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Need of Merger and Acquisition

All over the world, many M&A decisions have become lopsided towards strategy for growth only, ignoring valuations, people related issues, and economic-political-legal environments of business. Almost every day, there are media reports about mergers and acquisitions (M&As): the forthcoming or the completed ones, the mergers that have fallen through, or the ones that appear to be successful or unsuccessful and so on.

The public and the politicians praise or criticize. The anti-trust-commission or the Competition Commission makes further additions to the M&A anxieties. The employees become uneasy and skeptical about their future. But in order to understand the fundamental dynamics of M&A, one has to study what motivates companies to merge or de-merge, takeover or split, diverge or converge, or consolidate, and so on. The M&A activities now involve a substantial number of cross-border deals, and the main reason for the growing number of cross-border takeovers, mergers and joint ventures is the desire to complete or survive, in new world markets.

Mergers and acquisitions are important corporate strategic measure that assists the merged entity in external growth and offered its competitive advantage. From the legal point of view, a merge is a legal consolidation of two entities into one entity. Merger and acquisitions activity can be defined as a type of restructuring in that they in some entity reorganization with the aim provide growth or positive value.

An acquisition refers to the purchase of one entity by another. An acquisition takes place when one company takes over all of the operational management decisions of another. Merger and acquisition occur in order to realize effectiveness by diversifying economics of scale and increasing the level of business goings on to progress performance.

Merger and acquisitions can be classified into three main types: horizontal, vertical and conglomerate merger.

Firstly, horizontal merger and acquisitions cartels two parallel firms in the same industrial sector. For example: adidas already got its competitor Reebok to eliminate some rivalry and enlarge their marketplaces.

Secondly, vertical merger and acquisitions are made between two companies that are related to the buyer's seller type and are grouped under ownership. For example: the manufacturer may agree to join with the supplier.

Finally, merger and acquisitions conglomerate occurs when two or more companies whose business are not related either vertically or horizontally merge to create a sole business. These business are not rivals for example: the union between Proctor and gamble the consumer good company and Gillet in 2005.

Mergers and acquisitions in banking sector are forms of merger because the merging entities are involved in the same kind business or commercial activities. In the context of mergers and acquisitions in the banking sector, it can be reckoned that size does matter and growth in size can be achieved through mergers and acquisitions quite easily.

Growth achieved by taking assistance of the mergers and acquisitions in the banking sector may be described as inorganic growth. Both government banks and private sector are adopting policies for mergers and acquisitions.

Merger and acquisitions in the banking sector. Today the banking sector is counted among the rapidly growing industries in India. A relatively new dimension in the Indian banking industry is accelerated through mergers and acquisitions, which will enable the banks to achieve world class status and throw greater value to the stakeholders.

Theoretical Framework for Merger for Motives of M&A

Experts have formulated theories on the motives behind M&As. They opine that:
  1. Mergers and acquisitions are the results of rational business decisions which benefits shareholders of the companies through
    • Synergies following the Efficiency Theory
    • Gaining economic power following the Monopoly Theory and
    • Profit due to gaining of information following the Valuation Theory
  2. Mergers and acquisitions benefit the managers of the acquiring companies following the Empire Building Theory.
  3. Mergers and acquisitions are the results of in-transparent decision-making processes of managements calling for the Process Theory.
  4. Mergers and acquisitions are the results of economic conditions following the Disturbance Theroy.

Need of Mergers and Acquisition in Banking industry in India

It is observed that in literature most of the work done on mergers and acquisition is based on the financial and accountability aspect like performance of banking institutions based on Deros , Kodapakkam and Krishnamurthy (2008) studied merger and acquisitions as value creation, efficiency improvements as explanations for synergies and produced evidence that suggests mergers generate gains by improving resource allocation rather than by reducing tax payments of increasing the market power of the combined firms.
  • To increase the numbers of customers
  • To compete in the global market
  • To gain more by putting the resources together
  • To maintain the crowd of industries in the market

Objectives of Merger and Acquisitions

One of the principal objectives behind mergers and acquisitions in the banking sector is to reap the need of economics of scale. The general objective of the study was to establish the effect of merger and acquisitions on financial performance of banks to reduce the competition in the market. To determine the effect of mergers and acquisitions on the shareholder value in relation to financial performance. To examine the implication of mergers and acquisitions on profitability.

