EXECUTUVE SUMMARY

Banking M&A remains specialized from other M&A because of industry specific
features of banks including their valuation, their means to profit and their treatment of
capital, using deposits and funds as raw material for profit generating products.

Despite mixed evidence from event studies, event studies remain an effective analysis
tool to value mergers.

The banking industry in India is governed by Banking Regulation Act of India, 1949.
Since 1949, this sector has undergone phenomenal reforms due to the efforts and the
vision of the policymakers. The first phase of reform began with nationalization if the
14 banks in 1969. The second phase was the nationalization of 6 more banks in 1980.

However, what can be considered as a breakthrough in banking services was the entry
to private sector banks which was initiated in 1993. Eight new banks entered the
market.

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.
Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes,
however, a smaller firm will acquire management control of a larger or longer
established company and keep its name for the combined entity. This is known as a
reverse takeover.

Global Economics dictate large benefits of bank mergers and acquisitions around
economies of scale and oligopolistic competition that translate to lower costs and
higher profitability. Mergers also ally the firm with a better portfolio of Markets and
strategic knowledge that allows the firm to improve its product market portfolio and
deliver large gains to stakeholders.

1
2
 SIGNIFICANCE OF PROJECT

As merger is a combination of two or more co.’s into an existing co or a new co.

Acquired co. transfer its assets, liabilities and shares to the acquiring company for
cash or exchange of shares. Need for Merger and Acquisition arises because in
general, a merger can facilitate the ability of two or more competitors to exercise
market power interdependently, through an explicit agreement or arrangement, or
through other forms of behaviour that permits firms implicitly to coordinate their
conduct. It will be found to be likely to prevent or lessen competition substantially
when the parties to the merger would like to be in a position to exercise a materially
greater degree of market power in a substantial part of a market for two years or more,
than if the merger did not proceed in whole or in part. In short, a company can
achieve its growth objective by:
Expanding its existing markets
Entering in new markets
A company can expand internally or externally. If internally there is a problem due to
lack of resources and managerial skill it can to the same externally through mergers
and acquisitions. This helps a company to grow at a faster pace in a convenient and
inexpensive way. Combination of companies may result in more than the average
profitability due to reduction in cost and effective utilization of resources.

So an aspiring Investment Banker, this topic represents my goal of becoming a

professional in the field of Mergers & Acquisitions and is of utmost importance to
me.

3
 INTRODUCTION
The Indian economic environment provides an advantage to banks and also uniquely
accretes value to M&A based transactions proving benefits to bidders.

Mergers & Acquisitions remain an attractive inorganic strategy for banks to scale up
in product markets and support the economy from within an efficient and well-
regulated banking system.
Banking M&A remains specialized from other M&A because of industry specific
features of banks including their valuation, their means to profit and their treatment of
capital, using deposits and funds as raw material for profit generating products.
Despite mixed evidence from event studies, event studies remain an effective analysis
tool to value mergers. The gains from M&A are shared between bidders and targets.
The M&A strategy becomes key for growth in Emerging Markets and Asia.

Banking Mergers & Acquisitions are frequently criticized as a large ticket strategy
that does not deliver gains. Frequent problems cited in M&A relate to post closing
integration and lack of synergy gains; planned growth in profitability not panning out
because of unseen roadblocks; intractable attempts at reduction in operating costs and
the harassment and issues around labour cuts. Agency explanations of M&A
strategies adduce conflicts of interest between managers and owners interests and
support information and power motives. These take on interesting dimensions in the
presence of institutional shareholders. Banking valuations and merger financing
however separate the study of other M&A in Corporate Finance from Banking M&A.
This is backed by event study data for India where merger gains are not seen to be
obfuscated by near zero or negative returns to acquirers while the undervalued target
or the smaller target company frequently walks away with gains. The success of an
M&A strategy gets tougher to recognize in some industries vis-a-vis others.

Global Economics dictate large benefits of bank mergers and acquisitions around
economies of scale and oligopolistic competition that translate to lower costs and
higher profitability. Mergers also ally the firm with a better portfolio of Markets and
strategic knowledge that allows the firm to improve its product market portfolio and
deliver large gains to stakeholders. However, these gains are contingent on successful
post-merger integration and deal completion in good time. These gains are
additionally contingent on regulatory complexity. Adherence to regulatory

4
pronouncements is critical to successful private or public enterprise in banking in
India, even as Merger and Acquisition transactions become large impact strategies as
they directly impact the economy positively.

Be it industrial sector or services sector, M&As have become way forward in today ‘s
world. In a free market economy, companies have to keep evolving to remain
competitive. Adaptability to changes in the market becomes a crucial factor for
survival.

Banking mergers are not to save debt-ridden banks but to pave the way for
privatisation eventually, it was pointed out at the Global Banking Trade Union
convention, organised by the All India Bank Officers’ Confederation.Because of
the merger of banks, the volume of loans which were being made available in
priority sectors and agri-small scale industrial sectors are coming down. The
legal prospects of recovering loans taken by corporates from banks and which
have become debts are very limited in India.Some 15 years ago, the state of
affairs in public sector banks in India and China were the same. Today four
prominent Chinese banks have become front-runner banks in the world. Loan
repayments conditions are strict in China. Public sector banking declined in India
and ran into huge losses A seminar on banking mergers and protection of public
sector banks was held as part of the convention on Monday Technology and
innovations in banking sector, and Challenges faced by public sector banks in
rural developments were some of the topics discussed.

Experts from the socio-economic sectors, and officers’ unions in various Indian
banks are participating in the convention, which has been organised in
association with Global Labour University.

5
 INDIAN BANKING-AN OVERVIEW
The banking industry is the backbone of any monetized economy. The stage of
development of this industry is a good reflection of the development of the economy.
The banking industry in India is governed by Banking Regulation Act of India, 1949.
Since 1949, this sector has undergone phenomenal reforms due to the efforts and the
vision of the policymakers. The first phase of reform began with nationalization if the
14 banks in 1969. At this stage, priority sectors were identified and banking support
was given to them. The second phase was the nationalization of 6 more banks in
1980. However, what can be considered as a breakthrough in banking services was
the entry to private sector banks which was initiated in 1993. Eight new banks entered
the market at this stage with state of art technology and a brought with them a new
wave of professionalism. It was at this time that India was introduced to the concept
of Debit and Credit cards, e-transfer of funds, ATM ‘s.

Post-liberalisation, the banking industry in India has grown at a fast pace. Increased
economic activity coupled with de-regulation has further strengthened the position of
Indian banks. By the end of March 2006, the total deposits held by the scheduled
commercial banks stood at INR 21 lakh crores, a growth of 15.8 percent over 2005
and a compound annual growth rate (CAGR) of 14.9 percent since 2001-02. The total
loans and advances offered by commercial banks grew by 36 percent between March
2005 and March 2006 to reach INR 15 lakh crores, recording a CAGR of 23.6 percent
since 2001-02.
By the end of fiscal year 2005-06, there were 26 public sector banks (including seven
associates of the State Bank of India), 29 private sector banks (21 old and 8 new
private banks) and 30 foreign banks as Scheduled Commercial Banks (SCBs) in India.
As more foreign banks and aggressive new private banks are looking towards
increasing their footprints in an already crowded Indian banking industry, the
competition for nationalised banks is likely to escalate.

