CHAPTER 1

INTRODUCTION MERGER AND ACQUISITION

Mergers and acquisitions are both aspects of strategic management, corporate finance
and management dealing with the buying, selling, dividing and combining of
different companies and similar entities that can help an enterprise grow rapidly in its sector or
location of origin, or a new field or new location, without creating a subsidiary, other child entity
or using a joint venture.

M&A can be defined as a type of restructuring in that they result in some entity reorganization
with the aim to provide growth or positive value. Consolidation of an industry or sector occurs
when widespread M&A activity concentrates the resources of many small companies into a few
larger ones, such as occurred with the automotive industry between 1910 and 1940.

The distinction between a "merger" and an "acquisition" has become increasingly blurred in
various respects, although it has not completely disappeared in all situations. From a legal point
of view, a merger is a legal consolidation of two companies into one entity, whereas
an acquisition occurs when one company takes over another and completely establishes itself as
the new owner . Either structure can result in the economic and financial consolidation of the two
entities. In practice, a deal that is an acquisition for legal purposes may be called a "merger of
equals" if both CEOs agree that joining together is in the best interest of both of their companies,
while when the deal is unfriendly (that is, when the target company does not want to be
purchased) it is almost always regarded as an "acquisition.

An acquisition or takeover is the purchase of one business or company by another company or

other business entity. Such purchase may be of 100%, or nearly 100%, of the assets or ownership
equity of the acquired entity. Consolidation occurs when two companies combine together to
form a new enterprise altogether, and neither of the previous companies remains independently.

Acquisitions are divided into "private" and "public" acquisitions, depending on whether the
acquiree or merging company is or is not listed on a public stock market . Some public
companies rely on acquisitions as an important value creation strategy. An additional dimension
or categorization consists of whether an acquisition is friendly or hostile.

Achieving acquisition success has proven to be very difficult, while various studies have shown
that 50% of acquisitions were unsuccessful. "Serial acquirers" appear to be more successful with
M&A than companies who only make an acquisition occasionally.

Whether a purchase is perceived as being a "friendly" one or a "hostile" depends significantly on

how the proposed acquisition is communicated to and perceived by the target company's board of
directors, employees and shareholders. It is normal for M&A deal communications to take place
in a so-called "confidentiality bubble" wherein the flow of information is restricted pursuant to
confidentiality agreements. In the case of a friendly transaction, the companies cooperate in
negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling
to be bought or the target's board has no prior knowledge of the offer. Hostile acquisitions can,
and often do, ultimately become "friendly", as the acquirer secures endorsement of the
transaction from the board of the acquiree company. This usually requires an improvement in the
terms of the offer and/or through negotiation.

"Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however,
a smaller firm will acquire management control of a larger and/or longer-established company
and retain the name of the latter for the post-acquisition combined entity. This is known as

a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that
enables a private company to be publicly listed in a relatively short time frame. A reverse merger
occurs when a privately held company buys a publicly listed shell company, usually one with no
business and limited assets.

The combined evidence suggests that the shareholders of acquired firms realize significant
positive "abnormal returns" while shareholders of the acquiring company are most likely to
experience a negative wealth effect. The overall net effect of M&A transactions appears to be
positive: almost all studies report positive returns for the investors in the combined buyer and
target firms. This implies that M&A creates economic value, presumably by transferring assets to
management teams that operate them more efficiently

There are also a variety of structures used in securing control over the assets of a company,
which have different tax and regulatory implications:
The buyer buys the shares, and therefore control, of the target company being purchased.
Ownership control of the company in turn conveys effective control over the assets of the
company, but since the company is acquired intact as a going concern, this form of
transaction carries with it all of the liabilities accrued by that business over its past and all of
the risks that company faces in its commercial environment.

The buyer buys the assets of the target company. The cash the target receives from the selloff is paid back to its shareholders by dividend or through liquidation. This type of
transaction leaves the target company as an empty shell, if the buyer buys out the entire
assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the
assets that it wants and leave out the assets and liabilities that it does not. This can be
particularly important where foreseeable liabilities may include future, un quantified damage
awards such as those that could arise from litigation over defective products, employee

benefits or terminations, or environmental damage. A disadvantage of this structure is the tax

that many jurisdictions, particularly outside the United States, impose on transfers of the
individual assets, whereas stock transactions can frequently be structured as like-kind
exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the
seller's shareholders.

