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Mergers
BACHELOR OF MANAGEMENT STUDIES
SEMESTER V
2012-2013
IN PARTIAL FULFILLMENT OF RECRUITMENT
BACHELOR OF MANAGEMENT STUDIES
SUBMITTED BY:
HARDIK J. SHETTY
ROLL NO: 62
CERTIFICATE
(2012 2013)
Date:Place: - Mumbai
This is to certify that Mr. Hardik J. Shetty of Bachealor of Management
Studies Semester V (2012-2013) has successfully completed the project on
(Mergers) under the guidance of Prof. Mrs. Komal Tiwari.
DECLARATION
Date:-
I the undersigned Mrs Komal Tiwari have guided Mr Hardik J. Shetty for his
project; he has completed the project (Mergers) successfully.
I hereby declare that the information provided in this project is true as per the
best of my knowledge.
Thanking you,
Yours Faithfully
Acknowledgment
At the outset, I would like to thank Almighty GOD for his shower of
blessings. The desire of completing this dissertation was given by my guide
Prof. Mrs Komal Tiwari I am very much thankful to her for the guidance,
support and for sparing her precious time from a busy and hectic schedule.
I am thankful to Mr. Shridhara Shetty, Principal of S.M. Shetty College Of
Science, Commerce & Management Studies. My sincere thanks to our cocoordinator Prof.Mrs Shurly Tiwari who always motivated me and provided a
helping hand for conceiving higher education.
I would fail in my duty if I dont thank my parents and sister who are pillars
of my life and my friends who have always supported and motivated me.
Finally, I would express my gratitude to all those persons who directly and
indirectly helped me in completing my dissertation.
Hardik J. Shetty
[Roll No 62]
EXECUTIVE SUMMARY
Merger is a combination of two or more companies into one company. The acquiring
company,(also referred to as the amalgamated company or the merged company) acquires the
assets and the liabilities of the target company (or amalgamating company).
Typically, shareholders of the amalgating company get shares of the amalgamated company
in exchange for their shares in the Target Company.
There are two ways which company can grow; one is internal growth and the other one is
external growth.
The internal growth suffers from drawbacks like the problem of raising adequate finances,
longer implementation time of the projects, uncertain etc. in order to overcome these
problems a company can grow externally by acquiring the already existing business firms.
This is the route of mergers and acquisition.
INDEX
Sr
no.
Topic
Page
no.
Preface
1
2
3
4
5
6
Introduction
Types of Mergers
Advantages
Procedures
Mergers in banking sector
Case Study
38
Conclusion
Bibliography/Wibliography
12
14
19
25
We have been learning about the companies coming together to from another
company and companies taking over the existing companies to expand their
business.
With recession taking toll of many Indian businesses and the feeling of insecurity
surging over our businessmen, it is not surprising when we hear about the
immense numbers of corporate restructurings taking place, especially in the last
couple of years.
Several companies have been taken over and several have undergone internal
restructuring, whereas certain companies in the same field of business have
found it beneficial to merge together into one company. In this context, it would
be essential for us to understand what corporate restructuring and mergers and
acquisitions are all about.
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of
corporate strategy, corporate finance and management dealing with the buying,
selling and combining of different companies that can aid, finance, or help a
growing company in a given industry grow rapidly without having to create
another business entity
Thus important issues both for business decision and public policy formulation
have been raised. No firm is regarded safe from a takeover possibility.
On the more positive side Mergers & Acquisitions may be critical for the healthy
expansion and growth of the firm. Successful entry into new product and
geographical markets may require Mergers & Acquisitions at some stage in the
firm's development.
Successful competition in international markets may depend on capabilities
obtained in a timely and efficient fashion through Mergers & Acquisition's.
Many have argued that mergers increase value and efficiency and move
resources to their highest and best uses, thereby increasing shareholder value.
To opt for a merger or not is a complex affair, especially in terms of the
technicalities involved.
We have discussed almost all factors that the management may have to look
into before going for merger. Considerable amount of brainstorming would be
required by the managements to reach a conclusion. e.g. a due diligence report
would clearly identify the status of the company in respect of the financial
position along with the net worth and pending legal matters and details about
various contingent liabilities.
Decision has to be taken after having discussed the pros & cons of the proposed
merger & the impact of the same on the business, administrative costs benefits,
addition to shareholders' value, tax implications including stamp duty and last
but not the least also on the employees of the Transferor or Transferee Company.
WHAT IS MERGER ?
