MANAGEMENT OF FINANCIAL INSTITUTIONS MERGERS AND ACQUISITIONS HDFC AND TIMES BANK

Prepared by:

MERGER BETWEEN HDFC BANK AND TIMES BANK

Introduction: Increased Revenue or Market Share: The merger deal was struck with a stock swap whereby the shareholders of Times Bank will get one share of HDFC Bank for every 5.75 shares held. The Times Bank will merge with HDFC Bank and the emerging entity will continue to function as HDFC Bank. With the RBI giving a green signal, the merger is likely to come into effect by the first quarter in 2000. The Bennett Coleman group, which promoted the Times Bank, will have about 7.5 percent stake in HDFC Bank. The equity capital of HDFC Bank will rise from Rs. 200 crore to Rs. 233 crore. The merger

increased the customer base of HDFC Bank by 2, 00,000 taking the figure to 6, 50,000. Cross Selling: It will also provide cross-selling opportunities to the increased customer population. Various products of HDFC Bank as well as the housing finance products to its patent HDFC can be offered to the new customers. Most importantly the branch network would increase from 68 to 107. HDFC Banks total deposits would be around Rs. 6,900 crore and the size of the balance sheet would be over Rs.9, 000 crore. Resource Transfer: Since Times banks has technology in place, HDFC Bank saves on the costs associated with technology up gradation. According to the bank some amount of rationalization of the portfolios of corporate loans may be required. The bank also gains from existing infrastructure. The capital adequacy of HDFC Bank would be 10.3 percent post-merger and would go up to 11.1 percent after the proposed preferential offer to maintain the current level of holdings of different classes of investors. The merger of those two banks has another distinct advantage. The new private sector banks have nurtured employee culture in tune with competitive forces. Thus there is unlikely to be any clash of cultures in the new entity. This is likely to help the integration process. Geographical or other Diversifications: The branch network of both the banks does not overlap. Despite the growth of Internet banking, branch network in the brick and mortar form is vital for reaching out to the customer especially in the Indian context. HDFC Banks strategy for setting up of branches has been that of incurring lowest cost with about 6 8 persons per branch who look after both servicing and market functions of the bank. The bank has also prompted the customers to use phone banking in a big way. Since setting up of branches a new is a costlier affair, acquiring a readymade branch network could not have been better. Product complementarily was more pronounced in the case of ATM card networks. HDFC Bank had the Visa network

and Times Bank had Master Card network. On account of the merger, it would be part of both the networks. Synergy: The table Convergence Advantage shows that there is fair amount of convergence in the rate of business growth (in terms of deposits, advances and income) and diversification in non-interest income. Says Bandi Ram Prasad, Chief Economist, Indian Banks Association; There is sizeable divergence in efficiency of operations (measured in terms of net profit as percent of working funds and Net NPAs as percent of working funds and Net NPAs as percent of Net Advances. With its record of higher operational efficiency HDFC Bank could contribute value addition to the business growth of the Times Bank. Since both are low on staff costs, better control of costs is also possible. With HDFC having more metro branches (65 percent) and Times Bank more urban branches (43 percent) overlapping of branch network is also not very leading to enlarged potential market. That is enough incentive for consideration of a merger. Taxation: The removal of entry barriers saw the emergence of nine new private sector banks, some of them being the banking arms of the Fls themselves. While reforms of interest rates and capital adequacy brought pressure in performance, new entrants brought competitions into the market place. Where there is competition and struggle for us primacy there would be M&A. Public sector banks being entities owned by the governments cannot be participants in the M&A game. Even if they were allowed to merge, mergers among the PSBs inter se would not produce any synergy, for the simple reasons that they are all alike. They invariably have presence in the same segment and suffer equally from ills like overstaffing etc. And any attempt to reap the benefits that might arise on account of rationalization of branches and staff could invite trouble from the mighty trade unions that fight tooth and nail