INTRODUCTION

The words Mergers and Acquisitions are often used as an interchangeable term, a convenient but inaccurate usage. Mergers refer to deals where two or more companies take virtually equal stakes in each others businesses, whereas an acquisition is the straightforward purchase of a target company by another company. What is a Merger? A "merger" or "merger of equals" is often financed by an all stock deal (a stock swap). An all stock deal occurs when all of the owners of the outstanding stock of either company get the same amount (in value) of stock in the new combined company. The terms "demerger," "spin-off" or "spin-out" are sometimes used to indicate the effective opposite of a merger, where one company splits into two, the second often being a separately listed stock company if the parent was a stock company. Merger is a legal process and one or more of the companies lose their identity. What is an Acquisition? In a laymans language an acquisition is one company acquiring a cont rolling interest in another company. An acquisition (of un-equals, one large buying one small) can involve a cash and debt combination, or just cash, or a combination of cash and stock of the purchasing entity, or just stock. An acquisition occurs when an organization acquires sufficient shares to gain control/ownership of another organization. Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target's board. In an acquisition there are clear winners or losers; power is not negotiable, but is immediately surrendered to the new parent on completion of the deal. `Those who hold the title also hold the pen to draw the organizational chart'. High-yield In some cases, a company may acquire another company by issuing high-yield debt (high interest yield, "junk" rated bonds) to raise funds (often referred to as a leveraged buyout). The reason the debt carry a high yield is the risk involved. The owner can not or does not want to risk his own money in the deal, but third party companies are willing to finance the deal for a high cost of capital (a high interest yield). The combined company will be the borrower of the high-yield debt and it will be on its balance sheet. This may result in the combined company having a low shareholders' equity to loan capital ratio (equity ratio).
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Consolidation Technically speaking consolidation is the fusion of two existing companies into a new company in which both the existing companies extinguish. Merger and Consolidation can be differentiated on the basis that, in a merger one of the two merged entities retains its identity whereas in the case of consolidation an entire new company is formed. Takeovers A takeover bid is the acquisition of shares carrying voting rights in a company with a view to gaining control over the management. The takeover process is unilateral and the offer or company decides the maximum price. Demerger It means hiving off or selling off a part of the company. It is a vertical split as a result of which one company gets split into two or more. Amalgamation Halsburys Laws of England describe amalgamation as a blending of two or more existing undertaking into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertaking.

DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

CLASSIFICATIONS OF MERGERS
Mergers are generally classified into 5 broad categories. The basis of this classification is the business in which the companies are usually involved. Different motives can also be attached to these mergers. The categories are: Horizontal Merger It is a merger of two or more competing companies, implying that they are firms in the same business or industry, which are at the same stage of industrial process. This also includes some group companies trying to restructure their operations by acquiring some of the activities of other group companies. The main motives behind this are to obtain economies of scale in production by eliminating duplication of facilities and operations, elimination of competition, increase in market segments and exercise better control over the market. There is little evidence to dispute the claim that properly executed horizontal mergers lead to significant reduction in costs. A horizontal merger brings about all the benefits that accrue with an increase in the scale of operations. Apart from cost reduction it also helps firms in industries like pharmaceuticals, cars, etc. where huge amounts are spent on R & D to achieve critical mass and reduce unit development costs. Vertical Mergers It is a merger of one company with another, which is involved, in a different stage of production and/ or distribution process thus enabling backward integration to assimilate the sources of supply and / or forward integration towards market outlets. The main motives are to ensure ready take off of the materials, gain control over product specifications, increase profitability by gaining the margins of the previous supplier/ distributor, gain control over scarce raw materials supplies and in some case to avoid sales tax. Conglomerate Mergers It is an amalgamation of 2 companies engaged in the unrelated industries. The motive is to ensure better utilization of financial resources, enlarge debt capacity and to reduce risk by diversification. It has evinced particular interest among researchers because of the general curiosity about the nature of gains arising out of them. Economic gain arising out of a conglomerate is not clear.
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Much of the traditional analysis relating to economies of scale in production, research, distribution and management is not relevant for conglomerates. The argument in its favour is that in spite of the absence of economies of scale and complimentaries, they may cause stabilization in profit stream. Even if one agrees that diversification results in risk reduction, the question that arises is at what level should the diversification take place, i.e. in order to reduce risk should the company diversify or should the investor diversify his portfolio? Some feel that diversification by the investor is more cost effective and will not hamper the companys core competence. Others argue that diversification by the company is also essential owing to the fact that the combination of the financial resources of the two companies making up the merger reduces the lenders risk while combining each of the individual shares of the two companies in the investors portfolio does not. In spite of the arguments and counter- arguments, some amount of diversification is required, especially in industries which follow cyclical patterns, so as to bring some stability to cash flows. Concentric Mergers This is a mild form of conglomeration. It is the merger of one company with another which is engaged in the production / marketing of an allied product. Concentric merger is also called product extension merger. In such a merger, in addition to the transfer of general management skills, there is also transfer of specific management skills, as in production, research, marketing, etc, which have been used in a different line of business. A concentric merger brings all the advantages of conglomeration without the side effects, i.e., with a concentric merger it is possible to reduce risk without venturing into areas that the management is not competent in. Consolidation Mergers: It involves a merger of a subsidiary company with its parent. Reasons behind such a merger are to stabilize cash flows and to make funds available for the subsidiary. Market-extension merger Two companies that sell the same products in different markets. Product-extension merger Two companies selling different but related products in the same market.

WAYS OF HANDLING A MERGER OR AN ACQUISITION

There are 4 ways in which a merger can be handled 1 ) Friendly merger A merger whose terms are approved by the management of both companies. Usually such mergers have a high probability of success
2 ) Hostile merger

A merger in which the target firms management resists the acquisition or merger.
3 ) Tender offer

The offer of one firm to buy the stock of another by going directly to the stockholders, frequently (but not always) over the opposition of the target companys management
4 ) Proxy Fight

An attempt to gain control of a firm by soliciting stockholders to vote for a new management team.

Terms like "dawn raid", "poison pill", and "shark repellent" might seem like they belong in James Bond movies, but there's nothing fictional about them - they are part of the world of mergers and acquisitions (M&A). Owning stock in a company means you are part owner, and as we see more and more sector-wide consolidation, mergers and acquisitions are the resultant proceedings. So it is important to know what these terms mean for your holdings. Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today's dynamic economic environment, companies are often faced with decisions concerning these actions - after all, the job of management is to maximize shareholder value. Through mergers and acquisitions, a company can develop a competitive advantage and ultimately increase shareholder value. There are several ways that two or more companies can combine their efforts. They can partner on a project, mutually agree to join forces and merge, or one company can outright acquire another company, taking over all its operations, including its holdings and debt, and sometimes replacing management with their own representatives. Its this last case of dramatic unfriendly takeovers that is the so urce of much of M&As colorful vocabulary.
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Hostile Takeover This is an unfriendly takeover attempt by a company or raider that is strongly resisted by the management and the board of directors of the target firm. These types of takeovers are usually bad news, affecting employee morale at the targeted firm, which can quickly turn to animosity against the acquiring firm. Grumblings like, Did you hear they are axing a few dozen people in our finance department can be heard by the water cooler. While there are examples of hostile takeovers working, they are generally tougher to pull off than a friendly merger.

