abhinav merger and aquisition project copy05
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INTRODUCTION
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.
All our daily newspapers are filled with cases of mergers, acquisitions, spin-
offs, tender offers, & other forms of corporate restructuring. 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
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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:
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Equity shares in the transferee company,
Debentures in the transferee company,
Cash, or
A mix of the above modes.
WHAT IS ACQUISITION
Acquisition in general sense is acquiring the ownership in the property. In
the context of business combinations, an acquisition is the purchase by one
company of a controlling interest in the share capital of another existing company.
Methods of Acquisition:
An acquisition may be affected by
a)
Agreement with the persons holding majority interest in the company
management like members of the board or major shareholders commanding
majority of voting power;
b) Purchase of shares in open market;
c)
To make takeover offer to the general body of shareholders;
d) Purchase of new shares by private treaty;
e) Acquisition of share capital through the following forms of considerations
viz. Means of cash, issuance of loan capital, or insurance of share capital.
Takeover:
A takeover is acquisition and both the terms are used interchangeably.
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Takeover differs from merger in approach to business combinations i.e. The
process of takeover, transaction involved in takeover, determination of share
exchange or cash price and the fulfillment of goals of combination all are different
in takeovers than in mergers. For example, process of takeover is unilateral and the
offeror company decides about the maximum price. Time taken in completion of
transaction is less in takeover than in mergers, top management of the offeree
company being more co-operative.
De-merger or corporate splits or division:
De-merger or split or divisions of a company are the synonymous terms
signifying a movement in the company.
Purpose of Mergers & Acquisitions
The purpose for an offeror company for acquiring another company shall be
reflected in the corporate objectives. It has to decide the specific objectives to be
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achieved through acquisition. The basic purpose of merger or business
combination is to achieve faster growth of the corporate business. Faster growth
may be had through product improvement and competitive position.
Other possible purposes for acquisition are short listed below: -
(1) Procurement of supplies:
1. To safeguard the source of supplies of raw materials or intermediary
product;
2. To obtain economies of purchase in the form of discount, savings in
transportation costs, overhead costs in buying department, etc.;
3. To share the benefits of suppliers economies by standardizing the materials.
(2) Revamping production facilities:
1.
To achieve economies of scale by amalgamating production facilities
through more intensive utilization of plant and resources;
2.
To standardize product specifications, improvement of quality of product,
expanding
3. Market and aiming at consumers satisfaction through strengthening after sale
Services;
4.
To obtain improved production technology and know-how from the offered
company
5. To reduce cost, improve quality and produce competitive products to retain
and
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Improve market share.
(3) Market expansion and strategy:
1. To eliminate competition and protect existing market;
2.
To obtain a new market outlets in possession of the offeree;
3.
To obtain new product for diversification or substitution of existing products
and to enhance the product range;
4. Strengthening retain outlets and sale the goods to rationalize distribution;
5. To reduce advertising cost and improve public image of the offeree
company;
6. Strategic control of patents and copyrights.
(4) Financial strength:
1.
To improve liquidity and have direct access to cash resource;
2.
To dispose of surplus and outdated assets for cash out of combined
enterprise;
3.
To enhance gearing capacity, borrow on better strength and the greater
assets backing;
4. To avail tax benefits;
5. To improve EPS (Earning Per Share).
(5) General gains:
1. To improve its own image and attract superior managerial talents to manage
its affairs;
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2.
To offer better satisfaction to consumers or users of the product.
(6) Own developmental plans:
The purpose of acquisition is backed by the offeror companys own
developmental plans.
A company thinks in terms of acquiring the other company only when it has
arrived at its own development plan to expand its operation having examined its
own internal strength where it might not have any problem of taxation, accounting,
valuation, etc. But might feel resource constraints with limitations of funds and
lack of skill managerial personnels. It has to aim at suitable combination where it
could have opportunities to supplement its funds by issuance of securities, secure
additional financial facilities, eliminate competition and strengthen its market
position.
(7) Strategic purpose:
The Acquirer Company view the merger to achieve strategic objectives
through alternative type of combinations which may be horizontal, vertical,
product expansion, market extensional or other specified unrelated objectives
depending upon the corporate strategies. Thus, various types of combinations
distinct with each other in nature are adopted to pursue this objective like vertical
or horizontal combination.
