Merger & Acquisition Project.docx

A PROJECT REPORT on

“PROJECT REPORT ON MERGER & ACQUISITION” in the subject COMMERCIAL BANK MGMT Submitted to University of Mumbai for II Semester of M.Com. BY

PRIYANKA BHUMESH GUNDLA Roll No. 11 under the guidance of Prof. SAURABH CHAWAN 2014-2015

C E R T I F I C ATE

This is to certify that the project entitled “PROJECT REPORT ON MERGER & ACQUISITION” Roll No. 11 student of M.Com. Banking & Finance (University of Mumbai) (IInd Semester) examination has not been submitted for any other examination and does not form a part of any other course undergone by the candidate. It is further certified that she has completed all required phases of the project. This project is original to the best of our knowledge and has been accepted for Internal Assessment.

Internal Examiner

External Examiner

Co-ordinator

Principal

College seal

DECLARATION BY THE STUDENT

I, Ms. Priyanka Bhumesh Gundla student of M.Com. (Semester – Ist) Banking & Finance, Roll No. 11 hereby declare that the project for the Subject COMMERCIAL BANK MANAGEMENT titled, “PROJECT REPORT ON MERGER & ACQUISITION ” submitted by me to University of Mumbai, examination during the academic year 2014-2015, is based on actual work carried by me under the guidance and supervision of Prof. SAURABH CHAWAN.

I further state that this work is original and not submitted anywhere else for any examination.

PRIYANKA BHUMESH GUNDLA

Signature of student ______________

ACKNOWLEDGEMENT

At the beginning, I would like to thank GOD for his shower of blessing. The desire of completing this project was given by my guide Prof.SAURABH CHAWAN. I am very much thankful to him for the guidance, support and for sparing his precious time from a busy schedule.

I would fail in my duty if I don’t thank my parents who are pillars of my life. Finally I would express my gratitude to all those who directly and indirectly helped me in completing this project.

PRIYANKA BHUMESH GUNDLA

INDEX

Sr. No.

Topic

Page No.

1

Introduction

6

2

Meaning of Merger & Acquisition

7

3

Merger OR Acquisition?

9

4

Difference between M&A

10

5

Types of M&A

11

6

Merger & Acquisition Process

12

7

Advantages &Disadvantages of M&A

13

8

Case Study Analysis

16

9

Merger Strategy

20

10

Aftermath of the Merger

26

11

CONCLUSION

34

Chapter1. INTRODUCTION

Mergers and Acquisitions (M&A) are both aspects of strategic management, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. M&A can be defined as a type of restructuring in that they result in some entity reorganization with the aim to provide growth or positive value. Consolidation of an industry or sector occurs when widespread M&A activity concentrates the resources of many small companies into a few larger ones, such as occurred with the automotive industry between 1910 and 1940. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations. From a legal point of view, a merger is a legal consolidation of two companies into one entity, whereas an acquisition occurs when one company takes over another and completely establishes itself as the new owner (in which case the target company still exists as an independent legal entity controlled by the acquirer). Either structure can result in the economic and financial consolidation of the two entities. In practice, a deal that is an acquisition for legal purposes may be euphemistically called a "merger of equals" if

both CEOs agree that joining together is in the best interest of both of their companies, while when the deal is unfriendly (that is, when the target company does not want to be purchased) it is almost always regarded as an "acquisition"

Chapter 2. MEANING OF MERGER & ACQUISITION Meaning of Merger  A merger refers to a combination of two or more companies, usually of not greatly disparate size, into one company.  A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals".  Merger refers to a situation when two or more existing firms combine together and form a new entity.  Merger is a marriage between two companies of roughly same size. It is thus a combination of two or more companies in which one company survives n its own name and the other ceases to exist as a legal entity. Meaning of Acquisition  Acquisition refers to the acquiring of ownership right in the property and asset  Without any combination of companies. Thus in acquisition two or more companies  May remain independent, separate legal entity, but there may be change in control of companies. Acquisition results when one company purchase the controlling interest in the share capital of another existing company in any of the following ways:

 a)Controlling interest in the other company. By entering into an agreement with a personor persons holding  b)by subscribing new shares being issued by the other company.  c)by purchasing shares of the other company at a stock exchange, and  d)by making an offer to buy the shares of other company, to the existing shareholders of  that company.

