MERGER AND ACQUISITION IN BANKING

SECTOR

A Project Submitted to
University of Mumbai for partial completion of the degree of
Bachelor of Management Studies Under the Faculty of Commerce.
Semester VI

(2021-2022)
By
Ronak Makwana

ROLL NO. TYMS33

Under the Guidance of

Prof. Mr. Mustak Deraiya

BHAVANS COLLEGE
ANDHERI (WEST) MUMBAI 400058

1
 Declaration

I the undersigned Mr. Ronak Makwana by, declare that the work embodied in
this project work titled “MERGER AND ACQUISITION IN BANKING
SECTOR”. forms my own contribution to the research work carried out under
the guidance of Prof. Mr. Mustak Deraiya is a result of my own research work
and has not been previously submitted to any other University for any other
Degree to this or any other University.
Wherever reference has been made to previous works of others, it has been
clearly indicated as such and included in the bibliography.
I, here by further declare that all information of this document has been
obtained and presented in accordance with academic rules and ethical
conduct.

_________________________

Ronak Makwana

ROLL. NO. TYMS33

Certified by

Prof. Mr. Mustak Deraiya

Date:
Place:

Certificate

2
This is to certify that Mr. Ronak Makwana has worked and duly completed his
Project Work for the degree of Bachelor of Management Studies and his project is
entitled, “MERGER AND ACQUISITION IN BANKING SECTOR,, Under
my supervision. I further certify that the entire work has been done by the learner
under my guidance and that no part of it has been submitted previously for any
Degree of any University.
It is his own work and facts reported by his personal findings and
investigations.

_________________ _______________
Course coordinator Principal

______________

Project Guide

External Examiner
Sr. no Name of Signature Date
Examiner
1.

Acknowledgement

3
 To list who all have helped me is difficult because they are so numerous and
the depth is so enormous.

I would like to acknowledge the following as being idealistic channels and

fresh dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me

chance to do this project.

I would like to thank my Principal, Dr. Zarine Bhathena for providing the
necessary facilities required for completion of this project.

I take this opportunity to thank our Coordinator Dr. Rasika Vaidya, for her
moral support and guidance.

I would also like to express my sincere gratitude towards my project guide

Prof. Mr. Mustak Deraiya whose guidance and care made the project
successful.

I would like to thank my College Library, for having provided various

reference books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or
indirectly helped me in the completion of the project especially my Parents
and Peers who supported me throughout my project.

Table of Content
CHAPTER ● TITLE PAGE
NO. NO

4
 ● Introduction

I ● 1.1 Definition
● 1.2 Types Of Merger And Their Problem Outcone
● 1.3 Merger And Acquisation World Banking
● 1.4 Banking After Independence India

II ● Research Methodology
● 2.1 The Indian Banking Sector And Indian Banking
System
● 2.2 Industrial Scenario Of Indian Banking System
● 2.3 Types Of Banks
● 2.4 Banking Sector Reforms In India
● 2.5 Banking Sector Profile
● 2.6 Merger & Acuisitions (Global Scenario)
● 2.7 Growth Of Mergers And Acquisition
● 2.8 Global Financial Crisis And Global M&A Point
Of View For The Future
● 2.9 M&A In The Indian Context After
● Economic Reforms
● 2.10 Motives For Mergers And Acquisitions
● 2.11 M&As In Indian Banking Sector

III ● LITERATURE REVIEW

IV ● CASE STUDY

5
● BIBLOGRAPHY

6
MERGER AND ACQUISITION IN
BANKING SECTOR

7
 MERGER AND ACQUISITION IN BANKING SECTOR
CHAPTER 1 - INTRODUCTION
In Indian banking sector Mergers and acquisitions has become admired trend
throughout the country. A large number of public sector bank, private sector bank
and other banks are engaged in mergers and acquisitions activities in India. The
Main motive behind Mergers and acquisitions in the banking sector is to harvest
the benefit of economies of scales. Merger and acquisition have played an
important role in the transformation of industrial sector of India since the Second
World War period. During the Second World War Period Economic and political
conditions give rise to effective Mergers and acquisitions (M&A). Mergers can be
a large source of growth in any economy but particularly in one that’s
comparatively stagnant and mired in deep uncertainty. Mergers and acquisitions
(M&A) are considered as a relatively fast and efficient approach to expand into
new markets and incorporate new technologies. the main motive behind used
strategy by firms to strengthen and sustain their position in the market place.
Mergers and acquisitions (M&A) have played a major role for corporate
restructuring and the financial services industry. We can find many evidences that
their success is by no means assured. Pressures on the employees of banks around
the world have been manifold across, entry of new players and products with
superior technology, globalization of financial markets, changing demographics of
customer behavior, consumer pressure for wider choice and low cost service,
shareholder wealth demands, shrinking margins.

1.1 Merger and Acquisition defined:

8
The he verbalization of business over the past decade has spawned a search for
competitive advantage that is universal in scale. Companies have followed their
customers - who are going global themselves as they respond to the pressures of
obtaining scale in a rapidly consolidate global economy. In combination with other
trends, such as increased deregulation, privatization, and corporate restructuring,
verbalization has urged a never seen before strong wave in merger and acquisition
activity. Mergers and acquisitions are the hot topic in today's business world.
Mergers and acquisitions have become widely favoured or admired by different
companies having different motives. Be it the survival issue, or the profit
maximization, or the strengthening of the economy of the business mergers and
acquisitions are the most talked about topic in the competitive world Mergers and
acquisitions (M&A) are fundamentally carried out to expand the organization,
increasing profits, save the company facing losses these mergers and acquisitions
are the life saving techniques for companies. Mergers and acquisitions represent
the ultimate in change for a business. No other event is more difficult and
challenging as a merger and acquisition. It has become a normal routine in life and
people are more likely used to them. In today's global and competitive environment
mergers have become the means for long term survival. Any merger or acquisition
calls for great management survey and skills.

The employee-related issues inherent in any corporation are amplified many fold
by the disruption, stress, anxiety, and sacrifice caused by bringing two corporations
together. Mergers and acquisitions seems a name normally pronounced together
but in reality two words having two different meanings. Mergers on one hand are
more on a positive side whereas acquisitions are more of hostile nature. When we

9
talk about a 'merger', we are referring to the merging or getting together of two
companies where one company will continue to exist.

Merger and acquisition is a financial tool that is used for enhancing longterm
profitability by expanding their operations. Mergers occur when the merging
companies have their mutual consent as different from acquisitions. The terms
‘merger’ is the combination of two or more separate firms into a single firm. The
firm that results from the process could take any of the following identities:
Acquire target or new identity Acquisition on the other hand, takes place where a
company takes over the controlling shareholding interest of another company.

10
1.2 The types of Mergers and their Probable Outcomes:
A) Vertical Mergers: In this type of merger, the firm purchases one of its
suppliers or gets into a merger with one of its customers. The former is a 'backward
merger' and the latter may be termed as a 'forward merger'. An acquired firm
generally comes under the acquiring firm's corporate area, which is why their most
interaction remains at the corporate level in simple sense, a merger between two
companies producing different goods or services for one specific finished product
is a vertical merger. Example: Merger between Time Warner Incorporated, a major
cable operation. And the Turner Corporation, which produces CNN, TBS, and
other programming. In the merger, the Federal Trade Commission (FTC) was
alarmed by the fact that such a merger would allow Time Warner to monopolize
much of the programming on television ultimately, the FTC voted to allow the
merger but stipulated that the merger could not act in the interests of ant
competitiveness to the point at which the public good was harmed.

B) Horizontal Mergers: A horizontal merger is when two companies competing

in the same market merge or join together. Under this type of merger, one
company acquires another whose product or service is closely related or of the
same type. This type of merger can either have a very large effect or little to no
effect on the market When two extremely small companies combine, or
horizontally merge, the results of the merger are less noticeable. These smaller
horizontal mergers are very common. Horizontal mergers may negatively affect the
competitive situation in an industry. Therefore, they frequently run afoul of
regulatory officials. A horizontal merger often increases the degree of
concentration in an industry. Example: This type of merger occurs frequently as a
result of larger companies attempting to create more efficient economies of scale.
The amalgamation of Daimler-Benz and Chrysler is a popular example of a
horizontal merger.