HISTORY OF MERGERS IN THE 20TH CENTURY

In 1998 there were a large number of blockbuster mergers and acquisitions that made past mergers and acquisitions look small by comparison. For example, the largest announced mergers in 1998 were the marriage between Citicorp and Travelers Group estimated at $77 billion in value and Exxons acquisition of Mobil for an estimated $79 billion. Closely following were transactions between SBC and Ameritech values at approximately $61.8 billion and between Nations Bank Corp and BancAmerica Corp. valued at approximately $60 billion. AT&T announced the acquisition of TeleCommunications, Inc, valued at approximately $43 billion. One of the largest industrial mergers and acquisition was between Chrysler Group and Daimler Benz AG Valued at $45.5 billion, was also announced. These were all larger than the acquisition of MCI by WorldCom announced in 1997 and characterized as a megamerger by many at approximately $37 billion. The size and number of M&A transactions continue to grow worldwide. For example one of the largest mergers in history was announced in 1999 MCI WorldCom and Sprint agreed to a merger values by analyst at $ 115 billion and $129 billion. But it did not receive regulatory approval and the respective boards of directors called off the merger agreement in July 2000. Had the merger been completed it would have been the second largest global telecommunications company behind only AT&T.

IMPORTANCE OF MERGERS AND ACQUISITIONS

The 1980s produced approximately 55,000 mergers and acquisitions in the Un ited States alone. The value of the acquisitions during this decade was approximately $1.3 trillion as impressive as these figures are; they are small in comparison to the merger wave that began in the earlier 1990s approximately in 1993. The number and v alue of mergers and acquisitions have grown each year since 1993. For example in 1997 there were approximately 22,000 mergers and acquisitions roughly 40% of the total acquisitions during the whole decade of the 1980s. Perhaps more significant, the value of these mergers in 1997 was $1.6 trillion. In other words, the acquisitions completed in 1997 were valued at $300 billion more than the value of acquisitions during the 1980s. Interestingly 1980s was often referred to as the decade of Merger Madness. The year 1998 was no different, as noted by the huge Merger and Acquisitions transactions listed earlier; it was predicted to be another record year. Interestingly the 6,311 domestic mergers and acquisitions announced in 1993 had a total value of $234.5 billion for an average $37.2 million, whereas the mergers and acquisitions announced in 1998 had an average value of $168.2 million for an increase of 352% over those of 1993. Approximately $2.5 trillion in mergers were announced in 1999, continuing the upward trend. The merger and acquisitions in the 1990s represent the fifth merger wave of the twentieth century and their size and numbers suggest that the decade of 1990s might be remembered for the megamerger mania. With five merger waves throughout the twentieth century, we must conclude that mergers and acquisitions are an important, if not dominant. Strategy for twenty first century organizations

THE MOTIVE BEHIND MERGERS AND ACQUISITIONS

The strategic Goals of mergers and acquisitions 1 ) Economies of Scale
2 ) Consolidation: -

Media buyers are now consolidating to increase ad rates

3 ) Globalization: -

For Example Kerry Group an Irish milk processor and dairy cooperative has become a global player after a string of acquisitions in the food and ingredients business.
4 ) Create or gain access to distribution channels: -

A lack of distribution has been one of the main hindrances to growth of the wine companies. They are overcoming this by a string of acquisitions for example Fosters.
5 ) Gain access to new products and technologies: -

Pooling resources helps pharmaceutical companies to speed up research and development of new drugs and also to share the risks and place a number of bets on emerging technologies. In the 1990s 23 pharmaceutical merger to form the top ten players.
6 ) Enhance or increase products and/or services: -

Mergers between large banks specializing in different sectors for example when Allianz AG acquired Dresdner Bank.
7 ) Increase market share or access to new markets: -

Car manufacturers turn to mergers and acquisition for this reason. For example when Daimler Benz and Chrysler Group merged, when Ford acquired Jaguar. 8 ) Diversification
9 ) To offset threatened loss of market 1 0 ) To increase the rate of growth 11)

To improve cyclical and seasonal stability

12) 13)

To improve effectiveness of the marketing effort To employ excess capital

1 4 ) To change from a holding company to a operating company

STAGES OF A MERGER

Pre-mergers are characteristics by the following stages: 1 ) COURTSHIP: The respective management teams discuss the possibility of a merger and develop a shared vision and set of objectives. This can be achieved through a rapid series of meetings over a few weeks, or through several months of talks and informal meetings
2 ) EVALUATION AND NEGOTIATION: -

Once some form of understanding has been reached the purchasing company conducts due diligence a detailed analysis of the target company assets, liabilities and operations. This leads to a formal announcement of the merger and an intense round of negotiations, often involving financial intermediaries. Permission is also sought from trade regulators. The new management team is agreed at this point, as well as the board structure of the new business. This phase typically lasts three or four months, but it can take as long as a year if regulators decide to launch an investigation into the deal. Closure is a commonly referred term to describe the point at which the legal transfer of ownership is completed.
3 ) PLANNING: -

More and more companies use this time before completing a merger to assemble a senior team to oversee the merger integration and to begin planning the new management and operational structure. Post Merger is characterized by the following phases: 4 ) THE IMMEDIATE TRANSITION: 10

This typically lasts three to six months and often involves intense activity. Employees receive information about whether and how the merger will affect their employment terms and conditions. Restructuring begins and may include site closures, redundancy announcements, divestment of subsidiaries (sometimes required by trade regulators), new appointments and job transfers. Communications and human resources strategies are implemented. Various teams work on detailed plans for integration.
5 ) THE TRANSITION PERIOD : -

This lasts anywhere between six months to two years. The new organizational structure is in place and the emphasis is now on fine tuning the business and ensuring that the envisaged benefits of the mergers are realized. Companies often consider cultural integration at this point and may embark on a series of workshops exploring the values, philosophy and work styles of the merged business.

