Abhinav Merger and Aquisition Project Copy05

8/11/2019 Abhinav Merger and Aquisition Project Copy05

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INTRODUCTION

We have been learning about the companies coming together to from

another company and companies taking over the existing companies to expand

their business.

With recession taking toll of many Indian businesses and the feeling of

insecurity surging over our businessmen, it is not surprising when we hear about

the immense numbers of corporate restructurings taking place, especially in the last

couple of years. Several companies have been taken over and several have

undergone internal restructuring, whereas certain companies in the same field of

business have found it beneficial to merge together into one company.

In this context, it would be essential for us to understand what corporate

restructuring and mergers and acquisitions are all about.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-

offs, tender offers, & other forms of corporate restructuring. Thus important issues

both for business decision and public policy formulation have been raised. No firm

is regarded safe from a takeover possibility. On the more positive side Mergers &

Acquisitions may be critical for the healthy expansion and growth of the firm.

Successful entry into new product and geographical markets may require Mergers

& Acquisitions at some stage in the firm's development. Successful competition in

international markets may depend on capabilities obtained in a timely and efficient

fashion through Mergers & Acquisition's. Many have argued that mergers increase

value and efficiency and move resources to their highest and best uses, thereby


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increasing shareholder value. .

To opt for a merger or not is a complex affair, especially in terms of the

technicalities involved. We have discussed almost all factors that the management

may have to look into

Before going for merger. Considerable amount of brainstorming would be required

by the managements to reach a conclusion. E.g. A due diligence report would

clearly identify the status of the company in respect of the financial position along

with the net worth and pending legal matters and details about various contingent

liabilities. Decision has to be taken after having discussed the pros & cons of the

proposed merger & the impact of the same on the business, administrative costs

benefits, addition to shareholders' value, tax implications including stamp duty and

last but not the least also on the employees of the Transferor or Transferee

Company.

WHAT IS MERGER

Merger is defined as combination of two or more companies into a single

company where one survives and the others lose their corporate existence. The

survivor acquires all the assets as well as liabilities of the merged company or

companies. Generally, the surviving company is the buyer, which retains its

identity, and the extinguished company is the seller.

Merger is also defined as amalgamation. Merger is the fusion of two or more

existing companies. All assets, liabilities and the stock of one company stand

transferred to Transferee Company in consideration of payment in the form of:


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Equity shares in the transferee company,

Debentures in the transferee company,

Cash, or

A mix of the above modes.

WHAT IS ACQUISITION

Acquisition in general sense is acquiring the ownership in the property. In

the context of business combinations, an acquisition is the purchase by one

company of a controlling interest in the share capital of another existing company.

Methods of Acquisition:

An acquisition may be affected by

a)

Agreement with the persons holding majority interest in the company

management like members of the board or major shareholders commanding

majority of voting power;

b) Purchase of shares in open market;

c)

To make takeover offer to the general body of shareholders;

d) Purchase of new shares by private treaty;

e) Acquisition of share capital through the following forms of considerations

viz. Means of cash, issuance of loan capital, or insurance of share capital.

Takeover:

A takeover is acquisition and both the terms are used interchangeably.


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Takeover differs from merger in approach to business combinations i.e. The

process of takeover, transaction involved in takeover, determination of share

exchange or cash price and the fulfillment of goals of combination all are different

in takeovers than in mergers. For example, process of takeover is unilateral and the

offeror company decides about the maximum price. Time taken in completion of

transaction is less in takeover than in mergers, top management of the offeree

company being more co-operative.

De-merger or corporate splits or division:

De-merger or split or divisions of a company are the synonymous terms

signifying a movement in the company.

Purpose of Mergers & Acquisitions

The purpose for an offeror company for acquiring another company shall be

reflected in the corporate objectives. It has to decide the specific objectives to be


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achieved through acquisition. The basic purpose of merger or business

combination is to achieve faster growth of the corporate business. Faster growth

may be had through product improvement and competitive position.

Other possible purposes for acquisition are short listed below: -

(1) Procurement of supplies:

1. To safeguard the source of supplies of raw materials or intermediary

product;

2. To obtain economies of purchase in the form of discount, savings in

transportation costs, overhead costs in buying department, etc.;

3. To share the benefits of suppliers economies by standardizing the materials.

(2) Revamping production facilities:

1.

To achieve economies of scale by amalgamating production facilities

through more intensive utilization of plant and resources;

2.

