TABLE OF CONTENTS

Particulars page no.

1.Introduction

1.1 Mergers and acquisitions

1.2 Mergers and acquisitions in banking sector

2. Literature Review

3.Research Methodology

4.Kotak Mahindra Bank and ING Vysaya Bank merger

5.Analysis

6.Findings.

7.Conclusion

8.Bibliography

9.Annexure

EXECUTIVE SUMMARY

Merger is a combination of two or more companies into one company. The acquiring

company, (also referred to as the amalgamated company or the merged company) acquires

the assets and the liabilities of the target company (or amalgamating company). Typically,

shareholders of the amalgating company get shares of the amalgamated company in exchange

for their shares in the Target Company.

There are two ways which company can grow; one is internal growth and the othe one is external

growth. The intenal growth suffers from drawbacks like the problem of raising adequate finances,

longer implementation time of the projects, uncertain etc. in order to overcome these problems a

company can grow externally by acquiring the already existing business firms. This is the route of

mergers and acquisition.

MERGER AND ACQUISITION

Mergers and acquisitions (M&A) refers to the aspect of corporate strategy, corporate

finance and management dealing with the buying, selling and combining of different

companies that can aid, finance, or help a growing company in a given industry grow

rapidly without having to create another business entity. An acquisition, also known as a

takeover or a buyout, is the buying of one company (the ‘target’) by another. The

acquisition process is very complex and various studies shows that only

50% acquisitions are successful. An acquisition may be friendly or hostile. In a friendly

takeover a company’s cooperate in negotiations. In the hostile takeover, the takeover target

is unwilling to be bought or the target's board has no prior knowledge of the offer.

Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes,

however, a smaller firm will acquire management control of a larger or longer established

company and keep its name for the combined entity. This is known as a reverse takeover.

Although merger and amalgamation mean the same, there is a small difference between the

two. In a merger one company acquires the other company and the other company ceases

to exist. In an amalgamation, two or more companies come together and form a new

business entity.

MERGERS - A merger is a combination of two companies into one larger

company, which involves stock swap or cash payment to the target.

ACQUISITION - When one company takes over another and clearly established

itself as the new owner, the purchase is called an acquisition.

CLASSIFICATIONS OF MERGERS

Horizontal merger – is the merger of two companies which are in produce of

Same products.This can be again classified into large horizontal merger and

Small horizontal merger.Horizontal merger helps to come over from the competition

between two companies merging together strengthens the company to compete with

other companies. Horizontal merger between the small companies would not effect the

industry in large. But between the larger companies will make an impact on the economy

and gives them the monopoly over the market. Horizontal mergers between the two

small companies are common in India. When large companies merging together we

need to look into legislations which prohibit the monopoly.

Vertical merger – If a merger between two companies producing different

goods or services for one specific finished product. Vertical merger takes between the

customer and company or a company and a supplier. IN this a manufacture may merge

with the distributor or supplier of its products. This makes other competitors difficult to

access to an important component of product or to an important channel of

distribution which are called as "vertical foreclosure" or "bottleneck" problem.

Vertical merger helps to avoid sales taxes and other marketing expenditures.

Market-extension merger - is a merger of two companies that deal in same

products in different markets. Market extension merger helps the companies to

have access to the bigger market and bigger client base.

Product-extension merger – takes place between the two or more companies

which sells different products but related to the same category. This type of

merger enables the new company to go in for a pooling in of their products so

as to serve a common market, which was earlier fragmented among them. This

merger is between two companies that sell different, but somewhat related

products, in a common market. This allows the new, larger company to pool

their products and sell them with greater success to the already common market

that the two separate companies shared. The product extension merger allows

the merging companies to group together their products and get access to a

bigger set of consumers. This ensures that they earn higher profits.

Conglomeration - Two companies that have no common business areas. A

conglomeration is the merger of two companies that have no related products or

markets. In short, they have no common business ties. Conglomerate merger in

which merging firms are not competitors, but use common or related production

processes and/or marketing and distribution channels. Co generic merger:

Merger between firms in the same general industry but having no Mutual

buyer-seller relationship, such as a merger between a bank and a leasing

company.

Purchase mergers - this kind of merger occurs when one company purchases

another. The purchase is made with cash or through the issue of some kind of

debt instrument; the sale is taxable. Acquiring companies often prefer this type

of merger because it can provide them with a tax benefit. Acquired assets can

be written-up to the actual purchase price, and the difference between the book

value and the purchase price of the assets can depreciate annually, reducing

taxes payable by the acquiring company.

