INTRODUCTION TO CORPORATE MERGER

The phrase Corporate Merger 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.

A merger or acquisition is a combination of two companies where one corporation is completely

absorbed by another corporation. The less important company loses its identity and becomes part

of the more important corporation, which retains its identity. A merger extinguishes the merged

corporation, and the surviving corporation assumes all the rights, privileges, and liabilities of the

merged corporation.

A Corporate merger occurs when two or more companies combines and the resulting firm

maintains the identity of one of the firms. One or more companies may merger with an existing

company or they may merge to form a new company.

For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms

ceased to exist when they merged, and a new company, GlaxoSmithKline, was created.

Usually the assets and liabilities of the smaller firms are merged into those of larger firms.

Merger may take two forms-

1. Merger through absorption

2. Merger through consolidation.

Absorption

Absorption is a combination of two or more companies into an existing company. All companies

except one loose their identity in a merger through absorption.

Consolidation

A consolidation is a combination of two or more companies into a new company. In this form of

merger all companies are legally dissolved and a new entity is created. In consolidation the

acquired company transfers its assets, liabilities and share of the acquiring company for cash or

exchange of assets.

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ACQUISITION

A fundamental characteristic of merger is that the acquiring company takes over the ownership

of other companies and combines their operations with its own operations.

An acquisition may be defined as an act of acquiring effective control by one company over the

assets or management of another company without any combination of companies.

TAKEOVER

A takeover may also be defined as obtaining control over management of a company by another

company.

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DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

Although they are often uttered in the same breath and used as though they were synonymous,

the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established 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, often of about the same size,

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." Both companies' stocks

are surrendered and new company stock is issued in its place. For example, both Daimler-Benz

and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler,

was created.

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's technically an acquisition. Being bought out often

carries negative connotations, therefore, by describing the deal as a merger, deal makers and top

managers try to make the takeover more palatable.

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.

Whether a purchase is considered a merger or an acquisition really depends on whether the

purchase is friendly or hostile and how it is announced. In other words, the real difference lies in

how the purchase is communicated to and received by the target company's board of directors,

employees and shareholders.

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TYPES OF MERGERS

Mergers are of many types. Mergers may be differentiated on the basis of activities, which are

added in the process of the existing product or service lines. Mergers can be a distinguished into

the following four types:-

1. Horizontal Merger

2. vertical Merger

3. Conglomerate Merger

4. Concentric Merger

Horizontal merger

Horizontal merger is a combination of two or more corporate firms dealing in same lines of

business activity. Horizontal merger is a co centric merger, which involves combination of two

or more business units related to technology, production process, marketing research and

development and management.

Horizontal mergers are those mergers where the companies manufacturing similar kinds of

commodities or running similar type of businesses merge with each other. The principal

objective behind this type of mergers is to achieve economies of scale in the production

procedure through carrying off duplication of installations, services and functions, widening the

line of products, decrease in working capital and fixed assets investment, getting rid of

competition, minimizing the advertising expenses, enhancing the market capability and to get

more dominance on the market.

Nevertheless, the horizontal mergers do not have the capacity to ensure the market about the

product and steady or uninterrupted raw material supply. Horizontal mergers can sometimes

result in monopoly and absorption of economic power in the hands of a small number of

commercial entities.

According to strategic management and microeconomics, the expression horizontal merger

delineates a form of proprietorship and control. It is a plan, which is utilized by a corporation or

commercial enterprise for marketing a form of commodity or service in a large number of

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markets. In the context of marketing, horizontal merger is more prevalent in comparison to

horizontal merger in the context of production or manufacturing.

Horizontal Integration

Sometimes, horizontal merger is also called as horizontal integration. It is totally opposite in

nature to vertical merger or vertical integration.

Horizontal Monopoly

A monopoly formed by horizontal merger is known as a horizontal monopoly. Normally, a

monopoly is formed by both vertical and horizontal mergers. Horizontal merger is that condition

where a company is involved in taking over or acquiring another company in similar form of

trade. In this way, a competitor is done away with and a wider market and higher economies of

scale are accomplished.

In the process of horizontal merger, the downstream purchasers and upstream suppliers are also

controlled and as a result of this, production expenses can be decreased.

Horizontal Expansion

An expression which is intimately connected to horizontal merger is horizontal expansion. This

refers to the expansion or growth of a company in a sector that is presently functioning. The aim

behind a horizontal expansion is to grow its market share for a specific commodity or service.

Examples of Horizontal Mergers

Following are the important examples of horizontal mergers:

i. The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook

Bond

ii. The merger of Bank of Mathura with ICICI (Industrial Credit and Investment Corporation of

India) Bank

iii. The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply

Company

iv. The merger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar Cement

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Vertical Merger

Vertical merger is the joining of two or more firms in different stages of production or

distribution that are usually separate. The vertical Mergers chief gains are identified as the lower

buying cost of material. Minimization of distribution costs, assured supplies and market

increasing or creating barriers to entry for potential competition or placing them at a cost

disadvantage.

Vertical mergers refer to a situation where a product manufacturer merges with the supplier of

inputs or raw materials. In can also be a merger between a product manufacturer and the

product's distributor.

Vertical mergers may violate the competitive spirit of markets. It can be used to block

competitors from accessing the raw material source or the distribution channel. Hence, it is also

known as "vertical foreclosure". It may create a sort of bottleneck problem.

As per research, vertical integration can affect the pricing incentive of a downstream producer. It

may also affect a competitors incentive for selecting input suppliers. Research studies single out

several factors, which point to the fact that vertical integration facilitates collusion. Vertical

mergers may promote collusion through an outlets effect. A corollary of vertical integration is

that integrated business structures are able to perform better in crisis phases.

There are multiple reasons, which promote the vertical integration by firms. Some of them

are discussed below.

The prime reason being the reduction of uncertainty regarding the availability of quality inputs as

also the uncertainty regarding the demand for its products.

Firms may also enter vertical mergers to avail the plus points of economies of integration.

Vertical merger may make the firms cost-efficient by streamlining its distribution and production

costs. It is also meant for the reduction of transactions costs like marketing expenses and sales

taxes. It ensures that a firm's resources are used optimally.

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Conglomerate Merger

Conglomerate merger is the combination of two or more unrelated business units in respect of

technology, production process or market and management. In other words, firms engaged in the

different or unrelated activities are combined together. Diversification of risk constitutes the

rational for such merger moves.

As per definition, a conglomerate merger is a type of merger whereby the two companies that

merge with each other are involved in different sorts of businesses. The importance of the

conglomerate mergers lies in the fact that they help the merging companies to be better than

before.

Types of Conglomerate Mergers

There are two main types of conglomerate mergers –

The pure conglomerate merger

The mixed conglomerate merger.

The pure conglomerate merger is one where the merging companies are doing businesses that

are totally unrelated to each other.

The mixed conglomerate mergers are ones where the companies that are merging with each other

are doing so with the main purpose of gaining access to a wider market and client base or for

expanding the range of products and services that are being provided by them

There are also some other subdivisions of conglomerate mergers like the financial

conglomerates, the concentric companies, and the managerial conglomerates.

Reasons of Conglomerate Mergers

There are several reasons as to why a company may go for a conglomerate merger. Among the

more common reasons are adding to the share of the market that is owned by the company and

indulging in cross selling. The companies also look to add to their overall synergy and

productivity by adopting the method of conglomerate mergers.

