Mergers & Acquisitions HDFC-CBOP Final
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Transcript of Mergers & Acquisitions HDFC-CBOP Final
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MERGERS & ACQUISITIONS
PROF. RAMAKRISHNAN
HDFC-CBOP MERGER ANALYSIS
Amit Kumar-03
Krishnakumar Chirakkal-10
Darshan Joshi -11
Jeevan Prabhu -16
Ajoy Agarwal-31
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Introduction
M&As in banking since 1961
Nationalisation of Banks in 1969, even prior to that about46 amalgamations have taken place.
Initially, the mergers were thrust upon by RBI to take
over a sick bank. In 1998, Narsimham Committee II suggested market
driven mergers as a way to strengthen the IndianBanking Sector
They suggested that banks merge on the basis ofbusiness considerations and strategic fit so as to gainvarious kinds of synergies in the post-merger period
Thus in 1999, the first market driven merger took placebetween HDFC and Times Bank.
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Major Mergers of Last Decade
Year Transferor Bank Transferee Bank
2001 Bank of Madura ICICI Bank Ltd.
2002 Benaras State Bank Ltd. Bank of Baroda
2003 Bank Muscat Centurion Bank of Punjab
2004 Global Trust Bank Oriental Bank of Commerce
2006 Lord Krishna Bank Centurion Bank of Punjab
2007 Sangli Bank ICICI Bank Ltd.
2008 State Bank of Saurashtra State Bank of India
2008 Centurion Bank of Punjab HDFC Bank Ltd.
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Legal Perspective of BankingAmalgamation
Sec 44A of the Banking Regulation Act, 1949 providesfor the procedure for amalgamation of bankingcompanies.
The draft scheme of amalgamation has to be approvedby the shareholders of each banking company by aresolution passed by a majority in number representingtwo-thirds in value.
Any shareholder, who has voted against the scheme ofamalgamation at the meeting or has given notice inwriting shall be entitled to claim from the banking
company, the value in respect of the shares held by him Before convening a meeting of the shareholders for their
approval, the draft scheme of amalgamation needs to beapproved individually by the Board of Directors of eachbank.
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Legal Perspective of BankingAmalgamation
Once the Scheme of amalgamation is approved by therequisite majority of shareholders in accordance to theprovisions of the section, it shall be submitted to theReserve Bank for Sanction
On the sanctioning of the scheme from RBI, the assetsincluding any property thereof will be transferred to thetransferee company
Similarly, the liabilities of the transferor company, shall by
virtue of the sanction, be the virtue of the transfereecompany.
Further, on the receipt of the order the Registrar ofCompanies will strike the name off the transferor.
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A Brief History.
CBOP History
30 June94 - Centurion Bank was incorporated
2003 Acquires Bank Muscat
2005 - Bank of Punjab Merges with Centurion bankto form Centurion Bank of Punjab.
2006 CBOP acquired south-based Lord KrishnaBank
HDFC History August94 Incorporation of HDFC bank
2000- Acquired Times Bank
finally in 2008 Acquired CBOP
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Deal Size and Structure
The merger became effective onMay 23, 2008 as per the order ofReserve Bank of India (RBI) datedMay 20, 2008.
CBoP was valued at $2.63 billion
(Rs. 9510 crores) All stock deal
Swap Ratio 1:29
1 HDFC share swapped with 29shares of CBoP
The swap ratio was based on therecommendations made by jointvaluers Dalal & Shah, a charteredaccounting firm, and Ernst &Young, a consulting Firm
Pooling of interest method was
used for accounting
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BASES FOR DETERMINING EXCHANGERATIO
Market Price Method
Share Exchange Ratio = (Mkt Price of CBoP)/ (Mkt Price of HDFC Bank)
SER = 51 /1475 = 0.03458 i.e. Swap ratio 1:29
EPS Method
SER= (EPS of CBoP /EPS of HDFC Bank )
SER = 0.67/31.6 = 0.021 i.e. Swap ratio 1:48
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Stock Market Reaction
The CAR on the immediate announcement day is 1.01 forCBoP.
The CARs for the day 0 to +10 was -13.89 for CBoP.
The major cause of fall in returns of CBoP may be attributed
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Stock Market Reaction
The reason for the immediate negative market reaction to HDFC Bankcan be that it was a stock-financed merger and also the market felt thatHDFC Bank had paid more price than the real worth of the target bank.
HDFC Banks shares recover two days after the announcement on theexpectation of huge economic and managerial synergies that themerged entity would enjoy.
