PROJECT REPORT

SUBJECT- MERGERS & ACQUISTIONS

TOPIC - MERGER OF IC ICI BANK & BANK OF

RAJASTHAN

GROUP NO.- 4

GROUP MEMBERS-

Rashmi Kumari Richa Gupta Sakshi Puri Sakshi Arora

introduction

In the recent past, mergers and acquisitions are on a steady rise in the financial sector

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caused by regulatory interventions of the State and also due to business environmental reasons. Synergies arising from geographical diversification, increased efficiency, costsavings and economies of scale are the motivation drivers behind bank mergers across the world.

M&As have become a major strategic tool for achieving the same. ICICI Bank –Bank of Rajasthan merger is the seventh voluntary merger in Indian banking sector, u/s 44A of the Banking Regulation Act, 1949. This is the ICICI Bank’s fourth acquisition after Sangli Bank. the latest in India after the merger of HDFC Bank - Centurion Bank of Punjab in the year 2008.

ICICI BANK INTRODUCTION:-

ICICI Bank is the second largest bank in India and the biggest in the private sector.

It started its operations in 1994 as a new generation private sector bank.

ICICI Bank is the first Indian bank to be listed on the New York Stock Exchange with US GAAP accounting and has a worldwide presence including in the UK and Canada.

It had total assets worth Rs.3634 billion(US $ 81 bn) as on March 31,2010 and profit after tax of Rs.40.25 billion(US $ 896 million) for the year ended March 2010.

The bank has a network of 2035 branches and about 5518 ATMs in India and presence in 18 countries.

ICICI bank has offered a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and specialilzed subsidiaries in the area of investment banking, life and non life insurance, venture capital and asset management.ICICI Bank aims at long-term wealth creation through ‘Cs’ strategy of Current Account Savings Account (CASA) growth, cost control, credit quality and capital preservation.

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Unlike BoR which is only listed in India, ICICI bank’s ADRs are listed on NY stock exchange.

VISION OF ICICI BANK

To be the preferred bank for total financial and banking solutions for both corporates and individuals.

MISSION

Perfection in Power.

Icici bank’s MERGER EXPERIENCE:

The ICICI bank has been using mergers as a strategy to expand their geographical coverage, increase customer base and to meet regulatory requirements since the year 2000.

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The present merger with BoR is the 4th acquisition of ICICI Bank.

The Bank has a total business of 3832222 million as of 31.03.2010 and has 37000 employees with a business per branch of 304

Here is a list of mergers by ICICI Bank.

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BANK OF RAJASTHAN

INTRODUCTION:-

Bank of Rajasthan is an old private sector bank which has a strong presence in the northern part of India with registered office at Udaipur, Rajasthan.

It started its operations in the year 1943.

Branch network: Bank has a branch network of 466 branches out of which 280 were in Rajasthan with 4000 employees. Further, the bank sponsors Mewar

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Aanchalik Gramin Bank (MAGB) which was established in 1983 under the RRB Act, 1976.

Asset base: The Bank’s asset base and number of customers stands at 173000 million and 3 million respectively as on 31st March 2010.

Business: The total business amounted to 233918 million and the business per branch is 47 crore.

Efficiency: BoR reported a net loss of 102.13 crore in 2009-10 against a profit of 117.71 crore in the previous financial year.

Bank of Rajasthan with its stronghold in the state of Rajasthan has a nationwide presence, serving its customers with a mission of “together we prosper” engaging actively in Commercial Banking, Merchant Banking, Auxiliary services, Consumer Banking, Deposit and Money Placement services, Trust and Custodial services, International banking, Priority sector banking etc.

Background of the Deal - Regulatory Issues

The promoters of the Bank of Rajasthan (BoR) have been under huge pressure from regulatory authorities to restructure the Bank for a variety of problems from 2009 onwards.

BoR,controlled by Tayal Group, had been asked by the RBI to lessen their shareholding to below 10% from 28%. According to SEBI, the promoter’s shareholding in the old private sector bank accounted to 55%.

