Merger and Acquisition of Banking Industry

8/12/2019 Merger and Acquisition of Banking Industry

1/34

1

PROJ ECT

ON

DISSERTATION TOPIC

PREPARED BY

SUMAN PAUL

Roll NO.- 08FC116

BATCH- 2008-10

UNDER THE GUIDENCE OF

Prof.TUSHAR RANJAN PANIGRAHI


2/34


3/34

3

DECLARATION

I, SUMAN PAUL student of PGPFC Programme (Batch: 2008-10) ofInstitute of Management and Information Science happily declare that I

have successfully completed my Dissertation project on MERGER AND

ACQUISITION IN BANKING INDUSTRY under the guidance of Prof.

Tushar Ranjan Panigrahi. The project on which I am assigned is a

analysis based project. The recent changes in Indian banking sector,

especially after LPG came in Indian economy. So many changes that we

have witnessed. One of them is Merger and Acquisition in Indianbanking Industry. The report is exclusively and comprehensively

prepared by me. All the information and data has given in the report

being collected in the process of fieldwork and from different websites

and magazines.

Date:

Place:

Name: Suman Paul

Institute of Management and Information Science


4/34

4

ACKNOWLEDGEMENT

It is a great honour for me that I have been granted with an opportunity toexperience the financial battlefield in terms of the Dissertation. I hadenormous knowledge as well as adaptability of circumstance in due coursewhich has helped me to overcome the hurdles and realize the scenario. Ialso got the valuable support and guidance of the professorsfrom theinstitute and I am extremely thankful to them for providing me with theirprecious time. Above all, I am grateful to the institution where I amstudying namelyInstitute of Management Information Science,Bhubaneswar.

My sincere thanks goes to the following personnel:

Prof. Tushar Ranjan Panigrahi (Guide).

Prof. S. P. Mohapatra .

Prof. P.H. RAO.


5/34

5

ABSTRACT

The main focus of this study isto analyze economical, commercial,

financial impact of the banking sector at both season pre-merge and

post-merge season. The study consist with the reason behind the mergeup, the criteria, the changes in share prices, balance sheet items, changes

in income, profitability etc. The study has been developed on the basis of

authentic figures taken from various sources. The study also give a record

of merger and acquisition of different banks at different time. This study

also covers the swot analysis of bank Merger.


6/34

6

OBJECTIVE

The main object of this project is to analyze the performance of banks

before and after merge up with another bank. To analyze its changes in

profitability, ROE, changes in share prices, Revenue generation pattern,operational efficiency, product pattern, Changes in shareholding pattern,

functional changes etc. This study also shows how the Basel IInorms has

been applicable when Merger and Acquisition has take place. What is the

future outlook of Merger and Acquisition its also can be known through

this study.

SCOPE

This kinds of project gives knowledge of any particular object through

different dimensions. Because Merger and Acquisition makes a rapid

changes of two different companies, two different brand. It gives a new

face to that organization. So the data whatever has been given it has been

extracted from various but authentic sources. This topic is completely

different from other topic and design on a generalized form. It gives me

the opportunity to know in depth about Banking.

LIMITATION

This project also draws some limitations. Some important data which was

very much crucial was not available in websites where it should be. Like

share prices of the acquired company or delisted company was not

available in the nse websites. So the comparison has been limited into

interfarm comparison. Side by side the ROE, Balance Sheet of the

acquired company is also absent.


7/34


8/34

8

India (SBI). Also that year, Indias Central Bank, the Reserve Bank of

India began its operations.

2. POST INDEPENDENCE PERIOD:

After the independence, RBI was given extensive regulatory authority

over commercial banks of India. In 1959, the SBI obtained the state

owned banks of eight former princely states. Ten years later, i.e. July

1969, roughly 31% of scheduled banks all over India was controlled

by govt. as part of the SBI. In the first phase of financial reforms, in

July 1969, the govt. nationalized all banks with nationwide deposits

exceeding Rs. 500 million.

Since 1969, over 58000 bank branches were opened in India;

Between 1969 and 1980, the number of private banks branches grew

more quickly than those of public banks.