C) Conglomerate Mergers: Conglomerate Mergers involve firms engaged in

unrelated types of business activity. Among conglomerate Mergers, three types
have been distinguished. Product extension Mergers broadens the product lines of
firms. These are Mergers between firms in related business activities and may also

11
be called concentric Mergers. A geographic market extension merger involves two
firms whose operations have been conducted in no overlapping geographic areas.
The third one referred to as pure conglomerate Mergers involves unconnected or
unrelated business activities under a single banner. Conglomerate Mergers have the
potential for improved resource allocation in financial conglomerates; managerial
and concentric conglomerates have the potential for synergy and transfer of
managerial capabilities. Example: if an auto manufacturer and a motorcycle
manufacturer merge, the merger is a concentric one. Although both industries serve
the transportation needs of their customers, the two are quite unique in their
competitive structures. In concentric mergers there is a tendency to combine some
operations, especially departments focused on technology and marketing. This will
result in the sharing of expertise between the two firms, which may be resisted by
the employees of both firms. The best way to overcome this construction industry.

D) Congeneric Mergers: These mergers happen between entities engaged in the

same general industry and somewhat interrelated, but having no common
customer-supplier relationship. A company uses this type of merger in order to use
same sales and distribution channels their and to reach the customers of both
businesses.

E) Cash Merger: In a typical merger, the merged entity combines the assets of
the two companies and grants the shareholders of each original company shares in
the new company based on the relative valuations of the two original companies.
However, in the case of a ‘cash merger’, also known as a ‘cash-out merger’, the
shareholders of one entity receives cash in place of shares in the merged entity.
This is a common practice in cases where the shareholders of one of the merging
entities do not want to be a part of the merged entity.

F) Triangular Merger: A triangular merger is often resorted to for regulatory and

tax reasons. As the name suggests, it is a tripartite arrangement in which the target

12
merges with a subsidiary of the acquirer. Based on which entity is the survivor
after such merger, a triangular merger may be forward (when the target merges
into the subsidiary and the subsidiary survives), or reverse (when the subsidiary
merges into the target and the target survives)

1.3 Mergers and acquisitions World Banking: Scenario The trend towards
banking consolidation, mainly cross-border mergers and acquisitions is moving
unavoidably ahead and key deals show to indicate a fundamental shift in the
evolution of mergers and acquisitions. It is the beginning of a new phase in
banking structures, both in domestic and global market. Cross-border banks deals
have been evolving over recent years and have at this time reached a take-off stage
as the centre of gravity of global finances shifts to accommodate the growing
wealth of China, India and the Gulf country along with other emerging economies
across the world. Banking sector has played a vital role in the overall economic
development of this country right from the time of nationalization.

Due to globalization the Indian banking sector has been facing keen competition
from the foreign banks. The Reserve Bank of India (RBI), which is equally
protective of the Indian banking industry, has been already sounded a note of
warning to the foreign banks who suppose easier entry and takeover norms by
2009. The old and new private sector banks will be prime targets after foreign
banks are allowed to launch predatory forays in Indian banking sector. The world
is changing significantly and moving away from a US-centric focus. Last October
China’s bank, Industrial and Commercial Bank of China (ICBC), in a landmark $
5.6 billion deal, acquired a 20 per cent stake in South Africa’s Standard Bank. In
India a crossborder M & A the State Bank of India (SBI) acquired majority stakes
in an Indonesian bank Indo Monex. In another case SBI has acquired Mauritius
based Indian Ocean and Kenya Based GIRO Commercial Bank both in 2005.

1.4 Historical Perspective of Mergers and Acquisition in Indian Sector in

India From 1903 to 1905

History reveals that most of the mergers which took place in the first phase were
considered unsuccessful as they were not efficient enough to attain the required
standards, Then in 1903 the financial system of the world was shattered, followed
by a stock market collapse in 1904, Even this phase experienced a rather bad

13
experience, It was then that the apex judiciary body issued directions on the anti-
competitive mergers. It stated that these mergers could be demerged by
implementing the Sherman Act.

From 1916 to 1940

The mergers and acquisitions process was triggered by the financial boom which
came soon after the World War I. The expansions further helped in the various
developments in the fields of science and technology. It also saw the emergence of
infrastructure firms which provided services for required growth in railroads and
transportation by automobiles, The government strategies laid in 1920s made the
corporate ambiance supportive enough for firms to work in harmony; Financial
institutions like government and private banks also played a significant part in
aiding the mergers and acquisitions process. These were also horizontal mergers.
But like before this phase also ended with a huge decline in the stock market which
was further followed by great depression,

From 1965 to 1970

These mergers were characterized by increasing stock and interest rates. During
this phase the bidding companies were small in size and fiscal strength than the
target companies. These kinds of mergers were sponsored mainly by equities and
eliminating the roles of the banks. In 1968, the Attorney General decided to break
the multinationals which resulted in the end of merging activities but was shattered
decision because of the inefficient performance of the multinationals, but the
mergers which became successful and made a mark came up in 1970s.

From 1981 to 1989

This phase experienced acquisitions of companies which were much bigger in size
as compared to the firms in previous phases. Oil and gas, pharmaceuticals, banking
etc came up which were nationally or internationally merged. This phase came to
an end with the introduction of anti acquisition laws, restructuring of fiscal
organizations and the Gulf War.

From 1992 till 2000

14
This period was stimulated by globalization, upsurge in stock market boom and
deregulation policies. Major mergers were seen taking place between telecoms and
banking giants out of which most were sponsored by equities. Now there was also
experienced a change in the attitude of the industrialists and they started thinking it
as a more profitable thing.

From 2001 till now

Volume of mergers and acquisitions in India in 2007 are grew two fold from 2006
and four times compared to 2005. In 2007, the first two months alone accounted
for merger and acquisition deals worth $40 billion in India. Promising economic
trends, investments by corporate and revised government policies motivated the
participation of many conglomerates to contribute in the acquisition trend_ This
has led to a participation of different sector to enter into a merger or acquisition
deal. Sector wise, large volumes of mergers and mergers and acquisitions in India
have occurred in finance. telecoms. FMCG, construction materials, automotive and
metals.

In the telecoms sector, an increase of stakes by Sing Tel from 26,96 % to 32.8 % in
Bharti Telecoms was worth $252 million (Rs. 10.9 billion in Indian currency). In
the Foods a controlling stake of Shaw VVallace and Company was acquired by
United Breweries Group owned by Vijay Mallya. In the banking sector, important
mergers and acquisitions in India in recent years include the merger between IDBI
and its own subsidiary IDBI Bank. Then it was acquisition of centurion bank of
Punjab by HDFC bank in 2008 and ICICI bank acquired Bank of Rajasthan in
2010.

Considerably influenced by the merger and acquisition trends and they are further
interested in Indian markets. The process of mergers and acquisitions has gained
substantial importance in today's corporate world. This process is extensively used
for restructuring the business organizations. In India, the concept of mergers and
acquisitions was initiated by the government bodies. All over the world, in
developing as well as developed countries. Number of mergers and acquisitions are
recorded every year. The recent trends suggest that most of the mergers and
acquisitions actually led to the decrease in number of public undertakings and
increase in number of private enterprises. This happened as many public

15
organizations all over the world, were either merged into or acquired by big private
institutions. The reason of this particular Merger and Acquisition Trend was the
emergence and rapid growth of Private Equity Funds.

Moreover, the regulatory environment of the publicly owned companies and the
urge to attain growth of short term earnings were also behind the specific trend of
Mergers and acquisitions. Mergers and acquisitions resulting into privatization of
the public undertakings took place not only in Europe, but also in North America,
China and even in country like Brazil. In Europe this type of Mergers and
acquisitions took place significantly, as the market for public-to-private investment
was quite strong in Europe. India is arguably the world's most promising emerging
market, on its current growth scenario; India is expected to become the world's
third largest

16
 CHAPTER 2 – RESEARCH METHODOLOGY
2.1 The Indian Banking Sector and Indian Banking System:

The Indian banking system is that the backbone of a monetized economy. The
Indian banking sector divided into 2 phases, the pre alleviation section and also the
post alleviation. Within the pre alleviation section government of Indian
nationalized fourteen banks as 19July 1965 and additional business Banks were
nationalized as fifteen Gregorian calendar month 1980 in India. within the year
nineteen93 government united the new banks of Asian country and geographic
region National banks and this was the sole united between nationalized Banks
subsequently the quantity of Nationalized Banks reduces from twenty to 19.In the
post alleviation section, government had initiated the policy of alleviation and
licenses were issued to the non-public banks which might result in the expansion of
Asian country banking sector in India. the Indian industry is that the financial
organization of India referred to as Federal Reserve Bank of India .the Reserve
Bank of India(RBI) is answerable for the Indian industry since 1935, the business
banks in Asian country are quarantined into Public sector banks ,Private sector
banks and Foreign banks .All these banks constitute Federal Reserve Bank of
Asian country classification of regular business banks (SCBs).Public sector,
nonpublic sectors and Foreign banks as they're embody within the second regular
of the Reserve Bank of Asian country Act 1934.