To standardize product specifications, improvement of quality of product,

expanding

3. Market and aiming at consumers satisfaction through strengthening after sale

Services;

4.

To obtain improved production technology and know-how from the offered

company

5. To reduce cost, improve quality and produce competitive products to retain

and


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Improve market share.

(3) Market expansion and strategy:

1. To eliminate competition and protect existing market;

2.

To obtain a new market outlets in possession of the offeree;

3.

To obtain new product for diversification or substitution of existing products

and to enhance the product range;

4. Strengthening retain outlets and sale the goods to rationalize distribution;

5. To reduce advertising cost and improve public image of the offeree

company;

6. Strategic control of patents and copyrights.

(4) Financial strength:

1.

To improve liquidity and have direct access to cash resource;

2.

To dispose of surplus and outdated assets for cash out of combined

enterprise;

3.

To enhance gearing capacity, borrow on better strength and the greater

assets backing;

4. To avail tax benefits;

5. To improve EPS (Earning Per Share).

(5) General gains:

1. To improve its own image and attract superior managerial talents to manage

its affairs;


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2.

To offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror companys own

developmental plans.

A company thinks in terms of acquiring the other company only when it has

arrived at its own development plan to expand its operation having examined its

own internal strength where it might not have any problem of taxation, accounting,

valuation, etc. But might feel resource constraints with limitations of funds and

lack of skill managerial personnels. It has to aim at suitable combination where it

could have opportunities to supplement its funds by issuance of securities, secure

additional financial facilities, eliminate competition and strengthen its market

position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives

through alternative type of combinations which may be horizontal, vertical,

product expansion, market extensional or other specified unrelated objectives

depending upon the corporate strategies. Thus, various types of combinations

distinct with each other in nature are adopted to pursue this objective like vertical

or horizontal combination.

(8) Corporate friendliness:


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Although it is rare but it is true that business houses exhibit degrees of

cooperative spirit despite competitiveness in providing rescues to each other from

hostile takeovers and cultivate situations of collaborations sharing goodwill of each

other to achieve performance heights through business combinations. The

combining corporate aim at circular combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration

between the two combining business houses. Such integration could be operational

or financial. This gives birth to conglomerate combinations. The purpose and the

requirements of the offeror company go a long way in selecting a suitable partner

for merger or acquisition in business combinations.

Types of Mergers

Merger or acquisition depends upon the purpose of the offeror company it

wants to achieve. Based on the offerorsobjectives profile, combinations could be

vertical, horizontal, circular and conglomeratic as precisely described below with

reference to the purpose in view of the offeror company.


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(A) Vertical combination:

A company would like to takeover another company or seek its merger with

that company to expand espousing backward integration to assimilate the resources

of supply and forward integration towards market outlets. The acquiring company

through merger of another unit attempts on reduction of inventories of raw material

and finished goods, implements its production plans as per the objectives and

economizes on working capital investments. In other words, in vertical

combinations, the merging undertaking would be either a supplier or a buyer using

its product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the

acquirer company i.e.

1.

It gains a strong position because of imperfect market of the intermediary

products, scarcity of resources and purchased products;

2.

Has control over products specifications.

(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage of

industrial process. The acquiring firm belongs to the same industry as the target

company. The mail purpose of such mergers is to obtain economies of scale in

production by eliminating duplication of facilities and the operations and


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broadening the product line, reduction in investment in working capital,

elimination in competition concentration in product, reduction in advertising costs,

increase in market segments and exercise better control on market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to share common

distribution and research facilities to obtain economies by elimination of cost on

duplication and promoting market enlargement. The acquiring company obtains

benefits in the form of economies of resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like

DCM and Modi Industries. The basic purpose of such amalgamations remains

utilization of financial resources and enlarges debt capacity through re-organizing

their financial structure so as to service the shareholders by increased leveraging

and EPS, lowering average cost of capital and thereby raising present worth of the

outstanding shares. Merger enhances the overall stability of the acquirer company

and creates balance in the companys total portfolio of diverse products and

production processes.


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[4]Advantages of Mergers

Mergers and takeovers are permanent form of combinations which

vest in management complete control and provide centralized

administration which are not available in combinations of holdingcompany and its partly owned subsidiary. Shareholders in the selling

company gain from the merger and takeovers as the premium offered to

induce acceptance of the merger or takeover offers much more price

than the book value of shares. Shareholders in the buying company gain


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in the long run with the growth of the company not only due to synergy

but also due to boots trapping earnings.