The share of private bank branches stayed fairly constant from 1980

to 2000.

The present structure of Indian Banking scenario is as follows:

Public Sector Banks

Nationalized Banks (19).

State Bank group (8).

Other Private sector Banks (1).

Old Private Banks (20).

New Private Banks (9).

Foreign Banks (31). Scheduled Urban Co-operative Banks (55).


9/34


10/34

10

phenomenon of consolidation and convergence, the report of thecommittee on banking sector reforms (Chairman: Shri M. Narasimhan)had suggested mergers among strong banks, both in the public and privatesectors and even with financial institutions and NBFCs.

It is understood that there has been mergers in all the categories of banks(private sector & public sector). In the case of public sector banks, themain motive has been to merge with the weak bank. In the case of privatesector banks, the motives have been varied. The history has beenrewritten with the merger of ICICI Bank and Bank of Madura, theprofitmaking banks.

Rationale for Mergers and Consolidation in Banking Sector:

The principal economic rationale for a merger is that the value of the

combined entities is expected to be greater than the sum of the

independent values of the merging entities to reap the following benefits,

1. Cost benefits -economies of scale, organizational efficiency,Funding, costs and risks diversification,

2. Revenue benefits -economies of scale, enhancing monopoly rents,

3.Economic conditions mergers after business crises or after theupswing of the Business cycle to initiate strategies.

4. Other consideration -private managerial benefits, defense against

Takeover, etc.Further there is variety of reasons to induce merger

proposals. Some of them are 1. Synergy 2. Tax considerations, 3.

Economies of scale in operations 4. Diversification etc.


11/34

11

Significance of the study:

Banking is the most important component of the Indian financial system.The recent South-East Asian crisis and the earlier economic turmoil in

several developing nations demonstrated that strong banking systems arecritical for sound economic growth. It is important to improve thecompetitiveness and quality of the banking system to bring aboutefficiency in the performance. Merger taking place in India are in linewith the trend of consolidation that has characterized the financial servicesindustry and, in particular, the banking industry. The world over, bankshave been merging at a furious pace, driven by the urge to gain synergiesin their operation, derive economies of scale and offer one-stop facilities

to a more demanding clientele. Hence the desire to grow quickly throughmergers rather than through the slow and tortuous path of normalexpansion in business. Merger seems to lead to financial and strategicgrowth. The financial and strategic management aspect of merger is to beanalyzed from several bases. The present study evaluated financialimplications before and after mergers in the banking industry. Further, thereaction of security prices to announcement of M & A decisions are alsostudied.

Need of the Study:

Survival is the ultimate objective of any organization and Mergers andAcquisitions is one form of survival strategy. The fastest way to mergers,acquisitions, takeover etc, is the combination of firms. Indian governmentconsistently has put forward planned efforts to achieve higher economicgrowth. While Income Tax Act 1961carries some incentives to themerged firms, Indian Companies 1956 provides the procedure for

amalgamation. The merger has drawn the attention of probably allprofessionals, consultants, finance managers, bankers and merchantbankers who provide guidance and know-how to corporate clients.

At the same-time, Indian enterprises work under competition fromMNCs. This possess serious problem to all industries including banking


12/34

12

sector. Their reorganization through M&A could help them to re-establish themselves to operate as viable units of optimal size. Therefore,the success of reorganization is to be critically studied. This study seeks toexplore successfulness of Mergers & Acquisitions after merger efforts in

banking sector.

Scope of the Study:

The proposed study is limited to a select sample of banking companieswho were involved in Mergers & Acquisitions during the period of 1998-2004. It is proposed to compare the performance of these companiesduring three years before and after the period of Mergers and

Acquisitions. The first part of this study evaluates the implications ofMergers and Acquisitions from the financial point of view. The secondpart of this study investigates the adjustments of stock prices to theannouncement of mergers/ acquisitions.