Consolidation mergers - With this merger, a brand new company is formed and

both companies are bought and combined under the new entity. The tax terms are

the same as those of a purchase merger. A unique type of merger called a reverse

merger is used as a way of going public without the expense and time required

by an IPO. Accretive mergers are those in which an acquiring company's

earnings per share (EPS) increase. An alternative way of calculating this is if a

company with a high price to earnings ratio (P/E) acquires one with a low P/E

1.2 MERGER AND ACQUISITION IN BANKING SECTOR

PROCEDURE OF BANK MERGERS AND AQUISITIONS

• The procedure for merger either voluntary or otherwise is outlined in the respective state statutes/ the Banking regulation Act. The Registrars, being the authorities vested with the responsibility of administering the Acts, will be ensuring that the due process prescribed in the Statutes has been complied with before they seek the approval of the RBI. They would also be ensuring compliance with the statutory procedures for notifying the amalgamation after obtaining the sanction of the RBI.

• Before deciding on the merger, the authorized officials of the acquiring bank and the merging bank sit together and discuss the procedural modalities and financial terms. After the conclusion of the discussions, a scheme is prepared incorporating therein the all the details of both the banks and the area terms and conditions. Once the scheme is finalized, it is tabled in the meeting of Board of directors of respective banks. The board discusses the scheme threadbare and accords its approval if the proposal is found to be financially viable and beneficial in long run.

• After the Board approval of the merger proposal, an extra ordinary general meeting of the shareholders of the respective banks is convened to discuss the proposal and seek their approval.

• After the board approval of the merger proposal, a registered valuer is appointed to valuate both the banks. The valuer valuates the banks on the basis of its share capital, market capital, assets and liabilities, its reach and anticipated growth and sends its report to the respective banks.

• Once the valuation is accepted by the respective banks, they send the proposal along with all relevant documents such as Board approval, shareholders approval, valuation report etc to Reserve Bank of India and other regulatory bodies such Security & exchange board of India (SEBI) for their approval.

After obtaining approvals from all the concerned institutions, authorized officials of both the banks sit together and discuss and finalize share allocation proportion by the acquiring bank to the shareholders of the merging bank (SWAP ratio)

• After completion of the above procedures, a merger and acquisition agreement is signed by the bank.

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 empower Reserve Bank to formulate a scheme with regard to merger and amalgamation of banks, the State Governments have incorporated in their respective Acts a provision for obtaining prior sanction in writing, of RBI for an order, inter alia, for sanctioning a scheme of amalgamation or reconstruction .

The request for merger can emanate from banks registered under the same State Act or from banks registered under the Multi State Co-operative Societies Act (Central Act) for takeover of a bank/s registered under State Act. While the State Acts specifically provide for merger of co-operative societies registered under them, the position with regard to take over of a co-operative bank registered under the State Act by a co-operative bank registered under the CENTRAL

Although there are no specific provisions in the State Acts or the Central Act for the merger of a co-operative society under the State Acts with that under the Central Act, it is felt that, if all concerned including administrators of the concerned Acts are agreeable to order merger/ amalgamation, RBI may consider proposals on merits leaving the question of compliance with relevant statutes to the administrators of the Acts. In other words, Reserve Bank will confine its examination only to financial aspects and to the interests of depositors as well as the stability of the financial system while considering such proposals.

. RESEARCH METHODOLOGY

OBJECTIVES

To study the purpose of mergers and acquisitions in the Banking sector

To study the benefits of mergers and acquisitions.

To understand Bank merger/amalgamation under various Acts

To study the changes in the Indian Banking Scenario.

To study the Procedure of Bank Mergers and Acquisitions

To study the motives behind consolidation in the Banking sector.

To study the risk involved in merger and acquisition.

To study the HR issues during merger and acquisition.

To understand the challenges and opportunities in the Indian Banking Sector.

To study the major Banks involved in Mergers and

Acquisitions. Case Study on the Merger of ICICI Bank and Bank of Rajasthan.

DATA COLLECTION

The analysis is purely based on the secondary data.

Secondary Research based on: Business Magazines Internet Sources Finance books

RISKS IN BANK MERGERS AND ACQUISITIONS

When two banks merge into one then there is an inevitable increase in the size of the organization. Big size may not always be better. The size may get too widely and go beyond the control of the management. The increased size may become a drug rather than an asset.

Consolidation does not lead to instant results and there is an incubation period before the results arrive. Mergers and acquisitions are sometimes followed by losses and tough intervening periods before the eventual profits pour in. Patience, forbearance and resilience are required in ample measure to make any merger a success story. All may not be up to the plan, which explains why there are high rate of failures in mergers.