Merger and acquisition in banking sector are controlled or regulated by the apex
money authority of a selected country. As an example the Merger and acquisition

17
in banking sector of India are overseen by the Reserve Bank of India
(RBI).Sometime even run batted in additionally intervenes and tells one bank to
amass another bank as a result of non performance of that bank. In case, run batted
in feels that the purchasers mustn't suffer as a result of the non performance of the
bank .this forces them to come back forward and promote a merger or a sale.

2.2 Industry scenario of Indian Banking Industry:

The growth within the Indian Banking Sector has been additional qualitative than
quantitative and it's calculable to stay identical within the returning years. And
sector supported the projections created within the "India Vision 2020" ready by
the look Commission and also the Draft tenth arrange, the report forecasts that the
speed of growth within the balance-sheets of banks is probably going to decelerate.
the full assets of all regular business banks by endMarch 2010 square measure
expected at Rs forty, 90,000 crores. Which will comprise regarding 65 per cent of
value at current market costs as compared to sixty seven per cent in 2002-03? Bank
assets square measure expected to lift at AN annual composite rate of thirteen.4 per
cent throughout the remainder of the last decade as against the expansion rate of 67
per cent that existed between 1994-95 and 2002-03 in India. It is anticipated that
there'll be massive additions to the capital base and reserves on the liability aspect
in banking sector.

The Indian industry that is ruled by the Banking Regulation Act of India, 1949 may
be broadly speaking classified into 2 major classes, non-scheduled banks and
regular banks. Regular banks comprise business banks and also the co-operative
banks. In terms of possession, business banks may be additional classified into
nationalized banks, the banking company of India and its cluster banks, regional
rural banks and private sector banks (the old/ new domestic and foreign). These
banks have over 67,000 branches unfold across the country.

In India the Public Sector Banks (PSBs), that square measure the bottom of the
Banking sector in India account for quite 78 per cent of the full industry assets.
Sadly, they are burdened with excessive Nonperforming assets (NPAs), huge

18
hands and lack of contemporary technology. On the opposite hand the private
Sector Banks square measure creating tremendous progress. They are leaders in net
banking, mobile banking, phone banking, ATMs. As so much as foreign banks
square measure involved they're probably to reach the Indian industry.

In the Indian industry a number of the private Sector Banks operative square
measure IDBI Bank, ING Vyasa Bank, SBI business and International Bank Ltd,
Bank of Rajasthan Ltd. and banks from the general public Sector embrace
geographic area full service bank, Vijaya Bank, UCO Bank, Oriental Bank,
Allahabad Bank among others. Some other ANZ Grind lays Bank, ABN-AMRO
Bank, yankee categorical Bank Ltd, Citibank square measure a number of the
foreign banks operative within the Indian industry.

As so much because the gift situation worries the industry in India goes through a
transformation part. The most important part of monetary reforms resulted within
the nationalization of fourteen major banks in 1969 and resulted in a very shift
from category banking to Mass banking. This successively resulted in a very
important growth within the geographical coverage of banks. Each bank had to
allocate a minimum proportion of their loan portfolio to sectors known as “priority
sectors”. The producing sector additionally grew throughout the Nineteen
Seventies in protected geographic area and also the banking sector was a vital
supply. Ensuing wave of reforms saw the nationalization of vi additional business
banks in 1980. Since then the quantity of regular business banks raised four-fold
and also the number of bank branches raised eight-fold.

After the second part of monetary sector reforms and relief of the world within the
early nineties, the general public Sector Banks (PSB) s found it extraordinarily
tough to contend with the new private sector banks and also the foreign banks. The
new private sector banks initial created their look once the rules allowing them
were issued in January 1993. Eight new private sector banks square measure
presently operational. These banks attributable to their late begin have access to
progressive technology, that successively helps them to avoid wasting on hands
prices and supply higher services.

During the year 2000, the State bank of India (SBI) and its seven associates
accounted for a 25 % share in deposits and 28.1 % share in credit .The twenty

19
nationalized banks accounted for 53.2 % of the deposits and forty seven.5percent
of credit throughout identical amount. The share of foreign banks (numbering 42),
regional rural banks and different regular business banks accounted for 5.7 percent,
3.9 % and 12.2 % severally in deposits and 8.41 percent, 3.14 % and 12.85 %
severally in credit throughout the year 2000

2.3 Types of Banks:

20
In 1935, ‘The State Bank of India Act, was passed, accordingly, ‘The Imperial
Bank of India’ was nationalized and State Bank of India emerged with the
objective of extension of banking facilities on a large scale, specifically rural and
semi – urban area and for various of the public purposes. In 1969, fourteen major
Indian Commercial Banks were nationalized and in 1980, six more were added on
to constitute the public sector banks. Commercial Banks in India are classified in
Scheduled Bank and Non Scheduled Banks. Scheduled Banks are including
nationalized Bank, SBI and its subsidiaries, private sector banks and foreign banks.
Non Scheduled Banks are those included in the second Scheduled of the RBI Act,
1934.

1. Scheduled Banks: The second scheduled of RBI act, create a list of banks
which are described as “Scheduled Banks” In the terms of section 42 (6) of RBI
act, 1934, the required amount is only Rs. 5 Lakh. The Scheduled Banks enjoy
several privileges. It means that scheduled banks carries safety and prestige value
compared to non scheduled banks. It is entailed to receive refinance facility as
applicable.

2. Nationalized Banks: The nationalized banks include 14 banks nationalized on

19th July, 1969 and the 6 more nationalized on 15th April, 1980. They are also
scheduled banks, after this nationalization the governments try to implement
various welfare schemes.

3. Non- scheduled Banks: The commercial banks not included in the 2nd schedule
of the RBI act are known as non scheduled banks. They are not entitled to facilities
like refinance and rediscounting of bills etc, from RBI. They are engaged in
lending money discounting and collection bills and various agency services. They
insist higher security for loans.

4. Old private Banks: These banks all registered under Companies Act, 1956.
Basic difference between Cooperative bank and Private Banks is its aim. Co-
operative banks work for its member and private banks are work for own profit.

5. New Private Banks: These banks lead the market of Indian banking business in
very short period because of its variety of services and approach to handle
customer and also because of long working hours and speed of services. This is

21
also registered under the Company Act 1956. Between old and new private banks
there is wide difference.

6. Foreign Banks: Foreign Banks mean multi-countries bank. In case of Indian

foreign banks are such banks which open its branch office in India and their head
office are outside of India. E.g. HSBC Bank, City Bank, Standard Chartered Bank
etc.

7. Co-Operative Banks: Co-operative Banks another component of the Indian

bank with the enactment of the Cooperative Credit Societies were sated owing to
the increasing demand of Co-operative Credit, a new Act of the 1994, which
provide for the increasing demand of Co-operative Central banks by a union of
primary credit societies or by a union of primary credit socialites and individuals.

2.4 Banking sector Profile:

Banking sector has always been regarded as an important and necessary financial
sector in the economy of India. Without a sound and effective banking system in

22
India it cannot have a healthy economy the banking system of India has not only
become hassle free but it is also able to meet new challenges posed by the
technology and any other external and internal factors. The basic origin of banking
is very old during the pre-Independence days. Earlier there were a group of rich
dominating people called The Famindars and The Sahukars. These were regarded
as some of the upper. Lass people who had a strong financial background and used
to lend money to the poor farmers at their own preferable rate of interest. Therefore
we can say that the banking sector in India is a very old sector which has supported
the Indian economy from olden days,

The banking sector has provided a strong backbone for the Indian economy The
International banking scenario has shown major turmoil in the past few years in
terms of mergers and acquisitions. Deregulation has been the main driver, through
three major routes - dismantling of interest rate controls, Iremoval of barriers
between banks and other financial intermediaries, and lowering of entry barriers, It
has lead to dis-intermediation, investors demanding higher returns, price
competition, reduced margins, falling spreads and competition across geographies
forcing banks to look for new ways to boost revenues.