6
 MERGER AND ACQUISITON AN OVERVIEW

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.
Acquisition
An acquisition, also known as a takeover or a buyout or "merger", is the buying of
one company (the target) by another. An acquisition, or a merger, may be private or
public, depending on whether the acquiree or merging company is or isn't listed in public
markets. An acquisition may be friendly or hostile. Whether a purchase is perceived as a
friendly or hostile depends on how it is communicated to and received by the target
company's board of directors, employees and shareholders. It is quite normal for M&A
deal communications to take place in a so called 'confidentiality bubble' whereby
information flows are restricted due to confidentiality agreements. In the case of a
friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal,
the takeover target is unwilling to be bought or the target's board has no prior knowledge
of the offer. Hostile acquisitions can, and often do, turn friendly at the end, as the acquiror
secures the endorsement of the transaction from the board of the acquiree company. This
usually requires an improvement in the terms of the offer. Acquisition usually refers to a
purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will
acquire management control of a larger or longer established company and keep its name
for the combined entity. This is known as a reverse takeover. Another type of acquisition
is reverse merger, a deal that enables a private company to get publicly listed in a short
time period. A reverse merger occurs when a private company that has strong prospects
and is eager to raise financing buys a publicly listed shell company, usually one with no
business and limited assets. Achieving acquisition success has proven to be very difficult,
while various studies have shown that 50% of acquisitions were unsuccessful . The
acquisition process is very complex, with many dimensions influencing its outcome.
There is also a variety of structures used in securing control over the assets of a company,
which have different tax and regulatory implications:

7
The buyer buys the shares, and therefore control, of the target company being
purchased. Ownership control of the company in turn conveys effective control over
the assets of the company, but since the company is acquired intact as a going
concern, this form of transaction carries with it all of the liabilities accrued by that
business over its past and all of the risks that company faces in its commercial
environment.
The buyer buys the assets of the target company. The cash the target receives from the
sell-off is paid back to its shareholders by dividend or through liquidation. This type
of transaction leaves the target company as an empty shell, if the buyer buys out the
entire assets. A buyer often structures the transaction as an asset purchase to "cherry-
pick" the assets that it wants and leave out the assets and liabilities that it does not.
This can be particularly important where foreseeable liabilities may include future,
unquantified damage awards such as those that could arise from litigation over
defective products, employee benefits or terminations, or environmental damage. A
disadvantage of this structure is the tax that many jurisdictions, particularly outside
the United States, impose on transfers of the individual assets, whereas stock
transactions can frequently be structured as like-kind exchanges or other arrangements
that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders.
The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a
situation where one company splits into two, generating a second company separately
listed on a stock exchange.

8
 DISTINCTION BETWEEN
MERGERS AND ACQUISITIONS

Although often used synonymously, the terms merger and acquisition mean slightly
different things.
[This paragraph does not make a clear distinction between the legal concept of a
merger (with the resulting corporate mechanics - statutory merger or statutory
consolidation, which have nothing to do with the resulting power grab as between the
management of the target and the acquirer) and the business point of view of a
"merger", which can be achieved independently of the corporate mechanics through
various means such as "triangular merger", statutory merger, acquisition, etc.]
When one company takes over another and clearly establishes itself as the new owner,
the purchase is called an acquisition. From a legal point of view, the target company
ceases to exist, the buyer "swallows" the business and the buyer's stock continues to
be traded.
In the pure sense of the term, a merger happens when two firms agree to go forward
as a single new company rather than remain separately owned and operated. This kind
of action is more precisely referred to as a "merger of equals". The firms are often of
about the same size. Both companies' stocks are surrendered and new company stock
is issued in its place.
In practice, however, actual mergers of equals don't happen very often. Usually, one
company will buy another and, as part of the deal's terms, simply allow the acquired firm
to proclaim that the action is a merger of equals, even if it is technically an acquisition.
Being bought out often carries negative connotations, therefore, by describing the deal
euphemistically as a merger, deal makers and top managers try to make the takeover more
palatable. An example of this would be the takeover of Chrysler by Daimler-Benz in 1999
which was widely referred to in the time.

A purchase deal will also be called a merger when both CEOs agree that joining
together is in the best interest of both of their companies. But when the deal is
unfriendly - that is, when the target company does not want to be purchased - it is
always regarded as an acquisition.

9
 FINANCING M&A
Mergers and acquisitions (M&As) are part of the life cycle of any business. They can
help businesses expand, acquire new knowledge, move into new areas, or improve
their output with one simple transaction. There’s no doubt about it – mergers and
acquisitions are expensive, and without huge amounts of spare cash on hand,
companies will have to seek out alternative financing options in order to pay for their
transactions.

There are a number of different methods for financing mergers and acquisitions, and
the chosen method will depend not only on the state of the company, but also on
overall activity in M&A and finance at the time of the transaction.

Read on for an in-depth look at the best M&A financing options on the market today
– and the ones which should be avoided…

EXCHANGING STOCK

This is probably the most common option when it comes to financing an M&A deal.
If one company is seeking to merge with or acquire another, it is safe to assume that
they are in possession of a healthy balance sheet with a robust stock offering. In fact,
it is this stock pricing that probably led to the M&A activity in the first place.

In a typical stock-exchange transaction, the buyer will exchange shares in their own
company for shares in the selling company. Financing M&A with stock is a relatively
safe option as both parties share risks between the two of them after the transaction,
meaning that careful management is guaranteed. Paying with stock is also
advantageous to a buyer if their shares are overvalued on the market, as they will
receive more stocks in the seller company per shares exchanged than if they were
paying for their transaction in cash. In a merger deal, shareholders on both sides can
reap the benefits of a stock-swap in the long term, as they will generally receive an
equal amount of stock in the newly-formed company that results from the transaction,
rather than simply receiving money for their shares.

10
However, there is one major drawback to using stock as currency to pay for M&A –
stock volatility. No matter how well a company is doing, there is always a risk of a
drop in stock, particularly if word gets out about a possible M&A before any deal has
been finalized. Stock markets thrive on liquidity, so shareholders can move quickly to
sell their stock if they have any reason to feel nervous about the future of a particular
company.

TAKING ON DEBT

Agreeing to take on the debt owed by a seller is a great alternative to paying in stock
or cash. For many companies, debt is the reason behind any sale, as high interest rates
and poor market conditions make repayment impossible. In these circumstances, the
priority for the indebted company is to reduce the risk of further losses and
redundancies by as much as possible by entering into an M&A transaction with a
company which can guarantee its debts. Unfortunately, the debt of a company can
reduce its sale value significantly, and can even eliminate its price. However, from the
creditor’s point of view, it offers a cheap means of acquiring assets.

