1. Merger & Acquisition
Merger of HDFC Bank and
Centurion bank of Punjab
EPGP 2009-10 - Term V- Group 4 Submission
26-Apr-2009
Instructor: Prof. Neeraj Dwivedi
Prof. D L Sunder
Submitted by:
• Altaf Siddiqui 04
• Pankaj Kumar 20
• Rahul Dhandhania 26
• Rajendra Inani 27
• Vaibhav Samant 38
• Vikram Duggal 40

2. Table of Contents
1 Background and overall context of the merger...........................................................................3
2 Analysis of Corporate Strategy of the firms involved...................................................................5
2.1 About HDFC Bank.........................................................................................................................5
2.1.1 HDFC Strategy.......................................................................................................................6
2.1.2 History of Mergers................................................................................................................6
2.2 About Centurion Bank of Punjab.................................................................................................6
2.2.1 History of Merger..................................................................................................................6
3 Specific intent of this acquisition/ merger...................................................................................7
3.1 Intent ..........................................................................................................................................7
4 The Deal Size and Structure.........................................................................................................7
4.1 Key highlights of the Deal............................................................................................................8
5 How did the merger proceed? Were there any roadblocks? What were the reactions of various
stakeholders (Competitors, regulators, investors)?................................................................9
5.1 Issues/Challenges/ Roadblocks....................................................................................................9
6 Regulatory and legal issues in M & A highlighted in the merger ...............................................11
6.1 M&A Regulations.......................................................................................................................11
6.2 Acquisitions & Takeovers .......................................................................................................11
6.2.1 Major Laws Involved ..........................................................................................................11
6.2.2 HDFC & CBoP – Key Highlights............................................................................................12
7 Assessment of Value Addition...................................................................................................13
7.1 Positive Impact..........................................................................................................................13
7.2 Negative Impact.........................................................................................................................13
7.3 Upfront provisions/write-offs done wherever required............................................................13
7.4 Key Value Additions...................................................................................................................13
7.4.1 An apt apple-to-apple comparison, adding CBoP’s Q1’08’s results to HDFC’s, is as follows:
.....................................................................................................................................................14
8 Gains to the shareholders of the target and the acquirer..........................................................15
9 Current Scenario........................................................................................................................16
10 Key Learning’s..........................................................................................................................18
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3. 1 Background and overall context of the merger
In early 2008, The Reserve Bank of India sanctioned the Scheme of Amalgamation of Centurion Bank
of Punjab Ltd with HDFC Bank Ltd. All the branches of Centurion Bank of Punjab would function as
branches of HDFC Bank and the combined entity would have a nationwide network of 1,167
branches; a strong deposit base of around Rs. 1,22,000 crores and net advances of around Rs.
89,000 crores. The balance sheet size of the combined entity would be over Rs. 1,63,000 crores.
All of this was the result of sincere efforts put forth by the management of both banks who were very
determined that the deal go through. HDFC Bank Board on 25th February 2008 approved the merger
with Centurion Bank of Punjab (CBoP) for Rs 9,510 crore in one of the largest merger in the financial
sector in India. The merger was expected to be a win-win for both banks in terms of both asset size
and footprint. While CBoP is concentrated in the northern and southern parts of the country, HDFC
Bank is focused throughout India. CBOP Bank, before the merger had 170 branches in the north and
140 branches in the south, while HDFC Bank has about 250 branches in the north and nearly 150
branches in southern India. On the net interest margin front, HDFC Bank had a net interest margin of
4.3% while CBOP has an NIM of 3.6%. The current and savings account (CASA) stood at 50.9% and
24.5% for HDFC Bank and CBOP, respectively. Talking about the NPAs, HDFC Bank had low NPA of
0.4% as against 1.69% for CBoP. The capital adequacy for HDFC Bank was 13.8% as against 11.5%
for CBoP. Based on the financial parameters, the new HDFC Bank was termed as the third largest
bank in India after SBI and ICICI Bank.
The merger was a classic case of a Horizontal merger deal going through. Horizontal mergers are
those mergers where the company’s in similar kinds of commodities or running similar type of
businesses merge with each other. The principal objective behind this type of mergers is to achieve
economies of scale in the production procedure through carrying off duplication of installations,
services and functions, widening the line of products, decrease in working capital and fixed assets
investment, getting rid of competition, minimizing the advertising expenses, enhancing the market
capability and to get more dominance on the market.
In addition, several synergies are expected that may include revenue enhancement, along with cost
savings that can be found in various areas of business. Synergy can come in the form of staff
reductions as the merger of two companies creates overlap in some positions. For example, if two
companies each had a marketing director and the two companies then merged, only one person
would be needed to fill the position of marketing director. The newly merged company would be
producing more products and reaching more clientele with a reduction in staff. The economy of scale
also provides synergy. The economy of scale refers to the benefits that ordering in bulk provides as
the size increase that goes along with mergers provides better buying power for the newer, larger
entity. This buying power can be utilized when buying office supplies as well as equipment.