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Benefits of Conglomerate Mergers

There are several advantages of the conglomerate mergers. One of the major benefits is that

conglomerate mergers assist the companies to diversify. As a result of conglomerate mergers the

merging companies can also bring down the levels of their exposure to risks.

Implications of Conglomerate Mergers

There are several implications of conglomerate mergers. It has often been seen that companies

are going for conglomerate mergers in order to increase their sizes. However, this also, at times,

has adverse effects on the functioning of the new company. It has normally been observed that

these companies are not able to perform like they used to before the merger took place.

This was evident in the 1960s when the conglomerate mergers were the general trend. The term

conglomerate mergers also implies that the two companies that are merging do not even have the

same customer base as they are in totally different businesses.

It has normally been seen that a lot of companies that go for conglomerate mergers are able to

manage a wide variety of activities in a particular market. For example, these companies can

carry out research activities and applied engineering processes. They are also able to add to their

production as well as strengthen the marketing area that ensures better profitability.

It has been seen from case studies that conglomerate mergers do not affect the structures of the

industries. However, there might be significant impact if the acquiring company happens to be a

leading company of its market that is not concentrated and has a large number of entry barriers.

Concentric Merger

Concentric merger are based on specific management functions where as the conglomerate

mergers are based on general management functions. If the activities of the segments brought

together are so related that there is carry over on specific management functions. Such as

marketing research, Marketing, financing, manufacturing and personnel.

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BENEFITS OF MERGERS

1. GROWTH OR DIVERSIFICATION

Companies that desire rapid growth in size or market share or diversification in the range of

their products may find that a merger can be used to fulfill the objective instead of going through

the tome consuming process of internal growth or diversification. The firm may achieve the

same objective in a short period of time by merging with an existing firm. In addition such a

strategy is often less costly than the alternative of developing the necessary production capability

and capacity. If a firm that wants to expand operations in existing or new product area can find a

suitable going concern. It may avoid many of risks associated with a design; manufacture the

sale of addition or new products. Moreover when a firm expands or extends its product line by

acquiring another firm, it also removes a potential competitor.

2. SYNERGISM

The nature of synergism is very simple. Synergism exists whenever the value of the combination

is greater than the sum of the values of its parts. In other words, synergism is “2+2=5”. But

identifying synergy on evaluating it may be difficult, infact sometimes its implementations may

be very subtle. As broadly defined to include any incremental value resulting from business

combination, synergism in the basic economic justification of merger. The incremental value

may derive from increase in either operational or financial efficiency.

Operating Synergism: - Operating synergism may result from economies of scale, some

degree of monopoly power or increased managerial efficiency. The value may be achieved by

increasing the sales volume in relation to assts employed increasing profit margins or decreasing

operating risks. Although operating synergy usually is the result of either vertical/horizontal

integration some synergistic also may result from conglomerate growth. In addition, some times

a firm may acquire another to obtain patents, copyrights, technical proficiency, marketing skills,

specific fixes assts, customer relationship or managerial personnel.

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Operating synergism occurs when these assets, which are intangible, may be combined with the

existing assets and organization of the acquiring firm to produce an incremental value. Although

that value may be difficult to appraise it may be the primary motive behind the acquisition.

Financial synergism

Among these are incremental values resulting from complementary internal funds flows more

efficient use of financial leverage, increase external financial capability and income tax

advantages.

a) Complementary internal funds flows

Seasonal or cyclical fluctuations in funds flows sometimes may be reduced or eliminated by

merger. If so, financial synergism results in reduction of working capital requirements of the

combination compared to those of the firms standing alone.

b) More efficient use of Financial Leverage

Financial synergy may result from more efficient use of financial leverage. The acquisition firm

may have little debt and wish to use the high debt of the acquired firm to lever earning of the

combination or the acquiring firm may borrow to finance and acquisition for cash of a low debt

firm thus providing additional leverage to the combination. The financial leverage advantage

must be weighed against the increased financial risk.

c) Increased External Financial Capabilities

Many mergers, particular those of relatively small firms into large ones, occur when the acquired

firm simply cannot finance its operation. Typical of this is the situations are the small growing

firm with expending financial requirements. The firm has exhausted its bank credit and has

virtually no access to long term debt or equity markets. Sometimes the small firm has

encountered operating difficulty, and the bank has served notice that its loan will not be renewed.

In this type of situation a large firms with sufficient cash and credit to finance the requirements

of smaller one probably can obtain a good buy bee. Making a merger proposal to the small firm.

The only alternative the small firm may have is to try to interest 2 or more large firms in

proposing merger to introduce, competition into those bidding for acquisition. The smaller firm’s

situations might not be so bleak. It may not be threatened by non renewable of maturing loan.

But its management may recognize that continued growth to capitalize on its market will require

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financing be on its means. Although its bargaining position will be better, the financial synergy

of acquiring firm’s strong financial capability may provide the impetus for the merger.

Sometimes the acquired firm possesses the financing capability. The acquisition of a cash rich

firm whose operations have matured may provide additional financing to facilitate growth of the

acquiring firm.

d) The Income Tax Advantages

In some cases, income tax consideration may provide the financial synergy motivating a merger,

e.g. assume that a firm A has earnings before taxes of about rupees ten crores per year and firm

B now break even, has a loss carry forward of rupees twenty crores accumulated from profitable

operations of previous years. The merger of A and B will allow the surviving corporation to

utility the loss carries forward, thereby eliminating income taxes in future periods.

Other motives for Merger

Merger may be motivated by some other factors that should not be classified under synergism.

These are the opportunities for acquiring firm to obtain assets at bargain price and the desire of

shareholders of the acquired firm to increase the liquidity of their holdings.

1. Purchase of Assets at Bargain Prices

Mergers may be explained by opportunity to acquire assets, particularly land mineral rights,

plant and equipment, at lower cost than would be incurred if they were purchased or constructed

at the current market prices. If the market price of many socks have been considerably below the

replacement cost of the assets they represent, expanding firm considering construction plants,

developing mines or buying equipments often have found that the desired assets could be

obtained where by heaper by acquiring a firm that already owned and operated that asset. Risk

could be reduced because the assets were already in place and an organization of people knew

how to operate them and market their products. Many of the mergers can be financed by cash

tender offers to the acquired firm’s shareholders at price substantially above the current market.

Even so, the assets can be acquired for less than their current casts of construction. The basic

factor underlying this apparently is that inflation in construction costs not fully rejected in stock

prices because of high interest rates and limited optimism by stock investors regarding future

economic conditions.

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2. Increased Managerial Skills or Technology

Occasionally a firm will have good potential that is finds it unable to develop fully because of

deficiencies in certain areas of management or an absence of needed product or production

technology. If the firm cannot hire the management or the technology it needs, it might combine

with a compatible firm that has needed managerial, personnel or technical expertise. Of course,

any merger, regardless of specific motive for it, should contribute to the maximization of

owner’s wealth.

3. Acquiring new technology

To stay competitive, companies need to stay on top of technological developments and their

business applications. By buying a smaller company with unique technologies, a large company

can maintain or develop a competitive edge.

4. Economy of scale

This refers to the fact that the combined company can often reduce its fixed costs by removing

duplicate departments or operations, lowering the costs of the company relative to the same

revenue stream, thus increasing profit margins.

5. Economy of scope

This refers to the efficiencies primarily associated with demand-side changes, such as increasing

or decreasing the scope of marketing and distribution, of different types of products.

Increased revenue or market share: This assumes that the buyer will be absorbing a major

competitor and thus increase its market power (by capturing increased market share) to set

prices.

