INTODUCTION

TO
MERGERS
AND
ACQUISITIONS

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 INTRODUCTION TO MERGER AND ACQUISITION

MERGERS
A merger occurs when two or more companies combines and the resulting firm maintains
the identity of one of the firms. One or more companies may merger with an existing
company or they may merge to form a new company.
Usually the assets and liabilities of the smaller firms are merged into those of larger
firms. Merger may take two forms-
1. Merger through absorption
2. Merger through consolidation.

Absorption
Absorption is a combination of two or more companies into an existing company. All
companies except one loose their identify in a merger through absorption.
Consolidation
A consolidation is a combination if two or more combines into a new company. In this
form of merger all companies are legally dissolved and a new entity is created. In
consolidation the acquired company transfers its assets, liabilities and share of the
acquiring company for cash or exchange of assets.

ACQUISITION
A fundamental characteristic of merger is that the acquiring company takes over the
ownership of other companies and combines their operations with its own operations.
An acquisition may be defined as an act of acquiring effective control by one company
over the assets or management of another company without any combination of
companies.

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TAKEOVER
A takeover may also be defined as obtaining control over management of a company by
another company.

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

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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.

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 TYPES
OF
MERGERS

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TYPES OF MERGERS

Mergers are of many types. Mergers may be differentiated on the basis of activities,
which are added in the process of the existing product or service lines. Mergers can be a
distinguished into the following four types:-
1. Horizontal Merger
2. vertical Merger
3. Conglomerate Merger
4. Concentric Merger

Horizontal merger
Horizontal merger is a combination of two or more corporate firms dealing in same
lines of business activity. Horizontal merger is a co centric merger, which involves
combination of two or more business units related to technology, production process,
marketing research and development and management.

Vertical Merger
Vertical merger is the joining of two or more firms in different stages of production or
distribution that are usually separate. The vertical Mergers chief gains are identified as
the lower buying cost of material. Minimization of distribution costs, assured supplies
and market increasing or creating barriers to entry for potential competition or placing
them at a cost disadvantage.

Conglomerate Merger
Conglomerate merger is the combination of two or more unrelated business units in
respect of technology, production process or market and management. In other words,
firms engaged in the different or unrelated activities are combined together.
Diversification of risk constitutes the rational for such merger moves.

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Concentric Merger
Concentric merger are based on specific management functions where as the
conglomerate mergers are based on general management functions. If the activities of the
segments brought together are so related that there is carry over on specific management
functions. Such as marketing research, Marketing, financing, manufacturing and
personnel.

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Valuation
Methods

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Investors in a company that are aiming to take over another one must determine whether
the purchase will be beneficial to them. In order to do so, they must ask themselves how
much the company being acquired is really worth.

Naturally, both sides of an M&A deal will have different ideas about the worth of a target
company: its seller will tend to value the company at as high of a price as possible, while
the buyer will try to get the lowest price that he can.
There are, however, many legitimate ways to value companies. The most common
method is to look at comparable companies in an industry, but deal makers employ a
variety of other methods and tools when assessing a target company. Here are just a few
of them:
1. Comparative Ratios.

The following are two examples of the many comparative metrics on which acquiring
companies may base their offers:
 Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring
company makes an offer that is a multiple of the earnings of the target
company. Looking at the P/E for all the stocks within the same industry
group will give the acquiring company good guidance for what the target's
P/E multiple should be.
 Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring
company makes an offer as a multiple of the revenues, again, while being
aware of the price-to-sales ratio of other companies in the industry.

2. Replacement Cost.

In a few cases, acquisitions are based on the cost of replacing the target company.
For simplicity's sake, suppose the value of a company is simply the sum of all its
equipment and staffing costs. The acquiring company can literally order the target to
sell at that price, or it will create a competitor for the same cost. Naturally, it takes a
long time to assemble good management, acquire property and get the right
equipment. This method of establishing a price certainly wouldn't make much sense
in a service industry where the key assets - people and ideas - are hard to value and
develop.

3. Discounted Cash Flow (DCF).

A key valuation tool in M&A, discounted cash flow analysis determines a company's
current value according to its estimated future cash flows. Forecasted free cash flows
(net income + depreciation/amortization - capital expenditures - change in working
capital) are discounted to a present value using the company's weighted average costs
of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this
valuation method.