In the context of this case, the merger was between two banking entities, HDFC Bank and Centurion
Bank of Punjab (CBoP). Despite the economic crunch worldwide that saw pulverization of two of the
largest banking and finance giants of USA in 2008, Indian banking houses had managed to show
positive growth. India's leading national bank the State Bank of India posted net profit rise in almost all
quarters amid global turmoil. This came as a big shot in the arms for the investors and consumers of
the SBI group even though apprehension was mounting on other banking and broking firms
worldwide. There were also talks of big bailout packages being cashed out by governments all over
the world to save big business houses.
The other banks in India including ICICI bank had declared a 1% growth in the second quarter. Given
the international and domestic scenario no one could put this down as a mundane achievement.
While banks all over the west were on a cost cutting spree and firing employees, Indian Cos were
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4. actually working on boosting staffing in banking and broking sectors. This was evident as finance
minister Mr Chidambaram had assured Indian public about the sound health of all Indian banks and
HDFC Merged with CBoP. Both these banks were definitely not looking to survive, rather were
looking for growth in spite of the pace of growth being a little slow as compared to a year or two
before. CBoP had traditionally been strong in high yielding SME and retail segments, while HDFC
Bank had an enviable retail deposit franchise. With the merger, CBoP’s ability to grow its loan book
was expected to complement HDFC Bank’s deposit franchise. On the product portfolio side, both
the banks had a strong foothold in vehicle financing, which formed the basis for a natural synergy.
Please refer to the following charts for the breakup of their products:
CBoP Product Breakup HDFC Product Breakup
In addition, this merger was also important from HDFC’s point of view to face the competition posed
by foreign banks that were looking to enter into India on account of RBI’s liberal policies. The
Report on Currency and Finance released by the Reserve Bank of India in September 2008 made a
powerful case of defending the RBI’s policy with regard to foreign banks. Arguing that its procedures
were non-discriminatory and very liberal by global standards, the report pointed out that
(i) India issues a single class of banking license to foreign banks and does not require them to
graduate from a lower to a higher category of banking license over a number of years;
(ii) the single class of license places them virtually on the same footing as an Indian bank and does
not place any restrictions on the scope of their operations;”
The report also pointed out that although India has committed to allowing 12 branches of foreign
banks in a year under the WTO agreements, it has been more liberal than the commitments. During
the period 2003 to October 2007 as it gave approval for 75 new foreign bank branches. It noted that
the number of foreign banks in India increased from 24 in 1990 to 41 during 2000; although their
number consequently declined to 29 in 2005 on account of merger between the Indian branches of
foreign banks, merger of banks at a global level and closure of some foreign banks. The number of
branches of foreign banks increased significantly from 138 in 1990 to 186 in 2000 and further to 272
during 2007. Therefore, to ward of possibilities of takeovers or competition, the deal was
conceptualized and executed even before the regulation was put into place.
Apart from the foreign competition, the deal was even executed keeping into mind the domestic
competition posed by ICICI bank, who, being the largest private sector bank in the country, was
likely to open around 425 new branches by June 2008, taking its total tally to 1,380. HDFC Bank,
which had 754 branches and approval for 200 other branches, was in for stiff competition from ICICI
Bank who was eager to increase its share in the low cost deposit base. Hence, the merger would
create the largest private sector bank in terms of branch network with over 1,140 branches.
The deal added 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
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5. were spread throughout the country, whereas CBoP has a strong presence in Punjab, Maharashtra,
and with the acquisition of LKB, 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
increased by 44% in one shot, while its non metro branches increase by 57%. HDFC. Please refer to
the following chart for more details:
Number of Branches
Banks CBOP HDFC Merged
Metro 127 287 414
Non metro 267 467 734
Total 394 754 1148
% metro 32% 38% 36%
%Non metro 68% 62% 64%
Increase for HDFC 44% 57% 52%
Increase for CBoP 226% 175% 191%
The merger was also important for the two banks as the banking industry overall was looking for
higher productivity. Improvement in productivity levels would 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, played a big role in restraining CBoP’s return ratios. Lastly,
HDFC Bank was aware of the management strength of CBoP that had a strong and experienced
management team. The management demonstrated its capability to integrate diverse organizations
by successfully reaping synergies of the merger with Bank of Punjab and was expected to strengthen
HDFC Bank’s management bandwidth
2 Analysis of Corporate Strategy of the firms involved
2.1 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 asset 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 deposits were Rs. 993.9 billion, up 48.9% over
the corresponding quarter of previous year. Total balance sheet size too grew by 46.7% to Rs.1,314.4
billion.
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6. 2.1.1 HDFC Strategy
1. Increase their market share of India’s expanding banking and financial services industry
2. Maintain strong asset quality through disciplined credit risk management
3. Maintain a low cost of funds
4. Focus on high earnings growth with low volatility
HDFC is following organic growth and seeing history has only one merger prior to this one. This
merger supplements its organic growth and is new attractive option that it has explored as stated by
Mr Deepak parekh, chairman HDFC stated immediately after the merger. He also stated that they
were looking for right merger opportunity to help them grow in scale, geography and experienced staff
to its franchise.