The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where
one company splits into two, generating a second company which may or may not become
separately listed on a stock exchange.

1. As per knowledge-based views, firms can generate greater values through the retention of
knowledge-based resources which they generate and integrate.[5] Extracting technological
benefits during and after acquisition is ever challenging issue because of organizational
differences. Based on the content analysis of seven interviews authors concluded five
following components for their grounded modelImproper documentation and changing
implicit knowledge makes it difficult to share information during acquisition.
2. For acquired firm symbolic and cultural independence which is the base of technology
and capabilities are more important than administrative independence.
3. Detailed knowledge exchange and integrations are difficult when the acquired firm is
large and high performing.
4. Management of executives from acquired firm is critical in terms of promotions and pay
incentives to utilize their talent and value their expertise.
5. Transfer of technologies and capabilities are most difficult task to manage because of
complications of acquisition implementation. The risk of losing implicit knowledge is
always associated with the fast pace acquisition.

An increase in acquisitions in the global business environment requires enterprises to evaluate

the key stake holders of acquisition very carefully before implementation. It is imperative for the
acquirer to understand this relationship and apply it to its advantage. Retention is only possible
when resources are exchanged and managed without affecting their independence.

TYPES OF MERGERS

Merger or acquisition depends upon the purpose of the offeror company it wants to achieve.
Based on the offerors objectives profile, combinations could be vertical, horizontal, circular and
conglomeratic as precisely described below with reference to the purpose in view of the offeror
company.

(A) Horizontal combination:

It is a merger of two competing firms which are at the same stage of industrial process. The
acquiring firm belongs to the same industry as the target company. The main purpose of such
mergers is to obtain economies of scale in production by eliminating duplication of facilities and
the operations and broadening the product line, reduction in investment in working capital,
elimination in competition concentration in product, reduction in advertising costs, increase in
market segments and exercise better control on market.

(B) Vertical combination

A company would like to take over another company or seek its merger with that company to
expand espousing backward integration to assimilate the resources of supply and forward
integration towards market outlets. The acquiring company through merger of another unit
attempts on reduction of inventories of raw material and finished goods, implements its
production plans as per the objectives and economizes on working capital investments. In other
words, in vertical combinations, the merging undertaking would be either a supplier or a buyer
using its product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the acquirer company:

It gains a strong position because of imperfect market of the intermediary products,

scarcity of resources and purchased products;

Has control over products specifications.

(C) Circular combination:

Companies producing distinct products seek amalgamation to share common distribution and
research facilities to obtain economies by elimination of cost on duplication and promoting
market enlargement. The acquiring company obtains benefits in the form of economies of
resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM and Modi
Industries. The basic purpose of such amalgamations remains utilization of financial resources
and enlarges debt capacity through re-organizing their financial structure so as to service the

shareholders by increased leveraging and EPS, lowering average cost of capital and thereby
raising present worth of the outstanding shares. Merger enhances the overall stability of the
acquirer company and creates balance in the companys total portfolio of diverse products and
production processes.

TYPES OF ACQUISITION

There are different types of Acquisitions/takeover:-

Friendly takeovers

Hostile takeovers

Reverse takeovers

1. Friendly takeovers

Before a bidder makes an offer for another company, it usually first informs that company's

board of directors. If the board feels that accepting the offer serves shareholders better than
rejecting it, it recommends the offer be accepted by the shareholders. In a private company,
because the shareholders and the board are usually the same people or closely connected with
one another, private acquisitions are usually friendly. If the shareholders agree to sell the
company, then the board is usually of the same mind or sufficiently under the orders of the
shareholders to cooperate with the bidder.

2. Hostile takeovers

A hostile takeover allows a suitor to bypass a target company's management unwilling to agree to
a merger or takeover. A takeover is considered "hostile" if the target company's board rejects the
offer, but the bidder continues to pursue it, or the bidder makes the offer without informing the
target company's board beforehand.

A hostile takeover can be conducted in several ways. A tender offer can be made where the
acquiring company makes a public offer at a fixed price above the current market price.