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BENEFITS
OF
MERGER

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BENEFITS OF MERGERS

1. GROWTH 0R DIVERSIFICATION: - Companies that desire rapid growth

in size or market share or diversification in the range of their products may find that
a merger can be used to fulfill the objective instead of going through the tome
consuming process of internal growth or diversification. The firm may achieve the
same objective in a short period of time by merging with an existing firm. In addition
such a strategy is often less costly than the alternative of developing the necessary
production capability and capacity. If a firm that wants to expand operations in
existing or new product area can find a suitable going concern. It may avoid many of
risks associated with a design; manufacture the sale of addition or new products.
Moreover when a firm expands or extends its product line by acquiring another firm,
it also removes a potential competitor.
2. SYNERGISM: - The nature of synergism is very simple. Synergism exists when
ever the value of the combination is greater than the sum of the values of its parts. In
other words, synergism is “2+2=5”. But identifying synergy on evaluating it may be
difficult, infact sometimes its implementations may be very subtle. As broadly
defined to include any incremental value resulting from business combination,
synergism in the basic economic justification of merger. The incremental value may
derive from increase in either operational or financial efficiency.
• Operating Synergism: - Operating synergism may result from economies of
scale, some degree of monopoly power or increased managerial efficiency. The
value may be achieved by increasing the sales volume in relation to assts employed
increasing profit margins or decreasing operating risks. Although operating synergy
usually is the result of either vertical/horizontal integration some synergistic also
may result from conglomerate growth. In addition, some times a firm may acquire
another to obtain patents, copyrights, technical proficiency, marketing skills,
specific fixes assets, customer relationship or managerial personnel.

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 Operating synergism occurs when these assets, which are intangible, may be combined
with the existing assets and organization of the acquiring firm to produce an incremental
value. Although that value may be difficult to appraise it may be the primary motive
behind the acquisition.

• Financial synergism
Among these are incremental values resulting from complementary internal funds flows
more efficient use of financial leverage, increase external financial capability and income
tax advantages.
a) Complementary internal funds flows
Seasonal or cyclical fluctuations in funds flows sometimes may be reduced or eliminated
by merger. If so, financial synergism results in reduction of working capital requirements
of the combination compared to those of the firms standing alone.
b) More efficient use of Financial Leverage
Financial synergy may result from more efficient use of financial leverage. The
acquisition firm may have little debt and wish to use the high debt of the acquired firm to
lever earning of the combination or the acquiring firm may borrow to finance and
acquisition for cash of a low debt firm thus providing additional leverage to the
combination. The financial leverage advantage must be weighed against the increased
financial risk.
c) Increased External Financial Capabilities
Many mergers, particular those of relatively small firms into large ones, occur when the
acquired firm simply cannot finance its operation. Typical of this is the situations are the
small growing firm with expending financial requirements. The firm has exhausted its
bank credit and has virtually no access to long term debt or equity markets. Sometimes
the small firm has encountered operating difficulty, and the bank has served notice that its
loan will not be renewed? In this type of situation a large firms with sufficient cash and
credit to finance the requirements of smaller one probably can obtain a good buy bee.
Making a merger proposal to the small firm. The only alternative the small firm may have
is to try to interest 2 or more large firms in proposing merger to introduce, competition
into those bidding for acquisition. The smaller firm’s situations might not be so bleak. It

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 may not be threatened by non renewable of maturing loan. But its management may
recognize that continued growth to capitalize on its market will require financing be on its
means. Although its bargaining position will be better, the financial synergy of acquiring
firm’s strong financial capability may provide the impetus for the merger. Sometimes the
acquired firm possesses the financing capability. The acquisition of a cash rich firm
whose operations have matured may provide additional financing to facilitate growth of
the acquiring firm. In some cases, the acquiring may be able to recover all or parts of the
cost of acquiring the cash rich firm when the merger is consummated and the cash then
belongs to it.
d) The Income Tax Advantages
In some cases, income tax consideration may provide the financial synergy motivating a
merger, e.g. assume that a firm A has earnings before taxes of about rupees ten crores per
year and firm B now break even, has a loss carry forward of rupees twenty crores
accumulated from profitable operations of previous years. The merger of A and B will
allow the surviving corporation to utility the loss carries forward, thereby eliminating
income taxes in future periods.

