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MERGERS & ACQUISITIONS

MERGERS & ACQUISITIONS. IN BANKING INDUSTRY. Approval of Merger. RBI approved of the merger of HDFC Bank Ltd. And Centurion Bank of Punjab Ltd. As on May 23, 2008. All Branches of Centurion Bank of Punjab shall function as branches of HDFC Bank from that date.

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MERGERS & ACQUISITIONS

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  1. MERGERS & ACQUISITIONS IN BANKING INDUSTRY

  2. Approval of Merger RBI approved of the merger of HDFC Bank Ltd. And Centurion Bank of Punjab Ltd. As on May 23, 2008. All Branches of Centurion Bank of Punjab shall function as branches of HDFC Bank from that date. Balance Sheet of the combined entity will be at Rs.1,63,000 cr.

  3. STRENGTHS OF MERGING ENTITIES • INCEPTION AT THE SAME TIME • NEW GENERATION PRIVATE BANKS • GEOGRAPHIC FIT • HDFC Bank : • asset size of Rs. 131,439 crore as of the third quarter of 2007-08, • 1,100 branches • 21,477 employees • NPA 0.4% • CBoP Bank : • Rs. 25,404 crore • 390 branches • 7,500 employees • NPA 1.7% • Both have had mergers in past • CPoB has higher share of retail (60%) in its total loan portfolio than HDFC Bank (51%). • Economies of scale and retail lending will get a big boost • CBoP adds about 20% in terms of balance sheet • Both understand consumer and retail banking • Both have been on a technology platform

  4. ISSUES TO BE TAKEN CARE OF • CBoP HAS A WORKERS' UNION INHERITED FROM LORD KRISHNA BANK; HDFC BANK HAS ALWAYS WORKED IN A UNION-FREE ENVIRONMENT. • HDFC BANK IS PAYING AROUND ONE-THIRD FOR CBoP BRANCHES- VALUE MAXIMIZATION SHOULD TAKE PLACE • CBoP IS MORE ABOUT LOW-COST OPERATIONS AND DISTRIBUTES MORE LOW-COST PRODUCTS WHILE HDFC'S PRODUCTS ARE MORE UNIVERSAL AND SOPHISTICATED AND HIGHER UP THE VALUE CHAIN

  5. Mergers in Indian Banking Industry • Indian Economy growing at 8% • Banking Industry growing at 22% • 2009 RBI will open up Indian Banking Industry • Need many more banks, especially in the rural and semi-urban areas • More than 50% of the population does not have banking accounts • cost of intermediation is 5% in India • Hardly 20 Indian banks are found in top 1000 banks of the world • Therefore, future has to see many mergers in the Indian Banking Industry

  6. MERGERS & ACQUISITIONS IN GENERAL

  7. ISSUES IN MERGERS & ACQUISITIONS • PEOPLE ISSUES • CUSTOMER ISSUES • CULTURAL ISSUES • TECHNOLOGICAL ISSUES

  8. BENEFITS • SIZE OF BANK • MORE FINANCIAL RECOURCES • MORE DELEGATED POWER • LESS OPERATIONAL & TRANSACTIONAL COSTS DUE TO ECONOMIES OF SCALE • GREATER RISK TAKING ABILITY • LARGER STAFF STRENGTH • SYNERGY OF EXPERTS • INCREASE IN GEOGRAPHICAL & REGIONAL SPREAD • BETTER MARKET IMAGE • INCREASED BARGAINING POWER & BETTER COMPETITIVE POSITION • AID TO FORAY INTO OVERSEAS MARKET • LARGER VARIETY OF PRODUCTS UNDER SINGLE UMBRELLA

  9. RISKS ASSOCIATED • DIFFICULTY IN CONTROLLING DUE TO GREATER SIZE • PROFITS MAY COME ONLY GRADUALLY, MERGER MAY SOMETIMES BE FOLLOWED BY LOSSES • PROBLEMS OF INDUSTRIAL RELATIONS, DEPRESSION & DEMOTIVATION AMONG WORKFORCE • THOROUGH OVERHAULING & SYSTEM ANALYSIS TO ASSIMILATE BOTH ORGANISATIONS • NO FOOLPROOF VALUATION SYSTEM FOR TRANSFER & COMPENSATION • PROBLEM OF BRAND PROJECTION

  10. IMPORTANT CONSIDERATIONS TOWARDS MERGERS & ACQUISITIONS • Should have a fairly large number of banks to match up international banking scenario • Value maximizations & performance improvement • Government should give prime attention to consolidation process • Streamline human resource functions & skills • Study international experiences before merger • Empirically merger between big and small banks led greater gains than between equals • Capital Adequacy & NPA position improves due to mergers • Public sector banks have large market share but lower performance ratio so need to merger is felt • Not restricted to one particular banking group but across groups • Since banks display similar characteristics of performance scope of consolidation increases

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