An acquiring company can also engage in a proxy fight, whereby it tries to persuade enough
shareholders, usually a simple majority, to replace the management with a new one which will
approve the takeover.
Another method involves quietly purchasing enough stock on the open market, known as a
creeping tender offer, to effect a change in management. In all of these ways, management resists
the acquisition but it is carried out anyway.
3. Reverse takeovers

A reverse takeover is a type of takeover where a private company acquires a public company.
This is usually done at the instigation of the larger, private company, the purpose being for the
private company to effectively float itself while avoiding some of the expense and time involved
in a conventional IPO. However, under AIM rules, a reverse take-over is an acquisition or
acquisitions in a twelve month period which for an AIM company would:

exceed 100% in any of the class tests; or

result in a fundamental change in its business, board or voting control; or

in the case of an investing company, depart substantially from the investing strategy stated in its
admission document or, where no admission document was produced on admission, depart
substantially from the investing strategy stated in its pre-admission announcement or, depart
substantially from the investing strategy.

PROCESS OF MERGER AND ACQUISITION

Merger and acquisition process is the most challenging and most critical one when it comes to
corporate restructuring. One wrong decision or one wrong move can actually reverse the effects
in an unimaginable manner. It should certainly be followed in a way that a company can gain
maximum benefits with the deal.
Following are some of the important steps in the M&A process:
Business Valuation

Business valuation or assessment is the first process of merger and acquisition. This step includes
examination and evaluation of both the present and future market value of the target company. A
thorough research is done on the history of the company with regards to capital gains,
organizational structure, market share, distribution channel, corporate culture, specific business
strengths, and credibility in the market. There are many other aspects that should be considered
to ensure if a proposed company is right or not for a successful merger.
Proposal Phase

Proposal phase is a phase in which the company sends a proposal for a merger or an acquisition
with complete details of the deal including the strategies, amount, and the commitments. Most of
the time, this proposal is send through a non-binding offer document.

Planning Exit

When any company decides to sell its operations, it has to undergo the stage of exit planning.
The company has to take firm decision as to when and how to make the exit in an organized and
profitable manner. In the process the management has to evaluate all financial and other business
issues like taking a decision of full sale or partial sale along with evaluating on various options
of reinvestments.

Structuring Business Deal

After finalizing the merger and the exit plans, the new entity or the take over company has to
take initiatives for marketing and create innovative strategies to enhance business and its
credibility. The entire phase emphasize on structuring of the business deal.

Stage of Integration

This stage includes both the company coming together with their own parameters. It includes the
entire process of preparing the document, signing the agreement, and negotiating the deal. It also
defines the parameters of the future relationship between the two.
Operating the Venture
After signing the agreement and entering into the venture, it is equally important to operate the
venture. This operation is attributed to meet the said and pre-defined expectations of all the

companies involved in the process. The M&A transaction after the deal include all the essential
measures and activities that work to fulfill the requirements and desires of the companies
involved.

PURPOSE OF MERGERS AND ACQUISITIONS

The purpose for an offeror company for acquiring another company shall be reflected in the
corporate objectives. It has to decide the specific objectives to be achieved through acquisition.
The basic purpose of merger or business combination is to achieve faster growth of the corporate
business. Faster growth may be had through product improvement and competitive position.
Other possible purposes for acquisition are short listed below: (1) Procurement of supplies:
1. To safeguard the source of supplies of raw materials or intermediary product;
2. To obtain economies of purchase in the form of discount, savings in transportation costs,
overhead costs in buying department, etc.;
3. To share the benefits of suppliers economies by standardizing the materials.
(2) Revamping production facilities:
1. To achieve economies of scale by amalgamating production facilities through more intensive
utilization of plant and resources;
2. To standardize product specifications, improvement of quality of product, expanding
3. Market and aiming at consumers satisfaction through strengthening after sale Services;
4. To obtain improved production technology and know-how from the offered company
5. To reduce cost, improve quality and produce competitive products to retain and Improve market
share.

