKGROUND

2.1 In the 1950s and 1960s there were instances of private sector

banks, which had to be rescued or closed down because they had very

low capital and were mostly operating with other peoples money. In

1961, the Banking Companies (Amendment) Act empowered RBI to

formulate and carry out a scheme for the reconstitution and compulsoryamalgamation of sub-standard banks with well-managed ones.

2.2 In India, mergers have been used to bail out weak banks till the

Narasimham Committee-II discouraged this practice. With economic

reforms and opening up of the economy, like other sectors, banking

sector also saw a lot of changes. Two major changes are worth

mentioning. They are:-

Increased competition

Falling interest rates.

2.3 There has been a decline in the interest rates in the last decade

world wide. As a result of this profitability of the banks has been under

tremendous pressure. The interest rates both on the deposits and on the

loans have come down drastically. The spread which was available to the

banks thinned down and banks have started searching for cost reduction

and market enhancing strategies. Use of technology in their operations

has come up as an immediate strategy and banks have started using

technology in a big way. This has resulted in saving of salary expenses,

which used to be a major part of the banksexpenditure. In addition to


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this, banks have started looking for strategies which allow the banks to

grow faster. One of the options before the banks was to merge their

counterparts in it and become not only big but also gain entry into the

new markets.

REASONS OF BANKING MERGER

2.4 As a result of these mergers, banks are able to use their full

capacities and avoid unnecessary duplication of efforts. Some of the

reasons of Banking merger are:-

Growth with External Efforts: With the economic liberalization

the competition in the banking sector has increased and hence

there is a need for mega banks, which will be intensely competing

for market share. In order to increase their market share and the

market presence some of the powerful banks have started looking

for banks which could be merged into the acquiring bank. They

realized that they need to grow fast to capture the opportunities in

the market. Since the internal growth is a time taking process, they

started looking for target banks.

Deregulation: With the liberalisation of entry barriers, many

private banks came into existence. As a result of this there has

been intense competition and banks have started looking for target

banks which have market presence and branch network.

Technology: The new banks which entered as a result of lifting of

entry barriers have started many value added services with the help

of their technological superiority. The older banks which can not

compete in this area may decide to go for mergers with these high-

tech banks.


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New Products/Services: New generation private sector banks

which have developed innovative products/services with the help of

their technology may attract some old generation banks for merger

due to their incapacity to face these challenges.

Over Capacity: The new generation private sector banks have

began their operation with huge capacities. With the presence of

many players in the market, these banks may not be able to

capture the expected market share on its own. Therefore, in order

to fully utilise their capacities these banks may look for target banks

which may not have modern day facilities.

Customer Base: In order to utilise the capacity of the new

generation private sector banks, they need huge customer base.

Creating huge customer base takes time. Therefore, these banks

have started looking for target banks with good customer bases.

Once there is a good customer base, the banks can sell other

banking products like car loans, Housing loans, consumer loans,

etc., to these customers as well.

Merger of Weak Banks: There has been a practice of merging

weak banks with a healthy bank in order to save the interest of

customers of the weak Bank. Narasimham CommitteeII

discouraged this practice. Khan Group suggested that weak

Developmental Financial Institutions (DFIs) may be allowed to

merge with the healthy banks.

THE EVOLUTION OF TAKE OVER CODE

2.5 Let us now see how the Takeover Code evolved over a period of

time in India:


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1990. The Government amends clause 40 of the listing

agreement according to which, threshold acquisition level reduced

from 25% to 10% ; change in management control to trigger public

offer; minimum mandatory public offer of 20% disclosurerequirement through mandatory public announcement.

November 1994. SEBI notifies Substantial Acquisition of

Shares and Takeover, 1994. New provisions introduced to enable

both negotiated and open market acquisitions and competitive bids

allowed.

November 1995. SEBI sets up committee under former Chief

Justice of India P.N. Bhagwati to review the 1994 takeover

Regulations in order to frame comprehensive regulations.

January 1997. The Bhagwati Committee submits its report on

the takeover code to SEBI.

February 1997. SEBI accepts Bhagwati committee report and the

Substantial Acquisition of Shares and Takeovers Regulations, 1997,

notified.

February 1998. SEBI proposes to revise the takeover code make it

mandatory for acquirers to make a minimum open offer for 20%

(and not 10% as earlier) of the target companys equity, even if the

holding goes beyond 51% as a result of the offer.