Consolidation mainly comes due to the decision taken at the top. It is a top-heavy decision and willingness of the rank and file of both entities may not be forthcoming. This leads to problems of industrial relations, deprivation, depression and demotivation among the employees. Such a work force can never churn out good results. Therefore, personal management at the highest order with humane touch alone can pave the way.

The structure, systems and the procedures followed in two banks may be vastly different, for example, a PSU bank or an old generation bank and that of a technologically superior foreign bank. The erstwhile structures, systems and procedures may not be conducive in the new milieu. A thorough overhauling and systems analysis has to be done to assimilate both the organizations. This is a time consuming process and requires lot of cautions approaches to reduce the frictions.

There is a problem of valuation associated with all mergers. The shareholder of existing entities has to be given new shares. Till now a foolproof valuation system for transfer and compensation is yet to emerge.

Further, there is also a problem of brand projection. This becomes more complicated when existing brands themselves have a good appeal. Question arises whether the earlier brands should continue to be projected or should they be submerged in favour of a new comprehensive identity. Goodwill is often towards a brand and its sub-merger is usually not taken kindly.

KOTAK MAHINDRA AND ING VYSAYA BANK

About Kotak Mahindra Bank Limited (Kotak)

Kotak Mahindra Bank is an Indian private sector banking headquartered in Mumbai, Maharashtra, India. In February 2003,Reserve Bank of India (RBI) gave the licence to Kotak Mahindra Finance Ltd., the group's flagship company, to carry on banking business.

It offers a wide range of banking products and financial services for corporate and retail customers through a variety of delivery channels and specialized subsidiaries in the areas of personal finance, investment banking, life insurance, and wealth management.

As of 30 September 2014, Kotak Mahindra Bank has a network of 641 branches and over 1,159 ATMs spread across 363 locations in the country. Kotak Mahindra bank has received rave reviews from many customers and has been presented many awards by various bodies in India.  The bank, before its merger with ING Vysya, had around 29,000 employees.] In 2014, it was the fourth largest private bank in India by market capitalization

HISTORY

Kotak Mahindra group, established in 1985 by Uday Kotak, is one of India’s leading financial services conglomerates. In February 2003, Kotak Mahindra Finance Ltd. (KMFL), the Group’s flagship company, received a banking licence from the Reserve Bank of India (RBI). With this, KMFL became the first non-banking finance company in India to be converted into a bank – Kotak Mahindra Bank Limited (KMBL).

In a study by Brand Finance Banking 500, published in February 2014 by the Banker magazine (from The Financial Times Stable), KMBL was ranked 245th among the world’s top 500 banks with brand valuation of around half a billion dollars ($481 million) and brand rating of AA+. KMBL is also ranked among the top 5 Best Ranked Companies for Corporate Governance in IR Global Ranking.

ABOUT ING VYSYA BANK

ING Vysya Bank was a privately owned Indian multinational bank based in Bangalore, with retail, wholesale, and private banking platforms formed from the 2002 purchase of an equity stake in Vysya Bank by the Dutch ING Group. This merger marks the first between an Indian bank and a foreign bank.[3] Prior to this transaction, Vysya Bank had a seven-year-old strategic alliance with erstwhile Belgian bank Banque Bruxelles Lambert, which was also acquired by ING Group in 1998.

As of March 2013, ING Vysya is the seventh largest private sector bank in India with assets totaling ₹54836 crore (US$8.1 billion) and operating a pan-India network of over 1,000 outlets, including 527 branches, which service over two million customers.[1][4] ING Group, the highest-ranking institutional shareholder, currently holds a 44% equity stake in ING Vysya Bank, followed by Aberdeen Asset Management, private equity firm ChrysCapital, Morgan Stanley, and Citigroup, respectively.[5]

ING Vysya has been ranked the "Safest Banker" by the New Indian Express and among "Top 5 Most Trusted Private Sector Banks" by the Economic Times.[6]

On 20 November 2014, in an all stock amalgamation, ING Vysya Bank decided to merge with Kotak Mahindra Bank, creating the fourth largest private sector bank in India.[7] On 1 April 2015, the Reserve Bank of India approved the merger.[8]

HISTORYEstablished in 1930s, Vysya Bank was formally incorporated in the city of Bangalore, Karnataka. The state of Karnataka is known as the "cradle of Indian banking" due to the region's bygone banking relationship with several European East India Companies during the 17th, 18th and 19th centuries. Seven of the country's leading banks (Canara Bank,Syndicate Bank, Corporation Bank, Vijaya Bank, Karnataka Bank, State Bank of Mysore, and ING Vysya Bank) were originally established in Karnataka.[9]

From the 1930s through the 1950s, Vysya Bank built its banking business organically in southern India. The bank concentrated on serving the Vysya community, a merchant/trading community operating across Karnataka and Andhra Pradesh.[3] In 1958, the bank was licensed by the Reserve Bank of India (RBI) to expand its banking operations nationwide. In 1972, the RBI upgraded Vysya Bank to a national B class bank.

