Research Methods

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Title -
A critical evaluation of Mergers and Acquisition
Strategies within the Banking sector - A Case study of
ICICI (Industrial Credit and Investment Corporation of
India) bank acquisition with Rajasthan Bank (India)

Aims
To critically evaluate the different strategies of merger
and acquisition by the international Bank of ICICI within
banking industry

Objectives
To critically evaluate the theory of Mergers and
Acquisitions
To analyze the current position of the company
Evaluation of the company by using theory
Conclusion and Recommendation

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Introduction
Though the word merger and acquisition is spoken together still there is a slight
difference in its meaning. An acquisition takes place when one big company takes
over another small company and become the new owner of the business.
Whereas a merger takes place when two firms of about the same size decide to
come together and do business as a single new company rather than operating
separately. The news of mergers and acquisitions can be often heard. It involves
into it the fortune of the companies for the coming years. The shareholders value
is created when the merger and acquisition takes place. Because when the two
companies come together they hope to gain greater market share or to achieve
greater efficiency. In the recent years the banking industry has developed
drastically. The merger can take place when the company decides to go for an
expansion. In the past few years many mergers and acquisition took place in the
banking sector.

Companies are advised by the investment bankers for merger and acquisition.
They also help the company planning to take over and help it to raise capital for
merger and acquisition. The buyers of the company can be another company
from the same country or can be a global company. It can be a private equity firm.
According to the analysis private equity firm has more resources to make
takeover more successful.

The acquirer company may use capital market in order to finance the
acquisition. The acquired company is paid through cash or the acquiring company
can transfer his shares. In most of the merger and acquisitions the shares of both
the companies are swapped and promoters of the target company are issued the
shares of acquiring company.

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A merger and acquisition adviser is also hired in order to complete the

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transaction. Thus merger and acquisition advisor charge the acquiring company a
percentage of the deal. These advisors also help the acquiring company to raise
the money from capital market or any other source.

During 1980’s more than half of the US companies were restructured. More than
80000 companies were merged or acquired. Nearly 700,000 companies sought
bankruptcy protection. The data was nearly same in 1980’s but was for uprising of
the company’s growth or consolidation. (Andrew)

The most recent wave of merger and acquisition can be seen from mid 2004. This
was due to exhausting of cost cutting efficiencies in order to increase profitability.
There was one more reason for that. There was an increase in the corporate
profit which ultimately resulted in improved stock valuation. The interest rate in
the market was historically low in this period. This also helps the increasing trend
of merger and acquisition. In 2004, 31233 deals transaction were announced
worldwide. This was a percent more than 2003. The total value of transaction was
1.9 trillion.

In 2008, there was a sharp decline in merger and acquisition activities. This was
mainly due to credit crises worldwide. The merger and acquisition activities were
decreased by 2/3 in first quarter of 2008. It was due to lessen cash flow generated
by acquired companies.

In this analysis I would look at bank of Rajasthan acquired by ICICI bank limited
the second largest bank of India and its strategies and I will critically analyze the
impact of this acquisition.

Company background
ICICI bank is the second largest bank of India with total asset of 3562.28 billion
(US $ 77 billion) as on December 31 2009. The bank was formed in the year 1955.
In the private sector it stands on the 1st position. A wide range of banking
products and financial services to the corporate and the retail customer are
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provided by ICICI bank with the help of different delivery channels. The bank
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covers different areas which are banking, investments, bonds, venture capitals,
life insurance, general insurance and wealth management. The bank is having
1646 branches all over India and existence in 18 countries around the world. The
company is having its subsidies in many countries such as Russia, United Kingdom
and Canada and is having its branches in Dubai, Hong Kong, United States,
Quarter, Sri Lanka, Singapore, etc.

The following are the subsidies of ICICI bank

 ICICI Securities
 ICICI Lombard General Insurance
 ICICI Prudential life insurance
 ICICI Ventures

The bank aims at providing high level of customer satisfaction by providing

personalized, efficient and customer friendly services.

The Bank of Rajasthan was established in Udaipur, the city of Rajasthan (India) in
the year 1943. The bank was established with the capital investment if Rs. 10.00
laces. It is having its branches all over the world. The different sectors in which
Bank of Rajasthan is engaged are consumer banking, priority sector banking,
international banking, merchant banking, deposit and money placement services,
commercial banking, auxiliary services, depository, etc.

From the year 1997 ICICI had acquired many banks to broaden its area. Some of
its recent takeovers are:

Year 1997 classic finance and Anagram finance

Year 2000 Bank of Madura

Year 2007 Sangli Bank

In comparison the productivity of ICICI is higher than that of Bank of Rajasthan.