Furthermore, being in control of a large quantity of a company’s debt means increased

control over management in the event of liquidation, as in this instance owners of debt
have priority over shareholders. This can be another huge incentive for would-be
creditors who may wish to restructure the new company or simply take control of
assets such as property or contacts.

Of course, it is possible to trade debt in M&A deals without the threat of bankruptcy.
Under the terms of the deal, one company may offer to buy up a certain amount of
corporate bonds for a favourable interest rate, or bonds may be traded between
companies as a means of spreading risk and cementing a merger. Where a company’s
debts are relatively small, the creditor may simply offer to cover their costs as an extra
incentive during the latter stages of the transaction. As with exchanging stock, taking
on debt can merely be one part of a complex transaction agreement.

11
PAYING WITH CASH

Paying with cash is the most obvious alternative to paying for a transaction with
stock. Cash transactions are instant and mess-free, and cash does not require the same
kind of complicated management as stock would. Furthermore, the value of cash is far
less volatile and does not depend on the performance of a company. One exception is
when dealing in multiple currencies. Exchange rates can vary wildly, as evidenced by
the market response to the yen following the Ban of Japan’s deflation program; and
the British pound following the Brexit. Currency exchange fees can also add extra
expense to multi-national acquisitions.

But there are ways of obtaining cash from others ahead of an upcoming M&A
transaction:

 IPO

Initial public offerings (IPOs) are a good way for a company to raise money in any
context, but an upcoming M&A transaction is one of the better times to carry one out.
The prospect of an upcoming M&A transaction can make investors more excited
about the company’s future, as it signals an ambition to expand and a long-term
strategy. IPOs always attract market buzz, so by timing the IPO with an M&A
transaction, companies can maximize investor interest and drive up early share prices.

Moreover, increasing the value of an IPO with an upcoming M&A transaction also
increases the value of existing shares – in fact, existing shareholders could see their
stock value rocket overnight. However, due to the same volatility that has driven
down activity in stock-financed M&A, IPOs can be a risky way of financing ventures.
The market can fall just as easily as it can rise, and newly-minted companies are more
vulnerable to volatility as they do not have a long track record to reassure investors.

 BOND ISSUANCE

Corporate bonds are a quick and easy way of getting cash, either from existing
shareholders or from members of the public. Companies will typically release a
number of bonds covering a defined period of time (anything from one year to twenty

12
years), with a set interest rate (usually less than five percent). In purchasing these
bonds, investors are essentially loaning money to the company in the expectation that
they will receive a return on their capital over time, but once the investment has been
made, their money is locked in and can’t be touched until the maturation date. This
makes them popular with risk-averse, long-term investors, who tend to snap them up.

 LOANS / LEVERAGE

Borrowing money can be an expensive affair when undertaking an M&A transaction.

Lenders, or owners who have agreed to accept payments over an extended period of
time, will demand a reasonable interest rate for the loans they have made. Even when
the interest is relatively small, when you are dealing with a multi-million-dollar M&A
transaction, the costs can really add up. Interest rates, therefore, are an important
consideration in funding M&A transactions with debt, and low interest rates will
spike the number of transactions funded with loans. In 2015, for instance, loans
became very popular following central banks’ quantitative easing programs, which
greatly reduced US interest rates.

Other loan options include re-mortgaging (which is only a viable option if the
company has a large property portfolio), and bridge financing. A bridge loan is a very
short-term loan which is intended to ‘bridge’ the gap between expected payments. For
instance, a company may be expecting a slew of invoices dividends just after the
M&A deadline. A bridge loan would cover the shortfall by lending the money to the
company over a set period of weeks or months. In a way, this is the payday loan
equivalent of the business world, and should be approached as a last resort. Interest
rates are higher than average, and late payment penalties can be severe. Furthermore,
use of a bridge loan in an M&A transaction may raise concerns with the other party,
undermining the deal.

13
 MERGER WAVES
The economic history has been divided into Merger Waves based on the merger activities
in the business world as:

PERIOD NAME FACET

1889 – 1904 First Wave Horizontal mergers

1916 - 1929 Second Wave Vertical mergers
1965 - 1989 Third Wave Diversified conglomerate mergers
1992 - 1998 Fourth Wave Congeneric mergers; Hostile
takeovers;
Corporate Raiding
2000 - Fifth Wave Cross-border mergers

14
 BANK OF AMERICA – MERRILL LYNCH
ACQUISITION

Case Summary “On September 15, 2008, Merrill Lynch & Co., Inc. and Bank of
America Corporation announced a strategic business combination in which a
subsidiary of Bank of America will merge with and into Merrill Lynch. If the merger
is completed, holders of Merrill Lynch common stock will have a right to receive
0.8595 of a share of Bank of America common stock for each share of Merrill Lynch
common stock held immediately prior to the merger. In connection with the merger,
Bank of America expects to issue approximately 1.710 billion shares of common
stock and 359,100 shares of preferred stock”
–Bank of America Letter to Shareholder
Bank of America Bank of America is the world’s largest bank based in Delaware and
operating under U.S. federal law. It is headquartered in Charlotte, North Carolina. It
serves individual customers, small and middle enterprises, and large corporations in
175 countries. Bank of America business lines includes banking, investing, asset
management, and risk management products and services. In United States alone,
BOA had 59 million customers served through 6000 retail banking offices, 18000
ATMs, and online banking. As of June 30, 2008 it had total consolidated assets of $
1.7 trillion, deposits of $ 785 million, and stockholders’ equity of $ 163 billion (Bank
of America, 2008). Bank of America business and financial performance had been
great from 2003 up to 2006, interest income grew at 19% CAGR, non-interest income
grew at 27.6% CAGR, and net income doubled during the period. During the same
period loans and leases distributed grew at 22.3% CAGR, while deposits grew at
18.3%. The good business performance was supported by the low interest rate policy
of Federal Reserve between 2001-2004, where the interest rate was cut from 6% to
the low of 0.75% in December 2002 (figure 1.1). Federal Reserve was determined to
stimulate growth of the economy post Internet bubble period, in turn encouraging
Americans to lend more. There was a long period where interest rate stays, until it
was increased gradually in June 2004 to June 2007 (Bank of America, 2004; 2005;
2006)

15
The increase in interest rate leads to increase in floating rate of mortgage as well; at
the time many Americans are not in a good financial position to service their
mortgage, especially the sub-prime segment and the Adjustable Rate Mortgages
(ARMs). The lax lending standard employed previously results in high nonperforming
loan and default of home borrowers, decreasing the home price nationwide. The high
non-performing loan and foreclosure of houses impacted all saving and loan, banks,
and financial institution with exposure to mortgage, including investment bank that
securitize the mortgages into MBS (Havemann, 2009).

