Bank Mergers In India.docx

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INTRODUCTION

 A merger is an agreement that unites two existing companies into one new company. There are several types of mergers and also several reasons why companies complete mergers. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to please shareholders and create value.  Merger refers to the mutual consolidation of two or more entities to form a new enterprise with a new name. In a merger, multiple companies of similar size agree to integrate their operations into a single entity, in which there is shared ownership, control, and profit. It is a type of amalgamation. For example M Ltd. and N Ltd. joined together to form a new company P Ltd.

 The reasons for adopting the merger by many companies is that to unite the resources, strength & weakness the merging companies along with removing trade barriers, lessening competition and to gain synergy. The shareholders of the old companies become shareholders of the new company.

How a Merger Works A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity. The firms that agree to merge are roughly equal in terms of size, customers, scale of operations, etc. For this reason, the term "merger of equals" is sometimes used. Acquisitions, unlike mergers, or generally not voluntary and involve one company actively purchasing another. Mergers are most commonly done to gain market share, reduce costs of operations, expand to new territories, unite common products, grow revenues, and increase profits—all of which should benefit the firms' shareholders. After a merger, shares of the new company are distributed to existing shareholders of both original businesses. Due to a large number of mergers, a mutual fund emerged, giving investors a chance to profit from merger deals. The fund captures the spread or amount left between the offer price and trading price. The Merger Fund from Westchester Capital Funds has been around since 1989. The fund invests in companies that have publicly announced a merger or takeover. To invest in the fund, a minimum amount of $2,000 is required, with a 1.91% expense ratio. As of March 2, 2019, the fund has returned 6.1% annually since inception in 1989.

ADVANTAGES OF BANK MERGER  It reduces the cost of operation.  The merger helps in financial inclusion and broadening the geographical reach of the banking operation.  NPA and risk management are benefited.  Merger leads to availability of a bigger scale of expertise and that helps in minimising the scope of inefficiency which is more in small banks.  The disparity in wages for bank staff members will get reduced. Service conditions get uniform.  Merger sees a bigger capital base and higher liquidity and that reduces the government's burden of recapitalising the public sector banks time and again.  Redundant posts and designations can be abolished which will lead to financial savings.

DISADVANTAGES OF BANK MERGER  Many banks have a regional audience to cater to and merger destroys the idea of decentralisation.  Larger banks might be more vulnerable to global economic crises while the smaller ones can survive  Merger sees the stronger banks coming under pressure because of the weaker banks.  Merger could only give a temporary relief but not real remedies to problems like bad loans and bad governance in public sector banks  Coping with staffers' disappointment could be another challenge for the governing board of the new bank. This could lead to employment issues.  If there too many mergers of Banks, market will be controlled by these major Banks and there by customers will have less choice to Bank.

REASON FOR BANK MERGER 

Increasing capabilities: Increased capabilities may come from expanded research and development opportunities or more robust manufacturing operations. Similarly, companies may want to combine to leverage costly manufacturing operation.

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Gaining a competitive advantage or larger market share: Companies may decide to merge into order to gain a better distribution or marketing network. A company may want to expand into different markets where a similar company is already operating rather than start from ground zero, and so the company may just merge with the other company.

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Diverfsiying products or services: Another reason for merging companies is to complement a current product or service. Two firms may be able to combine their products or services to gain a competitive edge over others in the marketplace.

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Replacing leadership: In a private company, the company may need to merge or be acquired if the current owners can't identify someone within the company to succeed them. The owners may also wish to cash out to invest their money in something else, such as retirement.

TYPES OF BANK MERGER Conglomerate This is a merger between two or more companies engaged in unrelated business activities. The firms may operate in different industries or in different geographical regions. A pure conglomerate involves two firms that have nothing in common. A mixed conglomerate, on the other hand, takes place between organizations that, while operating in unrelated business activities, are actually trying to gain product or market extensions through the merger.

Congeneric A congeneric merger is also known as a Product Extension merger. It occurs when two or more companies join together that operate in the same market or sector with overlapping factors, such as technology, marketing, production processes, and research and development (R&D). A product extension merger is achieved when a new product line from one company is added to an existing product line of the other company.

Horizontal A horizontal merger occurs between companies operating in the same industry. The merger is typically part of consolidation between two or more competitors offering the same products or services. Such mergers are common in industries with fewer firms, and the goal is to create a larger business with greater market share and economies of scale since competition among fewer companies tends to be higher.

Vertical When two companies that produce parts or services for a product merger the union is referred to as a vertical merger. A vertical merger occurs when two companies operating at different levels within the same industry's supply chain combine their operations. Such mergers are done to increase synergies achieved through the cost reduction which results from merging with one or more supply companies.