A companys integration process can ensure the formation of such a circle. It acts rather like the Gulf Stream, where the flow of hot and cold water ensures a continuous cyclical movement. A well designed integration process ensures that the new entitys designed strategy reaches deep into the organization, ensuring a unity of purpose. Basically everyone understands the purpose and logic of the deal. The integration process can ensure that the ideas and the creativity can are not dissipated but are fed into the emergent strategy of the organization this is achieved through the day to day job of the encouraging and motivating people and also creating forums where people can think the impossible. The chart below demonstrates the relationship between designed and emergent strategy and merger integration. It suggests how merging organizations can become learning organization; strategy formulation and implementation merges into collective learning. Some merger failures can be explained by this model. For example, serious problems arise when a company relies too heavily on designed strategy. If the management team is not getting high quality feedback and information from the rest of the organisation, it runs the risk of becoming cut off. Employees may perceive their leaders as being out of touch with reality of the merger, leading to a gradual loss of confidence in senior
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managements ability to chart the future of the new entity. Similarly, the leadership team may not receive timely information about external threats, brought about perhaps by the predatory actions of competitors or dissatisfies customers with the result that performance suffers and the new management is criticized for failing to get grips with the complexities of the changeover. However, too much reliance on emergent strategy can lead to the sense of a leadership vacuum within the combining organizations. The management team may seem to lack direction or to be moving too slow. This often leads political infighting and territory building and the departure of many talented people. Therefore it is very important that a careful balance is struck between designed and emergent strategy for integration after the merger between two companies is done. MANAGING CULTURES DURING THE PROCESS OF MERGERS AND ACQUISITIONS Basing a merger decision purely on financial criteria is similar to deciding that your inlaws must move in to help share the rent. It may make financial sense, but it certainly doesn't take into account the disruption or impact this will have on your family life. What is culture? Culture concerns the internalization of a set of values, feelings, attitudes, expectations and the mindsets of the people within an organization. This culture provides meaning, order and stability to their lives and influences their behaviour. Organizational culture exists at two levels. 1) Those values that are shared by the people working in the organization, values that tend to persist within the organization even if its membership changes. 2) The behavior patterns or style of an organization. New employees are automatically encouraged to behave in a similar fashion by their colleagues. Culture can be categorized into various types such as Power Cultures, Support Cultures, Task \ Achievement Cultures and Role Cultures. The various aspects of culture can also be synthesized into a number of dimensions such as conflict resolution, culture management, customer orientation, and disposition towards change.

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Prior to a merger, the cultures of both organizations should be measured on these dimensions in order to determine the level of compatibility (or incompatibility) of the two organizations. Measuring and understanding the diverse organisational cultures should form part of the due diligence process, as it provides the negotiators from both parties with a sound understanding of the human resource issues. In this way, the cost of dealing with these issues can then be factored into the acquisition price of the company. Unless this is done, an acquirer might, in many cases, find that they have bought less than they bargained for. The other advantage of conducting an organisational culture audit before the companies are officially merged is that it provides a basis to measure later interventions to merge organisational culture. In addition, it focuses the energies of the executives in creating a unified organisation that maximises potential synergies. The tendency in mergers is to take the easy route and adopt the stronger culture; however, an opportunity to merge the best of both cultures is then missed. The earlier the direction of the new company and its identity is decided upon, as well as which parts of both contributing cultures are going to be kept, the easier the decision-making process will be, and the less the chance of losing a valuable aspect from either culture. The merger of two culturally different organizations could result in conflict during the period immediately following the merger or acquisition. This often results in a decrease in employee morale, anger, anxiety, communication problems and a feeling of uncertainty about the future. The organisation that does not take the positive aspects of organisational culture and the human resources within the acquired company into account, is missing one of the most valuable assets of that organisation: Intellectual capital. Executives who fail to consider these issues when acquiring a company are not serving themselves or their shareholders. An example of a merger that failed due to improper integration or understanding of cultures is the Daimler-Benz and Chrysler merger. People said that even seemingly mundane communication differences between the employees of the German and the American auto giants challenged the stability of the combined entity. The basic differences in the merger started cropping up because their, mentalities were opposite. Americans were bothered only with the vision and they would fill in the details in later. Germans are trained to think deductively and they kept thinking how they would make it work. Even something as innocuous as the office-seating layout started straining the relations. The Germans kept the doors of their office cabins closed because thats how they are trained but Americans always thought that the Germans were having meetings
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excluding them. The formal Germans and the informal Americans had a tough time trusting each other. People in Mergers An announcement of a merger or an acquisition sends a strong a message to your competitors and to the recruiting firms that serve them: your employees are ripe for the picking. Competitors understand that your employees dont know whether they have a job or, if they do, where it will be located, where they fit into the new companys structure, how much pay they will receive, or how their performance will be measured. Key employees usually receive inquiries within five days of a merger announcement precisely when uncertainty is at its highest. And no organizational level is exempt. Plenty of attention is paid to the legal, financial, and operational elements of mergers and acquisitions. But executives who have been through the merger process now recognize that in todays economy, the management of the human side of change is the real key to maximizing the value of a deal.

DISADVANTAGES OF MERGERS AND ACQUISITIONS All liabilities assumed (including potential litigation) 2 ) Two thirds of shareholders (most states) of both firms must approve 3 ) Dissenting shareholders can sue to receive their fair value 4 ) Management cooperation needed 5 ) Individual transfer of assets may be costly in legal fees 6 ) Integration difficult without 100% of shares 7 ) Resistance can raise price 8 ) Minority holdouts 9 ) Technology costs - costs of modifying individual organizations systems etc. 1 0 ) Process and organizational change issues every organization has its own culture and business processes 1 1 ) Human Issues Staff feeling insecure and uncertain. 1 2 ) A very high failure rate (close to 50%).
1)

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WHY MERGERS & ACQUISITIONS DO NOT SUCCEED?

Despite the popularity and importance of mergers and acquisitions among large and small firms, many mergers and acquisitions do not produce the benefits that are expected or desired by the buying firm. Some of the reasons could be:

1 ) High cost of financing

A study conducted by Mckinsey shows that 60% of the acquisitions examined failed to earn returns greater than the annual cost of capital required to finance the acquisitions.

2 ) The potential for managerial hubris

This may preclude an adequate analysis of the target firm or may produce substantial premiums paid for the firm that is acquired. In such a case the mergers and acquisitions may not be for the benefit of the company. An e.g. is Sonys $5 billion takeover of Columbia Studios in which Walter Yetnikoff, the CEO of Sony paid almost $800 million to acquire two producers from their contract at the Warner Bros. This was a part of the battle with the Warner Bros CEO, Steven Ross. Yetnikoff convinced his superiors at Sony that the producers would earn millions of $ for them. Unfortunately both of them set records for underachievement.

3 ) Failure to integrate
Diverse cultures, structures and operating systems of the two firms.

4 ) Failure to do proper due diligence

During the pre-merger or acquisition stage.

5 ) Bankruptcy of strategy
There is a strong belief that mergers and acquisitions indicate a bankruptcy of strategy, an inability to innovate. CEOs in order to defend their merger plans are often quoted saying Only the biggest survive. This rationale is largely spacio us; size does not inoculate a company from rule-busting innovation. Thus lack of innovation is another reason for mergers floundering.