(3) Market expansion and strategy:

1. To eliminate competition and protect existing market;
2. To obtain a new market outlets in possession of the offeree;
3. To obtain new product for diversification or substitution of existing products and to enhance the
product range;
4. Strengthening retain outlets and sale the goods to rationalize distribution;
5. To reduce advertising cost and improve public image of the offeree company;
6. Strategic control of patents and copyrights.
(4) Financial strength:
1. To improve liquidity and have direct access to cash resource;
2. To dispose of surplus and outdated assets for cash out of combined enterprise;
3. To enhance gearing capacity, borrow on better strength and the greater assets backing;
4. To improve EPS (Earning per Share).
5.To avail tax benefits.

(5) General gains:

1. To improves its own image and attract superior managerial talent to manage its affair.
2. To offer better satisfaction to consumer or users of the product.
(6) Own developemental plans;
The purpose of acquisition is backed by the offeror companys own developmental plans. A
company thinks in terms of acquiring the other company only when it has arrived at its own
development plan to expand its operation having examined its own internal strength where it
might not have any problem of taxation, accounting, valuation, etc. But might feel resource
constraint with limitations of funds and lack of skill managerial personnel. It has to aim at
suitable combination where it could have opportunities to supplement its funds by issuance of
securities; secure additional financial facilities eliminate competition and strengthen its market
position.
(7) Strategic purpose:
The Acquirer Company view the merger to achieve strategic objectives through alternative type
of combinations which may be horizontal, vertical, product expansion, market extensional or
other specified unrelated objectives depending upon the corporate strategies. Thus, various types
of combinations distinct with each other in nature are adopted to pursue this objective like
vertical or horizontal combination.
(8) Corporate friendliness:
Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite
competitiveness in providing rescues to each other from hostile takeovers and cultivate situations
of collaborations sharing goodwill of each other to achieve performance heights through business
combinations. The corporate aims at circular combinations by pursuing this objective.

BENEFITS OF MERGERS AND ACQUISITIONS

1. GROWTH or DIVERSIFICATION: - Companies that desire rapid growth in size or market

share or diversification in the range of their products may find that a merger can be used to fulfill
the objective instead of going through the tome consuming process of internal growth or
diversification. The firm may achieve the same objective in a short period of time by merging
with an existing firm. In addition such a strategy is often less costly than the alternative of
developing the necessary production capability and capacity. If a firm that wants to expand
operations in existing or new product area can find a suitable going concern. It may avoid many
of risks associated with a design; manufacture the sale of addition or new products. Moreover
when a firm expands or extends its product line by acquiring another firm, it also removes a
potential competitor.

2. SYNERGISM: - The nature of synergism is very simple. Synergism exists whenever the value
of the combination is greater than the sum of the values of its parts. In other words,
synergism is 2+2=5. But identifying synergy on evaluating it may be difficult, infact
sometimes its implementations may be very subtle. As broadly defined to include any
incremental value resulting from business combination, synergism is the basic economic
justification of merger. The incremental value may derive from increase in either operational or
financial efficiency.
Operating Synergism: - Operating synergism may result from economies of scale, some degree
of monopoly power or increased managerial efficiency. The value may be achieved by increasing
the sales volume in relation to assts employed increasing profit margins or decreasing operating
risks. Although operating synergy usually is the result of either vertical/horizontal integration
some synergistic also may result from conglomerate growth. In addition, sometimes a firm may
acquire another to obtain patents, copyrights, technical proficiency, marketing skills, specific

fixes assets, customer relationship or managerial personnel. Operating synergism occurs when
these assets, which are intangible, may be combined with the existing assets and organization of
the acquiring firm to produce an incremental value. Although that value may be difficult to
appraise it may be the primary motive behind the acquisition.

Financial synergism-Among these are incremental values resulting from complementary

internal funds flows more efficient use of financial leverage, increase external financial
capability and income tax advantages.

a) Complementary internal funds flows

Seasonal or cyclical fluctuations in funds flows sometimes may be reduced or eliminated by
merger. If so, financial synergism results in reduction of working capital requirements of the
combination compared to those of the firms standing alone.

b) More efficient use of Financial Leverage

Financial synergy may result from more efficient use of financial leverage. The acquisition firm
may have little debt and wish to use the high debt of the acquired firm to lever earning of the
combination or the acquiring firm may borrow to finance and acquisition for cash of a low debt
firm thus providing additional leverage to the combination. The financial leverage advantage
must be weighed against the increased financial risk.