Counter Synergism
Certain factors may oppose the synergistic effect contemplating from a merger. Often
another layer of overhead cost and bureaucracy is added. Do the advantages outweigh
disadvantages? Sometimes the acquiring firm agrees to long term employments contracts
with managers of the acquiring firm. Such often are beneficial but they may be the
opposite. Personality or policy conflicts may develop that either hamstring operations or
acquire buying out such contracts to remove personal position of authority.
Particularly in conglomerate merger, management of acquiring firm simply may not have
sufficient knowledge of the business to control the acquired firm adequately. Attempts to
maintain control may induce resentment by personnel of acquired firm. The resulting
reduction of the efficiency may eliminate expected operating synergy or even reduce the
post merger profitability of the acquired firm. The list of possible counter synergism

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factors could goon endlessly; the point is that the mergers do not always produce that
expected results. Negative factors and the risks related to them also must be considered in
appraising a prospective merger.

RISKS ASSOCIATED WITH MERGER

There are several risks associated with consolidation and few of them are as follows: -

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 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.

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 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 favour of a new comprehensive identity. Goodwill is often towards
a brand and its sub-merger is usually not taken kindly.

Other motives For Merger

Merger may be motivated by two other factors that should not be classified under
synergism. These are the opportunities for acquiring firm to obtain assets at bargain price
and the desire of shareholders of the acquired firm to increase the liquidity of their
holdings.
1. Purchase of Assets at Bargain Prices
Mergers may be explained by opportunity to acquire assets, particularly land mineral
rights, plant and equipment, at lower cost than would be incurred if they were purchased
or constructed at the current market prices. If the market price of many socks have been
considerably below the replacement cost of the assets they represent, expanding firm
considering construction plants, developing mines or buying equipments often have
found that the desired assets could be obtained where by heaper by acquiring a firm that
already owned and operated that asset. Risk could be reduced because the assets were
already in place and an organization of people knew how to operate them and market
their products. Many of the mergers can be financed by cash tender offers to the acquired
firm’s shareholders at price substantially above the current market. Even so, the assets
can be acquired for less than their current casts of construction. The basic factor
underlying this apparently is that inflation in construction costs not fully rejected in stock
prices because of high interest rates and limited optimism by stock investors regarding
future economic conditions.

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 2. Increased Managerial Skills or Technology
Occasionally a firm will have good potential that is finds it unable to develop fully
because of deficiencies in certain areas of management or an absence of needed product
or production technology. If the firm cannot hire the management or the technology it
needs, it might combine with a compatible firm that has needed managerial, personnel or
technical expertise. Of course, any merger, regardless of specific motive for it, should
contribute to the maximization of owner’s wealth.

3. Acquiring new technology

To stay competitive, companies need to stay on top of technological developments and

their business applications. By buying a smaller company with unique technologies, a
large company can maintain or develop a competitive edge.

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Restructuring

Methods

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There are several restructuring methods: doing an outright sell-off, doing an equity carve-
out, spinning off a unit to existing shareholders or issuing tracking stock. Each has
advantages and disadvantages for companies and investors. All of these deals are quite
complex.

Sell-Offs
A sell-off, also known as a divestiture, is the outright sale of a company subsidiary.
Normally, sell-offs are done because the subsidiary doesn't fit into the parent company's
core strategy. The market may be undervaluing the combined businesses due to a lack of
synergy between the parent and subsidiary. As a result, management and the board decide
that the subsidiary is better off under different ownership.

Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be used
to pay off debt. In the late 1980s and early 1990s, corporate raiders would use debt to
finance acquisitions. Then, after making a purchase they would sell-off its subsidiaries to
raise cash to service the debt. The raiders' method certainly makes sense if the sum of the
parts is greater than the whole. When it isn't, deals are unsuccessful.

Equity Carve-Outs
More and more companies are using equity carve-outs to boost shareholder value. A
parent firm makes a subsidiary public through an initial public offering (IPO) of shares,
amounting to a partial sell-off. A new publicly-listed company is created, but the parent
keeps a controlling stake in the newly traded subsidiary.

A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is
growing faster and carrying higher valuations than other businesses owned by the parent.
A carve-out generates cash because shares in the subsidiary are sold to the public, but the
issue also unlocks the value of the subsidiary unit and enhances the parent's shareholder
value.

