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:
- 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
- Mergers and acquisitions benefit the managers of the acquiring companies
following the Empire Building Theory.
- Mergers and acquisitions are the results of in-transparent
decision-making processes of managements calling for the Process Theory.
- 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
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:
- Increasing capabilities
- Gaining a competitive advantage or larger market share
- Replacing leadership and cutting costs
- Surviving and economies of scale
- Eliminate competitions and upgradation of technology
- Loss making bank merged with another healthy bank for revival
- 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:
- 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.
- 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.
- 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.
- 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
Re-classification of promoters as public shareholders under various
- 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.
- 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.
7. State Bank of India Act, 1955
|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
- 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
|Objection to scheme of
||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
||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
||E-voting was not permitted v/s
Number of specific provisions governing merger of listed company with
|Body of approving merger
||NCLT will deal matters related
||Scheme of arrangement to be
approved by respective MC which has jurisdiction over acquire and target
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
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
- Oriental Bank of commerce, United Bank of India merged into Punjab
- Syndicate bank merged into Canara Bank
- Indian Bank merged into Allahabad Bank
- Andhra Bank, Corporation Bank merged into Union Bank of India.
Benefits Of Merger
The following are the merits of mergers and acquisitions:
The synergy created by the merger of two companies is powerful enough to enhance
business performance, financial gains, and overall shareholders value in long
- 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.
- Competitive advantage
The combined talent and resources of the new company help it gain and maintain a
- New market
The market is improved by the mergers due to the diversification or the
combination of two businesses which results in better opportunities.
- The added branch network and customer base will also help in expanding
and enable the lender to rationalised resources across the board.
- 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:
- 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
- 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.
- 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.
- 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.
- 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.
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
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.