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Synergic Advantages of Mergers & Acquisitions - A Case Study on Private Sector Banks in India*

CASE STUDY, FINANCIAL MANAGEMENT
ET Cases - GSMC, 9 Pages
AUTHOR(S) : Poonam Singh, Ph.D Research Scholar, Jamia Hamdard University, New Delhi and Prof. Kanhaiya Singh, Professor- Finance, Fore School of Management, New Delhi

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Synergic Advantages of Mergers & Acquisitions - A Case Study on Private Sector Banks in India

 

In the banking context, over a period of time consolidation and merger have become the need of the hour due to various developments in the financial system in general  and in banking sector in particular. In view of various synergies and advantages of mergers and acquisitions, banks and the policy makers are in favor of consolidations of banks in India. However, there is a flip side of the Indian banking system in terms of competitive advantage to meet global standards and to shoulder the greater  responsibility of larger expansion of business. Apparently, the Indian banking is highly skewed in terms of the size of banks and as nearly 50% market share is occupied by major five public sector banks. The consolidation of banks has always been a focused issue in the banking industry in the past and it has geared spark again with change in government in the year, 2014. There is a proposal for consolidation of entire public sector banks to emerge into few bigger banks in terms of size, operational strength, capital adequacy and efficiencies. The implementation of Basel- III norm has further given impetus to this concept. Increased capital requirements and  increased level of non-performing assets are also crucial factors to support this move. Narshimam Committee set up in 1998 also recommended voluntary merger of  Indian banks. The private sector banks have been pioneered in the process of mergers and acquisitions and there have been several instances for banks mergers in the recent past. However, these mergers have remained market driven.

In the changing context and economic scenario, the mergers and acquisitions in the banking industry have become more crucial as it not only brings efficiency to the banking industry but also economies of scale and scope which make the banking system more vibrant and strong.....................

Significance of Synergies in Banking Mergers

Synergies play a very significant role in all kinds of mergers and acquisitions, irrespective of sector and industry. Due to the globalization of financial markets, M&A present huge investment opportunities. ‘Synergies are the present value of the net additional cash flow that is generated by a combination of two Banks that could not have been generated by either bank on its own’ virtually it’s an art and science of making merger 2+2=5 effect brought out by synergy (Bill Pursche)..........

Voluntary Mergers of Private Sector Banks

For the purpose of this case study, examples of two private sector banks have been taken (Exhibit I):..........

Bank of Rajasthan before the Merger (Merging Entity)

Bank of Rajasthan (BOR) was set up in Udaipur in 1943 and its Central Office located in Jaipur. It was one of the very old private sector banks. BOR had a market capitalization of INR1,600 crore at a much lower level as compared to ICICI Bank’s capitalization of INR99,000 crore.............

Performance of ICICI Bank

Ho: there is no difference between pre-merger and post-merger performance of bank

Ha: there is difference between pre-merger and post-merger performance of bank

......................

To test the above hypothesis, the trend analysis was undertaken on various financial performance parameters for the past 9 years. From the analysis..........

Centurion Bank of Punjab before the Merger

Merging entity: Centurion Bank of Punjab is one of the leading new generation private sector banks in India. In 2005, Centurion Bank and Bank of Punjab agreed to a merger and the combined bank took as its name Centurion Bank of Punjab. Bank of Punjab had been founded in 1995. Further, in 2006 CBOP acquired Lord Krishna Bank. Centurion Bank of Punjab operates on a strong nationwide franchise of 394 branches and 452 ATMs in 180 locations across the country and apart from Indian stock exchange CBOP also listed on the Luxembourg Stock Exchange. As a combined entity...............

Performance of HDFC Bank

Ho: there is no difference between per merger and post-merger performance of bank

Ha: there is difference between pre-merger and post-merger performance of bank

To prove the hypothesis the hypothesis was tested first after which the trend analysis was performed on financial performance of past 9 years to observe significant points about the change in health of bank. And also to analyse.............