The new legal entity of a carve-out has a separate board, but in most carve-outs, the
parent retains some control. In these cases, some portion of the parent firm's board of
directors may be shared. Since the parent has a controlling stake, meaning both firms
have common shareholders, the connection between the two will likely be strong.

That said, sometimes companies carve-out a subsidiary not because it's doing well, but
because it is a burden. Such an intention won't lead to a successful result, especially if a
carved-out subsidiary is too loaded with debt, or had trouble even when it was a part of
the parent and is lacking an established track record for growing revenues and profits.

Carve-outs can also create unexpected friction between the parent and subsidiary.
Problems can arise as managers of the carved-out company must be accountable to their
public shareholders as well as the owners of the parent company. This can create divided
loyalties.

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Spinoffs
A spinoff occurs when a subsidiary becomes an independent entity. The parent firm
distributes shares of the subsidiary to its shareholders through a stock dividend. Since this
transaction is a dividend distribution, no cash is generated. Thus, spinoffs are unlikely to
be used when a firm needs to finance growth or deals. Like the carve-out, the subsidiary
becomes a separate legal entity with a distinct management and board.

Like carve-outs, spinoffs are usually about separating a healthy operation. In most cases,
spinoffs unlock hidden shareholder value. For the parent company, it sharpens
management focus. For the spinoff company, management doesn't have to compete for
the parent's attention and capital. Once they are set free, managers can explore new
opportunities.

Investors, however, should beware of throw-away subsidiaries the parent created to

separate legal liability or to off-load debt. Once spinoff shares are issued to parent
company shareholders, some shareholders may be tempted to quickly dump these shares
on the market, depressing the share valuation.

Tracking Stock
A tracking stock is a special type of stock issued by a publicly held company to track the
value of one segment of that company. The stock allows the different segments of the
company to be valued differently by investors.

Let's say a slow-growth company trading at a low price-earnings ratio (P/E ratio) happens
to have a fast growing business unit. The company might issue a tracking stock so the
market can value the new business separately from the old one and at a significantly
higher P/E rating.

Why would a firm issue a tracking stock rather than spinning-off or carving-out its fast
growth business for shareholders? The company retains control over the subsidiary; the
two businesses can continue to enjoy synergies and share marketing, administrative
support functions, a headquarters and so on. Finally, and most importantly, if the tracking
stock climbs in value, the parent company can use the tracking stock it owns to make
acquisitions.

Still, shareholders need to remember that tracking stocks are class B, meaning they don't
grant shareholders the same voting rights as those of the main stock. Each share of
tracking stock may have only a half or a quarter of a vote. In rare cases, holders of
tracking stock have no vote at all.

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MERGERS AND
INDIAN
BANKING
SECTOR

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MERGER AND INDIAN BANKING SECTOR

Mergers and acquisitions encourage banks to gain global reach and better synergy and
allow large banks to acquire the stressed assets of weaker banks. Merger in India between
weak/unviable banks should grow faster so that the weak banks could be rehabilitated
providing continuity of employment with the working force, utilization of the assets
blocked up in the weak/unviable banks and adding constructively to the prosperity of the
nation through increased flow of funds.
The process of merger and acquisition is not a new happening in case of Indian Banking,
Grind lay Bank merged standard charated Bank, Times Bank with HDFC Bank, bank of
Madura with ICICI Bank, Nedungadi Bank Ltd. With Punjab National Bank and most
recdently Global Trust Bank merged with Oriental Bank of Commerce.
The small and medium sized banks are working under threats from economic
environment which is full of problem for them, viz. inadequacies of resources, outdated
technology, on systemized management pattern, faltering marketing efforts and weak
financial structure. Their existence remains under challenge in the absence of keeping
pace with growing automation and techniques obsolescence and lack of product
innovations. These banks remain, at times, under threat from large banks. Their
reorganization through consolidation/merger could offer succor to re-establish them in
viable banks of optimal size with global presence.
Merger and amalgamation in Indian banking so far has been to provide the safeguard and
hedging to weak bank against their failure and too at the initiative of RBI, rather than to
pay the way to initiate the banks to come forward on their own record for merger and
amalgamation purely with a commercial view and economic consideration.
As the entire Indian banking industry is witnessing a paradigm shift in systems,
processes, strategies, it would warrant creation of new competencies and capabilities on
an on going basis for which an environment of continuous learning would have to be
created so as to enhance knowledge and skills.
There is every reason to welcome the process of creating globally strong and competitive
banks and let big Indian banks create big thunders internationally in the days to come.