June 1998. SEBI asks justice Bhagwati to conduct a complete

review of the takeover code. Issues likely to be taken up are, the

extent of disclosure in an open offer and if any change in the

objective of the offer needs to be spelt out in the revised offer.


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June 1998. SEBI proposes to raise the creeping acquisition

limit under its Takeover Code from 2% to 5%. It also proposes to

increase the share acquisition limit for triggering the takeover code

from 10% to 15%.

November 1998. Takeover panel amends the takeover code

to incorporate buyback offers by companies. The committee decides

to allow takeover offers to be made when a buyback offer is open

and vice versa.

December 1998. Justice P.N. Bhagwati criticizes SEBI for

unilaterally increasing the trigger limit for making a public offer

from 10% to 15%. The Bhagwati Committee also recommends that

once an acquirer acquires 75% of shares or voting rights in a

company, he should be outside the purview of the Takeover

Regulations.

January 2000. SEBI again proposes that all open offers made by

promoters for consolidating their holding in a company will have to

be for a minimum of 20% of equity. Exemption to the minimum

20% requirement should be given only in the case of such

companies in which promoters hold over 75%.

February 2000. SEBI finalizes the recommendations of takeover

panel and review the takeover norms. However, the crucial decision

on issue relating to change in management control ofprofessionally

managed companies left unresolved.

June 2000. SEBI plans to bring public financial institutions

under the ambit of its takeover code, both as acquirers and as

pledgees.


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October 2000. Confederation of Indian Industry, FICCI and

ASSOCHAM seek amendments in the takeover code, especially in

the case of creeping acquisitions, to provide the promoters a level-

playing field against corporate raiders who may disrupt existingmanagements. Under the current takeover code, corporate raiders

can pick up 15% of the paid-up equity of the target company over a

12 month period without triggering off the takeover code.

November 2000. SEBI takeover panel decides to make it

mandatory for an acquirer to disclose his holdings in the target

company to the company as well to the exchanges, at three levels;

5 %, 10% and 14%, instead of the existing stipulation of only 5%.

December 2000. SEBI promises a new draft on the takeover

code in place by the end of March 2001 with investor protection as

its pivot. The main objective of the new code would be to ensure

that acquiring companies are prompt in informing the stock

exchanges when they cross the prescribed limits of holding a

companys stake, make public announcements and allow companies

to make counter offers.

LEGAL PROCEDURE

2.6 Sec. 44A of the Banking Regulation Act,1949, deals with the

procedure for amalgamation of banking companies. This procedure is

discussed hereunder:

No banking company shall be amalgamated with another banking

company, unless the shareholders of both the banking companies

approve merger scheme in a meeting called for the purpose by a

majority in number representing two-thirds in value of the

shareholders of each of the said company.


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The approved scheme of amalgamation shall be sent to RBI for its

approval.

Any shareholder who has voted against the scheme of merger orhas given notice in writing at or prior to the meeting shall be

entitled to claim from banking company the value of the shares held

by him as determined by the RBI while approving the scheme.

Once the scheme of amalgamation is sanctioned by the RBI, the

property and the liabilities of the amalgamated company shall

become the property and the liabilities of the acquiring company.

After sanctioning the scheme of amalgamation by the RBI, the RBI

may further order the closure of acquired bank and the acquired

bank stands dissolved from such a data as may be specified.


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MERGER ICICI BANK AND

BANK OF MADURA

BANK OF MADURA

3.1 Bank of Madura (BOM) was a profitable, well-capitalized, Indian

private sector commercial bank operating for over 57 years. The bank had

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 hada capital adequacy ratio of 15.8% as on March 31,2000.

3.2 The Banks equity shares were listed on the Stock Exchanges at

Mumbai and Chennai and National Stock Exchange of India before its

merger. ICICI Bank then was one of the leading private sector banks in

the country. ICICI Bank had total assets of Rs. 120.63 billion and deposits

of Rs. 97.28 billion as on September 30, 2000. The banks capital

adequacy ratio stood at 17.59% as on September 30, 2000. ICICI Bank

was Indias largest ATM provider with 546 ATMs as on June 30, 2001. The

equity shares of the bank were listed on the Stock Exchanges at Mumbai,

Calcutta, Delhi, Chennai, Vadodara and National Stock Exchange of India.

ICICI Banks American Depository Shares were listed on the New York

Stock Exchange.

ICICI BANK

3.3 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, and 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


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Bank had mentioned that the proceeds of the issue would be used to

acquire a bank.