DEFINITION OF 'MERGERS AND ACQUISITIONS - M&A' A general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.

Chapter 3. Merger or Acquisition?

The terms "merger" and "acquisition" are often confused and used interchangeably by business and financial executives. On the face of it, the difference may not really matter since the net result is often the same: Two companies (or more) that had separate ownership are now operating under the same roof, usually to obtain some strategic or financial objective. However, the strategic, financial, tax and even cultural impact of the deal may be very different, depending on how the transaction is structured. Merger refers to two companies joining (usually through the exchange of shares) to become one. Acquisition occurs when one company, the buyer, purchases the assets or shares of another company, the seller, paying in cash, stock or other assets of value to the seller. In a stock-purchase transaction, the seller's shares are not necessarily combined with those of the buyer's existing company. They may be kept separate as a new subsidiary or operating division. In an asset-purchase transaction, the assets to be conveyed by the seller to the buyer become additional assets of the buyer's company, with the hope and expectation that the value of the assets purchased will, over time, exceed the price paid, enhancing shareholder value as a result of the transaction's strategic or financial benefits.

Chapter4. Difference Between Merger Acquisition

Although merger and acquisition are often used as synonymous terms, there is a subtle difference between the two concepts.

In the case of a merger, two firms together form a new company. After the merger, the separately owned companies become jointly owned and obtain a new single identity. When two firms merge, stocks of both are surrendered and new stocks in the name of new company are issued. Generally, mergers take place between two companies of more or less same size. In these cases, the process is called Merger of Equals. However, with acquisition, one firm takes over another and establishes its power as the single owner.Generally, the firm which takes over is the bigger and stronger one. The relatively less powerful, smaller firm loses its existence, and the firm taking over, runs the whole business with its own identity. Unlike the merger, stocks of the acquired firm are not surrendered, but bought by the public prior to the acquisition, and continue to be traded in the stock market. Another difference is, when a deal is made between two companies in friendly terms, it is typically proclaimed as a merger, regardless of whether it is a buy out. In an unfriendly deal, where the stronger firm swallows the target firm, even when the target company is not willing to be purchased, then the process is labeled as acquisition. Often mergers and acquisitions become synonymous, because, in many cases, a bigger

firm may buy out a relatively less powerful one and compel it to announce the process as a merger. Although, in reality an acquisition takes place, the firms declare it as a merger to avoid any negative impression.

Chapter 5. Types of Merger and Acquisition

There are many types of mergers and acquisitions that redefine the business world with new strategic alliances and improved corporate philosophies. From the business structure perspective, some of the most common and significant types of mergers and acquisitions are listed below: Horizontal Merger This kind of merger exists between two companies who compete in the same industry segment. The two companies combine their operations and gains strength in terms of improved performance, increased capital, and enhanced profits. This kind substantially reduces the number of competitors in the segment and gives a higher edge over competition. Vertical Merger Vertical merger is a kind in which two or more companies in the same industry but in different fields combine together in business. In this form, the companies in merger decide to combine all the operations and productions under one shelter. It is like encompassing all the requirements and products of a single industry segment. Co-Generic Merger

Co-generic merger is a kind in which two or more companies in association are some way or the other related to the production processes, business markets, or basic required technologies. It includes the extension of the product line or acquiring components that are all the way required in the daily operations. This kind offers great opportunities to businesses as it opens a hue gateway to diversify around a common set of resources and strategic requirements.

Conglomerate Merger Conglomerate merger is a kind of venture in which two or more companies belonging to different industrial sectors combine their operations. All the merged companies are no way related to their kind of business and product line rather their operations overlap that of each other. This is just a unification of businesses from different verticals under one flagship enterprise or firm. Merger and Acquisition Process is probably the most important thing in a merger or acquisition deal as it influences the benefits and profitability of the merger or acquisition. The Merger and Acquisition Process is carried out in some steps which are discussed in the following page.