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In order to achieve the INDIAN VISION 2020 as envisaged by Hon’ble president of
India Sh. A.P.J.Addul Kalam much requires to be done by banking industry in this
regard. It is expected that the Indian banking and finance system will be globally
competitive. For this the market players will have to be financially strong and
operationally efficient. Capital would be key factor in the building a successful
institution. The Banking and finance system will improve competitiveness through a
process of consolidation either through mergers and acquisitions or through strategic
alliances. There is need to restructure the banking sector in India through merger and
amalgamation in order top makes them more capitalized, automated and technology
oriented so as to provide environment more competitive and customer friendly

Mergers Of Banking Sector

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YEAR Target Bank Acquirer Bank
1969 Bank Of Bihar State Bank Of India
1970 National Bank Of Lahore State Bank Of India
1971 Eastern Bank Ltd. Chartered Bank
1974 Krishnaram Baldeo Bank Ltd. State Bank Of India
1976 Belgaum Bank Ltd. Union Bank Of India
1984-85 Lakshmi Commercial Bank Canara Bank
1984-85 Bank Of Cochin State Bank Of India
1985 Miraj State Bank Union Bank Of India
1986 Hindustan Commercial Bank Punjab National Bank
1988 Trader's Bank Ltd. Bank Of Baroda
1989-90 United Industrial Bank Allahabad Bank
1989-90 Bank Of Tamilnad Indian Overseas Bank
1989-90 Bank Of Thanjavur Indian Bank
1989-90 Parur Central Bank Bank Of India
1990-91 Purbanchal Bank Central Bank Of India
1993-94 New Bank Of India Punjab National Bank
1993-94 Bank Of Karad Bank Of India
1995-96 Kasinath Seth Bank State Bank Of India
1996 SCICI ICICI
1997 ITC Classic ICICI
Oriental Bank of
1997 BARI Doab Bank Commerce
Oriental Bank of
1998 Punjab Co-operative Bank Commerce
1998 Anagram Fianance ICICI
1999 Bareilly Corporation Bank Bank of Baroda
1999 Sikkim Bank ltd. Union Bank
2000 Times bank HDFC Bank
2001 Bank of Madura ICICI
2002 Benaras state bank Bank of Baroda
2003 Nedungadi Bank Punjab national Bank
2004 South Gujrat Local Area Bank Bank of Baroda
Oriental Bank of
2004 Global Trust Bank Commerce
2005 Bank of Punjab Centurion bank
Centurion Bank of Punjab
2007-2008 Ltd(merged) HDFC Bank Ltd

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MERGER OF
TIMES BANK
WITH
HDFC BANK

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In a milestone transaction in the Indian banking industry, Times Bank Limited (another
new private sector bank promoted by Bennett, Coleman & Co. / Times Group) was
merged with HDFC Bank Ltd., effective February 26, 2000. This was the first merger of
two private banks in the New Generation Private Sector Banks. As per the scheme of
amalgamation approved by the shareholders of both banks and the Reserve Bank of India,
shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of
Times Bank.

Times Bank was a new generation private sector bank established by the Times group. As
part of HDFC Bank's strategy of attaining great heights it decided to merge with Times
Bank. As per the scheme of amalgamation issued by HDFC bank to its shareholder the
following were the reasons cited for the merger deal.

1. Branch Network would increase by over 50 percent and thus providing increased
geographical coverage.
2. Increase the total number of retail customer accounts so as to increase deposit and loan
products.
3 After the merger the bank would be able to use Times Bank's lower cost alternative
channels like phone banking, internet banking etc. and thereby the reducing of operating
costs.
4. The merger would increase the presence of HDFC bank in the depository participant
activities.
5. Improved infra structure facilities and central processing would help in deriving
economies of large scale. and share holding pattern have been looked into.