c) Increased External Financial Capabilities

Many mergers, particular those of relatively small firms into large ones, occur when the acquired
firm simply cannot finance its operation. Typical of this is the situations are the small growing
firm with expending financial requirements. The firm has exhausted its bank credit and has

virtually no access to long term debt or equity markets. Sometimes the small firm has
encountered operating difficulty, and the bank has served notice that its loan will not be
renewed? In this type of situation a large firms with sufficient cash and credit to finance the
requirements of smaller one probably can obtain a good buy bee. Making a merger proposal to
the small firm. The only alternative the small firm may have is to try to interest 2 or more large
firms in proposing merger to introduce, competition into those bidding for acquisition. The
smaller firms situations might not be so bleak. It may not be threatened by non renewable of
maturing loan. But its management may recognize that continued growth to capitalize on its
market will require financing be on its means. Although its bargaining position will be better, the
financial synergy of acquiring firms strong financial capability may provide the impetus for the
merger. Sometimes the acquired firm possesses the financing capability. The acquisition of a
cash rich firm whose operations have matured may provide additional financing to facilitate
growth of the acquiring firm. In some cases, the acquiring may be able to recover all or parts of
the cost of acquiring the cash rich firm when the merger is consummated and the cash then
belongs to it.

d) The Income Tax Advantages

In some cases, income tax consideration may provide the financial synergy motivating a merger,
e.g. assume that a firm A has earnings before taxes of about rupees ten crores per year and firm B
now break even, has a loss carry forward of rupees twenty crores accumulated from profitable
operations of previous years. The merger of A and B will allow the surviving corporation to
utility the loss carries forward, thereby eliminating income taxes in future periods.
Counter Synergism-Certain factors may oppose the synergistic effect contemplating from a
merger. Often another layer of overhead cost and bureaucracy is added. Do the advantages
outweigh disadvantages? Sometimes the acquiring firm agrees to long term employments
contracts with managers of the acquiring firm. Such often are beneficial but they may be the
opposite. Personality or policy conflicts may develop that either hamstring operations or acquire
buying out such contracts to remove personal position of authority. Particularly in conglomerate

merger, management of acquiring firm simply may not have sufficient knowledge of the business
to control the acquired firm adequately. Attempts to maintain control may induce resentment by
personnel of acquired firm. The resulting reduction of the efficiency may eliminate expected
operating synergy or even reduce the post merger profitability of the acquired firm. The list of
possible counter synergism factors could goon endlessly; the point is that the mergers do not
always produce that expected results. Negative factors and the risks related to them also must be
considered in appraising a prospective merger

Other motives For Merger

Merger may be motivated by two other factors that should not be classified under synergism.
These are the opportunities for acquiring firm to obtain assets at bargain price and the desire of
shareholders of the acquired firm to increase the liquidity of their holdings.

1. Purchase of Assets at Bargain Prices

Mergers may be explained as an opportunity to acquire assets, particularly land mineral rights,
plant and equipment, at lower cost than would be incurred if they were purchased or constructed
at the current market prices. If the market price of many socks have been considerably below the
replacement cost of the assets they represent, expanding firm considering construction plants,
developing mines or buying equipments often have found that the desired assets could be

obtained where by cheaper by acquiring a firm that already owned and operated that asset. Risk
could be reduced because the assets were already in place and an organization of people knew
how to operate them and market their products. Many of the mergers can be financed by cash
tender offers to the acquired firms shareholders at price substantially above the current market.
Even so, the assets can be acquired for less than their current casts of construction. The basic
factor underlying this apparently is that inflation in construction costs not fully rejected in stock
prices because of high interest rates and limited optimism by stock investors regarding future
economic conditions.
2. Increased Managerial Skills or Technology
Occasionally a firm with good potential finds it unable to develop fully because of deficiencies
in certain areas of management or an absence of needed product or production technology. If the
firm cannot hire the management or the technology it needs, it might combine with a compatible
firm that has needed managerial, personnel or technical expertise. Of course, any merger,
regardless of specific motive for it, should contribute to the maximization of owners wealth.
3. Acquiring new technology To stay competitive, companies need to stay on top of
technological developments and their business applications. By buying a smaller company with
unique technologies, a large company can maintain or develop a competitive edge.