2.1.2 History of Mergers
2.1.2.1 Merger with Times Bank Limited
On February 26, 2000 HDFC merged with Times Bank Limited. The merger was a stock for stock
transaction where they issued one share for every 5.75 shares of Times Bank Limited resulting in
23,478,261 of their shares being issued.
2.2 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 a strong player in
foreign exchange services, personal loans, mortgages and agricultural loans. Additionally the bank
offers a full suite of NRI banking products to overseas Indians.
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 major Indian stock exchanges, the Bank's shares are also listed on the
Luxembourg Stock Exchange.
2.2.1 History of Merger
2.2.1.1 Merger with Bank of Punjab Ltd
1. 1994- Centurion Bank was incorporated on 30 June 1994 and received its certificate of
Commencement of Business on 20 July. It was a joint venture between 20th Century Finance
Corporation and its associates and Keppel Group of Singapore through Kephinance
Investment (Mauritius). Centurion had a network of ten branches, which grew to 29 branches
the next year.
2. 1995 -Centurion Bank amalgamated 20th Century Finance Corporation.
3. 2005 -On 29 June 2005, the Boards of Directors of Centurion Bank and Bank of Punjab
agreed to a merger of the two banks. The combined bank took as its name Centurion Bank
of Punjab. Bank of Punjab had been founded in 1995. In July 2005 the approval was given to
the Centurion Bank and Bank of Punjab to merge – the ratio being 4:9. This means that for 4
shares of Bank of Punjab the shareholder would get 9 shares of the Centurion Bank. The
combined entity would henceforth be known as The Centurion Bank of Punjab. The merger
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7. was activated due to considerations of common goal and area of operation. The formal
merger took place after the nod being given by the shareholders and the approval of the RBI.
2.2.1.2 Merger with Lord Krishna Bank Ltd
1. On August 29, 2007, Lord Krishna Bank (LKB) merged with Centurion Bank of Punjab, post
obtaining all requisite statutory and regulatory approvals. This merger has further
strengthened the geographical reach of the Bank in major towns and cities across the
country, especially in the State of Kerala, in addition to its existing dominance in the northern
part of the country.
2. 2006- Centurion Bank of Punjab acquired Kochi-based Lord Krishna Bank. Lord Krishna Bank
had been established at Kodungallur in Thrissur District, Kerala in 1940. During the 1960's,
Lord Krishna acquired three commercial banks: Thiyya Bank, Josna Bank and Kerala Union
Bank. The merged entity had a network of 361 branches and 12 extension counters across
the country with employee strength of over 6,500. The combined balance-sheet size was Rs
15,080 crore. On the merger proposal, Mr Shailendra Bhandari, Managing Director and CEO,
Centurion Bank, said: "Growing by inorganic means is an important component of our
strategy; the proposed merger with Lord Krishna Bank would further improve our franchise
and customer proposition across the country, particularly in North India, Karnataka, Kerala,
and Maharashtra." Centurion Bank acquired Bank of Punjab in October 2005 and became
Centurion Bank of Punjab. The merger helped Centurion Bank improve its reach in the South.
The merger of the two banks improved Centurion Bank of Punjab's NPA level and asset
quality.
3 Specific intent of this acquisition/ merger
3.1 Intent
For HDFC Bank, this merger provided an opportunity to add scale, geography (northern and southern
states) and management bandwidth. In addition, there was a potential of business synergy and
cultural fit between the two organizations.
Aggressive growth and two back-to-back mergers (Bank of Punjab and Lord Krishna Bank) had
reduced the productivity to some extent. The bank lacked the product offerings essential to induce
customers to maintain higher CASA levels and generate fee income. Also, as compared to other
private sector peers, the bank has a lower brand value.
For CBoP, HDFC bank would exploit its underutilized branch network that had the requisite expertise
in retail liabilities, transaction banking and third party distribution. The combined entity would improve
productivity levels of CBoP branches by leveraging HDFC Bank's brand name.
4 The Deal Size and Structure
CBOP was valued at $2.63 billion (Rs 9510 crores) with the market price of share trading at Rs 48.25
per share whereas HDFC Bank was valued at $13.00 billion with market price of share trading at Rs
1474 per share. Therefore, final swap ratio was fixed at 1:29 i.e for every 29 shares of CBOP the
shareholders received 1 share of HDFC Bank. This was an all stock deal.
The Reserve Bank of India (RBI) approved the scheme of amalgamation of Centurion Bank
of Punjab with HDFC Bank effective May 23, 2008. Consequently, the shareholders of the-erstwhile
Centurion Bank of Punjab were allotted 69,883,956 equity shares of Rs. 10 each pursuant to the
share swap ratio of one equity share of Rs. 10 each of HDFC Bank for every twenty nine equity
shares of Re. 1 each held in Centurion Bank of Punjab by them as on June 16, 2008.
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8. HDFC group, the promoters of HDFC Bank, held 23.28% stake in HDFC Bank prior to the merger and
needed to infuse further capital to keep their shareholding level intact after the merger. There was a
capital dilution of around 25% consequent to the merger and preferential allotment to promoters
(HDFC group).