Research Problem:

The present research down sized to major problems in the form ofresearch gaps through the exploration of extensive research reviews. In allinternational literature they fail to identify the factors influencing M&A ofbanks. The predominant factors which create target and source banks forthe M&A were also not discussed in the literature works. It is alsoidentified that the national and international literature did not specify theoscillation of secondary data for a particular period of pre and post-merger periods. The share price movements in the public issues were alsonot noticed very meticulously in the literature survey the another problemencounter in the study is how the twining system of M&A which pairs

target banks and source banks. These researchgaps lead to the followingobjectives of the study.


13/34

13

Objectives of the Study:

The following are the main objectives of theresearch using secondarydata:

1.)To study the predominant factors influencing M&A of banks inIndian banking scenario.

2.)To analyse the M&A of public sector banks with pre and postperiods of M&A.

3.)To examine the M&A process private sectors banks with pre andpost periods of M&A.

4.)To develop an index model to ascertain M&A situation in general in

Indian banking scenario.5.)To offer suggestion and recommendation for the effectivefunctioning of bank after M&A.

Methodology:-

This study based on secondary data alone. Two public sector and privatesector banks and M&A scenario in the pre and post periods of six yearsare taken up as radical data in which pre merger three years and postmerger three years in particular two public sector merger and two privatesector merger in a particular period 2005-2006 are taken up for theanalysis.

Data Analysis:

The following mathematical and statistical tools are used to develop anindex model to study the factors influencing M&A.

Multiple regression analysis as well as linear probabilistic methods likeLi+Ri =Di.

The status QUO equilibrium characterized by loan rates and loanmarket share are used to under pin the main reason for M&A.Pair Z test and Test are also used to Find the significant difference in premerge &post merger periods.


14/34

14

Limitations of the Study:

This study is a descriptive analysis of financial performance and shareprice reaction to sample banks. While carrying on this study, theresearcher has observed certain limitation to cope up with the study.

1. The study is based on secondary data and is confined to bankingsector, only hence no comparison with other sectors was made2. There is an acute deficiency with reference to M&A in India. TheCMIE is one of the agencies, which has been publishing data on M&A in

India on a regular basis. Hence, the data from CMIE are used in thisstudy.

The relationship between targetbanks and source banks are establishedthrough the reserve channel denoted by kn are also exploited to identifythe analytical reason for liquidity.

CASE ANALYSIS

In this case, Dr. Pamarty has discussed about the significance andimportance of Merger and Acquisition of various banking industry.Mergerand acquisition of Indian banking has occupied an important placeamongst the personnel and policy-makers of banking system in recentyears, as a sequel to economic reforms to bring in equilibrium sandstability in the banking industry. Whether it is merger and acquisition inthe free markets or consolidation in the international markets, theunderlying objective is similar. Mergers have been considered as a

possible avenue for improving the structure and efficiency of the bankingindustry.merger is that the value of the combined entities is expected to be greaterthan the sum of the independent values of the merging entities to reap thefollowing benefits, Cost benefits economies of scale, organizationalefficiency, Funding, costs and risks diversification, Revenue benefits -


15/34


16/34

16

Regulatory intervention- To protect depositors, and prevent the de-stabilization of

the financial services sector, the RBI steps in to force the merger of a distressed

bank.

A SWOT Analysis of MERGER and ACQUISITION in INDIAN

BANKING INDUSTRY:

STRENGTH:

Liquidity

Sound Banking System

WEAKNESS:

Competition from foreign Banks High cost of intermediation.

High level of fragmentation

Lack of product differentiation.

Low penetration.

No competition at international level.

OPPORTUNITIES:

Advance Technology.

Basel norms

Cost cutting.

Enhancement in risk absorption abilities.

Enlarged customer base.

Geographical spread. Growth in less time.

Improvement in operational efficiency.

Maturing corporate sector.

Product Diversification.


17/34

17

Tax Shield.

THREATS:

Alignment of technology.

Assimilation of systems and processes.

Customer dissatisfaction.

Integration of people.

Marginalization of small customer.

Regulatory hurdles

Rise of Monopolistic structure.

BANK MERGERS AND ACQUISITIONS IN INDIA SINCE BANK

NATIONALISATION:

YEAR BIDDER BANK TARGET BANK

1969 STATE BANK OF INDIA Bank of Bihar

1970 STATE BANK OF INDIA National Bank of Lahore

1971 Chartered Bank Eastern Bank

1974 STATE BANK OF INDIA KrishnaramBaldeo Bank

Ltd.