Apart from the issues with housing and mortgage industry, in January 2008, Bank of
America acquired Countrywide Financial for $ 2.5 billion (Bank of America, 2007),
Countrywide was the largest mortgage lender in US. It has $ 408 billion mortgage
originations in 2007 and servicing portfolio of $ 1.5 trillion with 9 million loans. BoA
thinks that Countrywide acquisition would affirm their position as the nation’s
premier lender to consumers. Due to the weakness in housing market and increasing
trend of NPL, in 2007 Bank of America net income decrease 29% YoY due to the rise
in provision combined with decrease in interest and non-interest income (Bank of
America, 2008). In the first half of 2008, net income continue to worsen, decreasing
58% compared to the first half of 2007 due to the tripling provision for credit losses
and decrease in non-interest income (figure 1.2). Meanwhile, non-performing assets
quadrupled from 0.32% to 1.13% between first half of 2007 and 2008 (figure 1.3)
(Bank of America, 2009). The deterioration of Bank of America business was also
reflected in the stock price traded in NYSE, after rising from $ 40/share to $ 55/share
between January 2004 to late 2006, BoA stock price tumbled to its low of $ 18/share.
It then fluctuated between $ 25-40/share in September 2008.

16
BANK OF AMERICA – SUMMARY OF FINANCIAL CONSOLIDATED DATA

17
Merrill Lynch Merrill Lynch was founded in 1914 and became listed on Jun 1971. It
is one of the leading capital markets, advisory, and wealth management companies in
the world. Merrill Lynch has branches across 40 countries and total client assets of $
1.5 trillion at September 2008, it also has 45% voting interest and half of the
economic interest of BlackRock, Inc., world’s largest publicly traded asset
management with $1.3 trillion in assets under management at the time. Merrill Lynch
products and services include advisory to corporations, governments, institutions and
individuals worldwide, apart from its role as investment bank, global trader, and
underwriter of securities and derivatives (Bank of America, 2008). Merrill Lynch had
been actively underwriting derivatives, including CDO, CDO squared, and CDO cube
that during the course of financial crisis turned to be worth significantly less than the
par value. Between 2006 and 2007, Merrill was the lead underwriter on 136 CDOs
worth $93 billion, which it retained partly and lead to billions of dollar losses. For
example, in the middle of 2008 Merrill Lynch sold a group of CDOs valued at $ 30.6
billion to Lone Star Funds for $ 1.7 billion in cash and $ 5.1 billion in loan (Keoun
and Harper, 2008).

Merrill Lynch business and performance had been great from 2003 to 2006, revenue
grew at 36.3% CAGR, while net income grew at 24.4% CAGR (figure2.1) (Merrill
Lynch & Co., 2003; 2004; 2005; 2006). Securitization business had been growing at a
very rapid pace and contributed significantly Merrill’s balance sheet, at least 13% of

18
its assets at the end of 2006 (Appendix 2.2). In 2007 Merrill Lynch incurred $ 8
billion loss in net income due to the significant increase in interest expense (provision
for losses), although in the first half of the year it still recorded a profit of $ 4.17
billion. The condition deteriorated in the first half of2008, when total revenues
dropped 57% YoY. Stockholders’ equity, in turn, decrease 17.6% in the first half of
2008 compared to first half of 2007 (Bank of America, 2008). Considering Merrill
Lynch exposure to MBS and other derivatives, significant decline in their value could
easily wiped out Merrill’s equity.

Figure 2.1 Merrill Lynch Income Statement and Balance Sheet 2003 – mid 2008
(Bank of America, 2008) Deterioration of Merrill Lynch business performance and
market’s fear of worsening crisis drove Merrill’s stock down from $ 50/share in
January 2008 to $ 15-25/share in September 2008.

19
BoA-ML Acquisition In September 2008 US stock market has been declining 37%
from one year earlier, there were speculation on the impending collapse of financial
institutions such as Lehman Brothers. Lehman Brothers announced $ 3.9 billion net
loss for its third quarter of 2008 on September 10th, 2008. Merrill Lynch stock
declined 36% in only one week. On Saturday the same week, John Thain, Chairman
and CEO of Merrill Lynch, contacted Ken Lewis, Chairman and CEO of Bank of
America. Mr. Thain proposed for Bank of America to acquire 9.9% equity stake in
Merrill Lynch and to provide credit facility. However, Mr. Lewis said that he was not
interested in acquiring minority stake in Merrill Lynch, but is interested in business
combination with Merrill Lynch. He beliefs that the combination of both companies
would complement each other business line, in retail brokerage and wealth
management, also in investment banking and investment management (Bank of
America, 2008). In light of the imminent bankruptcy of Lehman Brothers and
deterioration in financial market, Bank of America and Merrill Lynch began arranging
meetings among management and advisors to discuss the pro and cons of such
transactions and did a due diligence on the business, financial, operational, and legal
aspect of the transaction. Representatives of Merrill Lynch also met with

20
representatives from BoA to discuss the valuation and pricing shares of Merrill’s
common stock, Merrill Lynch indicated that they were seeking a significant premium
to the last Friday’s closing price of $ 17.05/share, also at the appropriate book value
multiple. The discussion and negotiation over the weekend results in the transaction
price of $ 29.00/share, equal to exchange ratio of 0.8595 BoA common stock and
70.1% premium to September 12th, 2008 closing price (Bank of America, 2008).
Merrill Lynch benefits from the merger through BoA business that complements
Merrill Lynch global wealth management, markets, and investment banking
businesses, and stronger capital, funding capabilities, and liquidity of BoA. More
importantly, Merrill Lynch would avoid downgrade from rating agency that
potentially leads to bankruptcy. Meanwhile BoA benefits from the customer bases,
business products and skills of Merrill Lynch services to enhance the capabilities of
its business line. The Acquisition was also expected to save $ 7 billion each year on a
pre-tax basis due to overlapping business and infrastructure. The acquisition itself
may cost up to $ 3 billion pre-tax (Bank of America, 2008).

Pro-Forma Combined Balance Sheet of ML and BoA (Bank of America, 2008) .

To stabilize the financial market, on October 3rd, 2008, President George W. Bush
signed Emergency Economic Stabilization Act of 2008 into law, including the
authorization of Troubled Asset Relief Program (TARP), a $ 700 billion fund to buy

21
toxic assets from financial institutions. US Treasury Department used the fund to
inject $ 125 billion in capital through preferred shares and warrants to nine prominent
financial institutions, including BoA and Merrill Lynch (Rhee, 2010). On November,
Merrill Lynch submitted 10-Q for its third quarter, showing $ 8.25 billion pre-tax loss
and difficulty in mitigating risk due to market illiquidity. By then, Federal Reserve
had approved the acquisition under the Bank Holding Act, BoA and Merrill’s
shareholder had also approved the deal, but the acquisition was still in pending. In
early December Ken Lewis learned Merrill was expected to incur $ 12 billion losses
from its exposure to MBS and related securities in the fourth quarter, $ 3 billion
increase from the estimate just 6 days before. Ken Lewis did not inform shareholders
of Merrill’s losses, but he then advised the board about it. Lewis was considering
canceling the deal through the merger agreement’s Material Adverse Change (MAC)
clause. The MAC would have allowed BoA to terminate the deal based on material
change in events after the signing of the merger agreement but before closing the deal.
Ken Lewis informed the Treasury Secretary and Federal Reserve Chairman, Henry
Paulson and Ben Bernanke, that he was considering terminating the deal. Paulson and
Bernanke advised Lewis against it, considering the adverse consequences should
Merrill Lynch collapse that potentially add more systemic risk and uncertainty to the
market (Rhee, 2010). They believed that Merrill could not survive independently and
would collapse like Bear Stearns and Lehman Brothers.