The merger deal was struck with a stock swap whereby the shareholders of Times Bank
will get one share of HDFC Bank for every 5.75 shares held. The Times Bank w merged
with HDFC Bank and the emerging entity continued to function as HDFC Bank. With
the RBI gave a green signal, the merger came into effect by the first quarter in 2000.
The Bennett Coleman group, which promoted the Times Bank, got about 7.5 percent
stake in HDFC Bank. The equity capital of HDFC Bank raised from Rs. 200 crore to Rs.
233 crore.

With one stroke the merger helped HDFC Bank become the largest of the private sector
banks in the Indian banking industry. The merger increased the customer base of HDFC
Bank by 2,00,000 taking the figure to 6,50,000. It also provided cross-selling
opportunities to the increased customer population. Various products of HDFC Bank as
well as the housing finance products to its patent HDFC can be offered to the new
customers. Most importantly the branch network would increase from 68 to 107. HDFC
Bank’s total deposits would be around Rs. 6,900 crore and the size of the balance sheet
would be over Rs.9, 000 crore. Since Times banks has technology in place, HDFC Bank
saves on the costs associated with technology up gradation. According to the bank some

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amount of rationalization of the portfolios of corporate loans may be required. The bank
also gains from existing infrastructure. The capital adequacy of HDFC Bank would be
10.3 percent post-merger and would go up to 11.1 percent after the proposed preferential
offer to maintain the current level of holdings of different classes of investors. The
merger of those two banks has another distinct advantage. The new private sector banks
have nurtured employee culture in tune with competitive forces. Thus there is unlikely to
be any clash of cultures in the new entity. This is likely to help the integration process.

Reportedly the branch network of both the banks do not overlap. Despite the growth of
Internet banking, branch network in the brick and mortar form is vital for reaching out to
the customer especially in the Indian context. HDFC Bank’s strategy for setting up of
branches has been that of incurring lowest cost with about 68 persons per branch who
look after both servicing and market functions of the bank. The bank has also prompted
the customers to use phone banking in a big way. Since setting up of branches a new is a
costlier affair, acquiring a readymade branch network could not have been better.
Product complementarily was more pronounced in the case of ATM card networks.
HDFC Bank had the Visa network and Times Bank had Master Card network. On
account of the merger, it would be part of both the networks.

Similarities in business segments and the prospects for synergies appear to be the major
inducements for the HDFC-Times merger. The table ‘Convergence Advantage’ shows
that there is fair amount of convergence in the rate of business growth (in terms of
deposits, advances and income) and diversification in non-interest income. Says Bandi
Ram Prasad, Chief Economist, Indian Banks Association; “There is sizeable divergence
in efficiency of operations (measured in terms of net profit as percent of working funds
and Net NPAs as percent of working funds and Net NPAs as percent of Net Advances.
With its record of higher operational efficiency HDFC Bank could contribute value
addition to the business growth of the Times Bank. Since both are low on staff costs,
better control of costs is also possible. With HDFC having more metro branches (65
percent) and Times Bank more urban branches (43 percent) overlapping of branch
network is also not very leading to enlarged potential market. That is enough incentive
for consideration of a merger.”

Sanjay Sakhuja opines that the merger was an excellent transaction. He explains, “It is an
excellent transaction both in terms of the speed with which it was conducted and the way
in which it is put through. HDFC Bank gains in terms of size and complementarily of
network. From the times point of view too, I think this merger makes sense. The merger
made the shareholders of HDFC bank and erstwhile shareholders of Times Bank very
happy.”

Competition of late had been heating up. Foreign banks have been radically altering their
strategies. Some of the public sector banks also began attempting reshaping of their
competitive strategies. New private sector banks also began attempting reshaping of their
strategies. New private sector banks have been aggressive in the race to grab the market
share, thus for HDFC Bank the timing of merger opportunity could not have been better.

26 | P a g e
In the whole world of banking sector it was HDFC Bank and ICICI Bank, which
maintained better valuations while price of rest of the banks in the industry, plummeted in
the recent past.