The merger of ICICI bank and Bank of Rajasthan took place on 12 th August 2010
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with the approval of RBI. And all the branches of Bank of Rajasthan started
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functioning as ICICI bank from 13th August 2010.

When the deal took place it was decided that ICICI bank will offer 25 share for
every 118 share of Bank of Rajasthan. The share of ICICI fell 0.34 percent to 832
Rupees, while Bank of Rajasthan raised 9.97 percent to 158.80 after the merger
took place.

Literature review
Merger and acquisition have become very popular way of progress throughout
the world. This is because of globalization, technological development, and
changes in business environment. Merger and acquisition refers to contribution of
two relatively comparable companies into one. It is done in order to finance the
growth of the company in some way. In the past years some companies like
general electric, Citigroup Microsoft that have grown dramatically and built
revenue through their acquisition plans.

Some examples of famous merger and acquisitions are as follows:

 Tata Motors and Land Rover

 Arcelor and Mittal Steel
 Novartis formed by Ciba and Sandos
 Hutchison telecom bought by Vodafone

Understanding merger and acquisition

These two terms are mostly confused. It can be explained as follows:

 Merger

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It is a combination of two or more companies in which the assets and liabilities of

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selling company are totally bought by the acquiring company. The buying firm can
be all together different company after the merger. i.e. the merger of Arcelor and
Mittal Steel to form Arcelor Mittal.

 Acquisition

An acquisition is purchase of assets of the company entirely by the acquiring

company. It is mainly the buying of one company by other company.

Though these are two different words and different meanings but the result is
often the same. In both the cases two or more companies having separate
ownership come together to operate under the same roof. In merger there is
mainly the exchange of shares between the companies but typically in acquisition
there is a buying of one company by another by buying assets and shares of
selling company. In a stock purchase transaction the shares of the sellers are not
combined with the shares of the buyers. In an asset transaction the assets of the
acquired company become additional asset of the buying company. In most of the
cases the shares of both the companies are swapped and the buying companies
issues shares to selling company in lieu of its shares.

Types of mergers
 Horizontal merger
The horizontal merger is combining of two companies in the same product
line. The main motive of the horizontal merger is economy of scale.
Enhancement of market power is also a major resource for horizontal
merger.
 Vertical merger
When two companies working at different levels of production are merged
it is known as vertical merger. For example, manufacturer of clothes buy
retail chain of clothing. It is called downstream vertical merger. On the

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other hand if it buys some textile manufacturer it is known as upward

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vertical merger.

 Conglomerate
It is a merger of two companies working in two different sectors. These
sectors are unrelated to each other. One of the major examples of
conglomerate merger is Walt Disney and American Broadcasting Company.

 Forward merger
It is a merger of selling company with acquiring company.

 Reverse merger
It is a merger of buying companies to selling companies.

Valuation matters
Before buying the company the investing company must determine whether the
whether the purchase will be beneficial to them. It should be determined that
how much the company being acquired is really worth. The worth of the company
is always different in point of view of buyer and seller. The seller will tend to value
the company as higher as possible. While on the other hand the buyer will try to
buy the company at the lower price. The buying company applies different
methods to access the value of the target company.

These methods are:

Price-Earnings Ratio (P/E Ratio):

By using this ratio the buying company makes an offer to selling company. This
ratio is compared with the other companies in the same industry.

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Enterprise value to sales ratio:

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With this ratio the acquiring company makes an offer to the selling company as a
multiple of the revenues.

Discount cash flow:

It is a key valuation tool in merger and acquisition. With this method the buying
company can determine the value of its future cash flow. These cash flows are
discounted to a present value using the companies Weighted Average Cost of
Capital (WACC).

Major challenges to merger and acquisition success

While there are many gains from the merger and acquisition of companies but
there are some challenges to merger and acquisition. One of the major challenges
of merger and acquisition is lack of knowledge of the acquiring company.

Some of these challenges are discussed as under:

Due diligence

Due diligence is the term used for different method to investigate the business
before acquiring it. It is an examination of all the aspects of the target company.
In due diligence the investigation of all the aspects should be performed. The
acquiring firm should be sure that there are no legal problems with the selling
firm such as product liabilities, environmental problems, etc. due diligence
requires deep data analyze of asset and liability of the targeted company. All the
balance sheet items such as inventory, document receivable and account payable
should be studied in order to determine the fair value of the company. It also
includes the analyzing of receivable and stock find out any bad debt of any
absolute stock.