Reasons why bank merger

Mergers seek to improve income from services but the increase is offset by hidden staff costs, return on equity improves because of a decrease in capital .Acquisitions aims to restructure the loan portfolio of the acquired bank, improved lending policies results in higher profits.

Following are some of the economic reasons:

  1. Increasing capabilities
  2. Gaining a competitive advantage or larger market share
  3. Replacing leadership and cutting costs
  4. Surviving and economies of scale
  5. Eliminate competitions and upgradation of technology
  6. Loss making bank merged with another healthy bank for revival
  7. Growth in profits

Mergers and Acquisitions of Indian Banking

The recent mergers and acquisitions of banks throw us back to the history of India when various small banks were merged together or with some large bank.
In 1921, Imperial Bank of India was formed by the amalgamation of three presidency banks viz. The Bank of Calcutta, The Bank of Bombay and the Bank of India. Since then there have been various mergers in the Indian banking industry. First in 1998, the Narasimham-II committee recommended for larger Indian banks to make them strong along with other recommendations, there were a string of mergers in banks of India during the late 90's and early 2000's.

The history of Indian banking can be divided into three main phases:

  • Phase I (1786-1969) Initial phase of banking in India when many small banks were set up.
  • Phase II (1969-1991) Nationalization, regularization and growth.
  • Phase III (1991-onwards) - Liberalizations and its aftermath.

With the reforms in phase III the Indian banking sector, as it stands today, is mature in supply, product range and reach, with banks having clean, strong and transparent balance sheets. The major growth drivers are increase in retail credit demand, proliferation of ATMs and debit cards, decreasing NPAs due to securisations, improved macroeconomic conditions, diversifications, interest rate spreads, and regulatory and policy changes (Example: Amendments to the Banking Regulation Act).

Legal Framework for merger and amalgamation:

  1. Competition Act, 2002 and Regulation of Mergers and Acquisitions
    This is a very much a part of industrial evolution and corporate restructuring. In this process, such combinations can also create market power which may be abused. Competition law puts a check on restrictive or unfair trade practices by the firms in the market. The need for competition law arises from anti-competitive practices adopted after the mergers and acquisitions to stop free play of competition in the market, and unfair means against consumers and promoting competitive spirit in the market and requiring regulations of monopolistic powers arising out of merger and acquisitions.

  2. Companies (Compromise, Arrangements and Amalgamation) Rules 2016
    It deals with the procedure for carrying out a scheme of compromise or arrangement including amalgamation or reconstructions.

  3. Income Tax Act, 1961
    The Income Ta Act, 1961 does not regulate the procedural aspects for merger and acquisitions, but it provides for tax concessions or benefits in respect of the following: Amalgamation or mergers of companies or of banking company, Demerger of a company and slump sale. It covers aspects such as tax relief to amalgamation, carry forward of losses, exemptions from capital gain tax and specifying various taxable deductions or tax benefit to various parties associated with merger and acquisitions.

  4. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
    SEBI has notified SEBI Regulations 2015 on September 2, 2015. A time period of ninety days has been given for implementing the Regulations. However, two provisions of the regulations, which are facilitating in nature, are applicable with immediate effect which pertains to:
    Passing of ordinary resolution instead of special resolution in case of all material related party transactions subject to related parties abstaining from voting on such resolutions, in line with the provisions of the Companies Act 2013, and
    Re-classification of promoters as public shareholders under various circumstances.

  5. Sec 44A of Banking Regulations Act, 1949
    Under this Act, bank may be merged with another bank by approval of shareholders of each banking company by resolutions passed by majority 2/3 in value of the shareholder of each participating bank. RBI must give approval for the merger. The provision of section 44A of Banking Regulation Act, 1949, provides that the approval of high court is not for the merger scheme. RBI has also given the power to determine the market value of shares of the minority shareholders who have voted against the merger.