To enable the promoter group to restore its shareholding percentage in the Bank to the pre-merger
level and in line with shareholder and regulatory approvals, during the quarter ended June 30, 2008
HDFC Bank issued 26,200,220 warrants convertible into an equivalent number of equity shares to
HDFC Limited on a preferential basis at a rate of Rs. 1,530.13 each. HDFC Limited can exercise the
said options until December, 2009.
During the year under review i.e 2008-09, 10.67 lakh shares were allotted to the employees of HDFC
Bank pursuant to the exercise of options under the employee stock option scheme of the Bank. These
include the shares allotted under the employee stock option scheme of Centurion Bank of Punjab.
The swap ratio was based on the recommendations made by joint valuers Dalal Shah and Co, a
chartered accountant firm and Ernst and Young, a consulting firm.
4.1 Key highlights of the Deal
1. The amalgamated entity will be under the name of HDFC Bank Ltd with its Registered Office at
HDFC Bank House, Senapati Bapat Marg, Lower Parel, Mumbai, Maharashtra- 400013.
2. The market cap to branch ratio of HDFC Bank was Rs 721 million whereas the same for CBOP
was Rs 238 million. Hence HDFC Bank was able to buy the CBOP franchise at about one third of
what the market is giving to its own franchisee.
3. HDFC Bank MD Aditya Puri, CBoP chief executive Shailendra Bhandari and CBoP chairman
Rana Talwar are all ex-Citigroup bankers. Mr Bhandari was also a part of the core team that set
up HDFC Bank in ‘94. Interestingly, Citigroup is also the single biggest shareholder in HDFC - the
mortgage giant and parent of HDFC Bank. The deal was that post merger Mr Bhandari will join
the board of the new bank as joint managing director while Rana Talwar will be its non-executive
chairman.
4. The proposed HDFC Bank-Centurion merger will not only give the new bank a greater presence
in states like Punjab, Haryana and Kerala, but also give some headroom for greater capital
market lending - a business that HDFC Bank has perfected. Besides, it will help HDFC bank to
step up its retail and SME assets.
5. Ambit Capital was the investment banker hired for the deal and as per his valuations the book
value of the merged bank share would be Rs 210 (Rs 9 for CBoP and Rs 201 HDFC Bank) and
the share-swap ratio therefore, is calculated as 1:29.
6. The acquisition would help HDFC extend its reach before a 2009 central bank review that may
allow foreign banks to buy Indian lenders.
7. The merger talks between the two banks began in January 2008, after the principal shareholders
of CBoP – Bank Muscat with 14.02 per cent stake, Sabre Capital with 3.48 per cent stake and the
Kephinance Investment (Mauritius) with 6.13 per cent stake decided to move away from this
partnership.
8. It was agreed as part of the deal that there will be no single layoff with respect to the employees
of CBOP.
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9. 9. The merger has been accounted for as per the pooling of interest method of accounting in
accordance with the scheme of amalgamation.
5 How did the merger proceed? Were there any roadblocks? What were
the reactions of various stakeholders (Competitors, regulators,
investors)?
The news of proposed merger between HDFC bank and CBOP kicked off the country’s biggest
amalgamation in the banking sector with assets of over Rs 2 lakh crore. As would happen in any
merger, the management of HDFC Bank felt that there might be short term hiccups in successful
integration of technology and manpower and it would take a couple of quarters in streamlining of all
operations effectively.
5.1 Issues/Challenges/ Roadblocks
1. The technology platform for both the banks was entirely different. CBOP was working on Finacle
platform whereas HDFC Bank was on Finware. The main challenge was the migration of all
CBOP customer accounts to the new system. This was a tedious process and required lot of
technical stress. The migration was conducted in a three phased manner so that the routine
working of the branch is not hampered. However, all the accounts were successfully migrated in 9
months.
2. Synchronizing the internal processes of CBOP branches with the HDFC Bank processes was
another major challenge. Processes related to account opening, cheque book issuance, cash and
clearing transactions, loan sanctioning and appraisal, guidelines for credit scoring, maximum
exposure facilities, discontinuance of certain products of CBOP etc underwent a major change.
The efficiencies in the processes were achieved through regular audit and monitoring of CBOP
branches by the internal auditors of HDFC Bank and provision of adequate training to the CBOP
employees.
3. Another major challenge imposed by the merger was the mapping of employees and their
integration with the new system. This process was a cause of discontentment and dissatisfaction
among the employees as some felt unfairly treated in terms of not given suitable
roles/designations in the new system. In order to remove the discontentment and frustration of the
employees a professional HR body named Mercor was hired to scan the profile of each individual
and fit him to the best role available. Also suitable career guidance and consulting was offered on
case to case basis. This helped in proper integration of the employees and made them feel the
part of the new entity.
4. HR issues such as casual leaves, privileged leaves, maternity rules, employee insurance,
provident fund, gratuity, Leave travel encashment etc were a cause of contention for some time
and subsequently the processes were explained to the employees.
5. One of the major reasons for merger was the access to 394 branches of CBOP and increased
presence in northern states (Punjab and Haryana) and southern India (particularly Kerala).