1976 Union Bank Belgaum Bank

1984-85 Canara Bank Lakshmi Commercial bank

1984-85 STATE BANK OF INDIA Bank of Coachin

1986 Union Bank of India Miraj State Bank

1986 Punjab National Bank Hindustan Commercial

Bank1988 Bank of Baroda Traders Bank ltd.

1989-90 Allahabad Bank United Industrial Bank

1989-90 Indian Overseas Bank Bank of Tamilnadu

1989-90 Indian Bank Bank of Thanjavur

1989-90 Bank of India Parur Central Bank


18/34

18

1990-91 Central Bank of India Purbanchal Bank

1993-94 Punjab National Bank New Bank of India

1994 Bank of India Bank of Karad

1995-96 STATE BANK OF INDIA Kashinath Seth Bank

1997 Oriental Bank of Commerce Punjab Co-operative Bank

1997 Oriental Bank of Commerce Bari Doab Bank

1998 Bank of Baroda Bareilly Corporation Bank

1999 Union Bank of India Sikkim Bank

1999 HSBC British Bank of Middle East

1999 HDFC Bank Times Bank

2000 ICICI Bank Bank of Madura

2001 Bank of Baroda Benaras State Bank

2001-02 Standard Chartered Bank Grindlays Bank2002 Punjab National Bank Nedungadi Bank

2004 Oriental Bank of Commerce Global Trust Bank

2004 Bank of Baroda South Gujrat local Area

Bank

2005 Centurion Bank Bank of Punjab

2005 Centurion Bank of Punjab Lord Krishna Bank

2006 Federal Bank Ganesh Bank of Kurundwad

2006 IDBI Bank ltd. United Western Bank

2007 Indian Overseas Bank Bharat Overseas Bank

2007 ICICI Bank Ltd. The Sangli Bank Ltd.

2008 HDFC Bank Centurian Bank of Punjab

2008 State Bank of India State Bank of Saurashtra

Key M A Deals 2000 onwards: Some Case Studies

The cases chosen for the purpose of this study were selected based on

their prominence and recency (all post-2000) to ensure that the motivesdriving the deals will remain relevant in the current context.


19/34


20/34

20

In addition, there was a possibility of reorienting its asset profile to

enable better spreads and create a more robust micro-credit system post

merger.

BoM wanted a (financially and technologically) strong private sectorbank to add shareholder value, enhance career opportunities for its

employees and provide first rate, technology-based, modern banking

services to its customers.

enefits

The branch network of the merged entity increased from 97 to 378,

including 97 branches in the rural sector.9The Net Interest Margin

increased from 2.46% to 3.55 %. The Core fee income of ICICI almostdoubled from Rs 87 crores to Rs 171 crores. IBL gained an additional

1.2 million customer accounts, besides making an entry into the small

and medium segment. It possessed the largest customer base in the

country, thus enabling the ICICI group to cross-sell different products

and services.

Drawbacks

Since BoM had comparatively more NPAs than IBL, the CapitalAdequacy Ratio of the merged entity was lower (from 19% to about

17%). The two banks also had a cultural misfit with BoM having a trade-

union system and IBL workers being young and upwardly mobile,

unlike those for BoM. There were technological issues as well as IBL

used Banks 2000 software, which was very different from BoM's ISBS

software. With the manual interpretations and procedures and the lack

of awareness of the technology utilization in BoM, there were hindrancesin the merged entity.

Oriental Bank of Commerce Acquires Global Trust Bank Ltd (August

'04)


21/34


22/34

22

Liabilities =Rs. 12073 crore.

Equity market capitalization of Rs. 2466 cr.

Equity volatility of 0.748

Asset worth Rs. 13,249 crore with volatility 0.15.

Assets were 9.7% more than liabilities.

Has leveraged of 5.37 times.

PRE MERGER STATUS OF BANK OF MADURA

Liabilities =Rs. 4444 crore.Equity market capitalization =Rs. 100 cr.