6. Cross-selling

For example, a bank buying a stock broker could then sell its banking products to the stock

broker's customers, while the broker can sign up the bank's customers for brokerage accounts.

Or, a manufacturer can acquire and sell complementary products.

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LIMITATIONS OF MERGER

1. Method of valuation is not mention in most of the mergers, which would have been

more helpful in understanding the mergers.

2. Time for synergies to take place is different in each case ,so its not sure what time

period should be considered for analysis.

3. Merger & Acquisition is a risky activity. M & A business, whether in the preparation stage,

or in the operational phase of the merger, or post-integration phase, will be accompanied by

a large number of uncertainties. These uncertainties brought about by mergers and

acquisitions could lead to a huge financial risk.

4. Sometimes new synergies are not created between two different businesses and the talents

within each side are not successfully combined and thus, the success and

productivity/creativity of the two become stifled instead of complimented.

5. Often, many different businesses don’t know how to co-exist and sometimes just can’t

work together. For example, cultural or structural differences within a business can hinder

cohesive teamwork.

6. Companies sometimes enter a merger and acquisition without adequately setting up a

proper budget and plan-of-action. Lastly, people within the businesses don’t like change,

which is precisely what a merger and acquisition is.

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Terms Relating To Mergers and Acquisitions

Asset Stripping

When a company acquires another and sells it in parts expecting that the funds generated would

match the costs of acquisition, it is known as asset stripping.

Black Knight

The company that makes a hostile takeover is known as the Black Knight.

Dawn Raid

This is a process of buying shares of the target company with the expectation that the market

prices may fall till the acquisition is completed.

Demerger or Spin off

During the process of corporate restructuring, a part of the company may break up and set up as

a new company and this is known as demerger. Zeneca and Argos are good examples in this

regard that split from ICI and American Tobacco respectively.

Carve –out

This is a case of selling a small portion of the company as an Initial Public Offering.

Greenmail

Greenmail is a situation where the target company purchases back its own shares from the

bidding company at a higher price.

Grey Knight

A grey knight is a company that takes over another company and its intentions are not clear.

Hostile Takeover

Hostile bids occur when acquisitions take place without the consent of the directors of the target

company. This confrontation on the part of the directors of the target company may be short

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lived and the hostile takeover may end up being friendly. Most American\n and British

companies like the phenomenon of hostile takeovers while there is some more which do not like

such unfriendly takeovers.

Macaroni Defense

Macaroni Defense is a strategy that is taken up to prevent any hostile takeovers. The issue of

bonds that can be redeemed at a higher price if the company is taken over does this.

Management Buy In

When a company is purchased and the investors bring in their managers to control the company,

it is known as management buy in.

Management Buy Out

In a management buy out, the managers of a company purchases it with support from venture

capitalists.

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History of Mergers and Acquisitions

Tracing back to history, merger and acquisitions have evolved in five stages and each of these

are discussed here. As seen from past experience mergers and acquisitions are triggered by

economic factors. The macroeconomic environment, which includes the growth in GDP, interest

rates and monetary policies play a key role in designing the process of mergers or acquisitions

between companies or organizations.

The economic history has been divided into Merger Waves based on the merger activities in the

business world.

Period Name Fact

1889–1904 First Wave Horizontal mergers

1916–1929 Second Wave Vertical mergers

1965–1969 Third Wave Diversified conglomerate mergers

1981–1989 Fourth Wave Congeneric mergers; Hostile takeovers; Corporate Raiding

1992 - 2000 Fifth Wave Cross-border mergers

First Wave Mergers

The first wave mergers commenced from 1897 to 1904. During this phase merger occurred

between companies, which enjoyed monopoly over their lines of production like railroads,

electricity etc. the first wave mergers that occurred during the aforesaid time period were mostly

horizontal mergers that took place between heavy manufacturing industries.

End of 1st Wave Merger

Majority of the mergers that were conceived during the 1st phase ended in failure since they

could not achieve the desired efficiency. The failure was fuelled by the slowdown of the

economy in 1903 followed by the stock market crash of 1904. The legal framework was not

supportive either. The Supreme Court passed the mandate that the anticompetitive mergers could

be halted using the Sherman Act.

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Second Wave Mergers

The second wave mergers that took place from 1916 to 1929 focused on the mergers between

oligopolies, rather than monopolies as in the previous phase. The economic boom that followed

the post World War I gave rise to these mergers. Technological developments like the

development of railroads and transportation by motor vehicles provided the necessary

infrastructure for such mergers or acquisitions to take place. The government policy encouraged

firms to work in unison. This policy was implemented in the 1920s.

The 2nd wave mergers that took place were mainly horizontal or conglomerate in nature. Te

industries that went for merger during this phase were producers of primary metals, food

products, petroleum products, transportation equipments and chemicals. The investments banks

played a pivotal role in facilitating the mergers and acquisitions.

End of 2nd Wave Mergers

The 2nd wave mergers ended with the stock market crash in 1929 and the great depression. The

tax relief that was provided inspired mergers in the 1940s.

Third Wave Mergers

The mergers that took place during this period (1965-69) were mainly conglomerate mergers.

Mergers were inspired by high stock prices, interest rates and strict enforcement of antitrust laws.

The bidder firms in the 3rd wave merger were smaller than the Target Firm. Mergers were

financed from equities; the investment banks no longer played an important role.

End of 3rd Wave Merger

The 3rd wave merger ended with the plan of the Attorney General to split conglomerates in

1968. It was also due to the poor performance of the conglomerates.Some mergers in the 1970s

have set precedence. The most prominent ones were the INCO-ESB merger; United

Technologies and OTIS Elevator Merger are the merger between Colt Industries and Garlock

Industries.

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Fourth Wave Merger

The 4th wave merger that started from 1981 and ended by 1989 was characterized by acquisition

targets that wren much larger in size as compared to the 3rd wave mergers. Mergers took place

between the oil and gas industries, pharmaceutical industries, banking and airline industries.

Foreign takeovers became common with most of them being hostile takeovers. The 4th Wave

mergers ended with anti takeover laws, Financial Institutions Reform and the Gulf War.

Fifth Wave Merger

The 5th Wave Merger (1992-2000) was inspired by globalization, stock market boom and

deregulation. The 5th Wave Merger took place mainly in the banking and telecommunications

industries. They were mostly equity financed rather than debt financed. The mergers were driven

long term rather than short term profit motives. The 5th Wave Merger ended with the burst in the

stock market bubble.

Hence we may conclude that the evolution of mergers and acquisitions has been long drawn.

Many economic factors have contributed its development. There are several other factors that

have impeded their growth. As long as economic units of production exist mergers and

acquisitions would continue for an ever-expanding economy.

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Top 10 M&A deals worldwide by value (in mil. USD) from 1990 to 1999

Rank Year Purchaser Purchased Transaction value (in mil. USD)

1 1999 Vodafone Airtouch PLC Mannesmann 183,0002 1999 Pfizer Warner-Lambert 90,0003 1998 Exxon Mobil 77,2004 1998 Citicorp Travelers Group 73,0005 1999 SBC Communications Ameritech Corporation 63,0006 1999 Vodafone Group AirTouch Communications 60,0007 1998 Bell Atlantic GTE 53,3608 1998 BP Amoco 53,0009 1999 Qwest Communications US WEST 48,00010 1997 Worldcom MCI Communications 42,000

Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2009

Rank Year Purchaser Purchased Transaction value (in mil. USD)

1 2000 Fusion: America Online Inc. Time Warner 164,7472 2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,9613 2004 Royal Dutch Petroleum Co. Shell Transport & Trading Co 74,5594 2006 AT&T Inc. BellSouth Corporation 72,6715 2001 Comcast Corporation AT&T Broadband & Internet

Svcs72,041

6 2009 Pfizer Inc. Wyeth 68,0007 2000 Nortel Networks Corp. 59,9748 2002 Pfizer Inc. Pharmacia Corporation 59,5159 2004 JP Morgan Chase & Co Bank One Corp 58,76110 2008 Inbev Inc. Anheuser-Busch Companies,

Inc52,000

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Valuation Related to Mergers and Acquisitions

The methods of valuation related to mergers and acquisitions can be broadly categorized into

three types, namely market based method, income based method, as well as asset based method.