Consolidation has been a significant strategic tool for this and has become a
rationalization, worldwide phenomenon. driven by apparent advantages of scale-
economies. geographical diversification, and lower costs through branch and staff r
cross-border expansion and market share concentration The new Basel II norms
have also led banks to consider M&As. In India the banks are being segregated in
different groups. Each group has their own benefits and limitations in operating in
India. Each has their own dedicated target market. Few of them only work in rural
sector while others in both rural as well as urban. Many even are only catering in
cities. Some are of Indian origin and some are foreign players. They differ in their
relation with the customers, their mode of operation, etc,.. The RBI has shown
certain interest to involve more of foreign banks than the existing one recently.
This step has paved a way for few more foreign banks to start business in India.

Currently banking in India is generally fairly mature in terms of supply, product

range and reach-even though reach in rural India still remains a challenge for the
private sector and foreign banks. In terms of quality of assets and capital adequacy,
Indian banks are considered to have dean, strong and transparent alance sheets

23
relative to other banks in comparable economies in its region. The Reserve Bank of
India is an autonomous body, with minimal pressure from the government, The
stated policy of the Bank on the Indian Rupee is to manage volatility but without
any fixed exchange rate-and this has mostly been true. With the growth in the
Indian economy expected to be strong for quite some time-especially in its services
sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect M&As,
takeovers, and asset sales. With years, banks are also adding services to their
customers.

The Indian banking industry is passing through a phase of customers market The
customers have more choices in choosing their banks. A competition has been
established within the banks operating in India. With stiff competition and
advancement of technology, the services being provided by the banks has become
more easy and convenient. The past days are witness to an hour wait before
withdrawing cash from accounts or a cheque from north of the country being
cleared in one month in the south. A healthy banking system is essential for any
economy striving to achieve good growth and yet remain stable in an increasingly
global business environment.

The Indian banking system, with one of the largest banking networks in the world,
has witnessed a series of reforms over the past few years like the .dereg u I ation of
interest rates, dilution of the government stake in public sector banks (PSBs), and
the increased participation of private sector banks, The growth of the retail
financial services sector has been a key development on the market front. Indian
banks (both public and private) have not only been keen to tap the domestic market
but also to compete in the global market place.

New foreign banks have been equally keen to gain a foothold in the Indian market.
The banking system in India is significantly different from that of other Asian
nations because of the country's unique geographic, social and economic
characteristics. India has a large population and size. A diverse culture and extreme
disparities in income, which are marked among its regions. There are high levels of

24
illiteracy among a large percentage of its population but, at the same time, the
country has a large reservoir of managerial and technologically advanced talents.

The Indian financial system comprises the following institutions] 1 Commercial

banks a. Public sector b. Private sector c. Foreign banks d. Cooperative institutions

(I) Urban cooperative banks

(ii) State cooperative banks

(iii) Central cooperative banks

7 Financial institutions a. All-India financial institutions (AIRs) b. State financial

corporation's (SFCs) c. State industrial development corporations (SIDCs) 3, Non
banking financial companies (NBFCs) 4. Capital market intermediaries.

The Indian Banks are governed by a supreme authority Reserve Bank of india,
RBI. The central bank of the country is the Reserve Bank of India (RBI). Was
established in April 1935 with a share capital of Rs. 5 crore on the basis f the
recommendations of the Hilton Young Commission. The share capital ' as divided
into shares of Rs. 100 each fully paid which was entirely owned y private
shareholders in the beginning. The Government held shares of Itiominal value of
Rs. 2, 20,000.

Reserve Bank of India was nationalized in the year 1949. The general
Lperintendence and direction of the Bank is entrusted to Central Board of
Directors of 20 members, the Governor and four Deputy Governors, one
Government official from the Ministry of Finance, ten nominated Directors by the
Government to give representation to important elements in the economic life of
the country, and four nominated Directors by the Central Government to represent
the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New
Delhi. Local Boards consist of five members each Central government appointed
for a term of four years to represent territorial and canonic interests and the
interests of co-operative and indigenous banks he Reserve Bank of India Act. 1934
was commenced on April 1, 1935 the ct, 1934 (II of 1934) provides the statutory
basis of the functioning of the bank.

25
The Bank was constituted for the need of following: To regulate the issue of
banknotes to maintain reserves with a view to securing monetary stability and to
operate the credit and currency system of the country.

2.5 Mergers and acquisitions (Global scenario):

Business Combinations are a critical part of the fabric of doing business in a free
market economy and are deeply ingrained in the business strategy the world over.
Such combinations include mergers, acquisitions and other forms of corporate
restructuring undertaken both within a country and across international boundaries.
The intensity of M&A activity, in US in 1990s was unlike any other year in US
history. Following a drop in both the number of transactions and the total dollar
volume during the 1990 recession, M&A activity rebounded sharply in 1992. Deals
during the nineties were prompted more by strategic considerations and used less
debt as compared to 1980s. The financial environment which was quite favorable
in terms of vibrant stock markets and relatively low interest rates facilitated the
resurgence of M&A activity in US. According to the data furnished by Thomson
Financials, the global M&A activity jumped by 30% in the year 2006 to hit an all
time record of $3.7 trillion surpassing the year 2000 high of $3.4 trillion. The USA
which accounted for over 40% global M&A activity was the most targeted country

26
for acquisitions. The UK was the most targeted European country for acquisitions,
accounting for cross border and domestic transactions valued at $339 billion.

In the meantime according to the data released by Dealogic, a deal tracking firm,
Europe had overtaken the United States of America (USA) as the most targeted
region, accounting for $1.34 trillion or about 40% of the total deal value compared
with the USA share of 36%, or $1.22 trillion. This increase in M&A activity in
Europe was caused by demographics and economic changes which were the major
factors driving M&A activity as an integral part of the overall corporate
restructuring activity in Europe according to experts. The cash surplus held by
private equity firms (PEs) and public companies, the interest rates which touched
their historic lows and the willingness of banks to provide financing were found to
be the key factors for the global surge in M&A activity in 2006. The year 2007 was
again a record year for global M&A volumes which were estimated at a record
figure of around $4.4 billion according to Thomson Financials and $ 4.7 billion
according to Dealogic. Volumes in Europe were higher than in the US for the first
time in five years and only the second time ever: $1.78 trillion vs. $1.57 trillion
according to Thomson Financial. This has been partially attributed to the lag in
Europe being affected by the credit markets.

27
2.6 Growth of Mergers and acquisitions

Mergers and acquisitions (M&A) have been a popular strategy of business

expansion worldwide. Literature on the subject accounts for growth of M&A by
way of several waves that are caused by some favourable business climate and end
on account of economic or regulatory reasons. Lipton, M (2006) reports such
merger waves for US that has seen multiple waves of mergers over a long period in
its corporate history.

The first period — 1893-1904 was the time for horizontal mergers and created the
principal steel, telephone, oil, mining, railroad, and other giants of the basic
manufacturing and transportation industries in the US. The Panics of 1904 and
1907, anti-trust laws,

First World War are pointed to as the causes of the end of the first wave. The
second wave from 1919 to 1929 significantly increased vertical integrations in US
but ended with the Great Depression and the 1929 Crash. The third wave of 1955
to 1969 gave birth to conglomerates with companies diversifying into new
industries and areas. The wave ended with the crash of conglomerate stocks in
1969-70. while the fourth wave, 1980-89 was the period of takeovers and hostile
bids that ended with collapse of junk bond market, the fifth wave 1993-2000 was
the era of mega deals for US.

28
During this time, companies of unprecedented size and global sweep were created
on the assumption that size matters. This period also, however, ended with
slowdown in important sectors such as telecommunication and media and
technology and bursting of IT bubble.

Similarly, Europe also has witnessed a wave of takeovers since middle 1950s and
subsequently in 1980s. In recent times, such merger wave phenomenon is observed
in emerging markets with Asian economies experiencing a large growth in M&A
transactions. Deals by companies in emerging markets now account for 30% of
global M&A activity.'

Mergers and acquisitions deals worldwide reached an all time high in 2006, with a
total value of $3.7 trillion, surpassing the 2000 high of $3.4 trillion [Dobbs,
Goedhart and Suonio (2006)]. The analysis of authors indicate that US was the
most targeted country for acquisition representing over 40% of global M&A
activity, while UK was the most targeted European country for acquisition with
$339 bn of cross-border and domestic transactions. During the year 2010, the
global M&A activity increased 33% over 2009. 2 Fig.1.1 clearly depicts the
growing interest of corporate firms around the world in mergers and acquisitions.