6 ) Employees of the organization

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1 ) The sought-after benefits of greater size and efficiency are nullified by increased

losses related to top-heavy organizations which mean that the people increase as a result the benefits etc provided to the top management also substantially increase.
2 ) There are problems of: reduced job security, increased work loads, anxiety and stress

all of which have a negative effect on the morale of the employees which in turn affects their productivity.
3 ) If the employees and the culture of the companies are not integrated then this can be

a major reason for the failure of the merger and acquisition HR ISSUES IN MERGERS & ACQUISITIONS People issues like staffing decision, organizational design, etc., are most sensitive issues in case of M&A negotiations, but it has been found that these issues are often being overlooked.
Before the new organization is formed, goals are established, efficiencies

projected and opportunities appraised as staff, technology, products, services and know-how are combined. But what happens to the employees of the two companies? How will they adjust to the new corporate environment? Will some choose to leave? When a merger is announced, company employees become concerned about job security and rumors start flying creating an atmosphere of confusion, and uncertainty about change. Roles, behaviors and attitudes of managers affect employees' adjustment to M&A.
Multiple waves of anxiety and culture clashes are most common causes of

merger failure. HR plays an important role in anticipating and reducing the impact of these cultural clashes. Lack of communication leads to suspicion, demoralization, loss of key personnel and business even before the contract has been signed.
Gaining emotional and intellectual buy-in from the staff is not easy, and so
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the employees need to know why merger is happening so that they can work out options for themselves. Major stress on the accompany merger activity are: * Power status and prestige changes * Loss of identity * Uncertainty Unequal compensation may become issue of contention among new co-workers.

A SURE GUIDE TO UNSUCESSSFUL MERGERS / REASONS FOR FAILURE OF MERGERS COSTLY OVERSIGHTS Overlooking the scientific development of new competitive materials and new is only one of the faults that sometimes lead to unhappy merger results. Another costly oversight is failure to consider those new developments in chemistry, physics, metallurgy, plastics and so on which are now still in the pre-patent stage but which, when in full boom, may completely wipe out the market of the for the acquired companys chief product. Patents maybe developed for new scientific processes which chop production costs radically, may make machinery and equipment obsolete and undermine many of the older processes. For example, a major manufacturer of electronic organ part decided it was sound strategy to diversification was a sound move. With the help pf its major bank, this manufacturer acquired a well-run electronic company which specialized in electronic circuitry. This west coast producer had a new process in its lab it was of creating circuitry on glass and plastics this was done by specially treating glass and plastics and then scratching a circuit on its surface with a mechanical stylus. The result was a sort of primitive printed circuit which had an excellent potentiality for savings in material and labour costs. About two years after this costly acquisition, the parent manufacturer discovered that new chemical techniques were available which would produce uniform circuits on
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plastics and glass, outmoding the entire process of scratching such circuits with a mechanical stylus. How can this sad but common error be avoided? The answer lies in understanding how scientific innovations are detected in every industry. Many branches of the various scientific disciplines run along parallel path. In this above case actually clues to the new chemical development were all in the scientific literature of the industry at the time of the acquisition but no one had been asked to look. The Need for Research The likelihood of making acquisitions mistakes is especially strong among large companies which are buying a scattered selection of smaller companies operating in many diverse fields in which technical products or processes are involved. That this approach is quite common today is evidenced by the Federal Trade Commission, which indicated that conglomerate acquisitions were on the rise in many manufacturing industries. For example purchase if a canning-machinery concern by a diesel engine manufacture. The variety of actual conglomerate acquisitions is truly astounding, for example a truck assembler acquiring a chain of department stores. Some of these companies have taken the plunge because of a variety of reasons like they had a lot of cash in the corporate till and were in a hurry to grow. Others have wanted a leap out of a stagnant industry in one jump. Still others have chosen to diversify in order to escape their own industrys bust -or-boom cycle. A few have decided to move into new fields because they might run afoul of antitrust laws if they acquired firms in their own industry. A large plywood manufacturing company had been selling certain plywood to aircraft manufacturer for its interiors. On the advice of its bank it purchased a small chemical factory which had developed a substance which was of high transparency and could withstand high temperatures. This the plywood company felt they could easily supply to its aircraft manufacturers as windshields The plywood company acquired the chemical company invested a further six figure amount. Finally when the chemical subsidiary was ready to produce the windshields, they found out to their considerable dismay that researchers in another fields had discovered a better and a cheaper material then the one they had to offer.
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This development had been foreshadowed in research papers in the learned journals of this field, which were available to any knowledgeable technical investigator at the time the plywood company was acquiring the chemical subsidiary. This shows us the importance of research.

CROSS BORDER MERGERS AND ACQUISITIONS The rise of globalization has exponentially increased the market for cross border M&A. In 1996 alone there were over 2000 cross border transactions worth a total of approximately $256 billion. This rapid increase has taken many M&A firms by surprise because the majority of them never had to consider acquiring the capabilities or skills required to effectively handle this kind of transaction. In the past, the market's lack of significance and a more strictly national mindset prevented the vast majority of small and mid-sized companies from considering cross border intermediation as an option which left M&A firms inexperienced in this field. This same reason also prevented the development of any extensive academic works on the subject. Due to the complicated nature of cross border M&A, the vast majority of cross border actions have unsuccessful results. Cross border intermediation has many more levels of complexity to it than regular intermediation seeing as corporate governance, the power of the average employee, company regulations, political factors customer expectations, and countries' culture are all crucial factors that could spoil the transaction. Until upto a couple of years back, the news that Indian companies having acquired American-European entities was very rare. However, this scenario has taken a sudden U turn. Nowadays, news of Indian Companies acquiring foreign businesses is more common than other way round. Buoyant Indian Economy, extra cash with Indian corporates, Government policies and newly found dynamism in Indian businessmen have all contributed to this new acquisition trend. Indian companies are now aggressively looking at North American

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and European markets to spread their wings and become the global players.

The top 10 acquisitions made by Indian companies worldwide: Acquirer Target Company Country targeted Deal value Industry Corus Group plc UK 12,000 Steel Tata Steel Novelis Canada 5,982 Steel Hindalco Korea 729 Electronics Videocon Daewoo Electronics Corp. Betapharm Germany 597 Pharmaceuti Dr. cal Reddy's Labs Hansen Group Belgium 565 Energy Suzlon Energy Kenya Petroleum Kenya 500 Oil and Gas HPCL Refinery Ltd. Terapia SA Romania 324 Pharmaceuti Ranbaxy cal Labs Natsteel Singapore 293 Steel Tata Steel Thomson SA France 290 Electronics Videocon Teleglobe Canada 239 Telecom VSNL

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CHANGES IN INDIAN BANKING SCENARIO

Like all business entities, banks want to safeguard against risks, as well as exploit available opportunities indicated by existing and expected trends. M&As in the banking sector have been on the rise in the recent past, both globally and in India. In this backdrop of emerging global and Indian trends in the banking sector, this article illuminates the key issues surrounding M&As in this sector with the focus on India. It seeks to explain the motives behind some M&As that have occurred in India post-2000, analyse the benefits and costs to both parties involved and the consequences for the merged entity. A look at the future of the Indian banking sector, and some key recommendations for banks, follow from this analysis. The International banking scenario has shown major turmoil in the past few years in terms of mergers and acquisitions. Deregulation has been the main driver, through three major routes - dismantling of interest rate controls, removal of barriers between banks and other financial intermediaries, and lowering of entry barriers. It has lead to disintermediation, investors demanding higher returns, price competition, reduced margins, falling spreads and competition across geographies forcing banks to look for new ways to boost revenues. Consolidation has been a significant strategic tool for this and has become a worldwide phenomenon, driven by apparent advantages of scale-economies, geographical diversification, lower costs through branch and staff rationalization, cross-border expansion and market share concentration. The new Basel II norms have also led banks to consider M&As. M&As that have happened post-2000 in India to understand the intent (of the targets and the acquirers), resulting synergies (both operational and financial), modalities of the deal, congruence of the process with the vision and goals of the involved banks, and the long term implications of the merger. The article also analyses emerging future trends and recommends steps that banks should consider, given the forecasted scenario.