Merger and Acquisition Process is a great concern for all the companies who intend to go for a merger or an acquisition. This is so because, the process of merger and acquisition can heavily affect the benefits derived out of the merger or acquisition. So, the Merger and Acquisition Process should be such that it would maximize the benefits of a merger or acquisition deal.

Chapter 6. MERGER & ACQUISITION PROCESS The Merger and Acquisition Process can be divided in to some steps. The stepwise implementation of any merger process ensures its profitability. PreliminaryAssessment or Business Valuation In this first step of Merger and Acquisition Process, the market value of the target company is assessed. In this process of assessment not only the current financial performance of the company is examined but also the estimated future market value is considered. The company which intends to acquire the target firm, engages itself in an thorough analysis of the target firm's business history. The products of the firm, its' capital requirement, organizational structure, brand value everything are reviewed strictly. Phase of Proposal After complete analysis and review of the target firm's market performance, in the second step, the proposal for merger or acquisition is given. Generally, this proposal is given through issuing an non-binding offer document. Exit Plan

When a company decides to buy out the target firm and the target firm agrees , then the latter involves in Exit Planning. The target firm plans the right time for exit. It consider all the alternatives like Full Sale, Partial Sale and others. The firm also does the tax planning and evaluates the options of reinvestment.

Structured Marketing After finalizing the Exit Plan, the target firm involves in the marketing process and tries to achieve highest selling price. In this step, the target firm concentrates on structuring the business deal.

Origination of Purchase Agreement or Merger Agreement In this step, the purchase agreement is made in case of an acquisition deal. In case of Merger also, the final agreement papers are generated in this stage. Stage of Integration In this final stage, the two firms are integrated through Merger or Acquisition. In this stage, it is ensured that the new joint company carries same rules and regulations throughout the organization.

Strategies play an integral role when it comes to merger and acquisition. A sound strategic decision and procedure is very important to ensure success and fulfilling of expected desires. Every company has different cultures and follows different strategies to define their merger. Some take experience from the past associations, some take lessons from the associations of their known businesses, and some hear their own voice and move ahead without wise evaluation and examination. Following are some of the most essential strategies of merger and acquisition that can work wonders in the process: The first and foremost thing is to determine business plan drivers. It is very important to convert business strategies to set of drivers or a source of motivation to help the merger succeed in all possible ways. There should be a strong understanding of the intended business market, market share, and the technological requirements and geographic location of the

business. The company should also understand and evaluate all the risks involved and the relative impact on the business. Then there is an important need to assess the market by deciding the growth factors through future market opportunities, recent trends, and customer's feedback.The integration process should be taken in line with consent of the management from both the companies venturing into the merger. Restructuring plans and future parameters should be decided with exchange of information and knowledge from both ends. This involves considering the work culture, employee selection, and the working environment as well. At the end, ensure that all those involved in the merger including management of the merger companies, stakeholders, board members, and investors agree on the defined strategies. Once approved, the merger can be taken forward to finalizing a deal.

Chapter 7. Advantages & Disadvantages of M&A

Advantages and disadvantages of mergers and acquisitions (M&A) are determined by the short-term and long-term company strategic outlook of the new and acquiring companies. This is due to a host of factors including market conditions, differences in business culture, acquisition costs and changes to financial strength surrounding the corporate takeover. A well known example of mergers gone bad was the September 15, 2008 merger between Bank of America and Merrill Lynch. This merger was surrounded by complications ranging from employee bonuses, added debt and forced hands as evident in the April 13, 2009 U.S. Senate Committee on Banking investigation of the merger. (7)

In the case where short-term financial benefits are not realized, long-term advantages may be seen as a valid and probable reason for the merger or acquisition. This article will discuss advantages and disadvantages of mergers and acquisitions in four parts consisting of pros and cons of M&A decision making, operational and financial advantages, costs, and consumer benefits and drawbacks.

Pros and cons of mergers and acquisitions A number of reasons provide sanction for a corporate merger and acquisition, not all of which are necessarily financial in nature. Moreover, M&A is within the scope of the Board of Directors to pursue (1) and the company executives to initiate and execute. Since board members may also be subject to political, social, and personal interests, decisions seemingly in favor of the shareholders may also become quagmired with additional factors.