On February 26, 2010, the RBI levied a penalty of 25 lakhs for a series of violations including irregular property deals, actions against money laundering norms, deletion of corporate records from the information systems, irregularities in the accounts of corporate groups, extension of repayment period over permissible limits on intra-day overdraft, lack of enough credit committees and poor corporate governance.

Further, the RBI appointed a new CEO and nominated 5 directors for the Bank.

Following this, SEBI banned 100 entities holding BoR Shares for the sake of their promoters from stock market activities. The RBI then asked the BoR to perform an audit of ‘internal delegation of sanctioning powers followed by the banks’ and the provisioning procedure of bad debts.

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Due to a series of actions from the regulators, the Tayal family decided to merge the bank with ICICI Bank, the second largest bank in India which was looking for a target to increase their customer base and geographical reach in northern India.

In the probability of RBI favouring the decision, ICICI Bank will get the control of 83 branchesof Mewar Aanchalik Gramin Bank (MAGB), a regional rural bank sponsored by the BoR.

Why icici bank chose bank of rajasthan for merger?

It was presumed that the merger of BoR in ICICI Bank will place the Transferee Bank among the top three banks in Rajasthan in terms of total deposits and significantly augment the Transferee Bank’s presence and customer base in Rajasthan and it would significantly add 463 branches in branch network of ICICI Bank along with increase in retail deposit base. Consequently, ICICI Bank would get sustainable competitive advantage over its competitors in Indian Banking.

Deal would substantially enhance its branch network and it would combine BoR branch franchise with its strong capital base.

The deal which will give ICICI a sizeable presence in the northwestern desert state of Rajasthan values the small bank at 2.9 times of its book value, compared with the industry banking sector average of 1.84.

ICICI bank may be killing two birds with one stone through this merger.Besides getting 468 branches it will also get control of 58 branches of a regional rural bank sponsored by BoR.

WHY BANK OF RAJASTHAN AGREED?

The promoters of the Bank of Rajasthan (BoR) have been under huge pressure from regulatory authorities to restructure the Bank for a variety of problems from 2009 onwards.

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BoR, controlled by Tayal Group, had been asked by the RBI to lessen their shareholding to below 10% from 28%.

On February 26, 2010, the RBI levied a penalty of 25 lakhs for a series of violations including irregular property deals, actions against money laundering norms, deletion of corporate records from the information systems, irregularities in the accounts of corporate groups, extension of repayment period over permissible limits on intra-day overdraft, lack of enough credit committees and poor corporate governance.

The BoR had deep penetration with huge brand value in the State of Rajasthan where it had 294 branches with a market share of 9.3% in total deposits of scheduled commercial banks.

It was presumed that the merger of BoR in ICICI Bank will place the Transferee Bank among the top three banks in Rajasthan in terms of total deposits and significantly augment the Transferee Bank’s presence and customer base in Rajasthan and it would significantly add 463 branches in branch network of ICICI Bank along with increase in retail deposit base. Consequently, ICICI Bank would get sustainable competitive advantage over its competitors in Indian Banking.

Due to a series of actions from the regulators, the Tayal family decided to merge the bank with ICICI Bank, the second largest bank in India which was looking for a target to increase their customer base and geographical reach in northern India.

In order to salvage the bank from further sinking and to save guard the interests of all concerned including employees, perhaps, merger seems to be a wise idea. The option of ICICI Bank or any other bank is not the issue here. If Bank of Rajasthan was to survive, the merger became inevitable and this has been done timely at an appropriable moment.

DRAWBACKS OF THE DEAL

The possible drawbacks were for the ICICI bank because of the risk of non performing loans of BoR. As of FY 2010 the networth of ICICI bank was Rs5,17,000 cr. while that of BoR was Rs.760 cr.

The productivity of ICICI Bank was high as compared the Bank of Rajasthan. ICICI recorded a Business Per Branch of 3 bn rupees as against that of Bank Of Rajasthan which was 47 bn rupees for fiscal 2009.

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But the Non Performing Asset Record of the Bank of Rajasthan was better as compared to the ICICI bank. For the quarter ending December 2009,Bank of Rajasthan recorded 1.05% of advances as NPA’s which was far better than 2.1% as recorded of ICICI Bank.