Mergers and acquisitions are caused with the support of

shareholders, managers ad promoters of the combing companies. The

factors, which motivate the shareholders and managers to lend support

to these combinations and the resultant consequences they have to

bear, are briefly noted below based on the research work by various

scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subject to

merger should enhance in value. The sale of shares from one companys

shareholders to another and holding investment in shares should give

rise to greater values i.e. The opportunity gains in alternative

investments. Shareholders may gain from merger in different ways viz.

From the gains and achievements of the company i.e. Through

(a) Realization of monopoly profits;

(b)

Economies of scales;(c)

Diversification of product line;

(d) Acquisition of human assets and other resources not available

otherwise;

(e) Better investment opportunity in combinations.


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The merger or acquisition of a company by a conglomerate or

other acquiring company may have the effect on both the sides of

increasing the welfare in the form of purchasing power and other

miseries of life. Two sides of the impact as discussed by the researchers

and academicians are: firstly, mergers with cash payment to

shareholders provide opportunities for them to invest this money in

other companies which will generate further employment and growth to

uplift of the economy in general. Secondly,any restrictions placed on

such mergers will decrease the growth and investment activity with

corresponding decrease in employment. Both workers and communities

will suffer on lessening job

Opportunities, preventing the distribution of benefits resulting from

diversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic power is to be

understood as the ability to control prices and industries output as monopolists. Such

monopolists affect social and political environment to tilt everything in their favour to

maintain their power ad expand their business empire. These advances result into

economic exploitation. But in a free economy a monopolist does not stay for a longer

period as other companies enter into the field to reap the benefits of higher prices set

in by the monopolist. This enforces competition in the market as consumers are free to

substitute the alternative products. Therefore, it is difficult to generalize that mergers


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affect the welfare of general public adversely or favorably. Every merger of two or more

companies has to be viewed from different angles in the business practices which

protects the interest of the shareholders in the merging company and also serves the

national purpose to add to the welfare of the employees, consumers and does not

create hindrance in administration of the Government polices.

Change in scenario of Banking Sector

1. The first mega merger in the Indian banking sector that of the HDFC Bank with

Times Bank, has created an entity which is the largest private sector bank in the

country.

2. The merger of the city bank with Travelers Group and the merger of Bank of

America with Nation Bank have triggered the mergers and acquisition market in

the banking sector world wide.

3. Europe and Japan are also on their way to restructure their financial sector

thought merger and acquisitions. Merger will help banks with added moneypower, extended geographical reach with diversified branch Network, improved

product mix, and economies of scale of operations. Merger will also help banks

to reduced them borrowing cost and to spread total risk associated with the

individual banks over the combined entity. Revenues of the combine entity are


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THE BANKING SCENARIO HAS BEEN CHANGING AT FAST PLACE.

Bank traditionally just borrower and lenders, has started providing complete

corporate and retail financial services to its customers

1. Technology drive has benefited the customers in terms of faster improve

convenient banking services and Varity of financial products to suit their

requirement. Atms, Phone Banking, Net banking, Any time and Any where

banking are the services which bank have started offering following the

changing trend in sectors. In plastic money segment customer have also got a

new option of debits cards against the earlier popular credit card. Earlier

customers had to conduct their banking transaction within the restricted time

frame of banking hours. Now banking hours are extended.

2.

Atms ,Phone banking and Net banking had enable the customer to transact as

per their convince customer can now without money at any time and from any

branch across country as certain their account transaction, order statements of

their account and give instruction using the tally banking or on online banking

services.


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3. Bank traditionally involve working capital financing have started offering

consumer loans and housing loans. Some of the banks have started offering

travel loans, as well as many banks have started capitalizing on recent capital

market boom by providing IPO finance to the investors.

Procedure of Mergers & Acquisitions

Publi c announcement:

To make a public announcement an acquirer shall follow the following procedure:

1. Appointment of merchant banker:

The acquirer shall appoint a merchant banker registered as category

I with SEBI to advise him on the acquisition and to make a public

announcement of offer on his behalf.

2.

Use of media for announcement:


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Once the valuation is accepted by the respective banks , they send the

proposal along with all relevant documents such as Board approval, shareholders

approval, valuation report etc to Reserve Bank of India and other regulatory bodies

such Security & exchange board of India SEBI for their approval.