In 1987, Vysya Bank established two independently operating subsidiaries providing equipment leasing and home mortgaging services (Vysya Bank Leasing Ltd and Vysya Bank Housing Finance Ltd, respectively). In 1994, Vysya Bank began marketing several innovative financial products to the fast-growing Indian middle-class segment.

The DealThe proposed merger is an all stock merger. 1000 shares of Rs.10 each of ING Vysya will receive 725 shares of Rs.5 each of Kotak Mahindra Bank.

This exchange ratio indicates an implied price of Rs.790 for each ING Vysya share based on the average closing price of Kotak shares during one month to November 19, 2014, which is a 16% premium to a like measure of ING Vysya market price. The proposed merger will result in issuance of approximately 15.2% of the equity share capital of the merged Kotak.

If we calculate the premium as on 01/12/2014:

Price of 1 share of Kotak Mahindra Bank Rs. 1200

Therefore the price of 725 shares Rs. 8,70,000

Price of 1 share of ING Vysya Bank Rs. 834

Price of 1000 shares Rs. 8,34,000

Premium to shareholders will be Rs.36,000 which is 4.31%

Shareholding Pattern

Rationale of the Merger

1. Revenue Synergies & cost efficiency:o Less need for branch expansion.o Save on product introduction costs.o Origination cost savings – higher throughput of products through network.o Save on overlap of infrastructure.

2. Benefits to Employees:o Experience, expertise and diversity of employees is a significant asset for ING Vysyao ING Vysya employees will have growth opportunities across Kotak group.o Kotak employees would be part of a larger and deeper pan India franchise.

The employees of ING Vysya will also be at benefit as Mr Kotak has announced that there will be no drastic job cuts post-merger. Employees are the major concern in the service industry. As the employees will be satisfied, there will be no post-merger difficulties.

3. To Customers:o ING Vysya’s diverse customer segments with more than 2 million customers, will now have access

to Kotak’s wide product suite across financial services.

Particulars ING Vysya Kotak Kotak

(Merged)

Branches (nos) 573 641 1214

ATMs (nos) 635 1159 1794

Employees (nos) 10,591 29,220 39,811

Customers (millions) 2 8 10

After the acquisition, the prevailing interest rate of the acquiring bank is applicable on all savings accounts. So the account holders of the acquired bank could gain if the rate is higher than that offered by their existing bank. Since ING Vysya offers a 4 per cent annual interest rate and Kotak Mahindra gives 6 per cent for a balance of over Rs 1 lakh, the ING Vysya account holders stand to gain. For a balance of up to Rs 1 lakh, they can earn an interest rate of6 per cent per annum now.

4. Wider Coverage and Balanced Footprint:

Branch Density Complementary in Key Cities Branches

ING Vysya1 Kotak Kotak

(Merged)

West 12% 46% 30%

North 20% 34% 27%

South 64% 15% 38%

East 4% 5% 5%

Total 573 641 1,214

If we go through the table of branch density, number of branches of ING Vysya are more in South Region. As far as Kotak Mahindra is concerned it has less number of branches in South Region whereas branch density in west and North Region is more. The merger would give Kotak Mahindra a wider coverage and balanced footprint in three regions.

Financial Comparison of Kotak Mahindra Bank:

(Rs. In crores)

Particulars 2013-2014

2013-14 ( Merged)

Percentage increase

Net Total Income 10,923 13,576 24.29%

Profit After Tax   2,465   3,169 28.56%

Comparison for half yearly results for FY 2015:

                                                                                                                   (Rs. In crores)

Particulars H1FY15 H1FY15 ( Merged)

Percentage increase

Net Total Income 6,617 8,057 21.76%

Profit After Tax 1,416 1,740 22.88%

It seems that in both of the cases, the percentage of Increase in PAT is more than Net Total Income.

After announcement of merger share price Of Kotak Mahindra Bank rose from Rs.1078 to Rs.1200 and the share price of ING Vysya increased from Rs.728 to Rs.816.