All these methods carry a significant degree of importance in the context of mergers and

acquisitions. There are numerous elements, which ascertain whether a particular firm should be

acquired or not.

The financial steadiness of the firm, which is to be taken over is quite important to find out. In

addition, the financial track record over the last few years and trends demonstrated in the

macroeconomic ratio and indices require to be analyzed. Among the methods of valuation related

to mergers and acquisitions, the market based method might be regarded as more appropriate,

nevertheless, all the valuation methods are crucial, taking into account the condition that is

prevalent at the time when a merger or acquisition is going to take place.

Methods of Valuation Related to Mergers and Acquisitions

The methods of valuation associated with mergers and acquisitions can be broadly classified into

the following types:

1) Market Based Method

2) Income Based Method

3) Asset Based Method

1) Market Based Method

In valuation of mergers and acquisitions with the help of market based method, the different

attributes of the firm which is going to be acquired are compared with the similar types of

attributes of other firms in the market. These firms (not the firm in question) normally have a

market value that has been set up earlier. Furthermore, some other factors are to be taken into

consideration before the comparison of the different attributes is done. First of all, which

elements need comparison are to be distinguished and secondly, which are the firms that are

going to act as comparables. Public sector corporations involved in the same type of industry (of

the target firm) can be chosen as comparables. Nevertheless, if the target firm is not registered

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with a stock exchange or is relatively small in its size than the public sector corporations,

comparing it with the public sector corporations may not be useful. In these circumstances,

public and private databases are there and these are basically commercial databases.

The other features that require to be compared are net earnings, gross revenue, and book value of

assets. As soon as all the information has been gathered, a broad-based comparison is performed

for obtaining the value of the target firm.

The market based method can be further categorized into the following types:

i. Market multiple (or price-earnings ratio) of comparable firms for firms that are not listed

ii. Market capitalization of listed firms

2) Income Based Method

The income based method of valuation associated with mergers and acquisitions takes into

account the net present value. The net present value of earnings that is going to be received in the

future is taken into consideration through the implementation of a mathematical formula.

The income based method can be further classified into the following types:

i. Cost to create technique

ii. Free cash flow/discounted cash flow method

iii. Capitalized earnings technique

3) Asset Based Method

This method of valuation related to mergers and acquisitions is applied while the target firm is

running at a loss. In this kind of a situation, the valuation of the assets of the firm at loss is

estimated. Besides this procedure, the income based method and market based method can also

be applied. Valuation received with the help of these procedures may render small values.

Nevertheless, there is a probability that these methods would produce the true condition of the

assets of the target firm.

The asset based method can be further categorized into the following forms:

i. Valuation of Intangible Assets

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ii. Economic Book Value or Net Adjusted Asset Value

iii. Liquidation Value

Mergers and Acquisitions Laws

Business firms opt for mergers and acquisitions mostly for consolidating a fragmented market

and also for increasing their operational efficiency, which give them a competitive edge. Nations

across the globe have promulgated Mergers and Acquisitions Laws to monitor the functioning of

the business units therein. An estimate made in 2007 put the number of global competition laws

at 106. They possess merger control provisions.

While most mergers and acquisitions increase the operational efficiency of business firms some

can also lead to a building up of monopoly power. The anti-competitive effects are achieved

either through coordinated effects or unilateral effects. Sometimes mergers and acquisitions tend

to create a collusive market structure.

However, free and fair competition is seen to maximize the consumers' interests both in terms of

quantity and price.

Mergers and Acquisitions Laws: the Global Perspective

As per global experience around 85% of acquisitions and mergers are devoid of any competitive

concerns. They get approval within a period of 30 to 60 days.

The remaining percentage of firms usually has a substantially long gestation period for getting

the legal approval. These cases are relatively complex and need a close examination of the

various aspects by the regulatory bodies.

As per the guidelines from “The International Competition Network” simple merger and

acquisitions cases should receive approval within a period of 6 weeks. The comparable time

frame for complex cases is 6 months.

It may be noted that the 'Competition Network' mentioned above is actually an association of

international competition authorities.

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Mergers and Acquisitions Laws: the Indian Perspective

Indian competition law grants a maximum time period of 210 days for the determination of the

combination, which comprises acquisitions, mergers, amalgamations and the like. One needs to

take note of the fact that this stated time frame is clearly distinct from the minimum compulsory

wait period for applicants.

As per the law, the compulsory period of waiting for applicants can either be 210 days starting

from the day of notice filing or receipt of the Commission's order, whichever occurs earlier.

The threshold limits for firms entering business combinations are substantially high under the

Indian law. The threshold limits are set either in terms of the asset value or or in terms the firm's

turnover. Indian threshold limits are greater than those for the EU. They are twice as high when

compared with UK.

The Indian law also provides for the modern day phenomenon of merger and acquisitions, which

are cross border in nature. As per the law domestic nexus is a pre-requisite for notification on

this type of combinations.

It can be noted that Competition Act, 2002 has undergone a recent amendment. This has replaced

the voluntary notification regime with a mandatory regime. Of the total number of 106 countries,

which possess competition laws only 9 are thought to be credited with a voluntary notification

regime. Voluntary notification regimes are generally associated with business uncertainties.

Post-combination, if firms are seen to be involved in anti-competitive practices de-merger shows

the way out.

More on Indian Mergers and Acquisitions Laws

Indian Income Tax Act has provision for tax concessions for mergers/demergers between two

Indian companies. These mergers/demergers need to satisfy the conditions pertaining to section

2(19AA) and section 2(1B) of the Indian Income Tax Act as per the applicable situation.

In case of an Indian merger when transfer of shares occurs for a company they are entitled to a

specific exemption from the capital gains tax under the “Indian I-T tax Act”. These companies

can either be of Indian origin or foreign ones.

24

A different set of rules is however applicable for the 'foreign company mergers'. It is a situation

where an Indian company owns the new company formed out of the merger of two foreign

companies.

It can be noted that for foreign company mergers the share allotment in the merged foreign

company in place of shares surrendered by the amalgamating foreign company would be termed

as a transfer, which would be taxable under the Indian tax law.

Also as per conditions set under section 5(1), the 'Indian I-T Act' states that, global income

accruing to an Indian company would also be included under the head of 'scope of income' for

the Indian company.

25

Mergers and Acquisitions in India - Mergers and Acquisitions across Indian Sectors

The process of mergers and acquisitions has gained substantial importance in today's corporate

world. This process is extensively used for restructuring the business organizations. In India, the

concept of mergers and acquisitions was initiated by the government bodies. Some well known

financial organizations also took the necessary initiatives to restructure the corporate sector of

India by adopting the mergers and acquisitions policies. The Indian economic reform since 1991

has opened up a whole lot of challenges both in the domestic and international spheres. The

increased competition in the global market has prompted the Indian companies to go for mergers

and acquisitions as an important strategic choice. The trends of mergers and acquisitions in India

have changed over the years. The immediate effects of the mergers and acquisitions have also

been diverse across the various sectors of the Indian economy.