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Management relation should also be analyzed. Its resources should be extended

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in multiple dimensions. It should be considered that how the two managements
will fit together. It should be determined that which adjustments are needed.

Culture factors

Before going to the merger with the target company the acquiring company must
manage its own corporate culture effectively. If its own culture is not in order, the
merged companies and their culture will create a problem. They must already
have a program for employee training. The merger and acquisition can fail if the
corporate cultures of both the companies are very different. When a company is
bought or acquired all the financial aspects are considered but the culture
difference are often ignored. It is a big mistake. It should be considered
important. Culture difference can hinder the goal achievement.

Implementation

Implementation of the merger and acquisition is a major challenge. Many mergers

fail at the time of implementation. All the aspects of efficient operations must be
implemented before the companies are combined. There are challenges in
integrating the different technologies of the merged companies. Research
indicates that typical organization will spend 30% of their budget on the
integration. The integration of the dates should be done as soon as possible. Slow
integration can fail the merger and acquisition. Organization must have system to
integrate the data’s of both the companies. Day to day operation of the
companies should not be given up for the speed of integration.

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Justification
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From the study of literature review it is clear that mergers and acquisition is very
important tool for business development. This is the main issue after recession
period. I chose this topic for future advantage in banking sector. The acquisition
of bank of Rajasthan by Icici is one of the biggest of this year in India. This is very
challenging to work in this area. I can explore my knowledge by working on this
topic for my dissertation.

Hypothesis
In this dissertation I will critically evaluate effect of this merger. The following
points will be discussed.

 The effect of the merger on ICICI bank.

 The effect on the profits and the balance sheet of ICICI bank.
 The effect on the customer satisfaction level.
 The effect on the employees of both the companies.
 The competitive advantage ICICI will gain after this merger.

Methodology
The systemic method of data collection, to collect the necessary information and
analyzing the same is known as research methodology (Jankowicz, 2000).
Research method is a time consuming concept according to Jankowicz and for the
collection of valuable data from the available sources it should be managed
carefully. Research methodology is used to evaluate the Impact of merger upon
the ICICI bank on its working, its profits and the customer satisfaction. For
research methodology the following approaches can be used.

a) Deductive approach
b) Inductive approach

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DEDUCTIVE APPROACH

Deductive approach is also sometimes informally called “Top-Bottom” approach.

The deductive approach starts from the general and then moves down to specific
observation and the arguments based on accepted principles, laws and rules are
used for it. First the theory is analyzed then after that the hypotheses are formed,
after the hypothesis are made the observation is made and then the confirmation
is done. This is shown more clearly in the diagram below:

(Deductive approach diagram)

Theory

Hypothesis

Observation

Confirmation

INDUCTIVE APPROACH

The inductive approach is opposite to deductive approach it is called bottom to up

approach. It moves from the specific to general observation for example
generalization and theories. It starts with the observation then it measures the
hypothesis. After the hypotheses are measured then it moves to the conclusion.
The inductive approach also involves a point of uncertainty into it. The inductive
approach can be understood easily as follows:

(Inductive approach diagram)

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Hypothesis

Pattern

Observation

For my dissertation I will go for the inductive approach as this approach

is suitable for the case studies. There is general to specific pattern
followed regarding the mergers and acquisition i.e. from the general it
moves towards the specific theory of HSBC Bank.

DATA COLLECTION METHOD

In research methodology two types of data collection method is used which are:

a) Primary data collection

b) Secondary data collection

Primary data collection

Primary method can be qualitative in nature. In the primary method the primary
data is collected with the help of questioners, case-studies, observation,
telephonic interviews, face-to-face interview, diaries, portfolios, online survey,
focus group, etc. the main benefit in this data is that the data collected is unique
and no one can access to it until and unless it is published. Field research is
required to collect the primary data.

Advantages

 The data is definite to the purpose

 Is relatively cheaper
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 The data collected is always confidential.

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 Can be collected easily and quickly with the help of telephonic
interview and online surveys.
 The data is updated one.

Disadvantages

 Respondents needs time so there can be time delay

 Incomplete questioner may create problems.
 Difficult to collect all the data
 Cancelation of appointments and interviews may also create problems.
 Respondents are rude sometimes
 It is difficult to arrange the interviews.

Secondary data collection

Secondary data is that kind of data that is already exists and is further used by
someone else for a specific purpose. Some of the examples of this kind of data are
annual company report, company statics, etc. the secondary data sources are
investigated in the secondary research (Saunders, et al 2000).