According to Investopedia.com, an estimated 66% of mergers and acquisitions are not successful because of M&A intent. Of the 33% that are considered successful, the mergers and acquisitions achieved a net gain from the M&A with our without bad M&A intent. A number of reasons for the majority of failures exist in addition to the failures themselves indicating a potential disadvantage of M&A activity is a relatively high risk of failure. This is further illustrated in an article from a 2005 article in the Journal of Global Business on M&A preparation. (6) Moreover, the article that refers to numerous M&A case studies and research sources states the reasons for M&A failures include bad basis for decision making on the part of the company leadership, failure to consider and/or incorporate the new company, bad management and overestimating the valuation of the acquired corporation.

Despite the reasons some M&A’s fail, mergers and acquisitions, regulations of such and their circumstances may harness the characteristics of the decision makers for the net economic advantage despite possible conflicts of interest, short-term financial and consumer disadvantages. In other words, in theory, mergers and acquisitions may be economically beneficial in terms of reducing complexity of regulatory oversight, increasing global corporate competitiveness, and adding to shareholders net wroth. This is verified by the M&A activity that is successful through increases in equity valuations, larger market share, improved operational efficiency, higher industrial capacity etc.

Chapter 8. Case Study Analysis Merger between HDFC Bank Ltd and Centurion Bank of Punjab

About HDFC BANK

Promoted in 1995 by housing development finance corporation (HDFC), India’s leading housing finance company, HDFC Bank is one of India’s premier banks providing a wide range of financial products and services to its over 11 million customers across over three hundred cities using multiple distribution channels including a Pan-India network of branches, ATMs, phone banking, net banking and mobile banking. Within a relatively short span of time, the bank has emerged as a leading player in retail banking, wholesale banking, and treasury operations, its three principal business segments. The bank’s competitive strength clearly lies in the use of technology and the ability to deliver world-class service with rapid response time. Over the last 13 years, the bank has successfully gained market share in its target customer franchises while maintaining healthy profitability and assets quality. As on December 31, 2007, the bank had a network of 754 branches and 1,906 ATMs in 327 cities. For the quarter ended December 31, 2007, the bank reported a net profit of Rs. 4.3 billion, up 45.2%, over the corresponding quarter of previous year. Total balance sheet size too grew by 46.7% to Rs.1, 314.4 billion. About Centurion Bank of Punjab Centurion Bank of Punjab is one of the leading new generation private sector banks in India. The bank serves individual consumers, small and medium businesses and large corporations with a full range of financial products and services for investing, lending and advice on financial planning. The bank offers its customers an array of wealth management products such as mutual funds, life and general insurance and has established a leadership ‘position’. The bank is also strong player in foreign exchange services, personal loans, mortgages and agricultural loans. Additionally the bank offers a full site of NRI banking products to overseas Indians. On August 29, 2007, Lord Krishna Bank (LKB) merged with Centurion Bank of Punjab, Post obtaining all statutory and regulatory approvals. This merger has further strengthened the geographical reach of the bank in major town and cities across the

country, especially in the State of Kerala, in addition to its existing dominance in the northern part of the country. Centurion Bank of Punjab now operates on a strong nationwide franchise of 394 branches and 452 ATMs in 180 locations across the country, supported by employee base of over 7,500 employees. In addition to being listed on the Indian stock exchanges, the bank’s shares are also listed on the Luxembourg stock exchange. Centurion Bank is India’s fourth largest private-sector bank, after the significantly larger ICICI Bank, HDFC Bank and UTI Bank. Centurion's balance sheet is of modest scale, much smaller than those of major private-sector banks. The bank is capitalized to support rapid growth, and its high fixed operating costs suggest that profitability is leveraged to asset growth. Centurion's acquisition of Bank of Punjab has substantially bolstered its distribution franchise, widened its product and customer mix, and gives it the Platform to aggressively expand its balance-sheet; which it has hitherto achieved quite well. It is predominantly a Consumer bank – with almost 70% of its loans are in relatively high yield segments. Its distribution concentration is largely in the Western and Northern parts of the country, and it is seeking to acquire a mid-sized bank in the Southern parts of the country, to broaden and expand its distribution franchise. Bank Muscat is the largest shareholder in the bank post-merger with a 20.5% stake; Keppel Corp holds 9.0% and 18.6% is held through GDRs. Sabre Capital and BOP promoters hold 4.4% and 5.0%stakes in the bank, respectively.