Part II: Analysis and Discussion

Valuation using only income statement from 2004 to 2008.

22
Bank of America Condensed Income Statement Projection (without M&A).

We projected BoA net interest income to be declining in the next three years due to
the low interest rate policy conducted by Federal Reserve combined with the
reluctance of business and individuals to lend and increase consumption. Noninterest
in come is expected to be stable somewhat due to the need for retail consumer
conducting day-to-day business activities. The combination of declining interest
income and stable non-interest income is expected to results in a decline of total
revenue of 12% in 2009, 13% in 2010, and began to stable in 2011.

Provision for credit losses is expected to be high in 2009, as foreclosure remains high
due to the rising trend of unemployment since 2007. The decline in house price
nationally below mortgage value may also leave homeowners no choice but to
default. The rest of homeowners are expected to face difficulty in servicing their debt,
leading to higher non-performing loan as well. Operational expense is expected to
decline until the economic condition improves, the efficiency possible are layoff,
selloff in assets, and streamlining the business in general. Assistance from the
government through TARP and preferred stock are expected to incur significant cost
to BoA common equity shareholders, leading to a marked decline in net income
available to common shareholders. Preferred stock would then be terminated
gradually as the company generates excess cash.

Figure 4.2 Bank of America Free Cash Flow to Equity Valuation Method.

23
Using the assumption above, we derived the expected free cash flow to equity for the
next three years and valued the company using FCFE method. It results in Bank of
America fair value of $ 22.85/share, a significant premium to December 2008 share
price of $ 6.58, but only half the share price trading one year before. It was common
during crisis that shares are trading significantly below its fair value due to the fear of
sustained worsening economic condition and potential bankruptcy. Our valuation was
in line with BoA stock price before announcing Merrill’s acquisition. Nevertheless,
we are confident in our valuation based on the financial ratio displayed in figure 4.3.
We believe Bank of America has an adequate financial position due to business
diversification and more manageable exposure to mortgage compared to investment
bank that securitize the mortgage.

Figure 4.3 Bank of America Financial Ratio 2004 – 2011.

24
Figure 5.1 Merrill Lynch Condensed Income Statement Projection (without merger).

Unlike BoA, Merrill Lynch worst performance is expected to be in 2008 due to the
loss of mark-to-market securities that it holds. Merrill’s business is expected to
stabilize quickly in 2009 as investment-banking job tends to be short term in nature
and have an increasing demand, especially during market turmoil. Breakdown of
expected Merrill Lynch revenue is available at the appendix. Merrill Lynch is
projected to also reduce the number of employee and streamline the business in an
effort of cost reduction. Government assistance in the form of preferred stock would
also be gradually paid as the company’s condition improves. At the time, Merrill’s
main concern was to avoid bankruptcy at all cost.

Figure 5.2 Merrill Lynch Free Cash Flow to Equity Valuation Method.

Using the estimated projection above, we use FCFE method to value Merrill Lynch
and derive equity fair value of $ 7.76/share, half of Merrill’s stock price trading at
December 2008, and a 73% discount to the agreed acquisition price ($ 29/share).
Merrill’s loss in 2008 alone nearly wipes its equity value, meaning that unless Merrill
was acquired imminently, it would fail. Another signal of the potential failure of
Merrill Lynch was showed by its Capital Adequacy Ratio (CAR) and Tier 1 Common
Capital Ratio, which were below 8% and 4%, respectively, as mandated by Federal
Reserve.

25
Figure 5.3 Merrill Lynch Financial Ratio 2004 – 2011F BOAML post-acquisition
valuation In this part, we did valuation on post-M&A of BoA and ML including the
synergy that may be resulted. The underlying assumption of the projection is similar
to those we use when evaluating Bank of America and Merrill Lynch independently.
Acquisition of Merrill Lynch is expected to contribute significantly to BoA non-
interest income, while the efficiency from overlapping infrastructure and employee is
projected to reduce the operational expenses by 25% - 30% in 2009 compared to the
previous year.

Figure 6.1 BoA and ML Post Merger Income Statement Projection 2004 – 2011F The
number of shares outstanding has also counted the effect of dilution from Merrill’s
common stock conversion to BoA common stock; previously in December 2008 there
was 4.5 billion of BoA common stock outstanding, with 0.8595 conversion factor for
ML’s stock, there is now 5.6 billion shares outstanding.

26
Figure 6.2 Synergy Potential of BoA - ML M&A (pre-tax) We projected efficiency of 90% in
the operational expense of BoA-ML, apart from the efficiency done by each company
separately. The M&A is expected to save $ 5.4 billion in 2009 alone and a net present
value of $ 58.5 billion pre-tax.

Figure 6.3 BoA – ML Free Cash Flow to Equity Valuation Method Using the
projection above, we use FCFE to derive at the equity value of BoA after Merrill’s
acquisition. Our valuation results in equity fair value of $ 22.87/share, it reflects
12.55x 2009F earnings and 9.46x 2010F earnings, historically BoA traded at 11-13x
its current year earnings.

Part III: Conclusion and Recommendation In this part we are going to summarize the
event leading to the point Ken Lewis had to make a decision whether to close the deal
for acquiring Merrill Lynch. Then we outline our recommendation as if we are on the
side of BoA management. Conclusion In late December 2008, Bank of America CEO,
Ken Lewis, was contemplating whether to close the deal for acquiring Merrill Lynch,
a prominent investment bank that was suffering great loss from its exposure to
Mortgage Backed Securities. He had learned earlier that Merrill Lynch was incurring
large losses beyond what the September 2008 due diligence expect, meanwhile the
stock price of Bank of America itself had been declining 73% since announcing
Merrill’s acquisition in September. He was considering exercising the Material
Adverse Change clause to cancel or renegotiate the deal, however, he was pushed by

27
the Treasury Secretary and Federal Reserve to close the deal without renegotiating
further, as it was expected to increase the systemic risk to financial market. The
government even threatened to fire Bank of America board and management if they
attempt to cancel or renegotiate the deal. On the agreement in September, BoA agrees
to acquire Merrill Lynch for $ 29/share with conversion ratio of 0.8595 to BoA
common stock, a 70.1% premium at the time. At the time, BoA was trading between $
30-35/share, while Merrill was trading between $ 15-25/share. On December 31, as
the crisis worsen, BoA was trading at $ 6.58/share while ML was trading at $
13.25/share. Lewis was thinking whether the acquisition might jeopardize the going
concern of Bank of America and incur losses to BoA shareholders.