Merger is defined as combination of two or more companies into a single
company where one survives and the others lose their corporate existence. The
survivor acquires all the assets as well as liabilities of the merged company or
companies. Generally, the surviving company is the buyer, which retains its
identity, and the extinguished company is the seller. Merger is also defined as
amalgamation. Merger is the fusion of two or more existing companies. All
assets, liabilities and the stock of one company stand transferred to Transferee
Company in consideration of payment in the form of:
Cash, or
Merger waves
The economic history has been divided into Merger Waves based on the merger activities in the business world as:
Period
Name
Facet
18971904
First Wave
Horizontal mergers
19161929
Second Wave
Vertical mergers
19651969
Third Wave
19811989
Fourth Wave
19922000
Fifth Wave
Cross-border mergers
20032008
Sixth Wave
Types of Mergers
Merger or acquisition depends upon the purpose of the offeror company it wants
to achieve. Based on the offerors objectives profile, combinations could be
vertical, horizontal, circular and conglomeratic as precisely described below with
reference to the purpose in view of the offeror company.
Advantages Of Mergers
Mergers and takeovers are permanent form of combinations which vest in
management complete control and provide centralized administration which are
not available in combinations of holding company and its partly owned
subsidiary. Shareholders in the selling company gain from the merger and
takeovers as the premium offered to induce acceptance of the merger or
takeover offers much more price than the book value of shares. Shareholders in
the buying company gain in the long run with the growth of the company not
only due to synergy but also due to boots trapping earnings .Mergers and
acquisitions are caused with the support of shareholders, managers ad
promoters of the combing companies. The factors, which motivate the
shareholders and managers to lend support to these combinations and the
resultant consequences they have to bear, are briefly noted below based on the
research work by various scholars globally.
(a) Consumers
The economic gains realized from mergers are passed on to consumers in the
form of lower prices and better quality of the product which directly raise their
standard of living and quality of life. The balance of benefits in favour of
consumers will depend upon the fact whether or not the mergers increase or
decrease competitive economic and productive activity which directly affects the
degree of welfare of the consumers through changes in price level, quality of
products, after sales service, etc.
the PSBS mergers. Technology of the merging banks to should complement each
other NPA management. Management of efficiency, cost reduction, tough
competition from the market players and strengthing of the capital base of the
banks are some of the problem which can be faced by the merge entities.
Mergers for private sector banks will be much smoother and easier as again that
of PSBS.
travel loans, as wellas many banks have started capitalizing on recent capital
market boom by providing IPO finance to the investors.
Before deciding on the merger, the authorized officials of the acquiring bank and
the merging bank sit together and discuss the procedural modalities and
financial terms. After the conclusion of the discussions, a scheme is prepared
incorporating therein the all the details of both the banks and the area terms and
conditions
After the Board approval of the merger proposal, an extra ordinary general
meeting of the shareholders of the respective banks is convened to discuss the
proposal and seek their approval.
After the board approval of the merger proposal, a registered valuer is appointed
to valuate both the banks. The valuer valuates the banks on the basis of its share
capital, market capital, assets and liabilities, its reach and anticipated growth
and sends its report to the respective banks.
Once the valuation is accepted by the respective banks , they send the proposal
along with all relevant documents such as Board approval, shareholders
approval, valuation report etc to Reserve Bank of India and other regulatory
bodies such Security & exchange board of India
(SEBI) for their approval.
After obtaining approvals from all the concerned institutions, authorized officials
of both the banks sit together and discuss and finalize share allocation proportion
by the acquiring bank to the shareholders of the merging bank
(SWAP ratio)
After completion of the above procedures , a merger and acquisition agreement
is signed by the bank
Although the Banking Regulation Act, 1949 (AACS) does not empower Reserve
Bank to formulate a scheme with regard to merger and amalgamation of banks,
the State Governments have incorporated in their respective Acts a provision for
obtaining prior sanction in writing, of RBI for an order, inter alia, for sanctioning a
scheme of amalgamation or reconstruction.
The request for merger can emanate from banks registered under the same
State Act or from banks registered under the Multi State Co-operative Societies
Act(Central Act) for takeover of a bank/s registered under State Act. While the
State Acts specifically provide for merger of co-operative societies registered
under them, the position with regard to take over of a co-operative bank
registered under the State Act by a co-operative bank registered under the
CENTRAL
Although there are no specific provisions in the State Acts or the Central Act for
the merger of a co-operative society under the State Acts with that under the
Central Act, it is felt that, if all concerned including administrators of the
concerned Acts are agreeable to order merger/ amalgamation, RBI may consider
proposals on merits leaving the question of compliance with relevant statutes to
the administrators of the Acts.