HDFC Bank and Centurion Bank of Punjab have decided to merge. It is the largest merger in the space in recent times and perhaps the beginning of the consolidation wave in the BFSI sector. The HDFC Bank-CBOP merger is a smooth exercise when it comes to the marriage of technology at both banks. The merger comes as no surprise. With further liberalization, post-2009, an account of WTO regulations, there would be greater accessibility for foreign banks to Indian shores and vice-versa. With competition

hotting up, Indian Banks will have to gear up to compete with their global counterparts in terms of products, technology and people.

Chapter 9. MERGER STRATEGY

Merger with Centurion Bank of Punjab in the swap ratio of 1:29 The boards of both HDFC Bank and Centurion Bank of Punjab (CBOP) have approved the merger between the two banks in the ratio of 1:29(1 share of HDFC Bank for 29 shares of CBOP) HDFC bank would also consider selling shares to HDFC in order to maintain its holding over 20%. We rate this merger as neutral for HDFC Bank on as a long term perspective. However on a short term basis, it is negative for HDFC Bank’s stand-alone financials and shareholders At the current price, the CBOP’s is richly valued compared with that of HDFC bank despite CBOP’s lower banking franchise, inferior return ratios and higher NPAs. CBOP’s asset book constitutes about 20% of that of HDFC Bank; while its profit is merely 11%.Following is a summary of the key business parameters across HDFC Bank and CBOP.

Shareholding pattern of HDFC Bank on 31Dec 2007 Face value 10.00 Promoter’s holding No. of shares % of holding Indian Promoters 82443000 23.28 Subtotal 82443000 23.28 Non Promoter’s holding Institutional Investors Banks Fin. Inst. And Insurance 10068939 2.84

Main

FII’s 94087619 26.57 Subtotal 116142534 32.80 Other Investors Private Corporate Bodies 28598234 8.08 NRI's/OCB's/Foreign Others 6019811 1.70 Govt 3841342 1.08 Others 78110019 22.06 Subtotal 116569406 32.92 General public 38920380 10.99 Grand total 354075320 100.0 Other Investors

Highlights of Merger

 The merger was effected using the ‘pooling of interest’ method. The bank’s main task was to harmonize the accounting policies and, as a result, HDFC Bank took a hit of Rs. 7 bn to streamline the policies of erstwhile CBoP itself. Of this Rs. 7 bn, around 70% went toward the harmonization of accounting

policies relating to loan- loss provisioning and depreciation of assets, and the balance 30% reserves write-offs were toward the merger-related restructuring costs like stamp duty, HR and IT integration expenses.  The loan book size of erstwhile CBoP was close to Rs. 150 bn, largely constituted by retail loans with only around 15% of corporate loans. In terms of asset quality, the gross NPAs at the end of March2008 were around 3.8% and net NPAs at around 1.7%. The harmonizing was done to bring in more stringent provisioning requirements for identifying NPAs as the existing norms of the erstwhile CBoP were comparatively more relaxed. The duration of CBoP’s lending portfolio is around 18-20 months so the risk of incremental slippage would continue in near future; however the bank is confident of its strong recovery management process and anticipates lesser pain.  The CASA ratio at the end of June 2008 was 45%. This in line with expectations of analysts as CBoP had a much lower CASA ratio of around 25% compare to 56% of Pre-merged HDFC Bank. By the end of the year, the target CASA ratio is around 47-48%. This would primarily be driven by an increasing contribution of low-cost deposits from the erstwhile CBoP’s branches.

