BANK MERGERS AND ACQUISITIONS
Bank Mergers and Acquisitions
After reading this unit you should be able to:l l l l
understand the meaning and types of mergers in general; appreciate the need for bank mergers; describe the legal framework in which merger takes place; and analyse some bank merger case studies.
Structure 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 Introduction Types of Mergers Motives for Merger Bank Mergers Legal Framework Procedure for Amalgamation of Banking Companies Restructuring of Banks and Some Relevant Committees Case Studies Summary
16.10 Key Words 16.11 Self Assessment Questions 16.12 Further Readings Appendix
The Liberalisation, Privatisation and Globalisation process which was started in early 1990s has brought so many changes in the economic scene of the country. This process of economic reforms has brought competition not only from India but also from Overseas. In order to compete with these competitors, Indian corporate sector has tried to reorganise and restructure the companies by adopting various strategies. These strategies include Mergers, Acquisitions, Joint ventures, Spin off, Divestitures, etc. Restructuring can be broadly classified into three types. They are: a) b) c) Portfolio Restructuring, Financial Restructuring, and Organisational Restructuring.
If a firm is reshuffling its assets by selling some of its existing production facilities or acquiring some new facilities to produce the feeding rawmaterial for the main product, it is called portfolio restructuring. In financial restructuring the composition of debt and equity are shuffled. In the process of organisational restructuring, Organisational Structure is revisited and changes are made. All these restructurings are aimed to achieve better results for the company.5
Figure 16.1 presents a broad view of the different forms of Organisational Restructuring which can be seen these days in the Corporate World:Figure 16.1: Forms of Restructuring Business Firms Forms of Restructuring Business Firms
Expansion l Mergers and acquisitions l Tender Offers l Joint Ventures
Sell-offs l Spin-offs l Split offs l Split ups l Divestitures l Equity Carve-outs
Corporate Control l Premium Buy-backs l Standstill Agreements l Anti-takeover Amendments l Proxy contests
Changes in Ownership Structure l Exchange Offers l Share Repurchases l Going Private l Leveraged Buy-outs
Source: Adapted from Weston, Chung and Hong, 1998, Mergers, Restructuring and Corporate Control
Some of the sectors which saw a lot of activity in the last decade in relation to mergers are : fast moving consumer goods sector, financial services sector, cement, paper, chemicals and tyre industries. Some of the corporates which are involved actively in this activity are: Reliance group, Hindustan Levers, Aravind group, Eicher group, Vijay Mallaya, Chhabria group, etc. In the Banking sector ICICI Bank, HDFC Bank, and Punjab National Bank (PNB) are actively involved in the merger activity . In this unit we shall discuss the bank mergers in detail.
TYPES OF MERGERS
When a company acquires another company, the acquiring company is called the Acquirer Company and the company which is being acquired is called the Acquired Company. The acquirer company has two alternatives for dealing the acquired company. First the acquiring company can takeover the management of acquired company and run it as a separate company with its own new Management. This is called the Takeover or the Change of Management. The second alternative for Acquirer Company is to merge the acquired company into itself. This is called the merger. In this unit we shall be discussing mostly about the mergers. In case of mergers there could be three situations. They are: i) The acquirer company merges the acquired company into itself and the acquired company looses its entity, ii) The acquirer company may merge with the acquired company and may give up its own identity. Normally this kind of merger takes place for getting some Tax benefits. iii) There could be a situation in which both the acquirer company and acquired company loose their identity and form a altogether new company with a new name.
Mergers can be broadly classified into three types. They are vertical mergers, horizontal mergers, and conglomerate mergers. Let us understand each of these types hereunder: a) Vertical Mergers: If a company acquires another company, which buys the products of Acquirer Company and uses them as raw material in its production process or acquires a company from which the company buys its raw material, then it is called vertical merger. If a bank acquires a marketing company which provides the bank, marketing services for its products as an outsourcing solution, then it can be stated as vertical merger.
Horizontal Mergers: If a bank acquires another bank and merges it into itself, it is known as Horizontal merger. Similarly if a company acquires another company which is operating in the same area of its operation and merges it into itself, it is said to be horizontal merger. This could be to increase the market share, or to get technological advantages, or to enter into the new geographical areas, or to acquire any other strategic advantages. Conglomerate Mergers: If a company acquires a company which is not at all connected with the area of operations of acquiring company, it is said to be a conglomerate merger. For example, if a bank acquires a cement company and merges it into itself, then it can be treated as conglomerate merger.
Bank Mergers and Acquisitions
Depending upon the situation and need of the acquiring company, it may adopt any one of the above types of mergers.
MOTIVES FOR MERGER
Any acquisition takes place with a number of motivations culminating in a positive synergy (2+2=5 relationship). This means that the performance of the combined company is more than the sum of the performance of erstwhile two independent companies. Let us, now, examine the motives behind the merger. A study conducted in the U.S.A., identified 12 motives that promote merger and acquisition activity. They are given below in the order of their priority: 1. 2. 3. 4. 5. 6. 7. 8. 9. Taking advantage of awareness that a company is undervalued. Achieving growth more rapidly than by internal effort. Satisfying market demand for additional products/services. Avoiding risks of internal start-ups of expansion. Increasing earnings per share. Reducing dependence on a single product/service. Acquiring market share or position. Offsetting seasonal or cyclical fluctuations in the present business. Enhancing the power and prestige of the Owner, CEO, or Management.
10. Increasing utilization of present resources, et., physical plant and individual skills. 11. Acquiring outstanding Management or Technical Personnel. 12. Opening new markets for present products/services. A survey, conducted in 1955, by the U.S. Federal Trade Commission, to find out why companies choose the merger and acquisition route, listed seven major benefits of acquisition for the acquiring company. They are: 1. 2. 3. 4. 5. 6. 7. Gaining additional capacity to supply to a market already being serviced by the acquirer. Gaining extended product lines. Achieving diversification of product base. Gaining facilities to produce goods purchased earlier. Gaining facilities to process or distribute goods sold earlier. Gaining access to additional markets. Other advantages such as empty plants, control of patents, etc.7
In India, the merger and takeover phenomenon in the past was understood largely as one of the sick units being taken over by healthy ones. This is because of the reason that Sec. 72A of the Income Tax Act, 1961, provides for the carry forward of losses. The advantage that the merging corporations get is that the book losses of the sick corporation get written off against the future profits, thus saving the profitable corporations some tax outflow. As far as the Banking sector is concerned following reasons are more relevant: 1. Growth with External Efforts: With the economic liberalization the competition in the banking sector has increased and hence there is a need for mega banks, which will be intensely competing for market share. In order to increase their market share and the market presence some of the powerful banks have started looking for banks which could be merged into the acquiring bank. They realized that they need to grow fast to capture the opportunities in the market. Since the internal growth is a time taking process, they started looking for target banks. Deregulation: With the liberalisation of entry barriers, many private banks came into existence. As a result of this there has been intense competition and banks have started looking for target banks which have market presence and branch network. Technology: The new banks which entered as a result of lifting of entry barriers have started many value added services with the help of their technological superiority. The older banks which can not compete in this area may decide to go for mergers with these high-tech banks. New Products/Services: New generation private sector banks which have developed innovative products/services with the help of their technology may attract some old generation banks for merger due to their incapacity to face these challenges. Over Capacity: The new generation private sector banks have began their operation with huge capacities. With the presence of many players in the market, these banks may not be able to capture the expected market share on its own. Therefore, in order to fully utilise their capacities these banks may look f