3.4 As on March 31, 2000, bank had a network of 81 branches, 16extension counters and 175 ATMs. The capital adequacy ratio was at

19.64% of risk-weighted assets, a significant excess of 9 % over RBI

Benchmark.

3.5 ICICI Bank was scouting for private banks for 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 was as low as Rs. 161 lakh

and a snail pace of technical upgradation. While, BOM had an attractive

business per employee figure of Rs. 202 lakh, a better technological edge

and a vast base in southern India as compared to Federal Bank. While all

these factors sound good, a cultural integration was a tough task ahead

for ICICI Bank.

THE MERGER

3.6 ICICI Bank had then announced a merger with the 57 year old

BOM, with 263 branches, out of which 82 of them were in rural areas,

with most of them in southern India. As on the day of announcement of

merger (09-12-2000), 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 had about 4.7%,

while LIC and UTI were having marginal holding. The merger was

supposed to enhance ICICI Banks hold on the south Indian market. The

swap ratio was approved in the ratio of 1:2- two shares of ICICI Bank for

normal every one share of BOM. The deal with BOM was likely to dilute

the current equity capital by around 2%. And the merger was expected to


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bring 20% gains in EPS of ICICI Bank and a decline in the banks

comfortable Capital Adequacy Ratio from 19.64% 17.6%.

FINANCIAL PARAMETERS

3.7 Financials of ICICI Bank and Bank of Madura. The financial

parameters of ICICI Bank and Bank of Madura is tabulated below:-

Parameters ICICI Bank ICICI Bank Bank ofMadura

Bank ofMadura

(Rs. In Crores) 1999-2000 1998-1999 1999-2000 1998-1999

Net worth 1129.90 308.33 247.83 211.32

Total deposits 9866.02 6072.94 3631.00 3013.00

Advances 5030.96 3377.60 1665.42 1393.92

Net Profit 105.43 63.75 45.58 30.13

Share capital 196.81 165.07 11.08 11.08

Capital adequacy ratio 19.64% 11.06% 14.25% 15.83%

Gross less NPAs/gross adv 2.54% 4.72% 11.09% 8.13%

Net NPAs/net advances 1.53% 2.88% 6.23% 4.66%

3.8 The scheme of amalgamation was expected to increase the equity

base of ICICI Bank to Rs. 220.36 crore. ICICI Bank was to issue 235.4

lakh shares of Rs. 10 each to the shareholders of BOM. The merged 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 across the

country and 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.

3.9 On the Day of Merger Announcement. The financial

standing of both the banks drew a great degree of attention nationwide

on the day of merger announcement. There were number of issues on thefinancial concerns for both the banks. The details financial standing of


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both the banks on the day of announcement of merger is tabulated

below:-

Name ofthe Bank

Book value ofBank on the dayof mergerannouncement

Market price onthe day ofannouncementof merger

Earningsper share

Dividendpaid (in%)

P/Eratio

Profit peremployee(in lakh)1999-2000

Bank ofMadura

183.0 131.60 38.7 55% 3% 1.73

ICICIBank

58.0 169.90 5.4 15% - 7.83

3.10 Key Ratios. The key ratios between the two banks are

tabulated below:-

Particulars ICICI Bank Bank of Madura

CAR 17.6% 15.8%

NPAs as a % of net advances 1.5% 4.8%

ROA 0.9% 1.1%

Interest spread as a % of total assets 1.5% 2.3%

3.11 Comparative Valuations. The comparative valuation of both the

banks are tabulated below:-

Particulars ICICI Bank Bank of Madura

Market Price (Rs) 170 132

PER (x) 22.7 3.0

Dividend yield 0.9% 4.2%

Price/Book value (x) 2.7 0.6


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POST MERGER ISSUES

3.12 The Board of Directors at ICICI Bank had 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 grater resource/deposit mobilization. In addition to

this, ICICI will emerge as one of the largest private sector banks in

the country.

Branch Network: The ICICIs branch network would not only

increase by 263. But also increase its geographic coverage as well

as convenience to its customers.

Customer Base: The emerged largest customer base will enable

the ICICI Bank to offer other banking and financial services and

products to the erstwhile customers of BOM and also facilitate cross

selling of products and services of the ICICI group to their

customers.

Tech Edge: The merger will enable ICICI Bank to provide ATM,

phone and the Internet banking and such other technology based

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.