 Of the total non- interest income of CBoP, fee income constituted around 50% which was generated mainly through distribution of insurance products (Aviva) and from processing fees. In line with regulatory and operational issues, these streams of income have temporarily been discounted. This aspect act as a drag on the ‘other income’ of the merged entity and it would take 2-3 quarters for the issues to be addressed. Till these issues are resolved positively, the ‘other

income’ growth (primarily the fee income) would remain muted for the merged entity.  The cost/income ratio of the merged entity has increased to around 56% from 50% levels for standalone HDFC Bank. The increase was expected as CBoP’s C/I ratio was around 60%. HDFC Bank has retained almost all the employees of CBoP and expects to achieve full synergies and efficiencies, in terms of the restructured HR and IT processes, in the next 2-3 quarters. This means that by Q4FY09, the entire workforce would be working at full efficiency levels as that of the existing bank and the technology and IT-platforms would be completely integrated to support efficient performance. The aim is to reduce C/I ratio to around 52-53% by the end of FY09.

KEY BUSINESS PARAMETERS (Rs Million) HDFC BANK DEC-07 CBOP DEC-07 Branches (Nos) 754 394 ATM (Nos) 1906 452 Customer A/C (M) 10 2 Debit cards (m) 5.0 1.1

Credit cards (M) 3.5 0.2 LIABILITIES Deposits 993,869 207,100 CASA Deposits 505,630 50,740 CASA Ratio % 51 25 Share capital 3,541 1,873 NETWORTH 113,584 19,633 Other liabilities 206,942 27,306 Total liabilities 1,314,395 254,309 ASSETS Advances 713,868 150,835 Retail 364,073 90,228 Other assets 600,527 103,204 Goodwill TOTAL ASSETS 1,314,395 254,309 NET NPAs 2,798.0 2544.0

Chapter 10. AFTERMATH OF THE MERGER A.Branch expansion/Size – likely determinant of the merger The biggest benefit to

HDFC Bank from this acquisition would be

addition of 394 of CBoP’ branches [which are concentrated in the states of NCR (55), Punjab (78), Haryana’s(28), Maharashtra(39) and Kerala (91)]. About 60% of CBoP’ advances are to retail (v/ss~50% for HDFC Bank) with dominance in the areas of mortgages, personal loans, 2-wheelers and commercial vehicles (CVs). Both banks earn higher net interest margins — HDFC Bank is at 4%+ and CBoP is at ~3.6%. Moreover, the banks have a similar business model and philosophy underlined by a thrust on branch network expansion, retail assets, high margin business and strong fee income sources. Maharashtra(39) and Kerala (91)]. About 60% of CBoP’ advances are to retail (v/ss~50% for HDFC Bank) with dominance in the areas of mortgages, personal loans, 2-wheelers and commercial vehicles (CVs). Both banks earn higher net interest margins — HDFC Bank is at 4%+ and CBoP is at ~3.6%. Moreover, the banks have a similar business model and philosophy underlined by a thrust on branch network expansion, retail assets, high margin business and strong fee income sources. B. HDFC Bank would emerge as the biggest private bank in terms of branches HDFC Bank has always maintained that fast branch expansion is a key ingredient that will sustain its high CASA deposits and margins. This merger with CBoP would result in the combined entity having 1148 branches at present, which is the largest branch distribution network for a private bank in India (ICICI Bank currently has 955 branches). This apart, HDFC Bank would gain dominance in states like Punjab, Haryana, Delhi, Maharashtra and Kerala.

C. Positive aspects of the merger: (1) increased footprint and metro presence; (2) cost-income ratio has room for improvement;

(3) Enhanced management bandwidth to enable entry in to International business; and (4) Both banks have senior managements of high caliber who have worked with Citigroup at some point in their career. Negatives: (1) Merger likely to be EPS dilutive for the next two years, due to valuations; and (2) Integration of LKB branches may pose a challenge.

Major benefits accruing from the merger

 Wider distribution reach: 32% of CBoP branches are in metros

The merger will add close to 394 branches to HDFC Bank’s network of 750 branches, almost 50% increase in the existing network, while adding close to 19% to its asset base. HDFC Bank’s branches are currently spread throughout the country, whereas CBoP has a strong presence in Punjab, Maharashtra, and with the acquisition of LKB, now in Kerala as well. In view of RBI’s stringent license policy, metro licenses have been hard to come by for most banks. With the merger, HDFC Bank’s metro branches will increase by 44% in one shot, while its non metro branches will increase by 57%.