Laws Regulating Merger

Following are the laws that regulate the merger of the company:-

(I) The Companies Act , 1956

Section 390 to 395 of Companies Act, 1956 deal with arrangements, amalgamations, mergers
and the procedure to be followed for getting the arrangement, compromise or the scheme of
amalgamation approved. Though, section 391 deals with the issue of compromise or arrangement
which is different from the issue of amalgamation as deal with under section 394, as section 394
too refers to the procedure under section 391 etc., all the section are to be seen together while
understanding the procedure of getting the scheme of amalgamation approved. Again, it is true
that while the procedure to be followed in case of amalgamation of two companies is wider than
the scheme of compromise or arrangement though there exist substantial overlapping.
The procedure to be followed while getting the scheme of amalgamation and the important
points, are as follows:-

(1) Any company, creditors of the company, class of them, members or the class of members can
file an application under section 391 seeking sanction of any scheme of compromise or
arrangement. However, by its very nature it can be understood that the scheme of amalgamation
is normally presented by the company. While filing an application either under section 391 or
section 394, the applicant is supposed to disclose all material particulars in accordance with the
provisions of the Act.
(2) Upon satisfying that the scheme is prima facie workable and fair, the Tribunal order for the
meeting of the members, class of members, creditors or the class of creditors. Rather, passing an
order calling for meeting, if the requirements of holding meetings with class of shareholders or
the members, are specifically dealt with in the order calling meeting, then, there wont be any
subsequent litigation. The scope of conduct of meeting with such class of members or the

shareholders is wider in case of amalgamation than where a scheme of compromise or

arrangement is sought for under section 391
(3) The scheme must get approved by the majority of the stake holders viz., the members, class
of members, creditors or such class of creditors. The scope of conduct of meeting with the
members, class of members, creditors or such class of creditors will be restrictive some what in
an application seeking compromise or arrangement.
(4) There should be due notice disclosing all material particulars and annexing the copy of the
scheme as the case may be while calling the meeting.
(5) In a case where amalgamation of two companies is sought for, before approving the scheme
of amalgamation, a report is to be received form the registrar of companies that the approval of
scheme will not prejudice the interests of the shareholders.
(6) The Central Government is also required to file its report in an application seeking approval
of compromise, arrangement or the amalgamation as the case may be under section 394A.
(7) After complying with all the requirements, if the scheme is approved, then, the certified copy
of the order is to be filed with the concerned authorities.

(II) The Competition Act ,2002

Following provisions of the Competition Act, 2002 deals with mergers of the company:(1) Section 5 of the Competition Act, 2002 deals with Combinations which defines
combination by reference to assets and turnover
(a) exclusively in India and
(b) in India and outside India.
For example, an Indian company with turnover of Rs. 3000 crores cannot acquire another Indian
company without prior notification and approval of the Competition Commission. On the other
hand, a foreign company with turnover outside India of more than USD 1.5 billion may acquire

a company in India with sales just short of Rs. 1500 crores without any notification to the
Competition Commission being required.
(2) Section 6 of the Competition Act, 2002 states that, no person or enterprise shall enter into a
combination which causes or is likely to cause an appreciable adverse effect on competition
within the relevant market in India and such a combination shall be void.

All types of intra-group combinations, mergers, demergers, reorganizations and other similar
transactions should be specifically exempted from the notification procedure and appropriate
clauses should be incorporated in sub-regulation 5(2) of the Regulations. These transactions do
not have any competitive impact on the market for assessment under the Competition Act,
Section 6.

(III) Foreign Exchange Management Act,1999

The foreign exchange laws relating to issuance and allotment of shares to foreign entities are
contained in The Foreign Exchange Management (Transfer or Issue of Security by a person
residing out of India) Regulation, 2000 issued by RBI vide GSR no. 406(E) dated 3rd May, 2000.
These regulations provide general guidelines on issuance of shares or securities by an Indian
entity to a person residing outside India or recording in its books any transfer of security from or
to such person. RBI has issued detailed guidelines on foreign investment in India vide Foreign
Direct Investment Scheme contained in Schedule 1 of said regulation.