In other words, Reserve Bank will confine its examination only to financial
aspects and to the interests of depositors as well as the stability of the financial
system while considering such proposals
A] Annual reports of each of the Banks for each of the three completed
financialyears immediately preceding the proposed date for merger.
B] Financial results, if any, published by each of the Banks for any period
subsequent to the financial statements prepared for the financial year
immediately preceding the proposed date of merger.
Tier I Capital
Tier II Capital
Risk-weighted Assets
Gross and Net npas
Ratio of Tier I Capital to Risk-weighted Assets
Ratio of Tier II Capital to Risk-weighted Assets
Ratio of Total Capital to Risk-weighted Assets
Tier I Capital to Total Assets
Gross and Net npas to Advances
Cash Reserve Ratio
Statutory Liquidity Ratio
C.
If the values have relied upon projected information, the names and designations
of the persons who have provided such information and the extent of
verification, if any, made by the values in relation to such information
D.
Details of the projected information on which the values have relied
E.
Detailed computation of the realizable value of assets of the acquired bank.
Project Finance
Infrastructure Finance
Corporate Finance
Securitization
Leasing
Deferred Credit
Consultancy services
Custodial services
The ICICI Groups draws its strength from the core competencies of its
individual companies. Today, top Indian Corporate look towers ICICI as a
business partner for providing solutions to their varied financial
requirements.
Mr. K.V. Kamath, CEO of ICICI Limited, has recently voiced the intentions of
ICICI Limited towards banking and ICICI Bank.
ICICI Limited is endeavoring to forge a closer relationship with ICICI bank.
Mr. K V Kamath recently quoted in a leading daily Banking is dead.
1999 ICICI becomes the first Indian company and the first bank or
financialinstitution from non-Japan Asia to list on the NYSE
2002The Boards of Directors of ICICI and ICICI Bank approve the merger of
ICICI,ICICI Personal Financial Services Limited and ICICI Capital Services
Limited, with ICICI Bank. After receiving all necessary regulatory
approvals, ICICI integrates the group's financing and banking operations,
both wholesale and retail, into a single.
Hence, this proposed merger is a godsend for bom, which was otherwise a
bankrupt entity which was headed for closure given the low probability
that it would manage to raise Rs.800 crore of equity on a base of Rs.100
crore of market capitalisation. It is useful to observe that bom probably did
not see things in this way, given the willingness of India's banking
regulators to interminably tolerate the existence of bankrupt banks.
Closure of bom would normally involve pain for bom's shareholders and
workers; instead both groups will get an extremely pleasant ride if the
merger goesthrough. The proposed merger is a daunting problem for ICICI
Bank. It will need to rapidly find roughly Rs.800 crore in equity. If India's
banking regulators were serious about capital adequacy, ICICI Bank should
have to pay roughly zero to merge with bom (it is doing a favour to bom
and to India's banking system); instead ICICI Bank has paid a positive
price for bom. The key question that will be answered in the next
two/three years is: Will ICICI Bank's superior knowledge of products and
processes revitalize the assets and employees of bom, and generate
shareholder value in the merged entity? ICICI's top management clearly
thinks so, and it would be a very happy outcome if this did indeed happen.
The proposed merger is a good thing for India's economy, since the
headcount of bankrupt banks will go down by one, and there is a
possibility of obtaining higher value added out of the poorly utilized assets
and employees of bom. If the merger goes through, then it will reduce the
say of the management team of bom in India's resource allocation, which
is a good thing.
The proposed merger between ICICI Bank and Bank of Madura (bom) is
are markable one. The pre--merger market capitalization of ICICI Bank was
roughlyRs.2500 crore while bom was at roughly Rs.100 crore. Bom is
known to have a poor asset portfolio. What will the merged entity be
worth? The key rationale underlying every merger is the question of
synergy. Can ICICI Bank's products and technology bring new life to the
263 branches of bom? Will ICICI Bank (which has 1,700 employees) be
able to overcome the 2,600 employees that bom carries, given that Indian
labour law makes it troublesome and expensive to sack workers? In
applying these ideas to ICICI Bank and to bom, we need to believe that
the stock market effectively processes information to produce estimates
of the price and volatility of the shares of both these banks.
strategy, and improving asset quality and earnings growth are positive
features as far as ICICI Bank is concerned.
Despite these factors, the share had been on a downtrend from after
touching a high of Rs 271, eight months ago. The uptrend then was on the
back of the announcement of its ADR issue and new technology initiatives.
The subsequent downtrend was triggered by the possibility of the merger
with its parent. There is continuing concern on asset quality of ICICI.