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PROCEDURE OF BANK MERGERS AND AQUISITIONS

The procedure for merger either voluntary or otherwise is outlined in the respective state statutes/ the Banking regulation Act. The Registrars, being the authorities vested with the responsibility of administering the Acts, will be ensuring that the due process prescribed in the Statutes has been complied with before they seek the approval of the RBI. They would also be ensuring compliance with the statutory procedures for notifying the amalgamation after obtaining the sanction of the RBI. Before deciding on the merger, the authorized officials of the acquiring bank and the merging bank sit together and discuss the procedural modalities and financial terms. After the conclusion of the discussions, a scheme is prepared incorporating therein the all the details of both the banks and the area terms and conditions. Once the scheme is finalized, it is tabled in the meeting of Board of directors of respective banks. The board discusses the scheme threadbare and accords its approval if the proposal is found to be financially viable and beneficial in long run. After the Board approval of the merger proposal, an extra ordinary general meeting of the shareholders of the respective banks is convened to discuss the proposal and seek their approval. After the board approval of the merger proposal, a registered valuer is appointed to valuate both the banks. The valuer valuates the banks on the basis of its share capital, market capital, assets and liabilities, its reach and anticipated growth and sends its report to the respective banks. Once the valuation is accepted by the respective banks, they send the proposal along with all relevant documents such as Board approval, shareholders approval, valuation report etc to Reserve Bank of India and other regulatory bodies such Security & exchange board of India (SEBI) for their approval. After obtaining approvals from all the concerned institutions, authorized officials of both the banks sit together and discuss and finalize share allocation proportion by the acquiring bank to the shareholders of the merging bank (SWAP ratio)
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RBI Guidelines on Mergers & Acquisitions of Banks

With a view to facilitating consolidation and emergence of strong entities and providing an avenue for non disruptive exit of weak/unviable entities in the banking sector, it has been decided to frame guidelines to encourage merger/amalgamation in the sector. Although the Banking Regulation Act, 1949 (AACS) does not empower Reserve Bank to formulate a scheme with regard to merger and amalgamation of banks, the State Governments have incorporated in their respective Acts a provision for obtaining prior sanction in writing, of RBI for an order, inter alia, for sanctioning a scheme of amalgamation or reconstruction. The request for merger can emanate from banks registered under the same State Act or from banks registered under the Multi State Co-operative Societies Act (Central Act) for takeover of a bank/s registered under State Act. While the State Acts specifically provide for merger of co-operative societies registered under them, the position with regard to take over of a co-operative bank registered under the State Act by a co-operative bank registered under the CENTRAL Although there are no specific provisions in the State Acts or the Central Act for the merger of a co-operative society under the State Acts with that under the Central Act, it is felt that, if all concerned including administrators of the concerned Acts are agreeable to order merger/ amalgamation, RBI may consider proposals on merits leaving the question of compliance with relevant statutes to the administrators of the Acts. In other words, Reserve Bank will confine its examination only to financial aspects and to the interests of depositors as well as the stability of the financial system while considering such proposals.

RISKS IN BANK MERGERS AND ACQUISITIONS

1) When two banks merge into one then there is an inevitable increase in the size of the organization. Big size may not always be better. The size may get too widely and go beyond the control of the management. The increased size may become a drug rather than an asset. 2) Consolidation does not lead to instant results and there is an incubation
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period before the results arrive. Mergers and acquisitions are sometimes followed by losses and tough intervening periods before the eventual profits pour in. Patience, forbearance and resilience are required in ample measure to make any merger a success story. All may not be up to the plan, which explains why there are high rate of failures in mergers. 3) Consolidation mainly comes due to the decision taken at the top. It is a top- heavy decision and willingness of the rank and file of both entities may not be forthcoming. This leads to problems of industrial relations, deprivation, depression and demotivation among the employees. Such a work force can never churn out good results. Therefore, personal management at the highest order with humane touch alone can pave the way. 4) The structure, systems and the procedures followed in two banks may be vastly different, for example, a PSU bank or an old generation bank and that of a technologically superior foreign bank. The erstwhile structures, systems and procedures may not be conducive in the new milieu. A thorough overhauling and systems analysis has to be done to assimilate both the organizations. This is a time consuming process and requires lot of cautions approaches to reduce the frictions. 5) There is a problem of valuation associated with all mergers. The shareholder of existing entities has to be given new shares. Till now a foolproof valuation system for transfer and compensation is yet to emerge. 6) Further, there is also a problem of brand projection. This becomes more complicated when existing brands themselves have a good appeal. Question arises whether the earlier brands should continue to be projected or should they be submerged in favor of a new comprehensive identity. Goodwill is often towards a brand and its sub-merger is usually not taken kindly.

CHALLENGES AND OPPORTUNITIES IN INDIAN BANKING SECTOR

In a few years from now there would be greater presence of international players in Indian financial system and some of the Indian banks would become global players in the coming years. Also competition is not only on foreign turf but also in the domestic field. The new mantra for Indian banks is to go global in search of new markets, customers and profits. But to do so the Indian banking industry will have to meet certain challenges. Some of them are