(IV) SEBI Take over Code 1994

SEBI Takeover Regulations permit consolidation of shares or voting rights beyond 15% up to
55%, provided the acquirer does not acquire more than 5% of shares or voting rights of the target
company in any financial year. [Regulation 11(1) of the SEBI Takeover Regulations] However,
acquisition of shares or voting rights beyond 26% would apparently attract the notification
procedure under the Act. It should be clarified that notification to CCI will not be required for
consolidation of shares or voting rights permitted under the SEBI Takeover Regulations.
Similarly the acquirer who has already acquired control of a company (say a listed company),
after adhering to all requirements of SEBI Takeover Regulations and also the Act, should be
exempted from the Act for further acquisition of shares or voting rights in the same company.

(V) The Indian Income Tax Act (ITA), 1961

Merger has not been defined under the ITA but has been covered under the term 'amalgamation'
as defined in section 2(1B) of the Act. To encourage restructuring, merger and demerger has been
given a special treatment in the Income-tax Act since the beginning. The Finance Act, 1999
clarified many issues relating to Business Reorganizations thereby facilitating and making
business restructuring tax neutral. As per Finance Minister this has been done to accelerate
internal liberalization. Certain provisions applicable to mergers/demergers are as under:
Definition of Amalgamation/Merger Section 2(1B). Amalgamation means merger of either
one or more companies with another company or merger of two or more companies to form one
company in such a manner that:

(1) All the properties and liabilities of the transferor company/companies become the properties
and liabilities of Transferee Company.
(2) Shareholders holding not less than 75% of the value of shares in the transferor company

(other than shares which are held by, or by a nominee for, the transferee company or its
subsidiaries) become shareholders of the transferee company.
The following provisions would be applicable to merger only if the conditions laid down in
section 2(1B) relating to merger are fulfilled:

(1) Taxability in the hands of Transferee Company Section 47(vi) & section 47
(a) The transfer of shares by the shareholders of the transferor company in lieu of shares of the
transferee company on merger is not regarded as transfer and hence gains arising from the same
are not chargeable to tax in the hands of the shareholders of the transferee company. [Section
47(vii)]
(b) In case of merger, cost of acquisition of shares of the transferee company, which were
acquired in pursuant to merger will be the cost incurred for acquiring the shares of the transferor
company. [Section 49(2)]

(VI) Mandatory permission by the courts

Any scheme for mergers has to be sanctioned by the courts of the country. The company act
provides that the high court of the respective states where the transferor and the transferee
companies have their respective registered offices have the necessary jurisdiction to direct the
winding up or regulate the merger of the companies registered in or outside India.
The high courts can also supervise any arrangements or modifications in the arrangements after
having sanctioned the scheme of mergers as per the section 392 of the Company Act. Thereafter
the courts would issue the necessary sanctions for the scheme of mergers after dealing with the
application for the merger if they are convinced that the impending merger is fair and
reasonable.
The courts also have a certain limit to their powers to exercise their jurisdiction which have
essentially evolved from their own rulings. For example, the courts will not allow the merger to
come through the intervention of the courts, if the same can be effected through some other

provisions of the Companies Act; further, the courts cannot allow for the merger to proceed if
there was something that the parties themselves could not agree to; also, if the merger, if
allowed, would be in contravention of certain conditions laid down by the law, such a merger
also cannot be permitted. The courts have no special jurisdiction with regard to the issuance of
writs to entertain an appeal over a matter that is otherwise final, conclusive and binding as per
the section 391 of the Company act.

(VII) Stamp duty

Stamp act varies from state to State. As per Bombay Stamp Act, conveyance includes an order in
respect of amalgamation; by which property is transferred to or vested in any other person. As
per this Act, rate of stamp duty is 10 per cent.