Mergers and Acquisitions Across Indian Sectors

Among the different Indian sectors that have resorted to mergers and acquisitions in recent times,

telecom, finance, FMCG, construction materials, automobile industry and steel industry are

worth mentioning. With the increasing number of Indian companies opting for mergers and

acquisitions, India is now one of the leading nations in the world in terms of mergers and

acquisitions.

The merger and acquisition business deals in India amounted to $40 billion during the initial 2

months in the year 2007. The total estimated value of mergers and acquisitions in India for 2007

was greater than $100 billion. It is twice the amount of mergers and acquisitions in 2006.

Mergers and Acquisitions in India: the Latest Trends

Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises was not so

common. The situation has undergone a sea change in the last couple of years. Acquisition of

foreign companies by the Indian businesses has been the latest trend in the Indian corporate

sector.

There are different factors that played their parts in facilitating the mergers and acquisitions in

India. Favorable government policies, buoyancy in economy, additional liquidity in the corporate

26

sector, and dynamic attitudes of the Indian entrepreneurs are the key factors behind the changing

trends of mergers and acquisitions in India.

The Indian IT and ITES sectors have already proved their potential in the global market. The

other Indian sectors are also following the same trend. The increased participation of the Indian

companies in the global corporate sector has further facilitated the merger and acquisition

activities in India.

Major Mergers and Acquisitions in India

Recently the Indian companies have undertaken some important acquisitions. Some of those are

as follows:

Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982

million.

Tata Steel acquired Corus Group plc. The acquisition deal amounted to $12,000 million.

Dr. Reddy's Labs acquired Betapharm through a deal worth of $597 million.

Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million.

Suzlon Energy acquired Hansen Group through a deal of $565 million.

The acquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729

million.

HPCL acquired Kenya Petroleum Refinery Ltd.. The deal amounted to $500 million.

VSNL acquired Teleglobe through a deal of $239 million.

27

International Mergers and Acquisitions

International mergers and acquisitions are growing day by day. These mergers and acquisitions

refer to those mergers and acquisitions that are taking place beyond the boundaries of a particular

country. International mergers and acquisitions are also termed as global mergers and

acquisitions or cross-border mergers and acquisitions.

Globalization and worldwide financial reforms have collectively contributed towards the

development of international mergers and acquisitions to a substantial extent. International

mergers and acquisitions are taking place in different forms, for example horizontal mergers,

vertical mergers, conglomerate mergers, congeneric mergers, reverse mergers, dilutive mergers,

accretive mergers and others.

International mergers and acquisitions are performed for the purpose of obtaining some strategic

benefits in the markets of a particular country. With the help of international mergers and

acquisitions, multinational corporations can enjoy a number of advantages, which include

economies of scale and market dominance.

International mergers and acquisitions play an important role behind the growth of a company.

These deals or transactions help a large number of companies penetrate into new markets fast

and attain economies of scale. They also stimulate foreign direct investment or FDI.

The reputed international mergers and acquisitions agencies also provide educational programs

and training in order to grow the expertise of the merger and acquisition professionals working in

the global merger and acquisitions sector.

The rules and regulations regarding international mergers and acquisitions keep on changing

constantly and it is mandatory that the parties to international mergers and acquisitions get

themselves updated with the various amendments. Numerous investment bank professionals,

consultants and attorneys are there to offer valuable and knowledgeable recommendations to the

merger and acquisition clients.

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Methods of Financing International Mergers and Acquisitions

Usually, the following methods are implemented for funding international mergers and

acquisitions:

Financing (or taking loans)

Cash

Factoring

Hybrid Financing

Significant International Mergers and Acquisitions

Following are the instances of the major international mergers and acquisitions:

The merger of British Petroleum (BP) with Amoco (erstwhile Standard Oil of Indiana)

The acquisition of Mannesmann AG by Vodafone Airtouch PLC

The merger of Exxon with Mobil (The name of the company formed as a result of the

merger is ExxonMobil)

The acquisition of AirTouch Communications by the Vodafone Group

The acquisition of Compaq by Hewlett-Packard

The acquisition of Shell Transport & Trading Company by Royal Dutch Petroleum

Company

The merger of Bank One Corporation with JPMorgan Chase & Company

Factors Affecting International Mergers and Acquisitions

The following elements influence the international mergers and acquisitions from many aspects:

Corporate governance

Company acts

The capacity of average workers

Expectation of the consumers

Political features of a country

Tradition and culture of a country

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Mergers and Acquisitions in Different Sectors

1. Mergers and Acquisitions in Pharmaceutical Sector

There are several causes of mergers and acquisitions in the global pharmaceutical industry.

Among them are the absence of proper research and development facilities, gradual expiry of

patents and competition within specific pharmaceutical genres. The high profile product recalls

have also played a major role in the continuing mergers and acquisitions in the industry.

Mergers and Acquisitions in Indian Pharmaceutical Sector

In the Indian pharmaceutical market there are a number of companies that have entered into

merger and acquisition agreements in the context of the global market scenario. These companies

would be selling off the non-core business divisions like Over-the-Counter. This is expected to

further the consolidation in the mid-tier as far as the pharmaceutical industry in Europe is

concerned.

The sheer number of companies acquiring parts of other companies has shown that the Indian

pharmaceutical industry is ready to be a dominant force in this scenario. In the recent times

Nicholas Piramal has taken the ownership of 17% of Biosyntech that is a major pharmaceutical

packing organization in Canada.

Torrent has got the ownership of Heumann Pharma, a general drug making company and,

formerly, a subsidiary of Pfizer.

Matrix has acquired Docpharma, a major pharmaceutical company of Belgium.

Sun Pharmaceutical Industries is set to make acquisitions in pharmaceutical companies in

the US and has set aside $450 million to execute these plans.

In Bengaluru, Strides Arcolab has aimed at acquiring 70 percent in a pharmaceutical facility

in Italy that is worth $10 million.

Mergers and Acquisitions in European and Asian Pharmaceutical Sector

As per several financial experts, the mergers and acquisitions in the pharmaceutical industry of

Europe and India are meant to go on. In the Indian pharmaceutical scenario the mergers and

acquisitions are supposed to go on a medium term. Factors like the execution of new patent

30

regimen and companies dealing in specific pharmaceutical products are supposed to be the main

driving factors behind the expected continuance of mergers and acquisitions in the Indian

pharmaceutical market.

Opportunities for Pharmaceutical Companies

There are a number of opportunities for the major pharmaceutical products and services

providers in the Indian pharmaceutical sector as the price controls have been relaxed and there

have been significant changes in the medicinal requirements of the Indians. The manufacturing

base in India is also strong enough to support the major international pharmaceutical companies

from the performance perspective.

This may be said as the Indian pharmaceutical market is varied as well as economical. It is

expected that in the coming years the Indian pharmaceutical companies would be executing more

mergers and acquisitions. It is expected that the regulated pharmaceutical markets in the United

States and Europe would be the main areas of operation.

In the recent years the Indian pharmaceutical companies have been venturing into mergers and

acquisitions so that they can gain access to the big names of the international pharmaceutical

scenario.

Patterns of Mergers and Acquisitions in Pharmaceutical Sector

One of the major features of the mergers and acquisitions in the pharmaceutical sector of the

Asia-Pacific region has been the integration of the local pharmaceutical companies. This has

happened especially in India and China. Acquisition has made it convenient for a number of

companies to do business in various pharmaceutical markets.