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 FOREIGN BANKS India is experiencing greater presence of foreign banks over time. As a result number of issues will arise like how will smaller national banks compete in India with them, and will they themselves need to generate a larger international presence? Second, overlaps and potential conflicts between home country regulators of foreign banks and host country regulators: how will these be addressed and resolved in the years to come? It has been seen in recent years that even relatively strong regulatory action taken by regulators against such global banks has had negligible market or reputational impact on them in terms of their stock price or similar metrics. Thus, there is loss of regulatory effectiveness as a result of the presence of such financial conglomerates. Hence there is inevitable tension between the benefits that such global conglomerates bring and some regulatory and market structure and competition issues that may arise. GREATER CAPITAL MARKET OPENNESS - An important feature of the Indian financial reform process has been the calibrated opening of the capital account along with current account convertibility. It has to be seen that the volatility of capital inflows does not result in unacceptable disruption in exchange rate determination with inevitable real sector consequences, and in domestic monetary conditions. The vulnerability of financial intermediaries can be addressed through prudential regulations and their supervision; risk management of non-financial entities. This will require market development,Enhancement of regulatory capacity in these areas, as well as human resource development in both financial intermediaries and non-financial entities. TECHNOLOGY IS THE KEY IT is central to banking. Foreign banks and the new private sector banks have embraced technology right from their inception and continue to do so even now. Although public sector banks have crossed the 70%level of computerization, the direction is to achieve 100%. Networking in banks has also been receiving focused attention in recent times. Most recently the trend observed in the banking industry is the sharing of ATMs by banks. This is one area where perhaps India needs to do significant catching up. It is wise for Indian banks to exploit this globally state-of-art expertise, domestically available, to their fullest advantage. CONSOLIDATION We are slowly but surely moving from a regime of "large number of small banks" to "small number of large banks." The new era is one
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of consolidation around identified core competencies i.e., mergers and acquisitions. Successful merger of HDFC Bank and Times Bank; Stanchart and ANZ Grindlays; Centurion Bank and Bank of Punjab have demonstrated this trend. Old private sector banks, many of which are not able to cushion their NPAs, expand their business and induct technology due to limited capital base should be thinking seriously about mergers and acquisitions. PUBLIC SECTOR BANKS - It is the public sector banks that have the large and widespread reach, and hence have the potential for contributing effectively to achieve financial inclusion. But it is also they who face the most difficult challenges in human resource development. They will have to invest very heavily in skill enhancement at all levels: at the top level for new strategic goal setting; at the middle level for implementing these goals; and at the cutting edge lower levels for delivering the new service modes. Given the current age composition of employees in these banks, they will also face new recruitment challenges in the face of adverse compensation structures in comparison with the freer private sector. Basel II As of 2006, RBI has made it mandatory for Scheduled banks to follow Basel II norms. Basel II is extremely data intensive and requires good quality data for better results. Data versioning conflicts and data integrity problems have just one resolution, namely banks need to streamline their operations and adopt enterprise wide IT architectures. Banks need to look towards ensuring a risk culture, which penetrates throughout the organization. COST MANAGEMENT Cost containment is a key to sustainability of bank profits as well as their long-term viability. In India, however, in 2003, operating costs as proportion of total assets of scheduled commercial banks stood at 2.24%, which is quite high as compared to in other economies. The tasks ahead are thus clear and within reach. RECOVERY MANAGEMENT This is a key to the stability of the banking sector. Indian banks have done a remarkable job in containment of nonperforming loans (NPL) considering the overhang issues and overall difficult environment. Recovery management is also linked to the banks interest margins. Cost and recovery management supported by enabling legal framework hold the key to future health and competitiveness of the Indian banks. Improving recovery
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management in India is an area requiring expeditious and effective actions in legal, institutional and judicial processes. REACH AND INNOVATION - Higher sustained growth is contributing to enhanced demand for financial savings opportunities. In rural areas in particular, there also appears to be increasing diversification of productive opportunities. Also industrial expansion has accelerated; merchandise trade growth is high; and there are vast demands for infrastructure investment, from the public sector, private sector and through public private partnerships. Thus, the banking system has to extend itself and innovate. Banks will have to innovate and look for new delivery mechanisms and provide better access to the currently under-served. Innovative channels for credit delivery for serving new rural credit needs will have to be found. The budding expansion of non-agriculture service enterprises in rural areas will have to be financed. Greater efforts will need to be made on information technology for record keeping, service delivery, and reduction in transactions costs, risk assessment and risk management. Banks will have to invest in new skills through new recruitment and through intensive training of existing personnel. RISK MANAGEMENT Banking in modern economies is all about risk Management. The successful negotiation and implementation of Basel II .

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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 and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara, the Stock Exchange, Mumbai and the National Stock Exchange of India Limited and its adrs are listed on the New York Stock Exchange (NYSE). During the year 2005 ICICI bank was involved as a defendant in cases of alleged criminal practices in its debt collection operations and alleged fraudulent tactics to sell its products. The industrial Credit and Investment Corporation of India Limited now known as ICICI Ltd. Was founded b the World bank, the Government of India and representatives of private industry on January 5, 1955. The objective was to encourage and assist industrial development and investment in India. Over the years, ICICI has evolved into a diversified financial institution. ICICIs principal business activities include:

Project Finance Infrastructure Finance Corporate Finance Securitization Leasing Deferred Credit Consultancy services Custodial services

The ICICI Groups draws its strength from the core competencies of its individual companies. Today, top Indian Corporate look towers ICICI as a business partner for providing solutions to their varied financial requirements. The Group also offers a
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gamut of personal finance solutions to individuals. To lead the financial services into the new millennium, the Group is now truly positioned as a Virtual Universal Bank. The liberalization of the Indian economy in the 1990s offered ICICI an opportunity to provide a wide range of financial services. For regulatory and strategic reasons, ICICI set up specialized subsidiaries in the areas of commercial banking, investment banking, non- banking finance, investor servicing brooking, venture capital financing and state level infrastructure financing.

ICICI plans to focus on its retail finance business and expect the same to contribute upto 15-20 % of its turnover in the next five years. It is trying to change the perception that it is a corporate oriented bank. The bank hard selling its image as a retail segment bank has for the first time come up with an advertisement that addresses its products at the individual. This is to drive home the point that the bank has product and services catering to all individuals. For this purpose the network of ICICI Bank shall come into use. The parent plants to sell its products and also raise retail funds through the banking subsidiary. History of bank ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE.

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After consideration of various corporate structuring alternatives in the context of the emerging competitive scenario in the Indian banking industry, and the move towards universal banking, the managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities, and would create the optimal legal structure for the ICICI group's universal banking strategy. The merger would enhance value for ICICI shareholders through the merged entity's access to low-cost deposits, greater opportunities for earning fee-based income and the ability to participate in the payments system and provide transactionbanking services. The merger would enhance value for ICICI Bank shareholders through a large capital base and scale of operations, seamless access to ICICI's strong corporate relationships built up over five decades, entry into new business segments, higher market share in various business segments, particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries. In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's financing and banking operations, both wholesale and retail, have been integrated in a single entity.

THE ICICI GROUP COMPRISES OF: ICICI Bank Limited, ICICI Securities and Finance Company Limited (ICICI Securities), ICICI Credit Corporation Limited ( ICICI Credit), ICICI Investors Services Limited (ICICI Services), ICICI Venture Funds Management Limited (ICICI Venture), ICICI international Limited, 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
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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 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. Policies 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 in 1955. 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 the NYSE.

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 2001 ICICI acquired Bank of Madura (est. 1943). Bank of Madura was a Chettiar bank, and had acquired Chettinad Mercantile Bank (est. 1933) and Illanji Bank (established 1904) in the 1960s. 2002 The Boards of Directors of ICICI and ICICI Bank approve the merger of ICICI, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. After receiving all necessary regulatory approvals, ICICI integrates the group's financing and banking operations, both wholesale and retail, into a single.