28
Bank of America Income Statement Projection (pre-merger)

29
Bank of America Balance Sheet Projection (pre-merger)

30
Merrill Lynch Income Statement Projection (pre-merger)

31
32
 Merrill Lynch Balance Sheet Projection (pre-merger)

Bank of America Merrill Lynch Balance Sheet Projection (post-merger)

33
Bank of America Merrill Lynch Income Statement Projection (post – merger)

34
 A STUDY ON MERGERS OF HDFC
BANK LTD AND CENTURION BANK OF PUNJAB LTD.

ANALYSIS AND INTERPRETATION

In this study deals with merger of HDFC Bank Ltd (bidder bank) and Centurion Bank
of Punjab Ltd (Target Bank) . This deals took place in year 2008(i.e. may 23 rd 2008).
In order to analyses the financial performance of banks after the merger, the financial
and accounting ratios like Gross Profit Margin, Operating Profit Margin, Return on
Capital Employed, Return on Equity and Debt Equity Ratio have been calculated.
Table below indicates that the financial performance of both the banks before the
merger. Table 2 shows the financial performance of HDFC Bank ltd
(bidder bank) after merger.

FINANCIAL PERFORMANCE OF HDFC BANK LTD AND

CENTURIONBANK OFPUNJAB FOR THE LAST THREE FINANCIAL
YEARS IS ENDINGBEFORE THEMERGERFINANCIAL RATIOS (IN
PERCENTAGE)

35
FINANCIAL PERFORMANCE OF HDFC BANK LTD FOR THE
NEXTTHREEFINANCIAL YEAR WAS ENDING AFTER THE MERGER
ANNOUNCEMENTFINANCIAL RATIOS (IN PERCENTAGE)

MEAN AND STANDARD DEVIATION OF PRE-MERGER AND POST-

MERGER
RATIOS OF COMBINED (CBOP & HDFC BANKS) AND ACQUIRING
BANK (HDFC
BANK)

36
In the present case, the merger of the Centurion Bank of Punjab and the HDFC Bank,
the comparison between pre and post performance we seen that the Mean value of
Gross Profit margin(70.2136% Vs 75.2397%) has increased with t-value -4.008 which
shows significant improvement in the Gross Profit margin after the merger but in Net
Profit margin and Operating Profit margin you can see the decline the in the Mean of
both parameters that indicates that there is no change in the performance of banks Net
Profit margin and Operating Profit margin after merger and results shows that there is
no significance with Mean (18.8413% Vs 17.2268%) and t-value 0.610 and
(46.7550% Vs 53.4248%) and t-value -2.319 and the mean Return on Capital
Employed(1.1877% Vs 1.3220%) and t-value -2.182 which also not Significant
statically and shows that no charge has been in term of investment after the merger.
the mean of return on equity and debt equity ratio shows improvement and statically
conformed significant to mean value (2.1775%vs6.7197%)and t value -4.711and
(1.4876%vs4.0509%) and t value -5.667.the mean value of equity in post merger has
been n increased so it increased the share holders return held it also shows the
improved performance of bank after merger. Similarly debt equity ratio also improved
after the merger, the mean value shows the change in debt equity ratio after the
merger. From the above analyses we can conclude that some ratios indicates no effect
but most of the ratios shows the positive effect and increased the performance of
banks after merger announcement.

financial institution was formed in 1955 at the initiative of the World Bank, the
Government of India and representatives of Indian Industry. In 1990’s, ICICI
transformed its business from a development financial institution offering only project
finance to a diversified financial services group offering a wide variety of products
and services both directly and through a number of subsidiaries and affiliates like

37
 MERGERS OF ICICI BANK WITH BANK OF
RAJASTHAN -A STRATEGIC APPROACH

ICICI Bank. In 2001, the ICICI merged with the Bank of Madura to expand its
customer base and branch network.

Table1: Merger of ICICI Bank with Bank of Madura

Merger of the ICICI Bank (Transferee) and Bank of Rajasthan (Transferor) in

2010:

The merger of the ICICI Bank (Transferee) and Bank of Rajasthan (Transferor) as on
August 132010 and another merger of the State Bank of India (Transferee) and State
Bank of Saurashtra (Transferor) as on July 31 2008. ICICI Bank is taken form Private
sector bank and State Bank of India is taken from Public sector Bank. To analyse the
financial performance of the Banks Before and After Merger used the Ratios of
Productivity and Profitability narrates Gross Profit Margin, Net Profit Margin,
Operating Profit Margin, Return on Capital Employed, Return on Equity, Debt Equity
Ratio, Return on Net Worth, Interest Coverage Ratio, Current Ratio, Quick Ratio,
Credit per Employee, Deposit per Employee, Business per Branch, and Earnings Per
Sharehave been calculated. Table 1, 3 and 5 for ICICI Bank and Table 2,4 and 6for
State Bank of India are presented respectively.

38
Table 1. Financial Ratio Analysis of ICICI Bank before and After Merger

39
 MERGER OF CENTURION BANK WITH BANK OF
PUNJAB IN 2005:

On May 23, 2008, the merger of Centurion Bank of Punjab with HDFC Bank which is
considered as one of the biggest merger in domestic banking was formally approved
by Reserve Bank of India to complete the statutory and regulatory approval process.
The shareholders of Centurion Bank of Punjab received 1 share of HDFC Bank for
every 29 shares of CBoP. The merger has been advantageous to HDFC Bank in terms
of increased branch network, geographic reach, and customer base, and a bigger pool
of skilled manpower (Sai and Sultana, 2013).

Mar ' Mar ' Mar ' 05 Mar ' 04

07 06
Per share ratios
Adjusted EPS (Rs) 0.76 0.16 0.23 -1.18
Operating profit per share (Rs) 1.65 0.80 0.44 -0.68
Book value (excl rev res) per 8.91 6.61 5.82 3.40
share (Rs)
Net operating income per share 10.51 7.41 4.05 7.28
(Rs)
Profitability ratios
Operating margin (%) 15.69 10.85 11.02 -9.44
Gross profit margin (%) 12.23 5.92 3.78 -18.18
Adjusted return on net worth 8.61 2.54 4.06 -34.59
(%)
Leverage ratios
Total debt/equity 10.65 10.09 15.98 15.70
Fixed assets turnover ratio 1.77 1.18 0.61 0.55
Liquidity ratios
Current ratio 0.63 0.54 0.75 1.04
Quick ratio 10.15 8.03 6.40 7.46

40
1. EARNING PER SHARE

EARNING PER SHARE

1

0,76
0,5 0,23 0,16
0
MAR'04 MAR,05 MAR.06 MAR,07
EARNING PER SHARE
-0,5
-1,18

-1

-1,5

EPS is the portion of a company profit allocated to each of its outstanding

share.It is a indicator of companysprofitability.In the above fig,the eps is low in
march 2004 as compare to 2005 and 2006.This indicate after the merger of both
the banks in 2005,the EPS is improving continuaslly.It is a good sign of a
merger.

EPS = PROFIT AFTER TAX/ AVERAGE NO. OFSHARES.