The most sensitive part of this merger would be handling of human relations. The employees of BOR will resist such a merger for obvious   reasons as it makes them in secure, fragile and brings in fear of relocation, branch closure  and rationalization besides discrimination in treatment, positions, packages etc. The most  challenging task  before BOR employees would  be to adjust to new target oriented professional work culture where performance is rewarded and every team member has to  contribute in  tangible terms to organizational growth. Those who are able to change would survive and also rediscover their talent and those who won’t would find such merger really difficult to cope with.

DEAL VALUATION

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The promoters of Bank of Rajasthan (BoR) agreed to merge with ICICI bank. Both have agreed to a share swap of 1:4.72. In terms of quantity, every 118 shares of BoR will get 25 shares of ICICI Bank.

This merger is going to be on a going concern basis and existing shareholders of both banks would gain handsomely. So far as share exchange (swap ratio) is concerned, the present shareholders of BOR tend to gain in money terms considering the present price or even the price on the date of announcement in the board meetings of two banks. The share price of BOR has been jumping by 20 percent since then and even then at present prices, it gives a monetary gain.

IMPORTANT DATES IN THE MERGER:-

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ANALYSING impact of the merger

The impact of the merger can be analyzed by the merger matrix.

1)MERGER MATRIX

THE MERGER MATRIX

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Merger Announcement, Share Price Movements and Shareholding PatternChanges:-

Mergers and takeovers are important events in the life of any company. Mergerannouncements have a significant impact on the share prices of both the bidder and target banks.There is concrete evidence for wealth shifting in the global arena from bidder bank shareholders to target bank shareholders and vice versa. The present deal appears more favourable to BoR since their shareholders gained almost 90% between 07.05.2010 (the start of merger negotiations) and 23.05.2010 (Board Meeting approval).

For the purpose of analysis, the BoR share price data has been divided into three periods, viz, Period I, Period II and Period III respectively.

Period I pertains to the point starting from February 26, 2010 (the day the RBI imposed the penalty) to May 6, 2010 (the day before merger negotiations started). On February 26th, the closing price of BoR’s scrip was 61.8 and on 6thMay, it was 84.7. This is the period where the bank faced serious actions from the regulators.

During this period, the bank’s scrip value appreciated by 20.9% against the Bank Nifty return of 9.9%. BoR recorded a price of 66.85 and 62.5 on March 8 (SEBI ban) and March 9 (RBI’sspecial audit order) respectively.

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Period II represents the time period from May 6 to May 17, 2010 (period of merger negotiations).

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On May 6th, BoR’s scrip was at 84.7 and ICICI Bank was traded at 902.85. On May 17th,ICICI Bank and BoR recorded a price of 901.1 and 82.25 respectively. It indicates that merger negotiation has a zero effect on the price of merging entities. The Bank Nifty return for the period was 2.7%.

Period III comprises the time period after the merger announcement, i.e., May 18 to June 24, 2010. On June 24th, BoR filed the information about the merger to the Bombay Stock Exchange.

On May 16th, BoR’s price was 82.85. After the announcement of the merger, it shot updrastically to 99.45, 119.35, 131.30, 144.45, 158.9, and 162.3 on May 17th, 18th, 19th, 20th, 21th and 24th respectively. On the contrary, ICICI’s price reduced from 901.10 to 809.35. During the period, BoR gained about 77%, whereas ICICI lost 1.7% of its value. It is interesting to note that Bank Nifty showed a decline of 4.6 % during this period. Short

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term wealth creation of BoR can be read in line with the valuation and fixation of swap ratio. The indicative price agreed by both the banks was 188 per share. In the light of the present analysis, it can be concluded that there was not much vulnerability in the prices during the negotiation period. But, after the announcement, BoR’s share price adjusted almost to the price offered by ICICI.