It can be observed that the number of M&As have announced during the period
1988 to 2006, have increased from 2,856 in 1988 to 23,708 in the year 2006 with
maximum number of deals announced reported at 40,141 in the year 2000. Nearly
half (44%) of privately held businesses in the BRIC (Brazil, Russia, India and
China) economies are planning to grow by acquisition in 2011.

29
2.7 Global Financial Crisis and global M&A point of view for the future

The global financial crisis has pushed many countries around the globe into deep
recession and has dramatically affected their business plans and outlook the world
over. The global economy plunged into recession in the latter half of the year 2008.
This deepened in the early months of 2009, as global trade contracted sharply,
investment was slashed and consumer demand faded. This nine month period
coincided with the steepest decline in global economy in the post war era. This
period witnessed a combination of severe banking crises in many mature
economies like US, the credit squeeze, massive house price corrections and
dramatic collapse in fixed investments. While the recession may be easing, as a
sequel to the massive fiscal stimulus measures taken by the governments of the
countries concerned and world bodies, the recovery is going to be slow and patchy.

Mike Hughes, global leader-mergers and acquisitions for Grant Thornton

International while attributing the large scale reduction in transaction volumes to
the tight lending policies exuded optimism that these turbulent times could also
provide attractive opportunities to cash rich/well capitalized businesses to register
substantial improvement in their growth by acquiring ailing but fundamentally
sound rivals. The next 12 months are likely to be a buyer’s market offering
opportunities to make strategic acquisitions at attractive valuations” (Mergers and
acquisitions release, 2009-Thornton). M&A activities gained traction globally in
the fourth quarter of 2009,witnessing a rise in value by 46% to $739.6 billion
which was $150 billion higher than any other quarter in 2009(Business
Standard,20th March,2010). This has clearly thrown a hint at a resurgence of M&A
activity in the Year 2010 according to Dealogic.

30
2.8 M&A in the Indian context after economic reforms

The Indian economy has experienced a major structural transformation following

the introduction of economic reforms by the Government of India in 1991. The
forces of Liberalization, Privatization and Globalization unleashed by these
reforms have brought about a sea change in the traditional Indian business mindset.
Indian business leaders started thinking in terms of inorganic growth both within
and beyond the borders of the country. In this backdrop, M&A presented a viable
alternative for the businesses aspiring to grow quickly and gain the benefits of
sustainable competitive advantage by realizing the benefits of scale and scope
economies, fast changing technologies for effectively facing rapidly intensifying
domestic and international competition. Many corporate embarked upon several
corporate restructuring activities like M&As, Joint Ventures, Spin-offs and
Divestitures.

The major industry sectors influenced by the forces of consolidation in India,

though varied from time to time, were mostly in the realm of infrastructure sectors
like cement, power and steel, drugs, telecommunications, media & entertainment
and banking. A major change evident after 2002 in the corporate restructuring
activity in India is that of Indian companies making forays into developed foreign
markets through acquisitions and joint ventures (JVs). During this period India also
became an attractive destination for foreign direct investment (FDI) as the inbound
acquisitions also gained considerable momentum. Merger and Acquisition activity
in India comes under the purview of the various provisions of the Companies Act,
Securities Exchange Board of India (SEBI) and Competition Commission Act of
India, 2002.

In the year 2009, M&A and PE investments in India almost halved both in volume
and value terms due to the economic slowdown precipitated by the global financial
crisis. According to Grant Thornton’s Deal Tracker report, the total value of M&A
and PE deals announced in 2009 stood at $21.20 billion as against $41.54 billion in
2008. PE and qualified institutional placement in the same year was at $11.17
billion ($10.59 billion). The M&A and PE investments in 2007 were of the order

31
of $70.14 billion. There were 488 deals in the year 2009 against over 766 in
2008.Domestic M&A volumes dipped to 142 from 172 in 2008.

Outbound M&A was down at 64(196) while inbound M&A to 61(75% to $ 3.11
billion from $12.55 billion in 2008, the Russian 86). Coming to the value of deals,
the value of inbound deals dipped by about Government’s acquisition of a strategic
stake in Sistema Shyam Telecom for $676 million was the largest inbound deal in
2009 while Daichi’s acquisition of Ranbaxy Technologies for $4.5 billion was the
largest inbound deal in 2008. The value of outbound deals declined to $1.12 billion
($13.19 billion) in 2009. However, the top two outbound deals in 2008-Tata-Jaguar
Land Rover and ONGC-Imperial accounted for almost 40% of the outbound deals.
Top deals occurred in the oil and gas sector followed by telecom, pharmaceuticals,
healthcare and biotech while in the year 2008 the top deals were spread across
various sectors.

It may also be noted that in 2008, cash-rich Indian companies like Infosys
Technologies made new acquisitions both in India and abroad following a steep
drop in the valuations of target companies. According to global M&A(Mergers and
acquisitions) intelligence service, Merger market, the overall improvement in
economic and business environment of India has resulted in an impressive
(166.5%) jump in the M&A deals (both inbound and outbound being nearly equal
in volume terms at around $25 billion) in the year 2010 as against 2009.Telecom
sector got the lion’s share with 16 transactions amounting to $19.6 billion while
Bharti's acquisition of Zain Africa for $10.7 billion contributed significantly to the
M&A pie in the year 2010.

2.9 Motives for Mergers and acquisitions

The modern trend has been towards related mergers and acquisitions.
Infrastructure-related industries dominated Mergers and acquisitions in 2008
(accounting for over 45% of the deals in value terms). According to Bundeep
Singh Rangar, Chairman, Indus View Advisors Ltd, Europe’s fastest-growing

32
Indian Mergers and acquisitions firm advising multinational companies on
business opportunities emanating from India’s rapidly growing economy, the
dominance of this sector in Mergers and acquisitions symbolizes the growing need
for world class facilities, adoption of globally acceptable best practices,
experienced global management expertise & technology applications to accelerate
growth in the Indian economy. Grant Thornton (2006) conducted a survey of
Indian corporate managers across various sectors. Their findings revealed that
Mergers and acquisitions continued to be a significant form of business strategy for
Indian corporate.

The recent trend has been towards related mergers and acquisitions. The move
towards divesture of non-core business too has lent support to mergers and
acquisitions. In India Industries operating in the sector of telecommunication,
broadcasting, utilities and pharmaceuticals have witnessed consolidation leading
heavy mergers and acquisitions. at this time the strategic forces aim at getting a
bigger size of the market, enhancing product mix through R&D, to achieve
economies of scale and synergy, strengthening ownership control and guarding
against Acquisitions. Through adopting these strategic considerations companies
expected to focus on their core competencies through core consolidation and stay
economical.

2.10 M&As in the Indian Banking Sector

During the last two decades, the Indian banking sector has undergone a
metamorphic change following the economic reform process initiated by the
Government of India. The forces of globalization, deregulation and liberalization
unleashed by the economic reforms, set in motion in 1991, have transformed the
face of the Indian financial services sector landscape , including that of the Indian

33
banking sector in a big way. There has been a paradigm shift from a regulated to a
deregulated environment. Earlier, the banking industry was largely a nationalized
industry (since 1969). The larger developments in the economies across the globe,
the economic crisis in 1991 & more recently the sub-prime crisis and the changing
outlook of the policy makers in India have forced the pace of change of the Indian
banking industry. The economic liberalization and deregulation measures intiated
in the 1990s have opened up the doors to foreign competition and made the
markets more efficient and competitive. Continuous innovation and keeping pace
with technological change have become a must for survival of the firms in the
financial services industry including the banking sector. The developments in the
Indian banking sector have witnessed quite a few mergers and acquisitions
(M&A).

The banking sector in India has made remarkable progress since the economic
reforms in 1991.The entire financial sector - the banking sector in particular is of
fundamental importance to a developing economy. The Narasimham Committee
report in August 1991 highlighted the need for financial sector reforms and
fostering competitive spirit in the Indian banking sector. The report also suggested
a roadmap to achieve this objective. The central theme of the reforms was straight
forward: providing the much needed platform to the Indian banks to operate from a
vantage point on the basis of operational flexibility and functional autonomy,
thereby improving efficiency, productivity and profitability. The Government did
not accept all the recommendations due to political compulsions and the practical
difficulties in implementation.