  6. Merger and Amalgamation as per Companies Act 2013 and 1956
    Companies Act, 2013 compromising sections 230 to 234 and Companies Act, 1956 compromising sections 391 to 394 and 396A.
Applicability 2013 1956
Cross border merger Inbound merger(foreign company merging into Indian company) as well as outbound mergers(Indian company merging with foreign company with RBI approval) are allowed. Permits only inbound foreign company merger(foreign company merging into Indian company)
Fast track merger FTM is merger between two or more small companies, holding companies and its wholly owned subsidiary and such other company as may be prescribed.
  • Fast Track merger does not involve Court or Tribunal. Approval of National Company Law Tribunal is not required but both the Directors of the Company will have to approve the scheme after giving notice to the ROC and official liquidator inviting objections/suggestions to scheme.
  • Approval from atleast 90% shareholders and 90% creditors (value) would be required
  • After the approval of the scheme, notice to be given to Central Government, ROC and official liquidator. NCLT may confirm the scheme or order to go through the normal merger u/s 232 of the Companies Act, 2013
  • No requirements of sending notices to RBI or Income Tax or providing a valuation report or providing auditor certificate for complying with the accounting standards.
No provisions for exemption from court process for corporate reorganizations like amalgamation, merger etc.
Objection to scheme of amalgamations Such scheme can be objected only by shareholders having not less than 10% shareholding or creditors whose debt is not less than 5 percent of total o/s debt as per the last audited financial statement. There was no such limit which stated that a person holding even 1 percent of shareholding in the company can object the scheme.
Meeting of creditors/share holders to approve the scheme. Scheme if approved by 3/4th of creditors(value or class) or members and if sanctioned by NCLT, the same shall be binding as stated v/s 230.The 2013 Act additionally allows the approval of scheme by postal ballot and E-voting. Scheme of approved by 3/4th value of creditors, or members, it will be binding if sanctioned by court as stated v/s 391(2) voting in person or a proxy at meeting.
Merger of listed company into unlisted company The Company's Act 2013 requires that in case of merger between a listed transfer company and a unlisted transfer company, the transfer company would continue to be unlisted if becomes listed E-voting was not permitted v/s 1956 Act.
Number of specific provisions governing merger of listed company with unlisted company.
Body of approving merger NCLT will deal matters related to M&A Scheme of arrangement to be approved by respective MC which has jurisdiction over acquire and target companies.

7. State Bank of India Act, 1955
Sec 35 of SBI Act, 1955 provides the terms and conditions laid down by the Central Board of the SBI and the concerned banking institutions. Further, it is suggested that these terms and conditions are required to be submitted by RBI to the Central Government for its sanction. Besides this, provisions also made regarding the payment of considerations for the acquisitions of the business and assets and liabilities of any banking institutions, either in cash or by allotment of shares in the capital of the SBI(IBA, September 2004).

8. IFRS 3(International Financial Reporting Standard)
International Accounting Standard 22 for Business combinations has replaced by IFRS 3 for Business Combinations with effect from 31st march, 2004 and the change was prompted mainly due to too much of flexibility of IAS 22 in choosing the method of Mergers & Acquisitions accounting and high susceptibility of impairment of comparability of post- Merger & Acquisitions financial statements. The objective of this IFRS is to specify the financial reporting by an entity when it undertakes a business combinations.

Merger With Different Banks

Merger of ICICI Limited with ICICI Bank

ICICI Bank with different banks:
ICICI Bank Ltd ICICI Bank Ltd is the leader among the private sector commercial banks and the second largest bank in India. ICICI Bank Ltd was incorporated in the year 1994 as a part of the International Journal of Applied Research 2017; 3(1): 01-05 ~ 2 ~ International Journal of Applied Research ICICI group as ICICI Banking Corporation Ltd. In September 10, 1999, the name of the bank was changed to ICICI Bank Ltd. In March 10, 2001, ICICI Bank acquired Bank of Madura, an old private sector bank, in an all-stock merger.