Previously the pharmaceutical markets of Europe were closed to the companies of other

countries due to the difference in language. There were also other problems for companies like

the trade barriers for instance.

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Figures of Mergers and Acquisitions in Pharmaceutical Sector

As per the figures of mergers and acquisitions in pharmaceutical sector, from the year 2004,

there have been more mergers and acquisitions in the pharmaceutical sector in the Asia-Pacific

region compared to North America. The combined financial value of the mergers and

acquisitions in Asia-Pacific region has been greater than North America.

One of the major merger and acquisition deals in the Asia-Pacific region in the recent years has

been the merger of Fujisawa and Yamanouchi in Japan. This deal was worth $7.9 billion. In the

same period the Asia-Pacific region has experienced the highest percentage of growth in the

mergers and acquisitions in pharmaceutical sector.

In the same period the rate of growth in the Asia-Pacific region has been 37%. In Western

Europe the rate of growth has been 11% and in North America it has been 20%. The

pharmaceutical market in Eastern Europe has not experienced any increase in the rate of mergers

and acquisitions.

Mergers and Acquisitions in Global Pharmaceutical Sector

Since the year 2004 there has been an increase in the mergers and acquisitions in the global

pharmaceutical sector. This was reflective of the increase in the mergers and acquisitions in other

industries at the same period. There was 20% increase in the number of deals, which stood at

1,808. There were eight deals with the value of more than $1 billion. This was three more than

2003.

The total financial value of the deals was $112 billion and this was an increase of 53%.

However, these figures do not include the acquisition of Aventis by Sanofi-Synthelabo that was

worth $60 billion. This is the biggest acquisition in the pharmaceutical industry after the merger

of Pharmacia and Pfizer in 2002.

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2. Mergers and Acquisitions in Banking Sector

About Mergers and Acquisitions in Banking Sector

Mergers and acquisitions in banking sector have become familiar in the majority of all the

countries in the world. A large number of international and domestic banks all over the world are

engaged in merger and acquisition activities. One of the principal objectives behind the mergers

and acquisitions in the banking sector is to reap the benefits of economies of scale.

With the help of mergers and acquisitions in the banking sector, the banks can achieve

significant growth in their operations and minimize their expenses to a considerable extent.

Another important advantage behind this kind of merger is that in this process, competition is

reduced because merger eliminates competitors from the banking industry.

Mergers and acquisitions in banking sector are forms of horizontal merger because the merging

entities are involved in the same kind of business or commercial activities. Sometimes, non-

banking financial institutions are also merged with other banks if they provide similar type of

services.

Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in

the banking sector. They also try to enhance their customer base.

In the context of mergers and acquisitions in the banking sector, it can be reckoned that size does

matter and growth in size can be achieved through mergers and acquisitions quite easily. Growth

achieved by taking assistance of the mergers and acquisitions in the banking sector may be

described as inorganic growth. Both government banks and private sector banks are adopting

policies for mergers and acquisitions.

In many countries, global or multinational banks are extending their operations through mergers

and acquisitions with the regional banks in those countries. These mergers and acquisitions are

named as cross-border mergers and acquisitions in the banking sector or international mergers

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and acquisitions in the banking sector. By doing this, global banking corporations are able to

place themselves into a dominant position in the banking sector, achieve economies of scale, as

well as garner market share.

Mergers and acquisitions in the banking sector have the capacity to ensure efficiency,

profitability and synergy. They also help to form and grow shareholder value.

In some cases, financially distressed banks are also subject to takeovers or mergers in the

banking sector and this kind of merger may result in monopoly and job cuts.

Deregulation in the financial market, market liberalization, economic reforms, and a number of

other factors have played an important function behind the growth of mergers and acquisitions in

the banking sector. Nevertheless, there are many challenges that are still to be overcome through

appropriate measures.

Mergers and acquisitions in banking sector are controlled or regulated by the apex financial

authority of a particular country. For example, the mergers and acquisitions in the banking sector

of India are overseen by the Reserve Bank of India (RBI).

Major Mergers and Acquisitions in the Banking Sector of the United States

Following are some of the important mergers and acquisitions that took place in the banking

sector of the United States:

The merger of Chase Manhattan Corporation with J.P. Morgan & Company. The name of

the new company formed as a result of the merger is J.P. Morgan Chase & Company.

The merger of Firstar Corporation with U.S. Bancorp. The name of the resultant entity is

U.S. Bancorp.

The merger of First Union Corporation with Wachovia Corporation. The name of the

newly formed company is Wachovia Corporation.

The merger of Fifth Third Bancorp with Old Kent Financial Corporation. The name of the

merged company is Fifth Third Bancorp.

The merger of Summit Bancorp with FleetBoston Financial Corporation. The new

company is named FleetBoston Financial Corporation.

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The merger of Golden State Bancorp, Inc. with Citigroup Inc. The name of the newly

formed company is Citigroup Inc.

The merger of Dime Bancorp, Inc. with Washington Mutual and the name of the merged

entity is Washington Mutual.

The merger of FleetBoston Financial Corporation with Bank of America Corporation. The

newly formed entity is Bank of America Corporation.

The merger of Bank One with J.P. Morgan Chase & Company. Name of the new company

is J.P. Morgan Chase & Company.

The merger of SunTrust with National Commerce Financial and the newly formed entity is

also named SunTrust.

The merger of Hibernia National Bank with Capital One Financial Corporation and the

merged entity is known as Capital One Financial Corporation.

The merger of MBNA Corporation with Bank of America and the resultant entity is known

as Bank of America Card Services.

The merger of AmSouth Bancorporation with Regions Financial Corporation and the name

of the newly formed entity is Regions Financial Corporation.

The merger of LaSalle Bank with Bank of America and the new entity formed is called as

Bank of America.

The merger of Mellon Financial Corporation with Bank of New York Company, Inc. and

the newly merged entity is known as Bank of New York Mellon.

35

MERGER STORY OF BANKS IN INDIAYEAR BANK MERGED WITH

1969 Bank Of Bihar State Bank Of India

1974 Krishnaram Baldeo Bank Ltd. State Bank Of India

1976 Belgaum Bank Ltd. Union Bank Of India

1984-85 Lakshmi Commercial Bank Canara Bank

1984-85 Bank Of Cochin State Bak Of India

1985 Miraj State Bank Union Bank Of India

1986 Hindustan Commercial Bank Punjab National Bank

1988 Trader’s Bank Ltd. Bank Of Baroda

1989-90 United Industrial Bank Allahabad Bank

1989-90 Bank Of Tamilnad Indian Overseas Bank

1990-91 Purbanchal Bank Central Bank Of India

1993-94 New Bank Of India Punjab National Bank

1993-94 Bank Of Karad Bank Of India

1995-96 Kasinath Seth Bank State Bank Of India

1996 SCICI ICICI

1997 ITC Classic ICICI

1998 Punjab Co-operative Bank Oriental Bank of Commerce

1998 Anagram Fianance ICICI

1999 Bareilly Corporation Bank Bank of Baroda

1999 Sikkim Bank ltd. Union Bank

2000 Times bank HDFC Bank

2001 Bank of Madura ICICI

2002 Benaras state bank Bank of Baroda

2003 Nedungadi Bank Punjab national Bank

2004 South Gujrat Local Area Bank Bank of Baroda

2004 Global Trust Bank Oriental Bank of Commerce

2005 Bank of Punjab Centurion bank

36

3. Mergers and Acquisitions in Telecom Sector - Telecommunications

Industry mergers and acquisitions

The number of mergers and acquisitions in Telecom Sector has been increasing significantly.