However, due to the merger most of the states had parallel branches of erstwhile CBOP and
HDFC Bank running next to each other. This resulted in unnecessary costs such as rent,
electricity bill, water bill and other fixed cost related to running a branch. It also created confusion
in the minds of the customer as to which branch will service them. It was a major challenge and
required careful planning to close multiple branches and shift the staff to the other branch.
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10. 6. The profitability ratios of CBOP were quite low and it looked as an expensive proposition for
HDFC Bank in the short run. CBOP had a weaker asset profile with net NPAs of 1.6% as against
0.4% for HDFC Bank. This would require a charge of Rs 2 billion for HDFC Bank in order to
maintain the same level of NPAs in the merged entity.
7. The last merger in the Indian banking sector was between Bharat Overseas Bank and Indian
Overseas Bank in March 2007. The scenario during 2008 was that nine bank unions, representing
900,000 workers, were opposing merger proposals of state-run banks including subsidiaries of
State Bank of India, and seeking pensions for all bank staff. One of the union spokesman claimed
that they would oppose the merger between the two private banks if it caused job losses, even as
nearly a million bank workers prepared for a two-day nationwide strike that week against
proposed mergers between state-run banks. But as per the amalgamation agreement there was a
provision ensuring no lay-offs post merger and as a result the union did not revolt.
8. Reaction of Investors – The investors/shareholders of CBOP were not convinced by the share
swap ratio of 1:29 and felt a bit dejected. However, given the market cap of the bank and share
value, the valuation was reasonable and fair. Later on it got the approval of majority of the
shareholders of the bank.
9. Reaction of Competitors – As a result of the merger, the combined entity became the largest
private bank in terms of reach and overtook ICICI and Axis Bank. There was no stalling of the
process by the competitors as it was a friendly merger with managing directors of both the banks
well known to each other.
10. Reaction of Regulator – The RBI in this approved the scheme of amalgamation effective May
23, 2008.
In spite of all the roadblocks and challenges faced as cited above, the merger went through smoothly
and proved to be a successful one.
Another important concern that rises with such mergers is the question of blending the two distinct
and diverse styles of functioning and ensuring a smooth transition to a new work culture, absorbing
the strengths of both the merging companies. It is a meticulous task to ensure that the fundamental
ways of working and the ideology of the two companies supplement the growth of each other rather
than leaving any one of the potential organizations obsolete. This merger has come after a series of
activities marking an eventful past for CBoP, which include acquiring the Lord Krishna Bank and the
Bank of Punjab.
The corporate world is a place where only the vigilant, the sharp and the spontaneous can explore
their way up the ladder, while the remaining admire or envy the success of the former. Here, every
second tests the mental acumen of the professionals by putting them into various odd situations which
demand spontaneous, impromptu decisions to be crafted, keeping a long-term perspective in sight.
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11. 6 Regulatory and legal issues in M & A highlighted in the merger
6.1 M&A Regulations
Definition: "MERGER" is an arrangement, whereby the assets of two companies become vested in,
or under the control of, one company (which may or may not be one of the original two companies),
which has as its shareholders all, or substantially all, the shareholders of the two companies.
Procedure for Amalgamation / Merger:
• Forward promptly notice and proceedings of meeting to SE’s
• Report the result of the meeting to Court
• Move Court for approval of the scheme by filing petition in 7 days in Form 40
• Advertise the date of hearing fixed by the court
• On receipt of Order from High Court, file it with RoC.
• Proceed on effecting the scheme amalgamation / merger as approved by High Court
Relevant Sections: Section 391 – 394 of the Companies Act, 1956 deals with Compromises,
Arrangements and Reconstructions and other related issues through schemes of arrangement
approved by the High Courts. A resolution to approve the scheme of arrangement has to be passed
by the shareholders in the general meetings. The shareholders have to vote on the resolutions on the
schemes of arrangement on the basis of the disclosures in the notice/explanatory statement. Section
393 of the Companies Act, 1956 specifies the broad parameters of the disclosures which should be
given to the shareholders / creditors, for approving a scheme of arrangement.
6.2 Acquisitions & Takeovers
6.2.1 Major Laws Involved
• SEBI (substantial Acquisition of shares &Takeovers) Regulations 1997.
o Reg-7:Disclosuure to company and to stock exchange by any person who acquire
more than 5%,10% or 14% shares
o Reg-10: NO acquirer shall acquire 15% or more shares unless such acquirer makes a
public announcement to acquire shares of such company as per SAST,1997.
o Reg-11: If (15%-75%) shares acquired as per Law then no acquirer can acquire
additional shares which entitle him to exercise 5% or more in any financial year,
unless public announcement is made.
o Reg-13:Before making public announcement merchant banker is to be appointed
o Reg-14: Timing of Public Announcement Offer not later than 4 working days after
agreement for acquisition of shares.
o Reg-15: Public Announcement of offer to be made in newspaper, Hindi, regional and
mostly traded area. Public Announcement shall be submitted to: SEBI through
merchant Banker
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12. o Reg-18: Within 14 days from the date of Public Announcement draft letter of offer to
be filed with SEBI through Merchant Banker. The letter of Offer to be dispatched to
share-holders not earlier than 21days.
o Reg-19: Public announcement shall specify a date for the purpose of determining the
name of the shareholder to whom Letter of Offer will be sent shall not be later than
30th day.
o Reg-21: Minimum number of shares to be acquired by Public offer-20%. If the public
shareholding goes below 10%, delisting of securities guidelines will apply.
o Reg-28: ESCROW- The acquirer by way of security performance of his obligation,
deposit in ESCROW account sum as under
o Reg-29: PAYMENT OF CONSIDERATION - 7days from closure of offer open special
account with Banker to an issue and deposit sum as would together with 90% of lying
in ESCROW make up entire sum due and payable to shareholders
• The Securities and Exchange Board of India Act, 1992.