BANK OF MADURA

The pre--merger status of Bank of Madura is as follows: it had liabilities of Rs.4,444 crore, equity market capitalization of Rs.100 crore and equity volatility of 0.69. Working through options reasoning, we may say that the stock market thinks that its assets are worth Rs.4, 095 crore with a volatility of 0.02. Hence, bom is bankrupt (with assets which are Rs.350 crore behind liabilities) and has a leverage of 41 times. If we needed to bring bom up to a point where its assets were 10% ahead of liabilities, which is broadly consistent with the Basle Accord, this would require an infusion of Rs.800 crore of equity capital. How do we combine these to think of the merged entity? Assets and liabilities are additive, so the total assets of the merged entity would prove to be roughly Rs.17,345 crore and the liabilities would prove to be Rs.16,517 crore. The merged entity would hence need roughly Rs.800 crore of fresh equity capital in order to come up to a point where assets were atleast 10% ahead of liabilities. How can we estimate the market capitalization of the merged entity? The value of equity is the value of a call option on the assets of the merged entity. Pricing the call requires an estimate of the volatility of the merged assets, i.e. It requires knowledge of the extent to which the assets of the two banks are uncorrelated. We find that using values of the correlation coefficient ranging from 80% to 95%, the volatility of assets of the merged entity proves to be around 0.12. In this case, the valuation of the call option,
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i.e. An estimate of the market capitalization of the merged entity, proves to be roughly Rs.2,500 crore. This number is not far from the pre--merger market capitalisation of ICICI Bank, which was Rs.2,466 crore. Hence, we can say that on purely financial arguments, the merger is roughly neutral to ICICI Bank shareholders if bom was merged into ICICI Bank for free. Indeed, if banking regulators took their jobs more seriously, they would force the shareholders of bom to walk into such a merger at a zero share price as a way of reducing The number of bankrupt banks in India by one. Such a forced-merger would be a politically easier alternative for the RBI when compared with closing down bom. The shareholders of ICICI Bank have paid a non-zero fee for bom. This reflects a hope that the products and processes of ICICI Bank will rapidly improve the value of assets of bom in order to compensate. In addition, the merged entity will have to rapidly raise roughly Rs.800 crore of equity capital to obtain a 10% buffer between assets and liabilities. Hence, this proposed merger is a godsend for bom, which was otherwise a bankrupt entity which was headed for closure given the low probability that it would manage to raise Rs.800 crore of equity on a base of Rs.100 crore of market capitalisation. It is useful to observe that bom probably did not see things in this way, given the willingness of India's banking regulators to interminably tolerate the existence of bankrupt banks. Closure of bom would normally involve pain for bom's shareholders and workers; instead both groups will get an extremely pleasant ride if the merger goes through. The proposed merger is a daunting problem for ICICI Bank. It will need to rapidly find roughly Rs.800 crore in equity. If India's banking regulators were serious about capital adequacy, ICICI Bank should have to pay roughly zero to merge with bom (it is doing a favour to bom and to India's banking system); instead ICICI Bank has paid a positive price for bom. The key question that will be answered in the next two/three years is: Will ICICI Bank's superior knowledge of products and processes revitalize the assets and employees of bom, and generate shareholder value in the merged entity? ICICI's top management clearly thinks so, and it would be a very happy outcome if this did indeed happen.
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The proposed merger is a good thing for India's economy, since the headcount of bankrupt banks will go down by one, and there is a possibility of obtaining higher value added out of the poorly utilized assets and employees of bom. If the merger goes through, then it will reduce the say of the management team of bom in India's resource allocation, which is a good thing.

History of Bank of Madura Bank of Madura. The pre--merger status of Bank of Madura is as follows: it had liabilities of Rs.4,444 crore, equity market capitalisation of Rs.100 crore and equity volatility of 0.69. Working through options reasoning, we may say that the stock market thinks that its assets are worth Rs.4,095 crore with a volatility of 0.02. Hence, BoM is bankrupt (with assets which are Rs.350 crore behind liabilities) and has a leverage of 41 times. If we needed to bring BoM up to a point where its assets were 10% ahead of liabilities, which is broadly consistent with the Basle Accord, this would require an infusion of Rs.800 crore of equity capital. How do we combine these to think of the merged entity? Assets and liabilities are additive, so the total assets of the merged entity would prove to be roughly Rs.17,345 crore and the liabilities would prove to be Rs.16,517 crore. The merged entity would hence need roughly Rs.800 crore of fresh equity capital in order to come up to a point where assets were atleast 10% ahead of liabilities. How can we estimate the market capitalisation of the merged entity? The value of equity is the value of a call option on the assets of the merged entity. Pricing the call requires an estimate of the volatility of the merged assets, i.e. it requires a knowledge of the extent to which the assets of the two banks are uncorrelated. We find that using values of the correlation coefficient ranging from 80% to 95%, the volatility of assets of the merged entity proves to be around 0.12. In this case, the valuation of the call option, i.e. an estimate of the market capitalisation of the merged entity, proves to be roughly Rs.2,500 crore. This number is not far from the pre--merger market capitalisation of ICICI Bank, which was Rs.2,466 crore. Hence, we can say that on purely financial arguments, the merger is roughly neutral to ICICI Bank shareholders if BoM was merged into ICICI Bank for free. Indeed, if banking regulators took their jobs more seriously, they would force the shareholders of BoM to walk into such a merger at a zero share price as a way of
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reducing the number of bankrupt banks in India by one. Such a forced-merger would be a politically easier alternative for the RBI when compared with closing down BoM. The shareholders of ICICI Bank have paid a non-zero fee for BoM. This reflects a hope that the products and processes of ICICI Bank will rapidly improve the value of assets of BoM in order to compensate. In addition, the merged entity will have to rapidly raise roughly Rs.800 crore of equity capital to obtain a 10% buffer between assets and liabilities. Hence, this proposed merger is a godsend for BoM, which was otherwise a bankrupt entity which was headed for closure given the low probability that it would manage to raise Rs.800 crore of equity on a base of Rs.100 crore of market capitalisation. It is useful to observe that BoM probably did not see things in this way, given the willingness of India's banking regulators to interminably tolerate the existence of bankrupt banks. Closure of BoM would normally involve pain for BoM's shareholders and workers; instead both groups will get an extremely pleasant ride if the merger goes through. The proposed merger is a daunting problem for ICICI Bank. It will need to rapidly find roughly Rs.800 crore in equity. If India's banking regulators were serious about capital adequacy, ICICI Bank should have to pay roughly zero to merge with BoM (it is doing a favour to BoM and to India's banking system); instead ICICI Bank has paid a positive price for BoM. The key question that will be answered in the next two/three years is: Will ICICI Bank's superior knowledge of products and processes revitalise the assets and employees of BoM, and generate shareholder value in the merged entity? ICICI's top management clearly thinks so, and it would be a very happy outcome if this did indeed happen. The proposed merger is a good thing for India's economy, since the headcount of bankrupt banks will go down by one, and there is a possibility of obtaining higher value added out of the poorly utilised assets and employees of BoM. If the merger goes through, then it will reduce the say of the management team of BoM in India's resource allocation, which is a good thing. Merger of ICICI Bank with Bank of Madura The proposed merger between ICICI Bank and Bank of Madura is a remarkable one. The pre--merger market capitalization of ICICI Bank was roughly Rs.2500 crore