Telecommunications industry is one of the most profitable and rapidly developing industries in

the world and it is regarded as an indispensable component of the worldwide utility and services

sector. Telecommunication industry deals with various forms of communication mediums, for

example mobile phones, fixed line phones, as well as Internet and broadband services.

Currently, a slew of mergers and acquisitions in Telecom Sector are going on throughout the

world. The aim behind such mergers is to attain competitive benefits in the telecommunications

industry.

The mergers and acquisitions in Telecom Sector are regarded as horizontal mergers simply

because of the reason that the entities going for merger or acquisition are operating in the same

industry that is telecommunications industry.

In the majority of the developed and developing countries around the world, mergers and

acquisitions in the telecommunications sector have become a necessity. This kind of mergers

also assists in creation of jobs.

Both transnational and domestic telecommunications services providers are keen to try merger

and acquisition options because this will help them in many ways. They can cut down on their

expenses, achieve greater market share and accomplish market control.

Mergers and acquisitions in the telecommunications sector have been showing a prosperous

trend in the recent past and the economists are advocating that they will continue to do so. The

majority of telecommunication services providers have understood that in order to grow globally,

strategic alliances and mergers and acquisitions are the principal devices.

Private sector investment and FDI (Foreign Direct Investment) have also boosted the growth of

mergers and acquisitions in the telecommunications sector.

37

Over the last few years, a phenomenal growth has been witnessed in the number of mergers and

acquisitions taking place in the telecommunications industry.

The reasons behind this development include the following:

Deregulation

Introduction of sophisticated technologies (Wireless land phone services)

Innovative products and services (Internet, broadband and cable services)

Economic reforms have spurred the growth in the mergers and acquisitions industry of the

telecommunications sector to a satisfactory level.

Mergers and acquisitions in Telecom Sector can also have some negative effects, which

include monopolization of the telecommunication products and services, unemployment

and others. However, the governments of various countries take appropriate steps to curb

these problems.

In countries like India, mergers and acquisitions have increased to a considerable level from the

mid 1990s. In the United States, the mergers and acquisitions in the telecommunications sector

are going on in a full-fledged manner.

The mergers and acquisitions in the telecommunications sector are governed or supervised by the

regulatory authority of the telecommunication industry of a particular country, for instance the

Telecom Regulatory Authority of India or TRAI. The regulatory authorities always keep a tab on

the telecommunications industry so that no monopoly is formed.

Significant Mergers and Acquisitions in Telecom Sector

Following are the important mergers and acquisitions that took place in the telecommunications

sector:

The takeover of Mobilink Telecom by Broadcom. This can also be described as a suitable

example of product extension merger

AT&T Inc. taking over BellSouth

The acquisition of eScription Inc. by Nuance Communications Inc.

38

The taking over of Hutchison Essar by the Vodafone Group. Now it has become

Vodafone Essar Limited

China Communications Services Corporation Ltd. taking over China International

Telecommunication Construction Corporation

The acquisition of Ameritech Corporation by SBC (Southwestern Bell Corporation)

Communications

The merger of GTE (General Telephone and Electronics) with Bell Atlantic

The acquisition of US West by Qwest Communications

The merger of MCI Communications Corporation with Worldcom

Benefits Provided by the Mergers and Acquisitions in the Telecommunications Sector

Following are the benefits provided by the mergers and acquisitions in the telecommunications

industry:

Building of infrastructure in a more convenient way

Licensing options for mergers and acquisitions are often found to be easier

Mergers and acquisitions offer extensive networking advantages

Brand value

Bigger client base

Wide array of products and services

39

Case Study:

MERGER OF

BANK OF

PUNJAB

AND

CENTURIAN BANK

40

BANK OF PUNJAB

It was incorporated on may27, 1994 under the companies act, 1956.

The registered office of the bank was situated at SCO 46-47, sector 9-D, Madhya Marg,

Chandigarh- 160017.

It is banking company under the provisions of regulation act, 1949.

The objects of bank are banking business as set out in its memorandum and articles of

association.

The bank is a new private sector bank in operating for more than 10 years, with a national

network of 136 branches( including extension counters) having a significant presence in

the most of the major banking sectors of the country. The transferor bank offers a host of

banking products catering to various classes of customers ranging from small and

medium enterprises to large cooperates.

The bank is listed on the stock exchange, Mumbai, the national stock exchange of India

limited and the Ludhiana stock exchange.

CENTURION BANK

It was incorporated on june30, 1994 under the companies act, 1956.

The registered office of the Bank was situated at Durga Niwas, Mahatma Gandhi Road,

Panaji, 403001, Goa.

It is a banking company under the provisions of banking regulation act, 1949.

The objectives of transferee bank are banking business as set out in its memorandum and

articles of association.

The bank is a profitable and well capitalized new private sector bank having a national

presence of over 99 branches( including extension counter)

It has a significant presence in the retail segment offering a range of products across

various categories.

The bank is listed on the stock exchange, Mumbai and the National stock exchange of

India limited, Mangalore stock exchange of India limited, Mangalore stock exchange and

its global depository receipts are listed on the Luxembourg stock exchange.

Merger of the two Banks

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The amalgamation of the Transferor bank (BOP) with the transferee bank (centurion) is effected

subject to the terms and conditions embodied in the scheme of merger pursuant to section 44A of

banking regulation act, 1949( hereinafter “the act”). In terms of section 44A of the said act, a

resolution is required to be passed by a majority in number and two-third in the value of the

members of the Transferor and the Transferee Bank, present rather in person or by proxy at the

respective meetings. As both the companies are banking companies, the amalgamation is

regulated by the provisions of the act and would require the sanction of the reserve bank of India

under the said act. The provisions of section 391-394 of the companies’ act, 1956 relating to

amalgamation are not applicable to the amalgamation of the transferor bank with the transferee

bank and therefore the scheme is not be required to be sanctioned by a high court under the

provisions of the companies act, 1956.

About Centurion Bank of Punjab

Centurion bank of Punjab is a new generation private bank offering a wide spectrum of retail,

SME and corporate banking products and services. It has been among the earliest banks to offer

a technology enabled customer interface that provides easy access and superior customer service.

Centurion Bank of Punjab has a nationwide reach through its network of 241 branches and 389

ATMs. The bank aims to serve all the banking and financial needs of its customers through

multiple delivery channels, each of which is supported by state of the art technology architecture.

Centurion Bank of Punjab was formed by the merger of Centurion Bank and Bank of Punjab,

both of which had strong retail franchises in their respective markets. Centurion Bank had a well

managed and growing retail assets business, including leadership positions in two wheeler loans

and commercial vehicles loans and a strong capital base. Bank of Punjab brings with it a strong

retail deposit customer base in North India in addition to a sizable SME and agriculture portfolio.

The shares of the bank are listed on the major stock exchanges in India and also on the

Luxembourg Stock exchange. Among centurion bank of Punjab’s greatest strengths is the fact

that it is a professionally managed bank with a globally experienced and capable management

team. The day to day operations of the bank are looked by Mr. Shilnder bhandari, Managing

Director & CEO, assisted by a senior management team, under the overall supervision and

control of the Board of directors. Mr. Rana Talwar is the chairman of the board. Some of our

42

major shareholders are saber capital, Bank Muscat and Keppel Corporation, Singapore are

represented on the Board.

The book value of the bank would also go up to around Rs 300 crores. The higher book value

should help the combine entity to mobilize funds at lower rate.