2. OPERATING PROFIT PERSHARE

OPERATING PROFIT PER SHARE

2
1,5

1
1,65
0,8 OPERATING
0,5 0,44
-0,68 PROFIT PER…
0 MAR,04 MAR,05
MAR,06
MAR,07
-0,5

-1

41
 It is profit earned from a firm's normal core business operations.Profit after
tax subtract expenses such as market expenses,COGS,administrative and many
more..In march 2004,this operating profit is in a negative side but after the
merger deals it goes positive and on 2006 it is 0.8.It shows a higher jump in 2007
and reaches to 1.65.Higher the operating profit good will be the financial position
of thecompany.

3. NET OPERATINGINCOME

A company's operating income after operating expenses are deducted, but

before income taxes and interest are deducted. If this is a positive value, it is
referred to as net operating income, while a negative value is called a net
operating loss (NOL).

NOI is often viewed as a good measure of company performance. Some

believe this figure is less susceptible than other figures to manipulation by
management.The NOI also shows a positive sign,in 2005 it is 4.5 and in 2007 it
goes up to 10.51.The net operating income is become low in march 2005 due to
high cost involve in the merger process.

Thus it indicates that the NOI of the bank has increase after merger.

42
4. BOOKVALUE

Book value is the value of the asset as appear on the balance sheet which is
equal to the cost subtracted accumulated depreciation.Thus the figure clearly
shows that the book value goes to increase fron 2004 to 2007 which is a positive
financial indicator.IN 2005 it is 5.82 and on 2006 it is 6.61 and on 2007 it is 8.91.

BOOK VALUE

10

8
8,91 BOOK VALUE
4 6,61
6 5,82
2 3,4

0
MAR,04 MAR,05 MAR,06 MAR,07

So clearly there is a continuos growth in the book value of the asset after the 2005
which is a very good indicator.

5. GROSSS PROFITMARGIN

The gross profit margin reflects the efficiency with which management
produces each unit of product.A higher GPM implies that the firm is able to
produce at relatively lower cost. This figure shows us that the gross profit margin
has increase frm 2004 to 2007 .Before merger it was in negative but form 2005
onwards increase sharply due to the merger effect.In 2007 it is high at 12.73
which shows that the management very effective.

43
 GROSS PROFIT MARGIN
15

10
12.23
5 5.92
3.78
0
MARCH'04 MARCH.05 MARCH'06 MARCH'07
-5
-18.18
-10

-15

-20

6. OPERATING MARGIN (%)

OPERATING MARGIN %

20
15
15,69
10 11 10,85
5
MA-R9,044 MAR,05 MAR,06 MAR,07
0

-5

-10
7. RETURN ON NET WORTH

Net worth is nothing but TOTAL ASSET – TOTAL LIABILITIES. Net worth
can be used to determine creditworthiness because it gives a snapshot of the
company's investment history. also called owner's equity, shareholders' equity,
or net assets..In figure the net worth improves from 2005.In 2004 it is negative
which is a very bad indicator but on 2007 it is 8.61.In 2005,it is 4.65 ,which
means after the merger the net worthimproves.

44
 RETURN ON NET WORTH
10

0 4,06 2,54 8,61

-10 MAR,04 MAR,05 MAR,06
-20 -34,59
MAR,07
-30

-40

8. DEBT –EQUITYRATIO

A measure of a company's financial leverage calculated by dividing its total

liabilities by stockholders' equity. It indicates what proportion of equity and debt
the company is using to finance itsassets.

A high debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of the
additional interest expense. In the fig, the debt equity ratio going down after the
merger ie from 2005.It was 15.7 in 2004 and then it decline to 10.65 on2007.

Debt equity ratio

20

15,7 15,98
10
10,09
0 10,65
MARCH ,04
MARCH,05
MARCH,06
MARCH,07

45
9. FIXED ASSET TURNOVERRATIO

Fixed asset turnover ratio helps in knowing the efficiency of utilizing fixed
assets .Fixed asset can be calculated by –
FIXED ASSET TURNOVER = SALES
TOTAL ASSETS

This ratio helps the firm ability in generating sales from the financial resources
to total asset.In 2004 the turnover was
0.55 but on 2007 it became 1.77 which is higher than the 2004 and 2005.It is a
good indicator that the bank can generate more of the revenue from their
fixedassets.

FIXED ASSET TURNOVER RATIO

FIXED
1,5
ASSET
TURNOV
0,55 1,77 ER
1 0,61 1,18 RATIO
0

MAR,04
0,5 MAR,05
MAR,06
MAR,07

10. CURRENTRATIO

The current ratio is a current asset /current liabilities.It measure a company ability to
pay short term obligation.Higher the ratio more capable the company is paying its
obligation.But in this case the current ratio is going down frm 2004-2006..It show that
the bank is not very good in paying its short term obligations.

46
 CURRENT RATIO

1,2
1

0,8
1,04
0,6 CURRENT RATIO
0,75
0,4
0,54
0,63
0,2
MAR,04
0 MAR,05
MAR,06
MAR,07

11. QUICKRATIO

This ratio established a relationship between liquid asset and current

liabilities. A asset become liquid if it converted into a cashimmediately.
Generally quick ratio of 1 to 1 is considered satisfactory .In the given
figure,the ratio on 2004 was 8.2 and on 2005 it is 3.2 and it further down and
became 1.2 on 2007 which is good indicator.A company with quick ratio can
suffer from the shortage of funds and company with low quick ratio is prospering
and paying current obligation on time.

47
 QUICK RATIO
12
10

8
7,46
6 QUICK
6,4 8,03 10,15
4 RATIO
2 MAR,04
MAR,05
0 MAR,06
MAR,07

M&A IN THE INDIAN BANKING SECTOR AS AN

OPPORTUNITY
There are two prime reasons to believe that M&A in the Indian Banking Sector is an
opportunity.

1. CREATION OF A FINANCIAL SUPER MARKET OR A UNIVERSAL

BANK
A recent trend is to promote the concept of a financial super market chain, making
available all types of credit and non-fund facilities under one roof under one umbrella
organization (or through specialized subsidiaries).
An example of such a financial supermarket would be the reverse merger of ICICI
and ICICI Bank. ICICI Bank today stands as India ‘s second largest bank offering its
clients both in India and overseas a product range as varied us retail banking products
to exotic investment banking and treasury solutions. Similarly, IDBI and IDBI Bank
treaded the same route. Though one has to state that consolidated accounting and
supervisory techniques would have to evolve and appropriate fire walls built to
address the risks underlying such large organizations and banking conglomerates.

2. TECHNOLOGICAL EXPERTISE
New entrants in the banking sector are armed with technological expertise while older
players are well equipped with experience in practices. Mergers would thus help both
parties gain an expertise in areas in which they lack. In India, the retail banking

48
market biased towards the urban markets is growing at a Compounded Annual
Growth Rate (CAGR) of almost 18-20% while the rural market is yet to be fully
tapped. Keeping in focus the population profile, technology would be a major enabler
for banking in the future. A number of state-owned banks in India are adopting
sophisticated core banking solutions and these are just the larger ones. For smaller
banks to adopt technology platforms the expenditure may not be sustainable and
hence this may be one more reason for M&A.