It is worthwhile to analyse the shareholding pattern of BoR for the 4th quarter of FY of 2009 and the first quarter of FY of 2010 in the context of ‘unusual actions’ from the authorities. Between 31.03.2010 and 30.06.2010, the holding of institutional investors increased from 5.73% to 16.24% out of which FII’s part increased from 2.34% to 8.95%. Both the holding of body corporate and retail investors reduced considerably. This can be interpreted as a case ofinformation asymmetry and insider trading.(REFER FIGURE 3)

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ADEQUACY OF SWAP RATIO:-

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Table 4 shows a range of possible swap ratios in terms of generally used size based variables and profitability of the banks. The minimum and average ratios indicated by the analysis are .12 and .69 respectively. It can be seen that average ratio is more than 3 times of the actual ratio. Market capitalization and balance sheet size are analyzed for double-checking this result and for understanding the effect of sizes better. For this purpose, contribution analysis is used in which, relative contribution of merging entities with resulting from their merger has been identified and compared with.

From this analysis (Table 5), the individual contributions of merging partners inthe combined entity are found. The ratio derived from the analysis of the balance sheet size and market capitalization is .329 which is also higher than the actual ratio.

Based on the fixed exchange ratio. BoR’s EPS increased by at 11.98/- whereas ICICI Bank’s EPS reduced from 36.44 to at 26.91. So if we consider earnings accretion as a criteria. The deal was more favourable to BoR.

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(TABLE 6)

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RELATIVE CONTRIBUTION ANALYSIS

Table-7 clearly indicates that the average contribution of BoR in the combined entity in terms of various size variables is 7.4% which is higher than the actual shareholding of BOR in the combined entity (3%). So on the basis of contribution analysis it can be argued that BoR got undervalued. But, it is to be remembered that profitability aspect is not considered in that analysis as BoR reported a net loss of 1021 million rupees in the financial year prior to the merger.

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If the valuation had been based on financial parameters like book value, market value,net profit and EPS, it should have been more favourable to ICICI Bank (Table 6). Also it was a dilutive deal for ICICI Bank. In all these financial aspects, BoR is far below ICICI Bank whose strategy was similar to their previous acquisitions. Through the mergers with Bank of Madura and Sangli Bank, they increased their geographical coverage in Tamil Nadu andMaharashtra. Out of the 263 branches of Bank of Madura, 182 were in Tamil Nadu and out of the 198 branches of Sangli Bank, 158 were in Maharashtra only.

It is obvious that ICICI Bank’s desire to acquire a bank having strong presence in northern India was one of the major reasons for the acquisition of BoR. The BoR’s strong CASA deposits which amount to about 40% has played a major role in the fixation of swap ratio.

So if we consider all these aspects together, it can be concluded that the valuation is fair and a favourable exchange ratio for BoR (on the basis of market price) got reflected in the stock market.

PRE MERGER LEGAL ISSUES

Extraordinary general meeting that was called to approve the merger was first cancelled after a Kolkota Civil Court restrained the management from holding the EGM. This was based on a complaint filed by a shareholder who was against the merger.

They had all the shareholders who had gathered there and they decided that they could appoint a Chairman and continue with the meeting.(As per Companies Act)

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UNION STRIKE – A PROBLEM

Three major employee labour unions of BoR – All India Bank of Rajasthan Employees Federation, All India Bank of Rajasthan Officers Association and Akhilya bhartiya bank of Rajasthan Karmacharya Sanga called a strike to suspend the merger of ICICI bank and Bank of Rajasthan.

The United Forum Bank of Rajasthan Union had denied the merger giving cultural compatibility a major issue .According to it if a merger is essential it should be with a public sector bank.

Analyzing post merger performance

STRATEGIC SIMILARITY

Strategic similarity or dissimilarity of key variables has a significant impact on post merger bank performance. A merger will substantially increase the value of the firm only when there is a proper integration of strategic, financial, economic and organizational aspects. These factors are directly correlated to the performance of the firm after the merger.

Synergy realization needs the apposite matching of strategic features of the banks. Strategic similarity index gives the distance between banks by difference in the key strategic variables

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When two banks merge, the relative size of the target bank is a crucial determinant of post merger performance3. A lower size of BoR (.048) compared with ICICI may improve the performance because of easier integration, elimination of overlapping branches, sharing of technology, etc.