The combined bank will be full service commercial bank with a strong presence in the Retail,

SME and Agricultural segments.

Share holding pattern of Centurion Bank of Punjab

After the merger shareholding of Bank of Punjab (BOP) promotes will shrink to 5%. The family

of Darshanjit Singh which promoted Bop currently holds 15.62% while associates hold another

11.40% the promoter stake will now fall down to around 5% ad for associate that would be 7-

8%.

The major shareholder of the centurion bank, bank of Muscat’s stake will fall to 20.5% from

25.91%, Keppel’s stake will be at 9% from current level of 11.33% and Rana Talwar’s capital

will have a stake of 4.4% as against 5.61%.

The promoters of BoP and major stakeholders of centurion bank will have a combine stake of

around 42% in the merged entity- centurion bank of Punjab.

The costs of deposit of Bop were lower than Centurion; While Centurion had a net interest

margin of around 5.8%. The net interest margin of the merged entity will be at 4.8%.

The combined entity will have adequate capital of 16.1% to provide for its growth plans.

Centurion banks capital adequacy on a standalone basis stood at 23.1% while Bank of Punjab

figure stood at 9.21%.

The performance net worth of combined entity as at march 2005 stood at Rs. 696 crores with

centurion’s net worth at Rs. 511 crore and Bank of Punjab’s net worth at Rs. 181 crore, and

combine entity( centurion Bank of Punjab) will have total asset 9395 crore, deposit 7837 crore

and operating profit 43 crore.

43

The merged entity will have a paid up share capital of Rs. 130 cr and a net worth of Rs. 696 cr.

The merged entity will have 235 Branches and extension counters, 382 ATMs and 2.2 million

customers.

MERGER POSITION

Private Banks is taking to the consolidation route in a big way. Bank of Punjab (BOP) and

Centurion Banks (CB) have been merged to form Centurion Bank of Punjab (CBP). RBI

approved merger of Centurion Bank and Bank of Punjab effective from October 1, 2005. The

merger is at swap ratio 9:4 and the combined bank is called Centurion bank of Punjab. The

merger of the banks will have a presence of 240 branches and extension counters, 386 ATMs,

about 2.2 million customers. As on march 2005, the net worth of the combined entity is Rs 696

crore and the capital adequacy ratio is 16.1% in the private sector, nearly 30 banks are operating.

The top five control nearly 65% of the assets. Most of these private sector banks are profitable

and have adequate capital and have the technology edge. Due to intensifying competition, access

to low cost deposits is critical for growth. Therefore, size and geographical reach becomes the

key for smaller banks. The choice before smaller private banks is to merge and form bigger and

viable entities or merge into a big private sector bank. The proposed merger of bank of Punjab

and Centurion Bank is sure to encourage other private sector banks to go for the M&A road for

consolidation.

The merger of Centurion bank and Bank of Punjab, both of which had strong retail franchises in

their respective markets, formed centurion bank of Punjab. Centurion bank had a well managed

and growing retail assets business, including leadership positions in 2 wheeler loans and

commercial vehicle loans, and a strong capital base. Bank of Punjab brings with it a strong retail

deposit customer base in North India in addition to a sizeable SME and agricultural portfolio.

The shares of the bank are listed on the major stock exchanges in India and also on the

Luxembourg stock exchange. Bank of Punjab has net non- performing assets of around Rs

110.45 crore as on March 2004, which will be carried to Centurion Banks books after merger.

Both the brands are strong in their respective geographers and business hence the merged entity

will have the elements of both, he added. Centurion Bank has a presence in south and west and

44

Bank of Punjab has a strong presence in the north. “The merger will give us scale geographical

reach and entry into new products segments” said the official.

Bank of Punjab is strong in small and medium enterprises (ME) business in the north, with good

retail assets and an agriculture portfolio as well as deposit franchisee Centurion Bank has a

capital, ability to generate retail assets, risk management systems and good treasury division.

Market players except the swap ratio 2:1, said sources. For very two stocks of Centurion bank, a

shareholder will get one stock of Bank of Punjab. The merged entity will have a asset base of

Rs.10, 000 crore, said a senior bank official. The depository base of entity will be around Rs.

7165.67 crore and advances will be around Rs. 3909.87 crore. The organization structure for the

combined bank is in place and the grades and incentives across the organization have largely

been realigned. Centurion bank of Punjab said in a statement. ” The operations of the bank have

been integrated across the entire network.”

“A decision has been taken on a common system for the banks and a phased migration has been

planned to ensure minimum disruption of customer service and operation across the bank”’

Centurion Bank of Punjab Said.

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HIGHLIGHTS OF THE MERGER- CENTURION BANK AND BANK OF PUNJAB

Bank of Punjab is merged into Centurion Bank.

New entity is named as “Centurion Bank of Punjab”.

Centurion Bank’s chairman Rana Talwar has taken over as the chairman of the merged

entity.

Centurion bank’s MD Shailendra Bhandari is the MD of the merged entity.

KPMG India pvt ltd and NM Raiji & Co are the independent values and ambit corporate

finance was the sole investment banker to the transaction.

Swap ratio has been fixed at 4:9 that is for every four shares of Rs 10 of Bank of Punjab,

its shareholders would receive 9 shares of Centurion Bank.

There has been no cash transaction in the course of the merger; it has been settled through

the swap of shares.

There is no downsizing via the voluntary retirement scheme.

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In the opinion of the Board of Directors of Bank of Punjab the following are amongst others, the

benefits that are expected to accrue to the members from the proposed scheme:

(a) Financial Capability: The amalgamation is expected to enable the merged entity to have a

stronger financial and business profile, which could be synergized to both for resources and

mobilization and asset generation.

(b) Branch Network: As a result of the amalgamation, the branch network of the merged entity

would increase to 235 branches, providing increased geographic coverage, particular in the

southern India and giving it a larger national foot print as well as convenience to its

customers.

(c) Retail Customer Base: The amalgamation would enable the merged entity to increase its

retail customer base. This larger customer base will provide the merged entity enhanced

opportunities for offering banking and financial services and products and facilitate cross

selling of products and services.

(d) Use of Technology: Post amalgamation, the merged entity would be able to provide through

its branches, ATMs, phone and the internet banking and financial services and products to a

larger customer base, with expected savings in costs and operating expenses.

(e) Larger Size: the larger asset base of the merged entity will put the merged entity amongst the

bigger players in the private sector banking space.

(f) International Listing: The members will become shareholders of an internationally listed

entity which has the advantage of greater access to raising capital.

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BIBLIOGRAPHY

1. Pandey IM,” Financial Management” Vikas Publication Chennai 2001

2. Ramanujam S ,”Merger et al, Issue Implication And Case Laws In Corporate

Restructuring” Tata Mcgraw Hill Publication,2003.

3. Swain B.K.,”Consolidation In The Banking Industry.”

4. Lobana Singh Shelly,”Consolidation In The Banking Industry Through M & As

Corporate Restructuring Widens”

5. http://www.economywatch.com/mergers-acquisitions

6. www.banknetindia.com

7. www.bankindia.com

8. http://www.economywatch.com/mergers-acquisitions/international/recent.html

9. http://en.wikipedia.org/wiki/Mergers_and_acquisitions

10. http://www.investopedia.com/terms/m/merger.asp

11. http://www.investorwords.com/3045/merger.html

12. http://www.beginnersguide.com/accounting/merger-and-acquisitions/what-are-the-

greatest-risks-within-a-mergeracquisition.php

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