• Security Contract Regulation Act, 1956.
• RBI Mergers & Acquisition Approval
• The Depositories Act,1956.
• SEBI Disclosure and Investor Protection Guidelines 2000.
• Securities and Exchange Board of India (Prohibition of Insider Trading Regulation ),1992.
• Securities and Exchange Board of India (Merchant Bankers) Rules/Regulation 1992.
• SEBI (Delisting of Securities) Guidelines, 2003.
• Foreign Exchange Management Act, 1999.
• Companies Act, 1956.
6.2.2 HDFC & CBoP – Key Highlights
The parties to the HDFC & CBoP merger complied with the all the regulations mentioned above.
• Used Share swap & pooling method
• Deal was tax free
• Labour issues – no retrenchment clause
• Insurance distribution & fee income contributed about 50% of non interest income of CBOP. Due
to regulatory requirements the insurance income was discontinued.
• Merger approved by shareholders of both banks (CBoP shareholders initially sceptical on
valuation) & the RBI
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13. 7 Assessment of Value Addition
7.1 Positive Impact
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;
4. Both banks have senior managements of high caliber who have worked with Citigroup at
some point in their career.
7.2 Negative Impact
1. Merger likely to be EPS dilutive for the next two years, due to valuations;
2. Integration of LKB branches may pose a challenge.
7.3 Upfront provisions/write-offs done wherever required
HDFC Bank was aware of asset quality issues of CBoP in personal loans and 2 Wheelers portfolio. It
took upfront write-offs and provided aggressively to ensure that provisioning norms are in line with its
aggressive provisioning policy. But CBoP had slowed down these businesses two quarters back after
sensing problems, and hence HDFC Bank did not have to take extraordinary corrective measures.
7.4 Key Value Additions
• The deal created an entity with an asset size of Rs 1,09,718 crore (7th largest in India),
providing massive scale economies and improved distribution with 1,148 branches and 2,358
ATMs (the largest in terms of branches in the private sector). CBoP's strong SME
relationships complemented HDFC Bank's bias towards high-rated corporate entities.
• There were significant cross-selling opportunities in the short-term. CBoP management had
relevant experience with larger banks (as evident in the Centurion Bank and BoP integration
earlier) managing business of the size commensurate with HDFC Bank.
• The quality of its loan book has not been compromised even after achieving a sharp increase
in loan base and this makes it the safest play amongst private sector banks. Keeping in view
the aggressive nature of HDFC Bank in terms of provisioning, the Bank wrote-off the
reasonably high level of bad debt of CBoP as compared to the HDFC Bank.
• The total dilution because of the merger with CBoP along with the issue of warrants to HDFC
in order to maintain its holding at ~23% was around 22% thereby pulling down the ROE in the
near term. In short term there was a EPS dilution. However, as of now the ROE has
increased to 15.32 %.
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14. • HDFC Bank reported impressive results for Q1’09, post its merger with Centurion Bank of
Punjab (CBoP), which came into effect from May 23, 2008. Year-over- year, net profit surged
44.6% to Rs. 4.6 bn, net interest income rose by 74.9% to Rs. 17.2 bn, and fee income
increased by 37.3%. Advances grew by 79.8%, while deposits grew by 60.4%. Post the
merger, key metrics of HDFC Bank are as follows:
Quarterly Data
Q1'08 Q4'08 Q1'09 YoY % QoQ% FY07 FY08 YoY %
Net Interest Income 10,422 16,421 17,235 65.40% 5.00% 34,685 52,279 50.70%
Operating Income 26,417 21,914 23,169 -12.30% 5.70% 49,847 75,110 50.70%
Pre-Prov Profit 7,837 10,887 10,275 31.10% -5.60% 25,639 37,654 46.90%
Net Profit 3,212 4,711 4,644 44.60% -1.40% 11,415 15,902 39.30%
Cost/Operating Income(%) 43.10% 50.30% 55.70% - 48.60% 49.90% -
NIM ratio 4.20% 4.40% 4.10% - - - -
NPA ratio 0.40% 0.50% 0.50% - 0.40% 0.50% -
Per Share Data (Rs.)
PPP per share 23.5 30.3 24.2 3.00% -20.10% 81.1 108 33.20%
EPS 9.6 13.1 11 14.60% -16.00% 36.1 45.6 26.30%
BVPS 211.5 324.4 313.8 48.40% -3.30% 201.4 324.4 61.00%
(Figures in Rs mn, except per share data)
• Strong core performance: The Bank’s core performance remained strong despite the
merger—net interest income (NII) increased by 52.5% yoy on a proforma basis. However, the
net interest margin (4.1%) and CASA (44.9%) were impacted adversely.