It has been a stated goal of the ICICI group to go in for universal banking.
It is clear that once regulatory hurdles are removed, such a possibility
becomes distinctly feasible. But Given the battering that bank stock took,
ICICI may now hesitate to pursue this path. Also ICICI Bank is the most
visible investor-friendly face for the group in terms of returns to
shareholders and it may well be maintained as a separate entity. In this
backdrop, the stock may hold scope for improvement in the valuation of
the stock.
the merger of 57 year old BOM sooth bared old generation bank with a
fast growing technology say new Generation bank will help the latter and
the start merger is likely to bring cheer to shareholder and bank
employees of BOM and some amount of discomfort and anxiety to those
of ICICI bank. The scheme of amalgamation will increase the equity bank
of ICICI Bank to RS220.36 CR. ICICI Bank will issue 235.4-lakh share of RS
10 each to the shareholder of BOM. The merger entity will have an
increase of a net base over RS 160 bn and deposit base of RS 131 bn.
The merged entity will have 360 branches and a similar number of ATMs
across the country and also enable the
ICICI to serve a large customer bone
of 1.2 million customers of BOM through a wider network, adding to the
antoma bare to 2.7 million
Quality of assets:the nature of assets a bank is holding would signify its operational
efficiency. Usually the level of Non performing Assets ( NPAS) judges the
quality of assets. The lower the NAPS to total advances or total assets the
better the quality is and vice versa.
Staff productivity: -
One of the key area where banks can develop competition advantage. The
measurement of staff productivity becomes one of the essential factors
while measuring the performance of the banks
Liquidity:While assessing the liquidity of a bank the most sought ratio is net loans
to total assets. A rise in the net loans to total assets may be considered as
a fall in the liquidity of the bank.
Book Value per share:It is simply the net worth of the company (which is equal to the paid up
equity capital plus resource and surplus) divided by the number of
outstanding equity shares.
Earning per share:specific valuation per unit of investment given by Net income after income
taxes and after dividends on preferred stock of the company.
Profitability: the most crucial ratio in measuring the profitability is net profit of the
bank. The ratio such as Net Interest Income (NIL) and Net Interest Margin
(NIM)measure sustenance ability of the bank based on the spread. Entity
is using the package, Banks 2000, BOM computerized 90 percent of its
business and was converted with ISBS software. The BOM branches are
supposed to switch over to Banks 2000. Though it is not a difficult task,
with 80% computer literate staff would need effective retraining which
involves a cost. The ICICI Bank need to invest RS 50 core for upgrading
BOMs 263 branches.
Changes after the merger:While, BOM had an attractive business per employee figure of Rs.202 lakh,
a better technological edge and had a vast base in southern India when
compared to Federal bank. While all these factors sound good, a cultural
integration would be a tough task ahead for ICICI Bank.ICICI Bank has
announced a merger with 57-year-old Bank of Madure, with 263 branches,
out of which 82 of them are in rural areas, with most of them in southern
India.As on the day of announcement of merger) 09-12-00), Kotak
mahindra group was holding about 12 percent stake in BOM, the Chairman
BOM, Mr.K.M. Thaiagarajan,along with his associates was holding about 26
percent stake, Spic groups has about 4.7 percent, while LIC and UTI were
having marginal holdings. The merger will give ICICIBank a hold on South
India market, which has high rate of economic development.The board of
terms of market capitalization .As on September 30, 2006, ICICI Bank had total assets of
Rs. 282,373 crore. In the six months ended September 30, 2006, it made a net profit of
Rs. 1,375 crore.
-It had 632 branches and extension counters and 2,336 ATMs as on that date, and is in
the process of setting up additional branches and ATMs pursuant to authorisations
granted by the RBI. It has about31,500 employees.ICICI Bank offers a wide range of
financial products and services directly and through subsidiaries in the areas of life and
general insurance, asset management and investment banking.Its shares are listed on
the Bombay Stock Exchange Limited and the National Stock Exchange of IndiaLimited
and its American Depositary Shares are listed on the New York Stock Exchange
Mergers are highly beneficial to companies that are experiencing tough financial
times.
When two firms join together through mergers, the joint business benefits with
regards to cost efficiency and productivity. This is because the two companies join
together to form a bigger and new company in which production is going to be done
on a larger scale. As a result, there is an increase in output production and it is highly
likely that the total cost of production is reduced
Mergers also lead to revenue enhancement by market share gain since the
joint organization is going to be able to generate even more value than separate
companies. It is expected that after a merger, the new generated shareholder value is
going to be much higher than that of the total shares of two separate firms.
Bibliography / Wibliography
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