After obtaining approvals from all the concerned institutions, authorized

officials of both the banks sit together and discuss and finalize share allocation

proportion by the acquiring bank to the shareholders of the merging bank SWAP

ratio

After completion of the above procedures , a merger and acquisition

agreement is signed by the bank

Chapter 9: RBI Guidelines on Mergers & Acquisitions of Banks

With a view to facilitating consolidation and emergence of strong entities

and providing an avenue for non disruptive exit of weak/unviable entities in the

banking sector, it has been decided to frame guidelines to encourage

merger/amalgamation in the sector.

Although the Banking Regulation Act, 1949 (AACS) does not empowerReserve Bank to formulate a scheme with regard to merger and amalgamation of

banks, the State Governments have incorporated in their respective Acts a

provision for obtaining prior sanction in writing, of RBI for an order, inter alia, for

sanctioning a scheme of amalgamation or reconstruction.


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depositors) of theacquired bank.

3.Information which is considered relevant for the consideration of the scheme of

merger including in particular:-

A. Annual reports of each of the Banks for each of the three completed

financial years immediately preceding the proposed date for merger.

B.Financial results, if any, published by each of the Banks for any period

subsequent to the financial statements prepared for the financial year immediately

preceding the proposed date of merger.

C.Pro-forma combined balance sheet of the acquiring bank as it will appear

consequent on the merger.

D.Computation based on such pro-forma balance sheet of the following:-

I. Tier I Capital

Ii.Tier II Capital

Iii. Risk-weighted Assets

Iv. Gross and Net npas


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V. Ratio of Tier I Capital to Risk-weighted Assets

Vi. Ratio of Tier II Capital to Risk-weighted Assets

Vii. Ratio of Total Capital to Risk-weighted Assets

Viii. Tier I Capital to Total Assets

Ix. Gross and Net npas to Advances

X. Cash Reserve Ratio

Xi. Statutory Liquidity Ratio

4.Information certified by the values as is considered relevant to understand the

net realizable value of assets of the acquired bank including in particular:-

A.The method of valuation used by the values

B.The information and documents on which the values have relied andthe extent of the verification, if any, made by the values to test the accuracy of

such information

C.If the values have relied upon projected information, the names and

designations of the persons who have provided such information and the

extent of verification, if any, made by the values in relation to such information

D.Details of the projected information on which the values have relied


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E. Detailed computation of the realizable value of assets of the acquired

bank.

5.Such other information and explanations as the Reserve Bank may require.

Mergers in the Banking Sector

ICICI Bank

INTRODUCTION

ICICI Bank (formerly Industrial Credit and Investment Corporation of

India) is India's largest private bank. ICICI Bank has total assets of about Rs.20.05bn

(end-Mar 2005), a network of over 550 branches and offices, and about 1900 atms.

ICICI Bank offers a wide range of banking products and financial services to corporate
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ICICI -KINFRA Limited (I-KIN),

Mr. K.V. Kamath, CEO of ICICI Limited, has recently voiced the intentions

of ICICI Limited towards banking and ICICI Bank. ICICI Limited is endeavoring

to forge a closer relationship with ICICI bank. Mr. K V Kamath recently quoted in

a leading daily Banking is dead. Universal banking is in offering with a whole

range of financial products and services. The basic idea is for banks to do business

along with banking. Bankers will have to emerge as businessmen.

ICICI Bank is a focused banking company coping with the changing times

of the banking industry. So it can be a lucrative target for other player in the same

line of operations. However, when merged with ICICI Limited the attraction is

reduced manifold considering the magnitude of operations of the ICICI limited.

Of course, one would still need a bank to open letters of credit, offer

guarantees, handle documentation, and maintain current account facilities etc. So

banks will not superfluous. But nobody needs so many of them any more.

Secondly, besides credit, a customer may also want from a bank efficient

cash management, advisory services and market research on his product. Thus the

importance of fee based is increasing in comparison with the fund-based income.

The pre--merger status of ICICI Bank is as follows: it had liabilities of Rs.12,073

crore, equity market capitalization of Rs.2,466 crore and equity volatility of 0.748.

Working through options reasoning, we find that this share price and volatility are

consistent with assets worth Rs.13,249 crore with volatility 0.15. Thus, ICICI bank


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had assets which are 9.7% ahead of liabilities, which is roughly consistent with the

spirit of the Basle Accord, and has leverage of 5.37 times.