(Rs in Lakhs)

Particulars As On 31-3-2000 As On 31-3-99

Interest Income 67987 37608
Other Income 12535 6807
Total Income 80522 44415
Interest Expenditure 37428 22918
Other Expenditure 20963 8310
Total Expenditure 58391 31228
Gross Profit before Tax and Depreciation 22131 13187
Depreciation 2646 1502
Profit before Tax 19485 11685
Provision for taxation 7481 3445
Net Profit 12004 8240
Paid up Share Capital 24328 20000
Reserves (Excluding Revaluation Reserve) 50824 13893
Dividend % 16 13

From the above table we can conclude that the net profit of HDFC bank was
increased from 8240 to 12004 increases the net profit by 3764 with the
percentage of 45.67%

And the reserve is also increased by 36931 and in percentage 72.66%

SHARE HOLDING PATTERN

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The share holding pattern that might be influenced in a merger deal has also been closely
analyzed.

SHARE HOLDING PATTERNS OF HDFC BANK

ITEM PRE-MERGER %
AVERAGE POST MERGER
HDFC GROUP 28.78 25.74
INDIAN PRIVATE 10.00 8.95
EQUITY FUND
INDOCEAN 4.99 4.46
FINANCIAL
HOLDINGS
BENNET, NIL 7.78
COLEMAN
COMPANY AND
GROUP
PUBLIC 56.23 53.07
100 100

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29 | P a g e
 Effect Of Merger On Shareholders Wealth
Date Close Price Sensex Script Return(%) Market Return(%)
24-Jan-00 201.45 5,458.06
25-Jan-00 ED-30 217.55 5,367.79 7.99 -1.65
27-Jan-00 229.95 5,369.10 5.70 0.02
28-Jan-00 228 5,335.80 -0.85 -0.62
31-Jan-00 235.15 5,205.29 3.14 -2.45
1-Feb-00 239.55 5,215.54 1.87 0.20
2-Feb-00 242 5,304.92 1.02 1.71
3-Feb-00 225.55 5,340.19 -6.80 0.66
4-Feb-00 230.5 5,313.59 2.19 -0.50
7-Feb-00 245 5,474.00 6.29 3.02
8-Feb-00 251 5,610.56 2.45 2.49
9-Feb-00 251 5,649.10 0.00 0.69
10-Feb-00 251 5,789.04 0.00 2.48
11-Feb-00 230.95 5,933.56 -7.99 2.50
14-Feb-00 234 5,924.31 1.32 -0.16
15-Feb-00 ED-10 231 5,803.19 -1.28 -2.04
16-Feb-00 249.45 5,725.50 7.99 -1.34
17-Feb-00 250 5,835.15 0.22 1.92
18-Feb-00 246 5,721.65 -1.60 -1.95
21-Feb-00 239.5 5,876.89 -2.64 2.71
22-Feb-00 222 5,883.33 -7.31 0.11
23-Feb-00 222.45 5,642.46 0.20 -4.09
24-Feb-00 228 5,810.17 2.49 2.97
25-Feb-00 ED-1 226.1 5,623.08 -0.83 -3.22
28-Feb-00 ED+1 228 5,740.69 0.84 2.09
29-Feb-00 217.6 5,446.98 -4.56 -5.12
1-Mar-00 234.95 5,642.12 7.97 3.58
2-Mar-00 253.7 5,528.31 7.98 -2.02
3-Mar-00 273.95 5,378.27 7.98 -2.71
6-Mar-00 259.2 5,520.69 -5.38 2.65
7-Mar-00 262.25 5,589.85 1.18 1.25
8-Mar-00 ED+10 275 5,511.42 4.86 -1.40
9-Mar-00 263 5,328.79 -4.36 -3.31
10-Mar-00 256 5,301.78 -2.66 -0.51
13-Mar-00 276 5,129.22 7.81 -3.25
14-Mar-00 268.9 5,175.71 -2.57 0.91
15-Mar-00 259 5,249.76 -3.68 1.43
16-Mar-00 256.9 5,102.41 -0.81 -2.81
21-Mar-00 254.5 5,133.24 -0.93 0.60
22-Mar-00 264 5,201.87 3.73 1.34
23-Mar-00 276.1 5,115.02 4.58 -1.67
24-Mar-00 270 5,141.42 -2.21 0.52
27-Mar-00 272 5,146.30 0.74 0.09
28-Mar-00 ED+30 278 5,156.12 2.21 0.19

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 Expected Abnormal Acc.Abnormal
Date Return(%) Return(%) ret(%)