• Pressure on margins: Year over year, net advances grew 79.8% while deposits grew 60.4%.
• Asset quality moderated: Maintaining asset quality has been HDFC Bank’s forte. This
quarter, however, the Bank recorded a 111.6% yoy increase in its gross NPAs. This is more
on account of the merger with CBoP than due to deterioration in asset quality, since HDFC
Bank’s net NPA ratio stood at 0.5% of net advances this quarter.
7.4.1 An apt apple-to-apple comparison, adding CBoP’s Q1’08’s results to HDFC’s, is as
follows:
• Interest earned grew by 44% yoy and interest expended rose by 37.1%. This resulted in a rise
of 52.5% in the NII.
• Other income decreased by 16.9% yoy and operating expenses rose by 32.9%, resulting in a
17.5% rise in operating profit. However, net profit surged 31.1% yoy due to a slight decrease
in provisions other than tax.
• Thus the Bank’s performance has been remarkable.
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15. • The balance sheet of the Bank increased by 59.5% yoy post the merger as deposits grew by
60.4% to exceed Rs. 1.3 tn and advances grew by 79.8%. The CASA ratio fell to 44.9%. The
Bank’s total customer assets, (including advances, corporate debentures, and investments in
securitised paper, etc. net of loans securitised and participated out) were Rs. 995.5 bn.
• Sound fundamentals make HDFC Bank a strong performer. Despite taking a nominal hit on its
NIM post the merger with CBoP, NII grew by 74.9% yoy and fee income by 37.3% yoy. This
pulled up net profit by 44.6% and on a proforma basis, by 31.1%. The merger with CBoP is an
essential determinant of HDFC Bank’s growth. On the one hand, deposit and advances base
has enlarged; on the other, this has exerted pressure on margins as well as increased the
NPAs. Also, the merger has given HDFC Bank access to 394 more branches, which
increases its coverage considerably and will lead to strengthening of the core business and
earnings. At the same time, this will mean enlarged operating costs, which have been
increasing at a steady rate.
Given HDFC Bank’s sentient management, we believe that the Bank will revert back to its more
profitable numbers once CBoP is integrated in the former’s existing network.
8 Gains to the shareholders of the target and the acquirer
We’ll evaluate the gains to the acquirer & the target on the basis of simple share value appreciation.
In September 2007, before the rumors of the merger hit the markets, the share prices of HDFC Bank
& CBoP were Rs. 1433 & Rs. 41 respectively. The swap ratio was 1:29 which means that 1 HDFC
share of value 1433 was given in exchange for 29 shares of CBoP of value 1189. The Nifty was then
trading at 5001.
Currently the market price of HDFC bank share is 1954. This is a capital appreciation 36.4% for
HDFC Bank shareholders & a 64.3% capital appreciation for CBoP share holders. In the same period
the index returned a meagre 6.1%. These figures show that there were substantial gains to both
parties due to the merger.
Sep-07 SWAP value Apr-10 Value Appreciation
HDFC 1433 1433 1954 36.4%
CBOP 41 1189 NA 64.3%
Index 5001 5304 6.1%
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16. 9 Current Scenario
HDFC Bank has grown consistently at 30% in the last ten years. In 2008-09, to overcome the
slowdown, the bank sought adopted a conservative approach, resulting in a subdued growth in its
core business of lending- its credit growth has remained flat in the last few quarters. The merger of
Centurion Bank of Punjab (CBOP) with HDFC Bank extended its branch network in the near-term;
however it is too early to understand the real operational synergies from the merger.
FINANCIAL ESTIMATES
FY09 FY10E FY11E
Net interest income 7,421 8,997 10,931
Other income 3,318 3,973 4,595
Total income 10,739 12,969 15,526
Operating profit 5,207 6,688 8,248
Net profit 2,244 2,812 3,398
P/E (x) 26.2 20.9 17.3
P/BV (x) 4.2 3.4 3
All Figures in Rs. Crore
Source: Economic Times
Due to weak demand environment and it’s conservative approach, HDFC Bank's loan book grew by
just 7.2% y-o-y in June 2009 quarter, For June 2009 quarter, its net interest income and fee income
grew at a slower pace of 8% and 27% (y-o-y), respectively from around 30-40% in 2008-09. The lower
growth is also due to the base effect-due to the merger of CBOP with HDFC Bank in May last year. In
December 2009 quarter, the bank clocked a year-on-year growth of 32%. The striking part of the
performance in the quarter was the 30% growth in the bank’s corporate loan book.
During any downturn, non-performing assets (NPA) are bound to rise. Nevertheless, HDFC Bank has
been doing a good job of holding on to asset quality without major slippages in the recent quarters
even as CBOP books have deteriorated faster than its standalone book in the present downturn. Of
the total NPAs, around 40-42 per cent is estimated to have originated from CBOP is the extent of let-
up in the tough macro conditions, given that CBOP's share in total loan book is pegged at less than
20 per cent.