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while bom was at roughly Rs.100 crore. Bom is known to have a poor asset portfolio. What will the merged entity be worth? The key rationale underlying every merger is the question of synergy. Can ICICI Bank's products and technology bring new life to the 263 branches of bom? Will ICICI Bank (which has 1,700 employees) be able to overcome the 2,600 employees that bom carries, given that Indian labour law makes it troublesome and expensive to sack workers? In applying these ideas to ICICI Bank and to bom, we need to believe that the stock market effectively processes information to produce estimates of the price and volatility of the shares of both these banks. This assumption is suspect, because both securities have poor stock market liquidity. Hence, we should be cautious in interpreting the numbers shown here. There are many other aspects in 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

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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 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. ICICI Bank Ltd. Acquires Bank of Madura (March '01)

Intent ICICI Bank Ltd wanted to spread its network, without acquiring RBI's permission for
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branch expansion. BoM was a plausible target since its cash management business was among the top five in terms of volumes. In addition, there was a possibility of reorienting its asset profile to enable better spreads and create a more robust microcredit system post merger. BoM wanted a (financially and technologically) strong private sector bank to add shareholder value, enhance career opportunities for its employees and provide first rate, technology-based, modern banking services to its customers. Benefits

The branch network of the merged entity increased from 97 to 378, including 97 branches in the rural sector.The Net Interest Margin increased from 2.46% to 3.55 %. The Core fee income of ICICI almost doubled 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.

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M E RG E R O F S T AT E B A NK O F I N DI A A ND S T AT E B A NK O F S A U RA S H T R A S B S i s t h e s ma l l e s t o f t h e s e v e n a s s o c i a t e s . Th e o t h e r a s s o c i a t e s a r e S t a t e B a n k o f Tr a v a n c o r e , S t a t e B a n k o f M ys o r e , S t a t e B a n k o f B i k a n e r a n d J a i p u r , S t a t e B a n k o f H yd e r a b a d , S t a t e B a n k o f I n d o r e and State Bank of Patiala. S B S h a s 4 6 0 b r a n c h e s a n d t h e m e r g e r wo u l d h e l p e l i mi n a t e d u p l i c a t i o n o f b r a n c h e s i n t h e s a me a r e a . I t s n e t p r o f i t r o s e 4 5 p e r c e n t t o R s 8 7 .4 c r o r e i n 2 0 0 6 - 0 7 . T h e b a n k h a s p a i d - u p e q u i t y c a p i t a l o f R s 3 1 4 c r o r e . T h e t o t a l d e p o s i t s s t o o d a t R s 1 5 ,8 0 4 c r o r e wh i l e t o t a l a d v a n c e s we r e a t R s 1 1 ,0 8 1 c r o r e . T h e me r g e r wo u l d h e l p S B I c o n s o l i d a t e i t s p o s i t i on a s t h e c o u n t r y' s b i g g e s t b a n k a n d wi d e n t h e g a p wi t h n e a r e s t r i v a l I C I C I B a n k . Wi th 9 ,5 7 9 b r a n c h e s , S B I h a s t o t a l a s s e t s o f R s 5 ,6 6 ,5 6 5 c r o r e a n d p o s t e d a n e t p r o f i t o f R s 4 ,5 4 1 c r o r e a s o n M a r c h 3 1 , 2 0 0 7 . I C I C I B a n k h a d a s s e t s o f R s 3 ,4 4 , 6 5 8 c r o r e a n d p o s t e d a n e t p r o f i t o f R s 3 ,1 1 0 c r o r e in 2006-07. T h e me r g e r c o me s a t t i me wh e n t h e b a n k h a s d e c i de d t o g o i n f o r b i g e x p a n s i o n . Th e b a n k i s a l s o l o o k in g a t f r e e i n g u p c a p i t a l b y s e t t i n g u p a h o l d i n g c o mp a n y f o r i t s l i f e i n s u r a n c e a n d a s s e t ma n a g e me n t b u s i n e s s e s . S B I s mo v e t o me r g e i t s a r ms c o u l d p a v e t h e w a y f o r f u r t h e r c o n s o l i d at i o n i n t h e i n d u s t r y, wh i c h f a c e s i m mi n e n t c o mp e t i t i o n f r o m f o r e i g n b a n k s f r o m 2 0 0 9 .

M e r g e r o f S t a t e B a n k o f S a u r a s h t r a wi t h S B I wo u l d e n a b l e i t t o u p s c a l e i n t e r ms o f f o o t p r i n t , ma n p ow e r a n d o t h e r r e s o u r c e s . I t wo u l d a l s o e n a b l e i t t o f a c e c o mp e t i t i o n a r i s i n g f r o m g l o b a l i z a t i o n o f t h e e c o n o my, a p a r t f r o m a u g me n t i n g e f f i c i e n c y a n d e n a b l i n g b e t t e r ma n a g e me n t o f r i s k . S t a t e B a n k o f S a u r a s h t r a i s t h e s ma l l e s t o f i t s a s s o c i a t e b a n k s a n d o p e r a t e s i n r e g i o n s wh e r e S B I d o e s n o t h a v e a large presence.

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Finance minister P. Chidambaram is likely to urge state-run lenders to explore the possibility of mergers among themselves in his pre-budget meeting with bankers tomorrow. Consolidation will not only create a stronger banking network but will also reduce the governments recapitalisation burden. The government remains committed to infusing more capital into public se ctor banks, however, mergers creating large banks will have easier access to equity finance and increase the lenders ability to raise external equity, reducing its dependence on the government, sources said. They added that the Centre wanted to act only as a facilitator in any consolidation and expected banks to express the desire to merge and find their own partners. The government has agreed to infuse Rs 15,000 crore in PSU banks before March-end. However, analysts said the worsening fiscal and capital account deficits might constrain the Centre. Chidambaram had emphasised that there is a case for merger of banks and there is a case for two or three world-size banks. Bankers said discussions had been held on consolidation among the State Bank of India, Bank of India and Bank of Baroda to create a strong global bank. However, disagreement among the parties and the absence of a concrete plan had spoiled the plan. Between 1990 and 2000, the banking sector witnessed around a dozen mergers between lenders with weak financials. In the past 10 years, more than 15 consolidations have taken place among healthy banks because of commercial reasons. The acquisition of the Centurion Bank of Punjab by HDFC Bank in 2008 for Rs 9,510 crore was the biggest merger in domestic banking.

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The government has cleared a Rs 3,004-crore fund infusion in the SBI this fiscal, while the Union Bank of India expects around Rs 1,000 crore. Calcutta-based Uco Bank has sought Rs 800 crore to fund growth and boost capital adequacy ratio. The RBI has estimated that public sector banks will need common equity amounting to Rs 1.4-1.5 lakh crore on top of internal accruals and Rs 2.65-2.75 lakh crore in the form of non-equity capital to implement Basel III norms by 2018. Capital infusion by the government will shore up the equity base of banks and enable them to lend more to productive sectors such as agriculture and infrastructure. It will also help banks to implement the Basel guidelines. The government has injected about Rs 32,000 crore in PSU banks in the previous two fiscals. During 2011-12, state-run lenders got Rs 12,000 crore to improve their capital adequacy ratio.

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