In 1997, a second committee was set up (under M. Narasimham) to specifically

suggest further measures for banking sector reforms. The second Narasimham
committee, in its report submitted in April, 1998 had suggested, inter alia mergers
among strong banks, both in the public and private sectors. Since the onset of
reforms in 1990, according to the RBI report, 22 bank amalgamations, have taken
place in India (up to 2007). While, the amalgamations of Indian banks were mostly
driven by weak financials as reflected in the continuously deteriorating balance
sheets of the merging entities prior to the year 1999, in the post-1999 period there
have been mergers between healthy banks prompted by business and commercial
considerations. The mergers of the largest commercial bank of India, SBI with
State Bank of Saurashtra and State Bank of Indore (in progress) are the latest
34
among such mergers. A table depicting the size and net profits of major public
sector banks of India as at the end of March, 2009 is furnished below.

2.11 M&A in Banking Industry

Banking system is the bloodline of any economy and banks are trustees of public
money. The depositors therefore, have more stakes in the welfare of banks than the
share holders. Failure of a bank has more systemic implications than say, the
failure of a manufacturing company. Laws governing regulation and supervision of
banks in all countries therefore focus on protecting the interests of depositors.
Naturally, fillip to bank consolidation in many countries came through regulatory
and governmental actions in public interest. Large scale public funding has also
taken place in a number of countries to prevent failure of banks/banking system.

United States witnessed large scale bank failures in the eighties (Savings and Loan
Institutions) and the Government came to the rescue of banking system through

35
liberal FDIC (Federal Deposit Insurance Corporation) support. An estimated USD
100 Billion was sent on the rescue. In the process the Government encouraged
mergers among banks by giving incentives to the banks taking over assets and
liabilities of failed banks. Subsequent M & A activity in the USA in nineties and in
recent years have been motivated by market forces.

Nearer home, we have the Asian experience in bank consolidation post 1997
economic meltdown. The crisis brought out the vulnerability of a weak banking
system to economic shocks. Here again, the governments had come up with
funding support and actively encouraged consolidation among banks. Let us look
at some of the initiatives taken in this region for strengthening the banking system.
Indonesia witnessed large scale infusion of public funds into the banking system
through a specialized restructuring agency. Regulatory forbearance was also
present in good measure to facilitate bank recovery. As against Basel Capital
adequacy norm of 8%, banks were allowed to operate with 4% as an interim
measure. Only banks which had Capital adequacy ratio reduced to below - 25%
were marked for immediate closure.

Consolidation among banks was actively encouraged and FDI was allowed up to
99%. Net result was that the number of banks in Indonesia which stood at 239 in
1996 came down to 138 by 2003. Consolidation was most visible among private
banks with the number of such banks coming down from 164 to 76 during the
period. Post restructuring, the banks are now healthier and their branch network
and coverage has increased significantly in recent years.

In Malaysia Bank Negara, the Central Bank implemented a well crafted financial
master plan aimed at strengthening the domestic banks, create a level playing field
for foreign banks and open banking sector to global competition. The regulator
used suasion to create 10 anchor banks through the consolidation of 22 banks and
39 finance companies. FDI capped at 30% is expected to be increased in the
second phase of reforms scheduled to commence from 2007.

In Singapore, there are 3 main banking groups and they have given boost to
consolidation process not only within the country, but also in South Korea and
Malyasia

36
Thailand has implemented a Financial Sector Master Plan aimed at removing
obstructions to M & A and also allows FDI flow to strengthen the banking system.

Japan is a country which has witnessed a virtual collapse of the banking system
along with economic stagnation which lasted over 15 years. Japan had some of the
leading names in global banking arena. The economic slowdown saw the NPA
levels going up over the roofs and the banks virtually looking for government‘s
support. Needless to say, the low interest rate regime (near zero rates) would have
eased their sufferings somewhat. However, the banking system has recovered in
recent years helped by liberal financial assistance from the government and an
environment of extremely loose monetary policy. Consolidation process which was
kicked off as restructuring strategy has resulted in emergence of three large banks
viz. Mitsubishi UFJ, Mizuho and Sumitomo Mitusui.

Today NPA levels have come down to an acceptable level of 2% from a peak level
of 8.4% in the year 2002. Capital adequacy ratios have improved above the Basel
Benchmark of 8%. Banks have started showing profits and there is a pick-up in
their credit portfolio. Japanese banks may still have a long way to go as their
ratings continue to be low and they are heavily dependant on interest income with
heavy reliance on low margin corporate loans.

Another interesting development taking place in Japan is the government move to

privatize the postal agency, which doubles as a financial institution that holds the
world‘s largest pool of household savings. The Housing Loan Corporation
managing the advances of the postal agency had, at one time, nearly 50% of all
mortgage loans in Japan. As part of privatization this Corporation is being wound
up with the assets getting transferred to the banking system.

The privatisation of the postal agency would see the emergence of a new bank
(named as Yacho Bank) which could probably be one of the largest banking
entities in the world.

37
2.12 M&A in Indian Banking:

Mergers and acquisitions are not an unknown happening in Indian Banking. In

fact, the predecessor of State Bank of India, the Imperial Bank of India was born
out of consolidation of three Presidency Banks way back in 1920. In fact there
were several cases of bank failures, mergers and acquisitions which were reported
in pre-independence period dating back to even early 19th Century. Proper
regulation and control of banks and intervention by the regulator in the event of a
crisis came into being with the passing of Banking Regulation Act in 1949.

However, forced merger and amalgamation as a tool to provide relief to ailing

banks besides protecting public and depositor confidence in banking system came
into being only in 1960 when Section 45 inserted in BR Act. Panic created by the
Nath Bank in the fifties and Laxmi bank and Palai Central bank in 1960 had
prompted this legislative move. The first half of the sixties saw 45 forced mergers
under section 45. In the post nationalization period also a number of mergers and
acquisitions took place, most of them under Section 45. Interestingly almost all of
them were amalgamations of failed private banks with one of the Public sector
banks.

In the recent times, we have seen some M&A as voluntary efforts of banks. Merger
of Times Bank with HDFC Bank was the first of such consolidations after financial
sector reforms ushered in 1991. Merger of Bank of Madura with ICICI Bank,
reverse merger of ICICI with ICICI bank, coming together of Centurion Bank and
38
Bank of Punjab to form Centurion Bank of Punjab and the recent decision of Lord
Krishna Bank to merge with Federal Bank are voluntary efforts by banks to
consolidate and grow.

Consolidation fever has not been confined to the Scheduled Commercial Banks.
We have seen consolidation process gaining strength in other sectors as well. We
had 196 RRBs since 1989. The last year and a half has seen their numbers dwindle
to 103 with merger of RRBs sponsored by commercial banks within the same state.
This move is expected to bring most of the RRBs into profit making entities
capable of playing their role in the way they were expected to do when the RRB
Act was passed in 1996.

Well, the big question is ―When will we see M&A activity among Public Sector
Banks?‖ Public Sector Banks form nearly 75% of Indian Banking and we need to
see consolidation in this sector for the Indian Banking sector to stand up and be
counted in the Global Banking map.

39
 CHAPTER 3

LITERATURE REVIEW

Under this study an extensive review of literature has been carried out for the
purpose of providing an insight into the work related to Mergers and Acquisitions.
Several studies have been conducted to examine the impact of M & A on different
aspects of the banking sector. Further many studies have also highlighted the
various motives behind such a strategic move.

Egl Duksait and Rima Tamosiunien (2009) described the most common motives
for companies decision to participate in mergers and acquisitions transactions. The
reason is growth, synergy, access to intangible assets, diversification, horizontal
and vertical integration and so on arises from the primary company’s motive to
grow. Most of the motivations for mergers and acquisitions feature serve as means
of reshaping competitive advantage within their respective industries. However, it
may be that some of the motives identified affect some industries more than others,
and in that sense they can be expected to be associated with a greater intensity of
mergers and acquisitions in certain sectors rather than others.

P Akhil Bhan has made an attempt to study the insight into the motives and
benefits of the mergers in Indian banking sector. This is done by examining the
eight merger deals of the banks in India during the period of reforms from 1999 to
2006 . Through the empirical methods by applying t-test and EVA value

40
calculations the potential of the mergers has been evaluate to study the efficiencies
or benefits achieved due to the merger .Through this paper and the sample taken
for analysis it has been concluded that the mergers in the banking sector in the post
reform period possessed considerable gains which was justified by the EVA of the
banks in the post merger period.