31 | P a g e
24-Jan-00 Y=a+bX
25-Jan-00 ED-30 1.04 6.96 6.96
27-Jan-00 0.62 5.08 7.58
28-Jan-00 0.78 -1.63 8.36
31-Jan-00 1.23 1.90 9.60
1-Feb-00 0.58 1.29 10.18
2-Feb-00 0.20 0.82 10.38
3-Feb-00 0.46 -7.26 10.84
4-Feb-00 0.75 1.44 11.59
7-Feb-00 -0.12 6.41 11.47
8-Feb-00 0.01 2.44 11.49
9-Feb-00 0.46 -0.46 11.94
10-Feb-00 0.02 -0.02 11.96
11-Feb-00 0.01 -8.00 11.97
14-Feb-00 0.67 0.65 12.64
15-Feb-00 ED-10 1.13 -2.42 13.77
16-Feb-00 0.96 7.03 14.73
17-Feb-00 0.15 0.07 14.88
18-Feb-00 1.11 -2.71 15.99
21-Feb-00 -0.04 -2.60 15.95
22-Feb-00 0.60 -7.91 16.55
23-Feb-00 1.64 -1.44 18.19
24-Feb-00 -0.11 2.60 18.08
25-Feb-00 ED-1 1.42 -2.26 19.51
28-Feb-00 ED+1 0.11 0.73 19.62
29-Feb-00 1.89 -6.45 21.51
1-Mar-00 -0.26 8.23 21.25
2-Mar-00 1.13 6.85 22.38
3-Mar-00 1.30 6.68 23.68
6-Mar-00 -0.03 -5.36 23.65
7-Mar-00 0.32 0.86 23.97
8-Mar-00 ED+10 0.97 3.89 24.94
9-Mar-00 1.45 -5.81 26.39
10-Mar-00 0.75 -3.41 27.15
13-Mar-00 1.43 6.38 28.58
14-Mar-00 0.40 -2.98 28.98
15-Mar-00 0.27 -3.96 29.26
16-Mar-00 1.32 -2.13 30.58
21-Mar-00 0.48 -1.41 31.06
22-Mar-00 0.30 3.44 31.35
23-Mar-00 1.04 3.54 32.39
24-Mar-00 0.50 -2.71 32.89
27-Mar-00 0.60 0.14 33.50
28-Mar-00 ED+30 0.58 1.63 34.08

Accumulated Abnormal Return(%)

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ED-30 to ED-10 to ED-1 to ED+1 to ED+1 to
ED-1 ED-1 ED+1 ED+10 ED+30
229.99 59.42 0.74 60.62 145.62

HDFC Bank

250.00

200.00

150.00

100.00
Series1
50.00

0.00
ED-30 to ED-10 to ED-1 to ED+1 to ED+1 to
ED-1 ED-1 ED+1 ED+10 ED+30
Series1 229.99 59.42 0.74 60.62 145.62

33 | P a g e
 Acc.Abnormal Return(% )

20.00

15.00 ED+10

10.00
ED-10 ED+30
ED-30
5.00 Series1

0.00 ED+1
ED-1

-5.00

-10.00

The above chart shows accumulated abnormal return of HDFC bank.

Accumulated abnormal return is a difference between actual script return and expected
script return.

It is clear from the above chart that abnormal return is increasing after ED-30 (i.e. a
month before actual merger takes place.)

The return becomes negative a day before actual merger takes place.

The period between ED-30 to ED is the period in which speculator start investing and
after the ED period long term investors comes in the market for investing their moneys.

The person who holds the script of HDFC Bank for the period between ED-30 to ED+30
got 8.14% higher return than what they are supposed to get.

So from the view point of investors the script is feasible to invest.

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 CONCLUSION

Growth is always essential for the existence of a business concern. A

concern is bound to die if it does not try to expand its activities. The
expansion of a concern may be in the form of enlargement of its activities or
acquisition of ownership and control of other concerns. Internal expansion
results gradual increase in the activities of the concern. External expansion
refers to “business combination” where two or more concerns combine and
expand their business activities.
From the report we can conclude that
 The net profit of HDFC bank was increased from 8240 to 12004
increases the net profit by 3764 with the by 45.67%.

 The reserve is also increased by 72.66%

 The fundamentals of bank become strong

 It is a good script to invest for long term investment.

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 BIBLIOGRAPHY

 www.bseindia.com

 www.moneycontrol.com

 www.hdfcbank.com

 www.timesbank.com

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