BoR is the second smallest target after Sangli Bank (.009) in the ICICI Bank –Sangli Bank deal of 2006 in voluntary mergers. As far as cost to income ratio (CIR) is concerned, both the banks are dissimilar which may harm the post merger performance in the short run. BoR’s CIR stands at 106% (including fee expenses) which show that their expenses exceed income. ICICI Bank’s CIR stood at 87.87 % (including fee expenses), which is also not exemplary compared to global standards.

In financial leverage, the banks showed dissimilarity which will dilute the share capital of ICICI Bank up to 3% (see Table 2). Return on Assets (ROA) of BoR stands at .58%, while ICICI’s ROA is 1.1% which is just above the industry standards in India, which will thin the combined ROA. Quality of books of accounts of BoR is quite fair. The net NPA of the target bank is 1.6% against ICICI’s 1.87% but, in Capital Adequacy Ratio, the situation is worse for BoR. ICICI Bank has a strong CRAR of 19.4% against 9% prescribed by RBI and Basel II

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norms, whereas BoR’s CRAR is 7.74% which may harm the post merger performance. BoR’s non-interest expenses (efficiency ratio) are more but, their earnings diversity (non- interest income) is better than ICICI Bank which may offset in effect. The earnings diversification strategy indicates the bank’s exposure to the components of revenue other than interest income.

In the modern banking era, the income from other sources measures the bank’s efficiency to tap the financial service market, treasury operations etc. The post merger performance of the merged entity largely depends on how the bank’s management tackles these intrinsic issues.

WHAT ICICI BANK EXPECTED OUT OF THE MERGER

The immediate benefit will be a 23 per cent increase in ICICI Bank's branch network, especially in North India, where 60 per cent of BoR branches are located. This is of key importance, considering that ICICI has now moved to a branch-led business model.

It would increase ICICI Bank's equity capital by 3.07 per cent to 1.15 billion shares. As BoR is a loss-making entity, the merger will be marginally negative in terms of earnings. This means ICICI will have to slog in the initial months before the benefits of the deal accrue.

The acquisition will help ICICI increase CASA (current and savings account) flows, as also help in cross-selling products. With both banks working on the Financial platform, integration will also be less taxing.

What's more, with nearly 2,500 branches, ICICI Bank will steal a march over its nearest private sector rival, HDFC Bank, which had 1,725 branches at the end of March.

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Table showing some of the financials ratios before and after merger

PARTICULARS BoR(2010) ICICI before merger(2010)

ICICI after merger(/3/2011)

ICICI (march 2012)

Financial charges

coverage ratio

-.07 1.35 1.46 1.48

EPS -6.33 56.09 44.73 36.09Face value per

share10 10 10 10

Net profit margin

-6.85 12.17 15.91 16.14

Return on Equity

-18.86 7.79 9,35 10.70

Current ratio .02 .14 .11 .13Quick ratio 7.50 14.70 15.86 16.71

Capital adequacy ratio

7.52 19.41 19.54 18.52

CURRENT SCENARIOThe net profit of ICICI Bank has improved. It has improved from 5,151.38 to 6,465.26 from 2011 to 2012.

The net profit margin has improved from 9.94 to 11.48 from 2011 to 2012.

Return on Net Worth(%) has improved from 11.01 to 12.47 from 2011 to 2012.

Current Ratio has increased to 0.12 from 0.10.

ICICI Bank also reported a net profit of Rs.1,452 crore for the quarter ended March 31, 2011, an increase of 44 per cent compared to Rs.1,006 crore for the quarter ended March 31, 2010.

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ICICI BANK said : “The bank has continued with its strategy of pursuing profitable growth. In this direction, the bank continues to leverage its strong corporate franchise, its international presence and its expanded branch network in India,” ICICI Bank stated in a press release. The bank had 2,529 branches and 6,104 ATMs as on March 31, 2011, the largest branch network among private sector banks in the country.”