Table 1: Expanding metro reach by 44% CBoP HDFC Metro 127 287 Non Metro 267 467 Metro Proportion 32% 38%

Non Metro Proportion 68% 62% Chart 1: HDFC Bank to be largest private sector bank in terms of branch network

 Scope to enhance productivity CBoP’s, as a standalone bank, cost to income ratio is high at 63%; however, merging with a larger organization like HDFC Bank gives significant scope for operating leverage with economies of scale. There is also scope for improvement in utilization

ratios with improvement in branch and employee productivity to near HDFC Bank’s levels.

Table 3: Scope for improved utilization of branches INR mn HDFC Bank CBoP Merged entity Business/branch 2,289 908 1,812 Business/employee 80 65 77 Assets/branch 1,762 645 1,376 Assets/employee 61 46 58 PAT/branch 24 5 17 PAT/employee 0.8 0.3 0.7

 Complementary Overlay CBoP has traditionally been strong in high yielding SME and retail segments, while HDFC Bank has an enviable retail deposit franchise. With the merger, CBoP’s ability to grow its loan book will complement HDFC Bank’s deposit franchise. On the product portfolio side, both the banks have a strong foothold in vehicle financing, which is a natural synergy.

Chart 2: Retail loan break up

Higher productivity to help HDFC Bank bring down cost to income ratio

Improvement in productivity levels will help HDFC Bank lower CBoP’s cost to income ratio over the medium term. High cost to income ratio, mainly due to lower productivity of some merged branches and employees, has played a big role in restraining CBoP’s return ratios.

• Strong and experienced management team: HDFC Bank may add international business CBoP has a strong and experienced management team. The management has demonstrated its capability to integrate diverse organizations by successfully reaping synergies of the merger with Bank of Punjab. We expect the CBoP team to strengthen HDFC Bank’s management bandwidth and consequently the latter may add international banking to its services kitty. Near term performance likely to be muted; benefits to accrue over medium term The merger is positive from a strategic perspective; however, from minority shareholders’ perspective it is EPS dilutive, at least till FY09E. Consequently, we believe that near term stock performance is likely to be capped due to this EPS dilution. With better utilization of branches and rationalization of employees with organic expansion of business, the merger is likely to be EPS neutral in FY10E. Upside risks exist in the form of sooner-than-expected merger synergies. We expect 34% growth in balance sheet and 37% growth in EPS CAGR over FY0810E. The proposed issuance to HDFC is likely to provide adequate capitalization and enable strong organic expansion over the next two years. The stock is trading at 3.0x FY10E adjusted book(post merger) and 19.0x FY10E earnings

At a swap ratio of 1:29, it would lead to dilution of 21% for HDFC Bank. HDFC Bank would issue 76m shares ( fully diluted) to CboP shareholders.The merger would

worsen HDFC Bank’s RoEs, CASA ratio and asset in the near term and make valuations additionaly expensive.Presented belo is a snapshot of the merged entities HDFC Bank gearing for competition (would become 2nd largest) ICICI Bank, the largest private sector bank in the country, is likely to open around 425 new branches by June 2008, taking its total tally to 1,380. HDFC Bank, which currently has 754 branches and approval for 200 other branches, is in for stiff competition from ICICI Bank its peers who are eager to increase their share in the low cost deposit base. Hence, the current merger will catapult HDFC Bank with the highest network among private banks. Additional branches counter balance high deal value At times when branch licences are difficult to come by and with the possibility of the sector opening up to foreign competition post March 2009, leading domestic private banks are unlikely to sit idle. There is high possibility that these banks scale up their reach through the organic and inorganic route. We feel CBoP’s major presence in the northern part of the country (in Punjab post its merger with Bank of Punjab) and in the south (post its acquisition of Lord Krishna Bank) gives HDFC Bank sufficient room to Leverage these branches going ahead.

Chapter 11.

CONCLUSION One size doesn't fit all. Many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power. By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives. Additional capital can fund growth organically or through acquisition. Meanwhile, investors benefit from the improved information flow from de-merged companies. M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.