(8) Corporate friendliness:
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Although it is rare but it is true that business houses exhibit degrees of
cooperative spirit despite competitiveness in providing rescues to each other from
hostile takeovers and cultivate situations of collaborations sharing goodwill of each
other to achieve performance heights through business combinations. The
combining corporate aim at circular combinations by pursuing this objective.
(9) Desired level of integration:
Mergers and acquisition are pursued to obtain the desired level of integration
between the two combining business houses. Such integration could be operational
or financial. This gives birth to conglomerate combinations. The purpose and the
requirements of the offeror company go a long way in selecting a suitable partner
for merger or acquisition in business combinations.
Types of Mergers
Merger or acquisition depends upon the purpose of the offeror company it
wants to achieve. Based on the offerorsobjectives profile, combinations could be
vertical, horizontal, circular and conglomeratic as precisely described below with
reference to the purpose in view of the offeror company.
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(A) Vertical combination:
A company would like to takeover another company or seek its merger with
that company to expand espousing backward integration to assimilate the resources
of supply and forward integration towards market outlets. The acquiring company
through merger of another unit attempts on reduction of inventories of raw material
and finished goods, implements its production plans as per the objectives and
economizes on working capital investments. In other words, in vertical
combinations, the merging undertaking would be either a supplier or a buyer using
its product as intermediary material for final production.
The following main benefits accrue from the vertical combination to the
acquirer company i.e.
1.
It gains a strong position because of imperfect market of the intermediary
products, scarcity of resources and purchased products;
2.
Has control over products specifications.
(B) Horizontal combination:
It is a merger of two competing firms which are at the same stage of
industrial process. The acquiring firm belongs to the same industry as the target
company. The mail purpose of such mergers is to obtain economies of scale in
production by eliminating duplication of facilities and the operations and
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broadening the product line, reduction in investment in working capital,
elimination in competition concentration in product, reduction in advertising costs,
increase in market segments and exercise better control on market.
(C) Circular combination:
Companies producing distinct products seek amalgamation to share common
distribution and research facilities to obtain economies by elimination of cost on
duplication and promoting market enlargement. The acquiring company obtains
benefits in the form of economies of resource sharing and diversification.
(D) Conglomerate combination:
It is amalgamation of two companies engaged in unrelated industries like
DCM and Modi Industries. The basic purpose of such amalgamations remains
utilization of financial resources and enlarges debt capacity through re-organizing
their financial structure so as to service the shareholders by increased leveraging
and EPS, lowering average cost of capital and thereby raising present worth of the
outstanding shares. Merger enhances the overall stability of the acquirer company
and creates balance in the companys total portfolio of diverse products and
production processes.
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[4]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 holdingcompany 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
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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.
(1) From the standpoint of shareholders
Investment made by shareholders in the companies subject to
merger should enhance in value. The sale of shares from one companys
shareholders to another and holding investment in shares should give
rise to greater values i.e. The opportunity gains in alternative
investments. Shareholders may gain from merger in different ways viz.
From the gains and achievements of the company i.e. Through
(a) Realization of monopoly profits;
(b)
Economies of scales;(c)
Diversification of product line;
(d) Acquisition of human assets and other resources not available
otherwise;
(e) Better investment opportunity in combinations.
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The merger or acquisition of a company by a conglomerate or
other acquiring company may have the effect on both the sides of
increasing the welfare in the form of purchasing power and other
miseries of life. Two sides of the impact as discussed by the researchers
and academicians are: firstly, mergers with cash payment to
shareholders provide opportunities for them to invest this money in
other companies which will generate further employment and growth to
uplift of the economy in general. Secondly,any restrictions placed on
such mergers will decrease the growth and investment activity with
corresponding decrease in employment. Both workers and communities
will suffer on lessening job
Opportunities, preventing the distribution of benefits resulting from
diversification of production activity.
(c) General public
Mergers result into centralized concentration of power. Economic power is to be
understood as the ability to control prices and industries output as monopolists. Such
monopolists affect social and political environment to tilt everything in their favour to
maintain their power ad expand their business empire. These advances result into
economic exploitation. But in a free economy a monopolist does not stay for a longer
period as other companies enter into the field to reap the benefits of higher prices set
in by the monopolist. This enforces competition in the market as consumers are free to
substitute the alternative products. Therefore, it is difficult to generalize that mergers
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affect the welfare of general public adversely or favorably. Every merger of two or more
companies has to be viewed from different angles in the business practices which
protects the interest of the shareholders in the merging company and also serves the
national purpose to add to the welfare of the employees, consumers and does not
create hindrance in administration of the Government polices.