Advances increased by 19 per cent year-on-year to Rs.216,366 crore in 2010-11 from Rs.181,206 crore in 2009-10. Savings deposits increased by 26 per cent year-on-year to Rs.66,869 crore from Rs.53,218 crore and the CASA ratio increased to 45.1 per cent from 41.7 per cent.

The bank's capital adequacy for the year under review as per the Reserve Bank of India's revised guidelines on Basel II norms was 19.54 per cent and Tier-1 capital adequacy was 13.17 per cent, above RBI's requirement of total capital adequacy of 9 per cent and Tier-1 capital adequacy of 6 per cent.

Net non-performing assets decreased by 37 per cent to Rs.2,459 crore (Rs.3,901 crore).

CONCLUSION

Mergers and Acquisitions of banks are one of the major outcomes of the financialtransformation process in India. From the study, one can come to a definitive conclusion that the primary reason for the merger between ICICI Bank and the Bank of Rajasthan, a major landmark in Indian Banking history, has occurred due to the regulatory interventions of the authorities.

It is observed that both the banks are dissimilar in most of the key parameters.Therefore, the management of the acquiring firm (ICICI Bank) has to focus on this intrinsic issue in the post-merger period to boost the performance of the merged entity. There are only slight movements in the prices of both the banks during the merger-negotiation period.

Surprisingly, when the RBI and SEBI were initiating actions against irregularities in BoR, the bank experienced a major 20.9% rise in price whereas the Bank Nifty exhibited an increase of 9.9% only. It was during this quarter that, the holding of institutional investors increased substantially from 5.73% to 16.24%. Hence, it can be presumed that the reason for the market price appreciation was due to information asymmetry or insider trading or both. It is interesting to note that after the announcement of the

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merger, the BoR gained about 77% in price and ICICI Bank declined by 1.7%. The sharp increase in the share price of the BoR can be explained as a shift to the price offered by ICICI Bank. Finally, looking into the valuation of the merger, the swap ratio was 1: 4.72, which is fair if we combine the results of contribution analysis of size variables and the financial fundamentals of the banks.

Given the market value of immovable properties and other assets (brand, goodwill) it is a win-win situation for both the banks- a value buying for ICICI and a graceful face saving for Bank of Rajasthan. However, a seven decade old bank would loose its identity and name for ever- the cost it paid for the governance. The BOR- ICICI merger is perhaps a live example of what poor corporate governance can cost to the organization.

BOR’s slogan says ‘together we prosper’ which seems to be coming really true now……..

Post merger, the value of ICICI Bank shares will also go up as the business grows and the advantages of merger start accruing.

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ANNEXURE I: COMPARISON OF BALANCE SHEETS AND INCOME STATEMENTS OF ICICI BANK AND BOR AS ON 31-03-2010(RS. IN ‘000S)

PARTICULARS ICICI BoR

CAPITAL 1 11,148,892 1,61,35,01

RESERVES&SURPLUS2505,034,767 7,75,15,80

DEPOSITS2,020,165,972 1,50,62,35,11

BORROWINGS4942,635,686 65,48

OTHER L&P 155,011,834 13,00,54,65

TOTAL CAPITAL&LIABILTIES 36,33,997,151 1,73,00,06,05

CASH BALANCE WITH RBI273,142,920 10,78,70,47

MONEY AT CALL AND SHORT NOTICE

113,594,020 3,08,89,72

INVESTMENTS 1,208,928,005 67,22,50,98

ADVANCES1,812,055,971 83,29,47,45

FIXED ASSETS 32,126,899 5,16,15,86

OTHER ASSETS 192,149,336 3,44,31,57

TOTAL ASSETS 3,633,997,151 1,73,00,06,05

NET PROFIT/LOSS40,249,829 (1,02,13,05)

INTEREST INCOME257,069,331 13,59,48,86

OTHER INCOME 74,776,500 1,29,99,37

INTEREST EXPENDED 175,925,70410,24,47,64

OPERATING EXPENSES 58,597,327 4,92,90,44

PROVISIONS&CONTINGENCIES57,071,971 74,23,20

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