Equity volatility =0.69

Assets are worth Rs. 4095 crore with a volatility of 0.02

Assets are Rs. 350 crore less than liabilities.

Total Assets of the merged entity were to the tune of Rs. 17,345 cr. Andthe liabilities were Rs. 16,517 cr. So the merged entity required

approximately Rs. 800 cr. Of fresh equity capital so that their assets were

at least 10% ahead of liabilities.

Estimated market capitalization of the merged came out to be

approximately Rs. 2500 crore which was almost very near to the market

capitalization of the ICICI bank i.e. Rs. 2466 cr. Before merger. This

kind of merger was a politically easier alternative for the RBI when closingdown BoM. The shareholders of ICICI Bank have paid a non-zero fee

for the BoM. Hence, the merger was very feasible for BoM and was a

problem for ICICI Bank. But the merger of ICICI Bank and BoM ltd.,

has proved to be advantageous to ICICI Bank. In the process, ICICI


23/34

23

Bank gained a larger balance sheet size, enhance branch network,

increased customer base with cross selling, increased threshold to

financing SMEs segment and an expanding agro based lending and micro

credit. The merger too has taken up the customer accounts to 32 lakhs

with an addition of 12 lakhs customer base.

IMPLEMENTATION OF BASEL II NORMS:

The fundamental question is, would it be possible to have a dual

approach to Basel II, which requires bigger banks having international

presence to adopt Basel II guidelines, while permitting smaller banks to

continue under Basel I? From the perspective of regulation and

supervision, RBI has been safeguarding depositors Interest and ensuringstrong risk management visa-vis payments, clearing and settlement

systems. RBI has already put in place Prudential Supervisory Reporting

System, covering all vital aspects and a wide range of indicators, which

serve as an early warning signal as well. Macro-Prudential Indicators

(MPIs) are being compiled since March 2000 with a view to collecting

data from various reports that are received in the regulatory and

supervisory wings of the bank. The MPIs covers the areas of capitaladequacy, asset quality, risk management, management soundness,

earnings and profitability liquidity, interest rate, maturity structure of

assets and liabilities, and various indicators pertaining to major segments

of financial markets such as debt, forex, capital market segments,beside

macroeconomic indicators such as growth, inflation, interest rate and

exchangerate. TheMPI review is accompanied by a review of

developments in the global environment. As part of theefforts todisseminate these financial soundness indicators (FSIs), the Reserve Bank

has started publishing the core set of indicators in its various publications.

Under these circumstances, the systematic risk posed by smaller banks is

already thoroughly monitored. In this backdrop can we also look at the


24/34

24

feasibility of taking a line similar to the stance taken United States of

America that only bigger and internationally active banks will be required

to follow Basel II guidelines, while smaller banks can continue under

Basel I ?The smaller banks do not pose the kind of systematic risk posed

by internationally active and large banks. A dual approach to Basel IIwill

also reduce the burden on the regulator and the banks alike without much

impact on financial system in the form of additional risk. Looking to the

complexities involved and the enormous supervisory resources, a review

of the entire approach to Basel II may present some more possibilities.

ACCOUNTING METHODS FOR M As IN INDIA :

THE POOLING INTEREST METHOD

When an amalgamation is considered to be an amalgamation in the

nature of merger, it should be accounted for under the pooling of interest

method.

1. In preparing the transferee companys financial statements, the

assets, liabilities and reserves (whether capital or revenue or

arising outof revaluation) of the transferor company should berecorded at their existing carrying amounts and in the same form

as at the date of amalgamation. The balance of the profit and loss

account of the transferor company should be aggregated with the

corresponding balance of the transferee company or transferred

to the general reserve, if any.

2. If, at the time of amalgamation, the transferor and the transferee

companies have conflicting accounting policies, a uniform set ofaccounting policies should be adopted following the

amalgamation. The effects on the financial statements of any

changes in accounting policies should be reported in accordance


25/34

25

with Accounting Standard (AS) 5 Prior Period and extraordinary

Items and changes in Accounting Policies.

3. The difference between the amount recorded as share capital

issued (plus any additional consideration in the form of cash or

other assets) and the amount of share capital of the transferor

company should be adjusted in reserves.