Change in scenario of Banking Sector
1. The first mega merger in the Indian banking sector that of the HDFC Bank with
Times Bank, has created an entity which is the largest private sector bank in the
country.
2. The merger of the city bank with Travelers Group and the merger of Bank of
America with Nation Bank have triggered the mergers and acquisition market in
the banking sector world wide.
3. Europe and Japan are also on their way to restructure their financial sector
thought merger and acquisitions. Merger will help banks with added moneypower, extended geographical reach with diversified branch Network, improved
product mix, and economies of scale of operations. Merger will also help banks
to reduced them borrowing cost and to spread total risk associated with the
individual banks over the combined entity. Revenues of the combine entity are
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THE BANKING SCENARIO HAS BEEN CHANGING AT FAST PLACE.
Bank traditionally just borrower and lenders, has started providing complete
corporate and retail financial services to its customers
1. Technology drive has benefited the customers in terms of faster improve
convenient banking services and Varity of financial products to suit their
requirement. Atms, Phone Banking, Net banking, Any time and Any where
banking are the services which bank have started offering following the
changing trend in sectors. In plastic money segment customer have also got a
new option of debits cards against the earlier popular credit card. Earlier
customers had to conduct their banking transaction within the restricted time
frame of banking hours. Now banking hours are extended.
2.
Atms ,Phone banking and Net banking had enable the customer to transact as
per their convince customer can now without money at any time and from any
branch across country as certain their account transaction, order statements of
their account and give instruction using the tally banking or on online banking
services.
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3. Bank traditionally involve working capital financing have started offering
consumer loans and housing loans. Some of the banks have started offering
travel loans, as well as many banks have started capitalizing on recent capital
market boom by providing IPO finance to the investors.
Procedure of Mergers & Acquisitions
Publi c announcement:
To make a public announcement an acquirer shall follow the following procedure:
1. Appointment of merchant banker:
The acquirer shall appoint a merchant banker registered as category
I with SEBI to advise him on the acquisition and to make a public
announcement of offer on his behalf.
2.
Use of media for announcement:
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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
Chapter 9: RBI Guidelines on Mergers & Acquisitions of Banks
With a view to facilitating consolidation and emergence of strong entities
and providing an avenue for non disruptive exit of weak/unviable entities in the
banking sector, it has been decided to frame guidelines to encourage
merger/amalgamation in the sector.
Although the Banking Regulation Act, 1949 (AACS) does not empowerReserve 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.
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depositors) of theacquired bank.
3.Information which is considered relevant for the consideration of the scheme of
merger including in particular:-
A. Annual reports of each of the Banks for each of the three completed
financial years 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.
C.Pro-forma combined balance sheet of the acquiring bank as it will appear
consequent on the merger.
D.Computation based on such pro-forma balance sheet of the following:-
I. Tier I Capital
Ii.Tier II Capital
Iii. Risk-weighted Assets
Iv. Gross and Net npas
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V. Ratio of Tier I Capital to Risk-weighted Assets
Vi. Ratio of Tier II Capital to Risk-weighted Assets
Vii. Ratio of Total Capital to Risk-weighted Assets
Viii. Tier I Capital to Total Assets
Ix. Gross and Net npas to Advances
X. Cash Reserve Ratio
Xi. Statutory Liquidity Ratio
4.Information certified by the values as is considered relevant to understand the
net realizable value of assets of the acquired bank including in particular:-
A.The method of valuation used by the values
B.The information and documents on which the values have relied andthe extent of the verification, if any, made by the values to test the accuracy of
such information
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
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E. Detailed computation of the realizable value of assets of the acquired
bank.
5.Such other information and explanations as the Reserve Bank may require.
Mergers in the Banking Sector
ICICI Bank
INTRODUCTION
ICICI Bank (formerly Industrial Credit and Investment Corporation of
India) is India's largest private bank. ICICI Bank has total assets of about Rs.20.05bn
(end-Mar 2005), a network of over 550 branches and offices, and about 1900 atms.
ICICI Bank offers a wide range of banking products and financial services to corporate
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ICICI -KINFRA Limited (I-KIN),
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. Universal banking is in offering with a whole
range of financial products and services. The basic idea is for banks to do business
along with banking. Bankers will have to emerge as businessmen.
ICICI Bank is a focused banking company coping with the changing times
of the banking industry. So it can be a lucrative target for other player in the same
line of operations. However, when merged with ICICI Limited the attraction is
reduced manifold considering the magnitude of operations of the ICICI limited.