History of ICICI Bank

The World bank the Government of India and representatives of Indian industry

form ICICI Limited as a development finance institution to provide medium-term

and long-term project financing to Indian businesses in1955.

1994 ICICI establishes ICICI Bank as a subsidiary.

1999 ICICI becomes the first Indian company and the first bank or financial

institution from non-Japan Asia to list on theNYSE.

2001 ICICI acquired Bank of Madura (est. 1943). Bank of Madura was a

Chettiarbank, and had acquired Chettinad Mercantile Bank (est. 1933) and

Illanji Bank (established1904)in the1960s.
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which this reasoning leans on models, which are innately imperfect depictions of

reality. However, these models are powerful tools for understanding the basic

factors at work, and they probably convey the broad picture quite effectively.

The stock of ICICI Bank may be in the limelight on the back of the proposed

acquisition of Bank of Madura.

Though the stock has gained sharply in the last two months after hitting a

recent low of Rs 110, some upside may be left as the bank could get re-rated on

account of the merger. Existing shareholders could hold their exposures in ICICI

Bank while investors with an appetite for risk could contemplate exposures despite

the impressive gains of the past few months. ICICI Bank continues to be one of the

better options in the banking sector at the moment and the possible merger with

ICICI may well be on the backburner.

The merger would pitchfork ICICI Bank as the leading private sector bank.

The merger may be viewed favorably since Bank of Madura has focused strengths

and a reasonably good quality balance sheet. The board of directors is to meet on

December 11 to consider the merger.

It is quite likely that the swap ratio may be fixed in a manner that holds out a

good deal for the shareholders of Bank of Madura. This may also be influenced by

the fact that the Bank of Madura stock has gained sharply by around 70 per cent in

the past fortnight in the homestretch to the deal.

As the acquisition is to be financed by issuance of stock, the rise in the

market capitalization of Bank of Madura may mean a higher degree of equity


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issuance by ICICI Bank. But the price may well be worth paying as this is the only

way that ICICI Bank may be able to get control over banks with reasonable quality

balance sheets that could make a difference in the medium to long-term.

Bank of Madura has assets of Rs 3,988 crore and deposits of Rs 3,395 crore

as of March 2000. The fact that the bank has a capital adequacy of 15.8 per cent

with shareholder funds of Rs 263 crore may mean that ICICI Bank (post-merger

phase) will have more leeway to pursue growth without expanding the equity base

(other than paying for the acquisition).

Strong capital adequacy, a strong beachhead on the Internet arena, a revamped IT

architecture, a growing retail client base through a brick-and-click strategy, and

improving asset quality and earnings growth are positive features as far as ICICI

Bank is concerned.

Despite these factors, the share had been on a downtrend from after touching

a high of Rs 271, eight months ago. The uptrend then was on the back of the

announcement of its ADR issue and new technology initiatives. The subsequent

downtrend was triggered by the possibility of the merger with its parent. There is

continuing concern on asset quality of ICICI. It has been a stated goal of the ICICI

group to go in for universal banking. It is clear that once regulatory hurdles are

removed, such a possibility becomes distinctly feasible. But

Given the battering that bank stock took, ICICI may now hesitate to pursue this

path. Also ICICI Bank is the most visible investor-friendly face for the group in

terms of returns to shareholders and it may well be maintained as a separate entity.

In this backdrop, the stock may hold scope for improvement in the valuation of the

stock.


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Recommendation of Narasimham Committee on banking sector reforms

Globally, the banking and financial systems have adopted information and

communications technology. This phenomenon has largely by passed the Indian

banking system, and the committee feels that requisite success needs to be

achieved in the following areas:-

- Banking automation

-

Planning, Standardization of electronic payment systems

-

Telecom infrastructure

-

Data were

Merger between banks and dfls and nbfcs need to be based on synergies and

should make a sound commercial sense. Committee also opines that merger

between strong banks / fls would make for greater economic and commercial

sense and would be a case where the whole is greater than the sum of its party

and have a force multiplier effect. It also have merger should not be seen as a

means of bailing out weak banks.

A weak bank could be nurtured into healthy units. Merger could also be a

solution to a after cleaning up their balances sheets it only say if these is no

Voltaire response to a takeover of such bank, a restructuring commission for


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In economic and political circles, the planned merger was

celebrated as Germanys advance into the premier league of the

international financial markets. But the failure of the merger led to the

disaster of Germany as the financial center.


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Abhinav Merger and Aquisition Project Copy05

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