The secondary data is further classified into two

a) Internal sources
b) External sources

Internal sources

This data is found with the help of internal sources of the organization. It is found
within the company or from the different departments of the company. This data
can be out of date and cannot be used effectively.

External sources

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This data is found using the external sources such as internet, publications,
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libraries, informal contacts, census data, etc. some of the advantages of external
sources are:

 The data collection is time saving

 The collected data is accurate
 It can be used by any firm which is going to conduct research.
 This type of data is freely available and anybody can use it ( Ghauri and
Granhaug,2002)

Disadvantages:

 The data is sometimes out of date as it is collected over past time.

 The format of data can be different.

Qualitative Approach:
Qualitative approach is used to get in depth understanding and reasons for the
research. In this form the subjective data is collected. This type of research is
conducted for case studies.

Quantitative Approach:
In this approach investigation of quantitative properties is done. In this approach
process of measurement is considered. In this type research the data is given in
form of numerical values. There is a mathematical and statistical treatment for
the data.

In order to conduct my research I chose the combination of secondary and

primary data as data collection is very important part of any research and
therefore there will be appropriate selection of data collection should be there.
For this both primary and secondary data is important. Secondary data will be

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collected through the company websites, journals, annual reports, publications

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etc. and for the primary data collection I will approach to my cousin who is
Regional Manager in ICICI Bank Gujarat (India). He will provide all kind of primary
data regarding the development of my research. Even he will provide me
secondary data related to my topic about the information of bank strategies. For
my topic there is great scope of exploring the primary data as I have direct access
to the manager of the Bank.

Selection of data:
In order to conduct my research I will resort to both secondary and primary
methods of research as my topic is evaluate the impact of merger on the working
of the ICICI bank. For this I will concentrate on both the approaches and will also
consider the approach of onion research by Saunders and Thornhill.

Ethics:
In order to do my research most of my data is qualitative. For this I will get in
touch with my supervisor and will conduct the interviews directly or through the
telephones in order to collect the data for my research.

In order to collect the secondary data I will go through the profit and loss
statements of the banks and other income statements of the banks. I will also go
through the merger report issued by the investment banker involved in this
merger.

In order to perform qualitative and quantitative research I will consult my

supervisor.

For conducting all of my research I will abide to the ethics and rules. In case of any
problem I will consult my supervisor.

Scope :

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The area of my research i.e. impact of merger upon the performance of the bank
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has wider scope and is controllable during the research. The area of my research
is very important. I will critically evaluate the mergers impact and will develop the
effective result from the research.

Limitations:
The data of my research is very limited. As the merger happened about two
months back the data available is very limited. The online data is not available in
large amount. The data is still not available on government statistical websites. I
will have to arrange the interviews with the managers of the bank. there are
some confidential information that the banks don’t disclose so that will be
another limitation for my research. As the bank is from India I will have to resort
to its overseas branches in UK.

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References
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Books

Gill J. & Johnson P. (2002) Research Methods for Managers (3 rd edition),

London, SAGE Publications.

Zikmund, W. (2000) Business Research Methods (6th edition), USA,

Harcount, Inc.

Saunders, M. Lewis, P. and Thornhill, A. (2003) Research Methods for

Business Students (3rdedition), UK, Prentice Hall.

Fitzsimmons, JA and Fitzsimmons, MJ (2008) Service Management:

Operations, Strategy, Information and Technology 6th edition. New York:
McGraw-Hill

Chunlai Chen ,Z. Findlay, C. (2003) “ A Review of cross border mergers

and acquisitions in APEC

Gaughan (2007), “Mergers, Acquisitions and Corporate restructuring” 4th

Edition

Heffernan (2005)” Modern Banking” Chichester, Wiley, 2005

 
Gabbott, M and Hogg, G (1997) Contemporary Services Marketing
Management London: Dryden Press
 
Hollins, B and Shinkins, S (2006) Managing Service Operations London: Sage
 
Johnston, R and Clark, G (2005) Service Operations Management inproving
Service Delivery 2nd Edition. Essex: Pearson Education Ltd
 
  

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Zeithaml, VA. Bitner, MJ and Gremler, DD (2006) Services Marketing:

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Integrating Customer Focus Accross the Firm 4th Edition. New York:
McGraw-Hill

websites
http://www.icicibank.com/aboutus/about-us.html

http://www.bankofrajasthan.com/bor/wcms/en/home/about-us/services-to-
society/index.html

 http://www.ibtimes.com/articles/24715/20100524/icici-bank-bank-of-rajasthan.htm

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