CASE STUDY MERGER OF STATE BANK OF INDIA The most recent and largest merger in the history of banking industry was of State Bank of India with its 5 associate banks namely State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore(SBM), State Bank of Patiala(SBP), State Bank of Travancore(SBT) and Bharatiya Mahila Bank. It was on 1st April 2017 that "the SBI opened as 'one bank' and will continue to operate in the same manner as before, post-merger". Shares of State Bank of India (SBI) and its listed associate banks (State Bank of Bikaner, State Bank of Mysore and State Bank of Travancore) gained 3-13 percent on the back of approval from the cabinet for their merger. SBI merged with its associate banks in order to have increased balance sheet and economies of scale. With this merger: SBI has entered into the league of top 50 global banks. It has now 24,017 branches and 59,263 ATMs serving over 42 crore customers SBI is now a banking behemoth with an asset book of Rs 37 lakh crore. The merged entity will have one-fourth of the deposit and loan market, as the SBI's market share will increase from 17% to 22.5-23% The merger with SBI’s five associate banks was approved by the central government earlier in February, 2017 and Bhartiya Mahila Bank too was approved to join the merger in March 2017. With this merger, State Bank of India’s total assets will be worth ₹29 Lakh Crores.

MERGER OF BANK OF BARODA The merger of Dena Bank and Vijaya Bank with Bank of Baroda (BoB) was seen as a rescue mission for Dena Bank. Now, the share swap ratios confirm that the mission will leave everyone a loser. Even Dena Bank’s shareholders have ended up as losers, in contrast to the earlier expectation that they will gain from a favourable share swap ratio. Recent The merger of Dena Bank and Vijaya Bank with Bank of Baroda(BoB) was seen as a rescue mission prices suggest that traders were anticipating a swap ratio of not less than 150 shares of BoB in return for 1,000 Dena Bank shares. The announced ratio of 110:1,000 comes as a huge let down. Assuming BoB shares stay where they are when trading resumes on Thursday, Dena Bank’s shares need to correct by about 28% to align with reality. Not that this is a massive relief for BoB. While the dilution in its equity will be lower than anticipated, and may cause a relief rally, the drag from the bank merger is a far bigger worry. It’s little wonder that BoB shares have underperformed the Nifty PSU Bank index by about 12% since the merger was announced in mid-September. BoB shareholders are getting saddled with the tattered balance sheet of Dena Bank, which has low capital and no ability to lend. Dena Bank has been barred from lending by the regulator for the last seven months.

Merger of Kotak Mahindra Bank The merger with the Dutch ING marked the first ever merger between an Indian bank and a foreign bank. March 2013, ING Vysya was the seventh largest private sector bank in India with assets totaling ₹54,836 crore (US$8.6 billion) and operating a pan-India network of over 1,000 outlets, including 527 branches, which serviced over two million customers On November 20, 2014, Kotak announced the merger with ING Vysya in an all-stock deal worth of Rs. 148.51 billion or US$2.4 billion. On regulatory approval, all of ING Vysya’s branches and businesses would merge with Kotak. ING Vysya’s shareholders would get 0.725 share of Kotak stock for every one stock of ING Vysya they held i.e., 725 shares of Kotak for every 1,000 shares of ING Vysya. This exchange ratio indicated that the implied price of each stock of ING Vysya was Rs. 790 which was based on the average stock price of Kotak and ING Vysya for one month – from October 20, 2014, to November 19, 2014 – which came to Rs. 1089.50 and Rs. 682 respectively Chronology of Events September. The deal between Kotak and ING Vysya has sparked hopes of wider consolidation in the banking sector. In the past, consolidations took place between weak and strong banks on RBI’s directives. The present consolidation between 2 strong banks has brought in discussions about voluntary mergers between 2 strong entities in the banking industry. The deal was announced after the markets closed on Nov 20, 2014. Welcoming the deal, the benchmark Sensex advanced 0.12% to 28,067.56 points and the Banks gained 0.37% to 20,204.71 points. The prices of both the banks’ shares surged. Shares of Kotak Mahindra Bank gained 7.28% to Rs. 1,157.05 on the Bombay Stock Exchange (BSE), while shares of ING Vysya Bank rose 7.15% to Rs. 814.20.

Risk Associated with Bank Merger 1. When two banks merged to 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 2. Consolidation does not lead to instant results and there is an incubation period before the results arive Mergers and acquisitions are sometimes followed by losses and tough intervening periods before the eventual profit pour in. 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 both entities may not be forthcoming This leads to problems of industrial relations, deprivation depression and demotivation among the employees 4. The structure systems and the procedures followed two banks may be vastly different for example, a PSU bank of an old generation bank and that of a technologically superior foreign bank 5. There is a problem of valuation associated with all mergers The shareholder of existing entities has to be given new shares Till now foolproof valuation system for transfer and compensation yet to merge. 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 favor of a new comprehensive identity.