HDFC Bank has not witnessed any severe stress on its loans. All the losses are within the bank’s
expectations and it has taken all the corrective actions required to cut down on such loans and
address the over-leveraged customers. The bank mainly targets salaried customers in its retail
personal loan portfolio, in which the expected loss rate is 3-4%; this is well within the bank’s internal
estimates. In the credit cards business, on an incremental basis 70-80% of the customer base is
internal customers, giving the bank better information regarding their financial position which assists in
controlling delinquencies. Current delinquencies are within the bank’s expected levels on a portfolio
basis. The bank has increased its credit control standards and has adopted innovative steps to
identify trends in payment patterns to avoid future losses.
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17. The two wheeler and personal loan segments have been badly hit. Although eCBoP had stopped
originating fresh loans post December 2007, there is a portfolio amounting to Rs.20-25bn to run off in
the next 12-18 months and is likely to witness deterioration. The bank had taken a hit of Rs.6.5-7bn
during Q1FY09 adjusted through reserves, 70% of which is on account of realigning provisioning
levels of eCBoP with HDFC Bank’s own standards and remaining 30% for merger-related issues and
re-branding activities.
While there has been increase in the quantum of restructured assets in case of several banks, HDFC
Bank's restructured assets are among the lowest in the industry. Restructured loans account just 0.55
per cent of its loan book, around a fourth of the gross NPA of 2.05 per cent, which seems to be
manageable, going ahead. With most of the restructured loans given for working capital requirements
to corporate, analysts say that these should remain under check.
The bank opened 219 branches in the December ‘09 quarter. With access to such relatively low-cost
funds, HDFC Bank has been able to maintain its interest margin (NIM) at close to 4%. Going by the
way the bank is expanding its branch network, it is quite likely that it would be in a position to sustain
a NIM of 4% or close to it.
The bank has been reaping the benefits of the merger with CBoP for the past three quarters by
managing to keep operating expenses somewhat flat. Even in the December ‘09 quarter, salary and
other operating expenses fell by 0.5%. HDFC Bank has all the growth levers in place. A high share of
CASA, high NIM, low bad loans or NPAs and a low cost-to-income ratio will help the lender maintain
its earnings growth even going forward.
As the benefits of the merger start to contribute in terms of higher earnings from eCBoP branches, the
ROE’s are likely to pick up in FY10 at ~16.9%. Post the preferential allotment to HDFC bank in
December 2009, RoE is likely to remain suppressed. However, the bank would not be required to
raise any further equity capital at least till FY11.
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18. 10 Key Learning’s
Integration of IT Systems without disrupting customer service – The merger of IT systems is
highly critical aspect of this business merger. Both the banks were on different system platforms and it
took them around one year to fully integrate the IT systems on a common platform. Also, the number
of CBOP Branches to be migrated to was 394 which were huge and all this was achieved without any
disruption of services to the customer. All the branches were migrated by following a step-by-step
approach where the branches were grouped under clusters and most of the migration was done on
weekends.
Mapping of Employees – Lot of motivation and training is necessary to help the employees adjust to
such an organizational change. Blending of different cultures requires leadership, vision and initiative
on part of the acquirer to make the other side comfortable. This will help in reducing the attrition rate
of the company as well.
Customer Communication- Lot of communication needs to be delivered to the customers who are
one of the most important stakeholders of any service industry particularly banking. During the whole
merger process and even after that all the eCBOP customers were given confidence through effective
communication channels like mailers, inserts, direct contact etc. Efforts were made that all information
and developments related to the merger are transparent and disclosed in the public domain.
Elimination of redundancies - Net Banking and ATM system also merged and there was challenge
on the physical infrastructure level. All parallel branches running in a particular area were merged by
closing down one branch.
Top Management Vision - The decision for a merger or acquisition culminates after matching
business synergies and the perceived weaknesses of both the companies. It depends on the business
value that the combined entity brings to the business, customers and shareholders.
Having said this, it is the role of technology to quickly complete the merger to offer a single view, so
that the CEO can better perform his job of taking the organization to the next level.
Coordination between different functions - The CEO and CIO render complementary skills. The
CEO's role is more of strategy, whereas the CIO's role has to be a blend of strategy and tactics. It is
up to the CEO as to how he conducts the business and adapts it to the CIO's capabilities. With
regards to the combination of operations and technology, the CIO's capability to deliver will actually
influence the CEO’s thinking about what he can deliver. So for example, in the case of credit cards,
liabilities and assets, if the CEO wants a turnaround time of half an hour on loans, he cannot make
this statement in isolation. He is aware about the operations and technology processes that will be
able to support that vision. Hence, the CIO would try and help the CEO in deciding the strategy and
commit his support based on the status quo of the availability of operations and systems to translate
the vision of the CEO into reality.
Structuring of the Deal and Tax Implications – It is important to understand the legal and
regulatory requirements governing mergers and acquisitions and also various tax related regulations
in a deal. It is important to structure a deal which is a win-win for both the parties depending on the
circumstances of the case. Also relevance of Accounting Standards should not be ignored as they
help in preparing the consolidated financial statements post-merger.
In the end, reflecting upon the above learning’s will always prove useful when anyone finds himself
engaged in an M&A deal.
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