Julie Lei Zhu (2011) developed a new measure for shareholder value creation to
assess the efficiency of acquiring firms in utilizing capital before mergers and
acquisitions (M&As) and links this measure to acquirers’ post-acquisition
performance. His measure, constructed before the M&A transaction, (a) predicts
both the operating and long-run abnormal stock performance of merged firms after
the acquisitions and (b) hedge portfolios based on the measure generate substantial
abnormal returns. Overall, the results indicated that investors do not fully
recognize how efficient acquirers have been in utilizing capital before M&As and
that incorporating the new value creation measure into the decision process of
large-scale M&As can help protect shareholder wealth.

Dr. V. K. Shobhana and Dr. N. Deepa (2011) made a probe into the fulfilment of
motives as vowed in the merger deals of the nine select merged banks. The study
uses Summary Statistics, Wilcoxon Matched Paired Signed Rank Test and ‘t’ test
for analysis and interpretation of data pertaining to the five pre and post merger
periods each. The result indicates that there has been only partial fulfilment of the
motives as envisaged in the merger deals

41
Mehroz Nida Dilshad (2012) measured the efficiency of market with respect to
announcements of mergers and acquisitions using an event study methodology.
The study analyzed the effects of banks mergers and their announcements on the
prices of stocks, in Europe. Evidence here supports that significant cumulative
abnormal returns were short lived for the acquirers. At the end of the event
window, the cumulative abnormal returns were 0. Evidence of excess returns after
the merger announcement was also observed along with the leakage of information
that resulted in the rise of stock prices few days before the announcement of
merger or acquisition. At the same time, the results of cumulative abnormal returns
showed that target banks earned abnormal returns on the merger announcement
day.

Gupta Himani (2013) analyzed the impact of mergers and acquisition on financial
efficiency of banks in India by comparing selected pre and post merger indices.
Gross earnings, profits after tax and net assets of the selected banks were taken as
indices for comparison. Three mergers of Indian Banks were taken as sample for
the study.

42
History of Merger and acquisition in India

Mergers and acquisitions in Indian banking sector have initiated through the
recommendations of Narasimham committee II. The committee recommended that
merger between strong banks/ financial institutions would make for greater
economic and commercial sense and would be a case where the whole is greater
than the sum of its parts and have a “force multiplier effect”. (Narasimham
committee II, chapter, para 5.13 -5.15). Table 1 provides a list of banks that have
been merged in India since post-liberalization in the country. Mergers and
acquisitions in Indian banking sector have initiated through the recommendations
of Narasimham committee II. The committee recommended that merger between
strong banks/ financial institutions would make for greater economic and
commercial sense and would be a case where the whole is greater than the sum of
its parts and have a “force multiplier effect”. (Narasimham committee II, chapter,
para 5.13 -5.15).

43
 Before 1990

Year of
Name of the Banks Acquired Name of the Banks got Merged Merging
happened

Allahabad Bank United Industrial Bank Limited 1989

Bank of Baroda Traders Bank Ltd 1988

Punjab National Bank Hindustan Commercial Bank Ltd 1986

State Bank of India Bank of Cochin Ltd 1985

Canara Bank Lakshmi Commercial Bank Ltd 1985

Union Bank of India Miraj State Bank Ltd 1985

State Bank of India National Bank of Lahore Ltd 1970

State Bank of India Bank of Bihar Ltd 1969

44
 From 1990 to 1999

Year of
Name of the Banks
Name of the Banks got Merged Merging
Acquired
happened

Bank of Baroda Bareilly Corporation Bank Ltd. 1999

Union Bank of India Sikkim Bank Ltd. 1999
Oriental Bank of Commerce Bari Doab Bank Ltd. 1997
Oriental Bank of Commerce Punjab Co-operative Bank Ltd. 1996
State Bank of India Kashinath State Bank Ltd 1995
Bank of India Bank of Karad Ltd. 1994
Punjab National Bank New Bank of India 1993
 Bank Of India Parur Central Bank Ltd. 1990
Central Bank Of India  Purbanchal Bank Ltd. 1990
Indian Bank Bank of Thanjavur Ltd. 1990
Indian Overseas Bank Bank of Tamilnadu Ltd 1990

45
 From 1990 to 1999

Year of
Name of the Banks Acquired Name of the Banks got Merged Merging
happened

Bank of Baroda Bareilly Corporation Bank Ltd. 1999

Union Bank of India Sikkim Bank Ltd. 1999
Oriental Bank of Commerce Bari Doab Bank Ltd. 1997
Oriental Bank of Commerce Punjab Co-operative Bank Ltd. 1996
State Bank of India Kashinath State Bank Ltd 1995
Bank of India Bank of Karad Ltd. 1994
Punjab National Bank New Bank of India 1993
 Bank Of India Parur Central Bank Ltd. 1990
Central Bank Of India  Purbanchal Bank Ltd. 1990
Indian Bank Bank of Thanjavur Ltd. 1990
Indian Overseas Bank Bank of Tamilnadu Ltd 1990

46
 From 2010 to 2017

Year of
Name of the Banks
Name of the Banks got Merged Merging
Acquired 
happened

State Bank of India Bharatiya Mahila Bank (BMB) 2017

State Bank of India State Bank of Travancore (SBT) 2017

47
 State Bank of Bikaner and Jaipur
State Bank of India 2017
(SBBJ)

State Bank of India State Bank of Hyderabad (SBH) 2017

State Bank of India State Bank of Mysore (SBM) 2017

State Bank of India State Bank of Patiala (SBP) 2017

Kotak Mahindra Bank ING Vyasa Bank 2014

ICICI Bank Bank of Rajasthan Ltd. 2010

48
 Name of the Banks Name of the Banks
Year of Merged
Acquired Merged into

Indian Bank and

2019 August Indian Bank
Allahabad Bank

Union Bank, Andhra

2019 August Union Bank Bank and Corporate
Bank

Canara Bank and

2019 August Canara Bank
Syndicate bank

Punjab National
Bank, Oriental bank
2019 August Punjab National Bank
of commerce and
United bank of India

Vijaya bank and

2019 April Bank of Baroda
Dena Bank
Bhartiya Mahila
2017 April State Bank of India
Bank (BMB)
All the 5 associates
2017 April State Bank of India
of SBI
2014 Nov Kotak Mahindra Bank ING Vyasa Bank
2010 May ICICI Bank Bank of Rajasthan

49
 CHAPTER4

CASE STUDY

MERGER OF BANK OF BARODA, VIJAYA BANK AND DENA BANK

The government has decided to merger three banks – Bank of Baroda, Dena

Bank and Vijaya Bank — to reduce the amount of capital it needs to put into
these banks and help clean their balance sheets. The three merged state-owned
banks will the third-largest lender after State Bank of India and HDFC Bank. The
name of the merged entity and the share-swap ratio will be decided soon. Bank
unions, however, were quick to oppose the merger.

While Dena Bank has been placed under the prompt corrective action framework
by Reserve Bank of India with restriction o n lending, Vijaya Bank is among the
only two lenders to have reported a profit in 2017-18. As a percentage of total
assets, Dena Bank has the highest net non-performing assets at 11.04% while
Vijaya Bank has 4.10% and Bank of Baroda 5.4%. The weaknesses of Dena Bank
are being diluted by pooling them with the strengths of the other two.

The merger of the three banks is a signal for further consolidation among the 17
state-owned banks that have seen spiraling non-performing assets.  One of the
reasons to merger these three banks were that they use the same software – Finacle
from Infosys making the task of merging the technology platforms and back-ends
easier.  In the past, the government merged State Bank of India’s associate banks
with the parent and let Life Insurance Corporation take over the debt-ridden IDBI
Bank.

50
The three concerns expressed by investors are about the quality of Dena Bank’s
book, distraction from the growth journey for Bank of Baroda and Vijaya Bank
and whether the merged entity will be able to raise capital. There are also concerns
that whether Bank of Baroda will get distracted to the point that growth will suffer
in the long-run. Any merger of such a type will raise these doubts. The answer will
be in proper integration process. The merger proposal will first need to be
approved by the board of directors of the three banks. The government will then
prepare an amalgamation scheme, which will need to be approved by the cabinet
and Parliament.

In general, challenges on asset quality and profitability, erosion in networth and

high dependence on government for capital support continues to hamper the
growth aspirations of state-owned banks, especially under the RBI’s prompt
corrective action framework. In fact, state-owned banks account for over 80% of
the Rs 10.4 lakh crore of non-performing assets in the banking system as on June
30, 2018, and reported aggregated losses of Rs 1 lakh crore for the past five
quarters.