THE PURCHASE METHOD

When an amalgamation is considered to be an amalgamation in the of

purchase, it should be accounted for under the purchase method.

1. In preparing the transferee companys financial statements,

the assets and liabilities of the transferor company should be

incorporated at their existing carrying amounts or,

alternatively, the consideration should be allocated to

individual identifiable assets and liabilities on the basis of

their fair values as on the date of amalgamation. The reserves

of the transferor company, other than the statutory reserves,

should not be included in the financial statements of thetransferee company.

2. Any excess of the amount of the consideration over the value

of the net assets of the transferor company acquired by the

transferee companys financial statements as goodwill arising

on amalgamation. If the amount of the consideration is lower

than the value of the net assets acquired, the difference

should be treated as capital reserve.3. The goodwill arising on account of amalgamation should be

amortized to income on a systematic basis over its useful life.

The amortization period should not be exceed 5 yrs. Unless

a somewhat longer period can be justified.


26/34

26

4. As per the requirement, statutory reserve of the transferor

company should be recorded in the financial statement of the

transferee company. The corresponding debit should be

given to a suitable account head (e.g. Amalgamation

Adjustment Account), which should be disclosed as a part of

miscellaneous expenditure or other similar category in the

balance sheet. When the identity of the statutory reserves is

no longer required to be maintained, both the reserves and

the aforesaid account should be reversed.

VALUATION OF MERGER

Apart those methods Comparative Ratios like P/E ratio, EV/Sales,

Replacement Cost method, Discounted Cash Flow method also being

applied while valuation of merger.

RESEARCH AND METHODOLOGY

The research work what I have done in this project has taken on the basis

of collection of primary data from different but authentic source.The

revaluation of two different banks after merger and acquisition can be

done from different angle, different aspectslike change in share price,

change in the income from profit and loss statement or change in the

balance sheet items assets or liabilities can be measure.Here in this study

PRE- MERGER STOCK PRICE =

PRE-MERGER VALUE OF BOTH FIRMS + SYNERGY

POST MERGER NUMBER OF SHARES


27/34

27

I make a comparative analysis both 4 banks in pre merger and post

merger situation. For making a comparative studyI have taken some

parameters like Profitability, P/E Ratio, Debt-Equity ratio, Earning per

shareetc.HDFC Bank Acquir es Cent ur ion Bank of Punj ab (May 08)

For HDFC Bank, this merger provided an opportunity to add scale,

geography (northern and southern states) and management bandwidth.

In addition, there was a potential of business synergy and cultural fit

between the two organizations.

For CBoP, HDFC bank would exploit its underutilized branch network

that had the requisite expertise in retail liabilities, transaction banking

and third party distribution. The combined entity would improve

productivity levels of CBoP branches by leveraging HDFC Bank's brand

name.

enefits

The deal created an entity with an asset size of Rs 1,09,718 crore (7thlargest in India), providing massive scale economies and improved

distribution with 1,148 branches and 2,358 ATMs (the largest in terms

of branches in the private sector). CBoP's strong SME relationships

complemented HDFC Bank's bias towards high-rated corporate entities.

There were significant cross-selling opportunities in the short-term.

CBoP management had relevant experience with larger banks (as

evident in the Centurion Bank and BoP integration earlier) managingbusiness of the size commensurate with HDFC Bank.

Drawbacks

The merged entity will not lend home loans given the conflict of interest

with parent HDFC and may even sell down CBoP's home-loan book to


28/34

28

it. The retail portfolio of the merged entity will have more by way of

unsecured and two-wheeler loans, which have come under pressure

recently.

Changes of HDFC Bank before Merger and After Merger:

Particulars 2007-08 2008-09

PAT 159,018 224493EPS 46.22 52.85PE Ratio 28.80 18.42MPS 1331.25 973.40

DPS 8.50 10.00Net Profit 15,901,930 22,449,392FIXED ASSETS

At cost

Addition onAmalgamation

Addition duringthe year

Deduction duringthe year

5243809

1298061

669230

(50435)

3676903

_

328190

(41858)

OTHER ASSETS

At Cost

Addition onAmalgamation

Addition duringthe year

Deductionsduring the yr.