Case: Bank of Rajasthan Ltd., Merged with ICICI Bank

The amalgamation of the Transferor Bank with the Transferee Bank was in accordance with the provisions of the Scheme formulated pursuant to Section 44A of the Banking Regulation Act, 1949, Reserve Bank of India’s guidelines for merger/amalgamation of private sector banks dated May 11th 2005, and in accordance with the..........

Case: Centurion Bank of Punjab (CBOP) Merger with HDFC Bank

The Reserve Bank of India has sanctioned the Scheme of Amalgamation of Centurion Bank of Punjab Ltd. with HDFC Bank Ltd. The Scheme has been sanctioned in exercise of the powers contained in Sub-section (4) of Section 44A of the Banking Regulation Act, 1949. The Scheme will come into force with effect from May 23rd 2008. All the branches of..........

Exhibits

Exhibit I: Details of the Two Private Sector Banks

Exhibit II: Mergers by ICICI Bank Ltd. in India

Exhibit III: ICICI Bank Profile

Exhibit IV: t-Test: Paired Two Sample for Means

Exhibit V: HDFC Bank Profile

Exhibit VI: t-Test: Paired Two Sample for Means

Teaching Note Preview

Synergic Advantages of Mergers & Acquisitions - A Case Study on Private Sector Banks in India

 

Synopsis

This was a case of voluntary merger of ICICI bank with bank of Rajasthan and HDFC with centurion bank of Punjab. Since, both the mergers were synergy oriented and there were several motives behind the voluntary merger. Further, also take a glance on policy procedure and regulatory authority involvement in voluntary  mergers of bank.

  • • From the case we can learn about swift change in the financial performance of bank immediately affected from the merger year
  • • Also can be realized on kind of synergies exist in the bank mergers and the expected time consume by a bank in a way to absorb the dispensing entity, at the same time giving fruitful outputs in longer run
  • • Critically can learn that the synergistic merger always create worth for the acquiring bank in short run as well as in long run
  • • Also to understand the policy procedure, regulatory and supervisory authorites and bank’s constitution contribution in way of execution of voluntary merger of private  banks

 

Pedagogical Objectives

  • • To ascertain the rationale for the mergers
  • • To identify various synergies that will create worth for acquiring bank
  • • To assess impact of merger on profitability and revenue generation aspect of the bank
  • • Policies involvement for voluntary merger of bank

 

Assignment Questions

  • I. Is there any other mode for growth and expansion for banks except for mergers and acquisition?
  • II. What kinds of synergy generate when M&A deals take place?
  • III. Does the series of mergers by certain bank add value to its performance?
  • .....................................................
  • .....................................................

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Abstract

Synergies are the soul of mergers and acquisitions in any of the industry/sector. Therefore, the two entities planning for mergers and acquisitions lay significant  importance to this aspect. The effective results are realized and desired goals are achieved once expected synergies are consummated on time. Since, the contribution of private sector banks in the growth process has emerged extensively in Indian banking scenario, their strengths in terms of operational advantages play an important role. This has resulted in many mergers of private sector banks in the recent past. The case is about voluntary merger of private sector banks which will determine underlying motives and expected synergies existing before the merger and proportion of synergies realized after the merger over a period of time. For the purpose of  construction of this case study, synergies like, operational and revenue synergies have been considered. Subsequently, an analysis has been undertaken to assess its impact on growth and future prospects of the merged entity. The case study reveals that both synergies are closely related and have positive influence on each other in achieving the desired goals and results.

Further, to make the case study more specific and to address defined objectives the pre and post-merger performance of the case would be analysed through trend analysis on different parameters and using SPSS tool to strengthen the case study. The case will focus on in the changes in terms of financial performance, expansion and growth process and strengthening of a bank’s market share after opting for merger. The case will also examine certain policy issues involved in voluntary merger of banks.



Pedagogical Objectives

  • To analyze underlying motive and expected synergies in the voluntary merger of banks
  • To determine level of synergies consummated after the merger resulting in significant achievements in the longer run
  • To assess time factor involved in a way to absorb the merging entity and to derive fruitful results
  • * GSMC 2014, IIM Raipur

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