51
 The combined entity: Gaining scale

The government is hoping that Bank of Baroda’s large balance sheet and healthy
capital ratios and Vijaya Bank’s robust capital base would fill the losses in Dena
Bank’s balance sheet. The merged entity will have a strong presence across the
country, especially in South India, with more than 34% of low-cost deposits. The
business book will be 14.82 lakh crore. The largest of them — Bank of Baroda has
a business book of Rs 10.29 lakh crore, followed by Vijaya Bank at Rs 2.79 lakh
crore and Dena Bank at Rs 1.72 lakh crore.  The economies of scale and large
players and large players are positive for the banking system. It is beneficial for the
system to get larger banks but the integration will have to be managed well to gain
business benefits.

The merger can bring about material operating efficiencies over time reducing
combined operating costs, lower funding cost and strengthened risk management
practices on a consolidated basis apart from increasing the scale and reach
moderately. The asset-liability mismatch of the smaller banks can be better
addressed at the consolidated level.

52
TABLE 1: FINANCIALS OF MERGING BANKS

Net Tier -1 Total Deposits

Branch Employe
Banks NPAs Capital business (Rs (Rs lakh
es es
(%) (%) lakh crore) crore)

Bank of
5.4 9.27 10.3 5502 5.8 55662
Baroda

Vijaya
4.1 10.35 2.8 2129 1.6 16079
Bank

Dena
11 8.25 1.7 1858 3 13613
Bank

Merged
5.7 9.32 14.8 9489 8.4 85354
entity

Among challenges, the grouping of accounts will be one of the biggest. There
could be some accounts which may be standard in one bank and substandard in
another. The provision and classification of accounts will have to be aligned in the
next two quarters. In fact, State Bank of India had undertaken a similar exercise a
few quarters before the five associate banks were merged with it. The associate
banks had reported huge losses prior to the merger because some of the accounts
needed high provisions to be in line with that of SBI. It is likely that these banks
may report high provisions as they align their accounts with each other.  Dena

53
Bank has been barred from lending for the past four months by RBI. What the
merged entity will have is Dena Bank’s Rs 15,000 crore toxic loan piles for which
provisioning cover is just 58%.

The merger process could happen gradually. At first, there will be consolidation of
the business followed by the integration of information technology structures. For
instance, at the time of merger of ING Vysya with Kotak Mahindra Bank,
corporate banking and treasury departments were merged before retail banking was
integrated. The merged banks have very different cultures, different operating
procedures, different HR processes and managing their integration is going to be a
tough job. The proposed amalgamation will require significant bandwidth of
management along with deft handling so that operational aspects such as business
growth and resolution of large stock of delinquent assets continue receiving
adequate attention.

Realigning human resources will be one of the biggest challenges in this merger.
The government has assured that there will be no job loss or change in service
conditions. The multiple posts that exist in the three banks will surely have to be
merged as there cannot be so many posts for single functions. Issues of seniority
are important in state-owned setups and the combined management will have to
figure out the structure, going forward.

54
TABLE 2: GEOGRAPHIC DISTRIBUTION OF BANK BRANCHES
(AS ON JUNE 2018)

Bank of Dena Vijaya Merged Indust Share

Area
Baroda Bank Bank entity ry (%)

East 189 41 42 272 5774 4.7

North-
10 1 8 19 737 2.5
east

West 1433 487 284 2205 26894 8.2

North 446 101 166 713 16545 4.3

South 347 71 429 846 21669 3.9

Central 384 48 39 470 6635 7.1

Total 2809 749 968 4525 78254 5.8

For each of the three institutions, there will be added advantages. For instance,
Bank of Baroda’s technology platform could be of value to the other banks and the
bank’s global presence could be of value to the customers of the other two banks.
Merging of three banks will give the new entity benefits of economies of scale and
distribution.  Moody’s Investors Services has said the plan to merge the three state-
owned banks will be credit positive as it would improve their efficiency and

55
governance. The combined entity will have a well-diversified loan book of Rs 6.5
lakh crore and a loan-weighted net interest margin of 2.7%. The merged entity is
going to have the second-largest deposit base backed by 34% current account
savings account.

SBI, associate banks merger

In February 2017, the government started the process of merger of five associate
banks of SBI with SBI and in August last year the Lok Sabha passed the State
Banks (Repeal and Amendment) Bill to amend the State Bank of India Act of 1955
to remove references related to subsidiary banks.  The merger of five associates
and Bharatiya Mahila Bank with State Bank of India was relatively easier because
of common branding and technology, and SBI’s strong balance sheet, which could
cover asset-side risks of subsidiaries. However, the merger of five associate banks
of State Bank of India has resulted in a sharp jump in the combined entity’s bad
loans portfolio, crimping its profits. The associate banks made a loss of Rs 5,792
crore for the March quarter of 2016-17 and Rs 10,243 crore for the entire year
2016-17. This resulted in the consolidated net profit of SBI going down to Rs 241
crore when the standalone profit was Rs 10,484 crore in the year (2016-17).

56
The biggest merger benefit is the reduction in competition for lending and deposit
business within the group. There has been rationalization of branches which has
led to higher efficiency. Merger of group entities of SBI led to the restructuring of
the balance sheet of the entities and some of the liabilities were set off with
realization of assets. Cost savings on account of treasury operations, audit, and
technology helped lower the cost-to-income ratio.

57
 Take away from casestudy
The government’s move to merge two better performing banks – Bank of Baroda
and Vijaya Bank – with a weak one – Dena Bank – is a good strategy to ensure
stability of both, operations and the credit profile of the consolidated entity. The
success of the three-way merger will be crucial as it will pave the revival path for
other weak state-owned banks through mergers. Moreover, the merger will reduce
the capital burden for the government over the long term, and enable better
management of a smaller set of large nationalized banks. The ability to manage
potential challenges in terms of balance sheet, people and processes and their
impact on growth and operating metrics over the medium term will determine the
success of future mergers.

Merging state-owned banks is lot more challenging given the integration-related

issues, especially regarding human resources and operations. If this merger is
executed well it can set the path for future mergers among PSU banks which will
strengthen the banking sector in the country.

58
 CHAPTER5

Conclusion

Mergers and Acquisitions played a very important role in Banking Sector. The
small and medium size banks are working under threat from the economic
environment which is full of problems for them, viz, inadequacy of resources,
outdated technology, on-systemized management pattern, faltering marketing
efforts, weak financial structure, technique obsolescence and lack of product
innovations. Their reorganization through merger could offer re-establishment of
those in viable banks of optimum size with global presence. Merger and
acquisition in Indian banking so far has been to provide the safeguard and hedging
weak bank against their failure. The merger cult in India has yet to catch fire with
merchant bankers and financial consultants acquiring skills in grinding the banks to
absorb unviable banks and put them again on successful operations. All the merged
entities after mergers and acquisitions are continuously growing rather than before
the merger. There is increase in no. of branches and ATMs as well as in deposit
amount, their net profit and worth.

59
 BIBLOGRAPHY

1. https://shodhganga.inflibnet.ac.in/bitstream/10603/200556/9/09_chapter 1.pdf
2. https://www.google.com/search?
q=merger+and+acquisition+in+banking+sector+images&oq=merger+and+a
cquisition+in+banking+sector+images&aqs=chrome..69i57.14681j0j7&clie
nt=ms-unknown&sourceid=chrome-mobile&ie=UTF-8
3. https://www.google.com/url?sa=t&source=web&rct=j&url=https://
www.researchgate.net/publication/
331079592_A_Literature_Review_of_Mergers_and_Acquisitions&ved=2ah
UKEwjL-
crl4vnnAhUYfisKHRRvBKwQFjADegQIARAB&usg=AOvVaw3ONcs9gS
tVWtnhLOhr4fHy
4. https://mnacritique.mergersindia.com/merger-bank-of-baroda-dena-vijaya/
5. https://www.google.com/url?sa=t&source=web&rct=j&url=https://
www.researchgate.net/publication/
328698363_Mergers_and_Acquisitions_MA_in_Banking_Sector_A_Revie
w_of_the_Literature&ved=2ahUKEwjL-
crl4vnnAhUYfisKHRRvBKwQFjACegQIDhAN&usg=AOvVaw2G89GzkE
6b5Ev5B643MLdj

60