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Managing Rural Branches: Most of the branches of ICICI were in

metros and major cities, whereas BOM had its branches mostly in

semi urban and city segments of south India. The task ahead lying

for the merged entity was to increase dramatically the business mixof 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 on the way, is

technology. While ICICI Bank, which is a fully automated entity was

using the package, banks 2000, BOM has computerized 90% of its

businesses and was conversant with ISBS software. The BOM

branches were supposed to switch over to banks 2000. Thought it is

not a difficult task, 80% computer literate staff would need effective

retraining which involves a cost. The ICICI Bank needs to invest

Rs.50 crores, for upgrading BOMs 263 branches.

Managing Human Resources: One of the greatest challenges

before ICICI Bank was managing the human resources. When the

head count of ICICI Bank is taken, it was less than 1500

employees; on the other hand, BOM had over 2,500. The merged

entity will have about 4000 employees which will make it one of the

largest banks among the new generation private sector banks. The

staff of ICICI Bank was 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.

Managing Client Base: The client base of ICICI Bank, after

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. The BOM has built up its client base over a

long time, in a hard way, on the basis of personalized services. Inorder to deal with the BOMs clientele, the ICICI Bank needs to


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redefine its strategies to suit to the new clientele. If the sentiments

or a relationship of small and medium borrowers is hurt; it may be

difficult for them to reestablish the relationship, which could also

hamper the image of the bank.

DISADVANTAGES

3.13 Since BoM had comparatively more NPAs than IBL, the Capital

Adequacy Ratio of the merged entity was lower (from 19% to about

17%). The two banks also had a cultural misfit with BoM having a trade-

union system and IBL workers being young and upwardly mobile, unlike

those for BoM. There were technological issues as well as IBL used Banks

2000 software, which was very different from BoM's ISBS software. With

the manual interpretations and procedures and the lack of awareness ofthe technology utilisation in BoM, there were hindrances in the merged

entity.


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CONCLUSION

FUTURE OF M&A IN INDIAN BANKING

4.1 In 2010, further opening up of the Indian banking sector is forecast

to occur due to the changing regulatory environment (proposal for upto

74% ownership by Foreign banks in Indian banks). This will be an

opportunity for foreign banks to enter the Indian market as with their

huge capital reserves, cutting-edge technology, best international

practices and skilled personnel they have a clear competitive advantage

over Indian banks. However, excessive valuations may act as a deterrent,

especially in the post-sub-prime era.

4.2 Persistent growth in Indian corporate sector and other segments

provide further motives for M&As. Banks need to keep pace with the

growing industrial and agricultural sectors to serve them effectively. A

bigger player can afford to invest in required technology. Consolidation

with global players can give the benefit of global opportunities in funds'

mobilisation, credit disbursal, investments and rendering of financial

services. Consolidation can also lower intermediation cost and increase

reach to underserved segments.

4.3 The Narasimhan Committee (II) recommendations are also an

important indicator of the future shape of the sector. There would be a

movement towards a 3-tier structure in the Indian banking industry: 2-3

large international banks; 8-10 national banks; and a few large local area

banks. In addition, M&As in the future are likely to be more market-

driven, instead of government-driven. 11

4.4 Based on the trends in the banking sector and the insights from thecases highlighted in this study, one can list some steps for the future

which banks should consider, both in terms of consolidation and general

business. Firstly, banks can work towards a synergy-based merger plan

that could take shape latest by 2009 end with minimisation of technology-

related expenditure as a goal. There is also a need to note that merger or

large size is just a facilitator, but no guarantee for improved profitability

on a sustained basis. Hence, the thrust should be on improving risk

management capabilities, corporate governance and strategic business

planning. In the short run, attempt options like outsourcing, strategicalliances, etc. can be considered. Banks need to take advantage of this


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fast changing environment, where product life cycles are short, time to

market is critical and first mover advantage could be a decisive factor in

deciding who wins in future. Post-M&A, the resulting larger size should

not affect agility. The aim should be to create a nimble giant, rather than

a clumsy dinosaur. At the same time, lack of size should not be taken toimply irrelevance as specialised players can still seek to provide niche and

boutique services.


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REFERENCE

1. www.economictimes.indiatimes.com

2. www.smfi.org

3. www.moneycontrol.com

4. www.hinduonnet.com

5. www.icicibank.com

6. www.financialexpress.com

7. www.livemint.com

8. www.telegraphindia.com

9. www.karvy.com

10 www.smartinvestor.in

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