In April 2007, Sangli Bank Ltd merged with the ICICI Bank with effect from April 19, 2007. In August 2010, as per the scheme of amalgamation, Bank of Rajasthan with its 463 branches was amalgamated with the ICICI Bank with effect from the close of business on 12 August, 2010.

On September, 2017 Narendra Modi government announced plans to merge three public sector banks: Mumbai based Dena Bank, Bengaluru's based Vijaya Bank and Vadodara based Bank of Baroda. With this the government has thrown a life to Dena Bank, whose performance was very poor. With this merger Dena Bank performance will be better.

Merger of 10 public sector banks into 4 bank: All these came into force from April 2020:
  1. Oriental Bank of commerce, United Bank of India merged into Punjab National Bank
  2. Syndicate bank merged into Canara Bank
  3. Indian Bank merged into Allahabad Bank
  4. Andhra Bank, Corporation Bank merged into Union Bank of India.

Benefits Of Merger

The following are the merits of mergers and acquisitions:
  1. Synergy
    The synergy created by the merger of two companies is powerful enough to enhance business performance, financial gains, and overall shareholders value in long run.

  2. Cost efficiency
    The merger results in improving the purchasing power of the company which helps in negotiating the bulk orders and leads to cost efficiency which result in staff reduces the salary costs and increases the margins of the company.

  3. Competitive advantage
    The combined talent and resources of the new company help it gain and maintain a competitive advantage.

  4. New market
    The market is improved by the mergers due to the diversification or the combination of two businesses which results in better opportunities.

  5. The added branch network and customer base will also help in expanding and enable the lender to rationalised resources across the board.

  6. Large scale economies
    Merger leads to increase in volumes of business and also banking operations. Once volumes are increases, the acquiring bank will also enjoy the benefits of large scale economies.

Demerits Of Merger

The following are the demerits of demerger:
  1. Not enough commitment
    Execution risk is danger in bank mergers. In some cases, banking executives don't commit enough time and resources into bringing the two platforms together and the resulting impact on their customers causing the newly merged bank to fail completely.

  2. Customer impact and perception
    Especially with smaller community banks, customers often respond emotionally to a bank acquisitions, so its essential that bank manage customer perception with regular, careful communications.

  3. Compliance and risk consistency
    Every financial institutions handles Banking Compliance and Federal Banking Regulations differently, but its important that the two merging banks agree on their approach moving forward.

  4. Job losses
    A merger can lead to job losses. This is a particular cause for concern if it is an aggressive takeover by an asset stripping company.

  5. Less choice
    A merger can lead to less choice for consumers. This is important for industries such as retail/clothing/food where choice is as important as price.

Conclusion
Merger helps the banks and the economy to function more efficiently because it helps in the increase of the resources and thus the profits. It is done to reduce the competition and for survival in the market but it is good only when the economy does not gets affected due to competition issues.

Merger help in strengthening the base of the new unit and also helps in saving of taxes. With regard to reductions to the announcement of merger, the market has initially tried to react negatively to the most of the banks acquisition announcement but overall there was either destruction or creation in shareholders wealth of investors of public and private sector banks.

Though the employees were nervous about the information of merger, communication from the management them to cope with the changes, and employees were happy with changes. It helps in cost reductions and increase in revenue.

Recommendations And Suggestions
One must start Integration and Implementation when the merger agreement has been signed. The first must implement all aspects of effective operations before it can effectively combine the merging organizations.

This means that the merging firm must have a shareholder value orientation. It must have a strategies and organizational structures compatible with its multiple business units. Companies or banking should pursue merger that improve their strategic fitness, strengthen weaknesses, fill gaps, develop new growth opportunities, and extend capabilities, integrate leadership and people. The company should maintain ongoing communications that clearly addresses the concerns of employees due to acquisitions or combinations. There shall be conscious and organized efforts to synthesize the differing organizations cultures, for the managers to yield the desired results.

All the team or staff should work together i.e. three divisions: finance, sales & marketing, and operations. They also need to be aware of the need for balance between speed and disruption. Day-to-day operations should not be sacrificed for rapidity of integration. The key is to formulate, in advance, integration plans that can effectively accomplish the goals of the mergers and acquisitions processes.

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