49
Growing integration of economies and the markets around the world is making global
banking a reality. The surge in globalization of finance has also gained momentum
with the technological advancements which have effectively overcome the national
borders in the financial services business.
Widespread use of internet banking, mobile banking, and other modern technologies
(such as SWIFT) has widened frontiers of global banking, and it is now possible to
market financial products and services on a global basis.
In the coming years globalization would spread further on account of the likely
opening up of financial services under WTO. India is one of the signatories of
Financial Services Agreement (FSA) of 1997. This gives India ‘s financial sector
including banks an opportunity to expand their business on a quid pro quo basis. An
easy way for this is thus to go through adequate reconstruction to acquire the
necessary technology and get an early mover advantage in globalizing the Indian
Banks.

50
 DESCRIPTIONS OF THE STAGES OF MERGERS AND
ACQUISITIONS INTEGRATION PROCESS

STAGES DESCRIPTIONS

Pre-merger stage • Consideration of possible M&A.

• M&A related discussions are confined to top
level management.
• Information leaks cause various rumours and
speculations.
• The organizations are still relatively stable.

Initial planning and formal combination stage

• The merger is officially announced.
• Reason, vision, goal, direction of merger is
clarified.
• Decisions on management changes, staffing,
organizational structure are made.
• Old organizational entities are dissolved and a
new organization is legally created.
• Joint committees or teams are formed to
develop concrete guidelines and plans of the
structural, procedural and operational
integration.

Operational combination stage

• Organizations go through actual integration of
organizational functions and operations.

51
 • Interactions between the two organizational
members are extended to all work units.
• Employees ‘tasks, roles, bosses, and
workplaces are reassigned.
• Employees learn new ways of doing things
and new cultural expectations.

• Changes and adjustments are continued but

gradually diminished.
Stabilization stage
• Norms and roles are stabilized, and new
routines take place.
• Renewed expectation, cooperation, and inter-
unit tolerance.

52
 MOTIVES FOR MERGERS AND ACQUISITIONS IN
THE INDIAN BANKING SECTOR

Recent reports on banking sector often indicate that India is slowly but surely moving
from a regime of 'large number of small banks' to 'small number of large banks. The
aim of this paper is to probe into the various motivations for mergers and acquisitions
in the Indian Banking sector. Thus, literature is reviewed to look into the various
motivations behind a banks' merger/ acquisition event. Given the increasing role of
the economic power in the turf war of nations, the paper looks at the significant role
of the state and the central bank in protecting customer's interests vis-à-vis creating
players of international size. While, gazing at the mergers & acquisitions in the Indian
Banking Sector both from an opportunity and as imperative perspectives, the paper
also glances at the large implications for the nation.
`
MANAGED TRANSITION
India may have to follow a managed transition model to ensure a stronger banking
sector. This can be achieved by undertaking the following route:
 Encourage domestic acquisitions by strong local banks
 Selectively open the banking sector to foreign competition
 Increased dominance of 2-3 strong local players through acquisitions
 Foreign banks begin to increase presence

TO ACHIEVE IT ONE NEEDS TO RESOLVE 3 ISSUES:

1. DEFINE OVERALL MARKET END-STATE STRUCTURE

This would require the need to have a Micro-Market which would mainly comprise of
niche players like community banks or credit unions who would serve a particular
rural market or a small set of customers.

53
 2. DEFINE OVERALL BANK PERFORMANCE END-STATE

This is achieved by ensuring that there is capital stability, along with profitability
i.e. the banks would need to achieve an industry average ROA > 1 percent and ROE
around the 10~15 percent range through a greater profitability orientation. Also, there
is a need to ensure proper asset quality i.e. Banks ‘NPL/total loans ratios need to be
1~2 percent maximum, which is more in line with the developed world.

3. DEFINE COST MANAGEMENT END-STATE

This can be achieved through:

Efficiency: Cost efficiency ratio of banks should move to the 30-40% percent range
in line with more developed countries in a few years through improving operational
effectiveness.
Productivity of Payment System: Banks should focus more on electronic payment
system. Create industry-wide utilities to aid banks
Branch Structure for retail delivery: Improve branch productivity and realign
distribution.

54
 SPECIFIC OBSERVATIONS AND STATISTICS

DIFFERENCES IN PSU BANK MERGERS AND PRIVATE

MERGERS
PSU mergers show significant overvaluation of proposed consolidation deals. This
again needs to be investigated from corporate governance standards built around the
regulated and market linked corporate governance superstructure that needs to be
created in an index.

Deal activity in India

Domestic deals contribution to M&A activity (billion USD)

55
Top 5 sectors attracting PE investment (billion USD)

Top 5 M&A transactions in 2018

Top 5 PE transactions in 2018

56
57
58
59
 CONCLUSION

Mergers and Acquisitions (M&A) have immensely evoked and still continue to
capture scholars‘ interests. More so, M&A in the banking sector evokes high interest
simply for the fact that after decades of strict regulations, easing of the ownership &
control regulations has led to a wave of M&A in banking industry throughout the
world.

Considering the changed environment conditions, we believe that M&A in the Indian
Banking are an important necessity. The reasons include (a) fragmented nature of the
Indian banking sector resulting in poor global competitive presence and position; (b)
large intermediation costs and consequent probability in increasing its risk profile;
and (c) meet the new stringent international regulatory norms. While a fragmented
Indian banking structure may very well be beneficial to the customers (given
increased competition due to lower market power of existing players), at the same
time this also creates the problem of not having any critical mass to play the game at
the global banking industry level. This has to be looked at significantly from the
state‘s long-term strategic perspective. Given that economic power is increasingly
used as a tool by nations to defend their position, to signal power, to signal intent, and
to establish their supremacy over others hence owning and managing large powerful
global banks would be an obvious interest for every country.

Consolidation through M&A may be requirement of future. M&A of future should

aim at creation of strong entity and to develop ability to withstand the market shocks
instead of protecting the interests of depositors of weak banks. The M&As in the
banking sector should be driven by market related parameters such as size and scale;
geographical and distribution synergies and skills and capacity. The emerging market
dynamics like falling interest rate regime which makes the spread thinner; increasing
focus on retail banking, enhanced quest for rural credit, felt need for increasing more
profits especially from operations, reduction of NPA's in absolute terms, need for
more capital to augment the technology needs, etc are the major drivers for mergers
and acquisitions in the banking sector.

60
 REFERNCES

Research report “A Study On Mergers & Acquisition In Banking Industry-A Global

Phenomenon”
By Shipra Jindal

Research report “M&A in the Indian Banking Sector: An analysis of private and
public bank transactions”
By Amit Mittal ,April 29, 2016

Research report “Mergers and Acquisitions in Indian Banking Sector-A Strategic

Approach”
By Parveen Kumari

Research report “Impact of Merger Announcements on

ShareholdersWealth: Evidence fromIndian Private Sector Banks”
By Manoj Anand and Jagandeep Singh

Annual Report “Deals in India: Annual review and outlook for 2019”
ByPWC, December 2018

“Global Banking M & A Trends”

By KPMG, 2018

“Global M & A Themes”

By EY, 2018

61