18187640

4906684

5460218

(762533)

15060199

_

3281910

(154469)

Changes in Income 163322611 101150087


29/34

29

So if we compare of both year, we can see the following changes:

Compare to 2007-08, in the year 2008-09 PAT has been increased

by41.17%.

EPS has been increased by 14.34 % by the yr. 2008-09. Both P/E Ratio and Market Price per Share has been decline by

36.04% and 26.88% respectively in the yr. 2008-9, compare to 2007-

08.

Dividend per share has been increased by 17.64%.

Change in income in terms of percentage is -38.07% i.e. loss.

Bank of Bar oda Acquir es Sout h Guj a r a t Local Ar ea

Bank Ltd (J une 04)

According to the RBI, South Gujarat Local Area Bank had suffered net

losses in consecutive years and witnessed a significant decline in its

capital and reserves5. To tackle this, RBI first passed a moratorium

under Section 45 of the Banking Regulation Act 1949 and then, after

extending the moratorium for the maximum permissible limit of six

months6, decided that all seven branches of SGLAB function as

branches of Bank of Baroda. The final decision about the merger was of

the Government of India in consultation with the RBI. Bank of Baroda

was against the merger, and protested against the forced deal7

enefits

The clients of SGLAB were effectively transferred to Bank of Baroda,deriving the advantage of dealing with a more secure and bigger bank.

SGLAB did not benefit much, except that it was able to merge with a

bigger bank and able to retain its branches and customers, albeit under a

different name. Since BoB was a large entity (total assets of Rs. 793.2


30/34

30

billion at the time of merger), addition of a small liability did not affect it

much. Albeit minor, it obtained seven more branches and the existing

customers of SGLAB. This further strengthened its position in rural

Gujarat.

Drawbacks

There was no widespread criticism or any apparent drawback of the

merger since the financials involved were not very high.

CHANGE OF BANK OF BARODA BEFORE AND AFTER MERGER :

PARTICULARS 31.03.2005 31.03.2004

PAT 67,68,399 9669959

EPS 23.08 32.97

DIVIDEND PAYOUT

RATIO

24.67% N.A.

FIXED ASSETS 8608033 8152686

OTHER ASSETS 40744077 34068926

CHANGES IN

INCOME

77362456 78660752

If we analyse the above changes we found that :

PAT had been decline by 30%.

PAT has been decline hence EPS came to the negative point, it also come

around 29.99%.

Fixed Assets has been increased by 5.58 %.

Other assets has been increased by 19.59 %.

Income has been decline by 1.65%.

FINDINGS:

Compare to private bank HDFC bank the growth rate of public sector bank Bank

of Baroda, is not satisfactory. Because after merger companies net profit ,EPS,


31/34


32/34

32

Based on the trends in the banking sector and the insights from the cases

highlighted in this study, one can list some steps for the future which banks

should consider, both in terms of consolidation and general business. Firstly,

banks can work towards a synergy-based merger plan that could take shape latest

by 2009 end with minimization of technology-related expenditure as a goal.There is also a need to note that merger or large size is just a facilitator, but no

guarantee for improved profitability on a sustained basis. Hence, the thrust should

be on improving risk management capabilities, corporate governance and

strategic business planning. In the short run, attempt options like outsourcing,

strategic alliances, etc. can be considered. Banks need to take advantage of this

fast changing environment, where product life cycles are short, time to market is

critical and first mover advantage could be a decisive factor in deciding who wins

in future. Post-M&A, the resulting larger size should not affect agility. The aimshould be to create a nimble giant, rather than a clumsy dinosaur. At the same

time, lack of size should not be taken to imply irrelevance as specialized players

can still seek to provide niche and boutique services.

REFERENCE:

PROFESSOINAL BANKERS

ICFAI JOURNALS WWW.ECONOMICTIMES.COM

WWW.SSRN.COM

www.google.com

www.hdfc.com

www.bankofbaroda.com


33/34

33


34/34

Documents

Merger and Acquisition of Banking Industry