Of course, one would still need a bank to open letters of credit, offer
guarantees, handle documentation, and maintain current account facilities etc. So
banks will not superfluous. But nobody needs so many of them any more.
Secondly, besides credit, a customer may also want from a bank efficient
cash management, advisory services and market research on his product. Thus the
importance of fee based is increasing in comparison with the fund-based income.
The pre--merger status of ICICI Bank is as follows: it had liabilities of Rs.12,073
crore, equity market capitalization of Rs.2,466 crore and equity volatility of 0.748.
Working through options reasoning, we find that this share price and volatility are
consistent with assets worth Rs.13,249 crore with volatility 0.15. Thus, ICICI bank
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had assets which are 9.7% ahead of liabilities, which is roughly consistent with the
spirit of the Basle Accord, and has leverage of 5.37 times.
History of ICICI Bank
The World bank the Government of India and representatives of Indian industry
form ICICI Limited as a development finance institution to provide medium-term
and long-term project financing to Indian businesses in1955.
1994 ICICI establishes ICICI Bank as a subsidiary.
1999 ICICI becomes the first Indian company and the first bank or financial
institution from non-Japan Asia to list on theNYSE.
2001 ICICI acquired Bank of Madura (est. 1943). Bank of Madura was a
Chettiarbank, and had acquired Chettinad Mercantile Bank (est. 1933) and
Illanji Bank (established1904)in the1960s.
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which this reasoning leans on models, which are innately imperfect depictions of
reality. However, these models are powerful tools for understanding the basic
factors at work, and they probably convey the broad picture quite effectively.
The stock of ICICI Bank may be in the limelight on the back of the proposed
acquisition of Bank of Madura.
Though the stock has gained sharply in the last two months after hitting a
recent low of Rs 110, some upside may be left as the bank could get re-rated on
account of the merger. Existing shareholders could hold their exposures in ICICI
Bank while investors with an appetite for risk could contemplate exposures despite
the impressive gains of the past few months. ICICI Bank continues to be one of the
better options in the banking sector at the moment and the possible merger with
ICICI may well be on the backburner.
The merger would pitchfork ICICI Bank as the leading private sector bank.
The merger may be viewed favorably since Bank of Madura has focused strengths
and a reasonably good quality balance sheet. The board of directors is to meet on
December 11 to consider the merger.
It is quite likely that the swap ratio may be fixed in a manner that holds out a
good deal for the shareholders of Bank of Madura. This may also be influenced by
the fact that the Bank of Madura stock has gained sharply by around 70 per cent in
the past fortnight in the homestretch to the deal.
As the acquisition is to be financed by issuance of stock, the rise in the
market capitalization of Bank of Madura may mean a higher degree of equity
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issuance by ICICI Bank. But the price may well be worth paying as this is the only
way that ICICI Bank may be able to get control over banks with reasonable quality
balance sheets that could make a difference in the medium to long-term.
Bank of Madura has assets of Rs 3,988 crore and deposits of Rs 3,395 crore
as of March 2000. The fact that the bank has a capital adequacy of 15.8 per cent
with shareholder funds of Rs 263 crore may mean that ICICI Bank (post-merger
phase) will have more leeway to pursue growth without expanding the equity base
(other than paying for the acquisition).
Strong capital adequacy, a strong beachhead on the Internet arena, a revamped IT
architecture, a growing retail client base through a brick-and-click 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.
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Recommendation of Narasimham Committee on banking sector reforms
Globally, the banking and financial systems have adopted information and
communications technology. This phenomenon has largely by passed the Indian
banking system, and the committee feels that requisite success needs to be
achieved in the following areas:-
- Banking automation
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Planning, Standardization of electronic payment systems
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Telecom infrastructure
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Data were
Merger between banks and dfls and nbfcs need to be based on synergies and
should make a sound commercial sense. Committee also opines that merger
between strong banks / fls would make for greater economic and commercial
sense and would be a case where the whole is greater than the sum of its party
and have a force multiplier effect. It also have merger should not be seen as a
means of bailing out weak banks.
A weak bank could be nurtured into healthy units. Merger could also be a
solution to a after cleaning up their balances sheets it only say if these is no
Voltaire response to a takeover of such bank, a restructuring commission for
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In economic and political circles, the planned merger was
celebrated as Germanys advance into the premier league of the
international financial markets. But the failure of the merger led to the
disaster of Germany as the financial center.
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