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Challenges to the Merger
Expensive Acquisition
HDFC bank had paid a sum of 2.68 Cr whereas cost of setting up anew
branch is 0.3 Cr Sub-optimal locations of 50-100 CBOP branches
Low Quality Assets
Inferior asset quality of CBOP
Ratio of NPA to total assets = 0.43% for HDFC, whereas 1.31% forCBOP Declining share of low cost deposits at CBOP
Risky Loan Profile
SME loans are prone to high default rates
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Challenges to the Merger
Integration Issues
Both HDFC Bank and CBoP have worked in a union-free
environment
Trade union culture at Lord Krishna bank
Ongoing agitation by unions of public sector banks
Competency and perception mapping of employees
Dilution in ROE
After merger shareholding of HDFC promoters is going to
reduce from 23% to 19%
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Opportunity in every Difficulty
Expensive deal Time machine taking HDFC 2.5yrs ahead. Also it has saved itself from thehassles it would have to face for getting freshbranch licenses from RBI
Integration - Top brass of the managementsshared a good chemistry, strengtheningmanagement bandwidth
Different technology platforms - Yet there are no
data legacy issues as the two are alreadytechnology oriented. Dilution of equity Convertible warrants to
promoters of HDFC
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Operating Synergy
Economies of Scope
Addition of 394 of CBoPs branches resulted in thecombined entity having 1148 branches. With themerger, HDFC Banks metro branches will increase by
44% in one shot, while its non metro branches willincrease by 57%.
Similar business model and philosophy underlined bya thrust on branch network expansion and retail
assets. Transform in the largest branch distribution network for
a private bank in India.
Both banks have senior managements of high calibrewho have worked with Citigroup at some point in their
career.
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Operating Synergy
Economies of Scale
Scope to enhance productivity CBoPs cost to income ratio is high at 63%. There is also scope for improvement in utilization
ratios with improvement in branch and employeeproductivity to near HDFC Banks levels. Improvement in productivity levels will help HDFC
Bank lower CBoPs cost to income ratio over themedium term.
Complementary Overlay With the merger, CBoPs ability to grow its loan book
will complement HDFC Banks deposit franchise. On the product portfolio side, both the banks have a
strong foothold in vehicle financing, which is a naturals ner .
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Operating Synergy
Boost to International Operations: HDFC had a representative office in Dubai and had
obtained licenses to operate branches in Bahrain and HongKong, whereas CBoP had one branch in Canada.
The merged entity may also explore the opportunity ofacquiring banks in foreign markets.
Managerial Synergies: HDFC Bank had been growing at over 40% annually and to
sustain this growth, it needs massive managementbandwidth.
The merger with CBoP would bring with it the top-notchmanagement team that would help the merged entity inmeeting its future manpower requirements.
The merged entity would be leveraging the expertise of thisstar-studded management team for managing its domestic
as well as international operations.
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Post Merger Scenario
Impact on Growth
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Post Merger Scenario
The size of merged entity expanded by 23%.
The merged entity moved up from 10th to 7thposition.
The merger immediately provided hugeadvantage to the merged entity in terms of size,
deposits, customers, business and profitability.
Impact on Growth
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Post Merger Scenario
Impact on Profitability
Ahead of its peer as well as the rival bank even aftermerger in terms of various profitability ratios, though thesewould decline compared to the stand-alone performance
of HDFC Bank.
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Post Merger Scenario
Impact on Efficiency
Except for the ratio of operating cost/total assets, all otherefficiency ratios were better for the merged entity as compared tothat of the stand-alone entity, its peer and the rival banks. So, themerger improved the efficiency with immediate effect.
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Post Merger Scenario
Impact on Productivity - Branch
Branch productivity of the merged bank deteriorated interms of all ratios as compared to the stand-aloneperformance of HDFC Bank as well as when compared tothe performance of its peer and rival bank.
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Post Merger Scenario
Impact on Productivity - Employee
Results similar to those of branch productivity -decreased
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Post Merger Scenario
From analysis of various ratiosMerged HDFC Bank gain size, scale and businessreach along with the improvement in the profitabilityand efficiency with immediate effect.
Branch productivity as well as employee productivitydeteriorate as a result of the merger.
1. Proper branch and employee rationalization.(more products and services being pushed throughthe
enlarged branch network and workforce).2. Realization of potential synergies in the form of
economies of scale and scope
Requirement
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Post Merger Scenario
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Post Merger Scenario
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Post Merger Scenario
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Post Merger Scenario
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Thank You