Intellectual Property Due Diligence In Mergers And Acquisitions

The increased profile, frequency, and value of intellectual property related transactions have
elevated the need for all legal and financial professionals and Intellectual Property (IP) owner to
have thorough understanding of the assessment and the valuation of these assets, and their role in
commercial transaction. A detailed assessment of intellectual property asset is becoming an
increasingly integrated part of commercial transaction. Due diligence is the process of
investigating a partys ownership, right to use, and right to stop others from using the IP rights
involved in sale or merger ---the nature of transaction and the rights being acquired will
determine the extent and focus of the due diligence review. Due Diligence in IP for valuation
would help in building strategy, where in:-

(a) If Intellectual Property asset is underplayed the plans for maximization would be discussed.
(b) If the Trademark has been maximized to the point that it has lost its cachet in the market
place, reclaiming may be considered.
(c) If mark is undergoing generalization and is becoming generic, reclaiming the mark from
slipping to generic status would need to be considered.

(d) Certain events can devalue an Intellectual Property Asset, in the same way a fire can
suddenly destroy a piece of real property. These sudden events in respect of IP could be adverse
publicity or personal injury arising from a product. An essential part of the due diligence and
valuation process accounts for the impact of product and company-related events on assets
management can use risk information revealed in the due diligence.
(e) Due diligence could highlight contingent risk which do not always arise from Intellectual
Property law itself but may be significantly affected by product liability and contract law and
other non Intellectual Property realms.

Therefore Intellectual Property due diligence and valuation can be correlated with the overall
legal due diligence to provide an accurate conclusion regarding the asset present and future.

CHAPTER 2

MERGER AND ACQUISITION IN BANKING SECTOR

Introduction

The International banking scenario has shown major turmoil in the past few years in terms of
mergers and acquisitions. De regulation has been the main driver, through three major routes dismantling of interest rate controls, removal of barriers between banks and other financial
intermediaries, and lowering of entry barriers. It has lead to disintermediation, investors
demanding higher returns, price competition, reduced margins, falling spreads and competition
across geographies forcing banks to look for new ways to boost revenues. Consolidation has
been a significant strategic tool for this and has become a worldwide phenomenon, driven by
apparent advantages of scale-economies, geographical diversification, and lower costs through
branch and staff rationalization, cross-border expansion and market share concentration. The new
Basel II norms have also led banks to consider M&As.

This article looks at some M&As that have happened post-2000 in India to understand the intent
(of the targets and the acquirers), resulting synergies (both operational and financial), modalities
of the deal, congruence of the process with the vision and goals of the involved banks, and the
long term implications of the merger. The article also analyses emerging future trends and
recommends steps that banks should consider, given the forecasted scenario.

The Indian financial system would be open to intense international competition with complete
implementation of the provisions of WTO agreement on services (GATS) during the year 200506 when banks will be required to compete across the globe with multinational banks having
greater financial strengths. The banks will also be required to strengthen their capital position to
meet stringent prudential capital adequacy norms under Basel-II (beginning 2006-07). In the
backdrop of growing openness of Indian financial system, there is growing interest in mergers
and acquisition with focus on size of the banking organization. It is inevitable that banks in India,
particularly the public sector banks, could no longer afford to operate as a monolith and the
Central govt. has already indicated that the banks have to consolidate, not just to create
behemoths, but to create synergies.

Focus Of Mergers:

The growing tendency towards mergers in banks world-wide, has been driven by intensifying
competition, need to reduce costs, need for global size, take benefit of economies of scale,
investment in technology for technology gains, desire to expand business into new areas and
need for improvement in shareholder value. The underlying strategy for mergers, as it is
presently being thought to be, is,larger the bank, higher its competitiveness and better prospects
of survival.
Due to smaller size, the Indian banks may find it very difficult to compete with international
banks in various facets of banking and financial services.
Hence, one of the strategies to face the intense competition could be, to consolidate through the
process of mergers.

Recent Scenario Of Mergers in India:

In India, the mergers in 60s had taken place under the direction of RBI and as a result from 566
banks during 1951, the no. came down to 85 (14 non- scheduled) by 1969. During 90s, the
merger of NBI with PNB created personnel integration problems and as a result, PSB mergers
were not contemplated, subsequently. However private bank mergers continued with merger of
Bank of Madura with ICICI, that of Times Bank with HDFC, Benares State Bank with BoB in
2002, Nedungadi Bank with PNB in 2003 and more recently that of the Global Trust Bank with
OBC in 2004. Reverse merger of ICICI Ltd also took place with ICICI Bank, during the year
2001. These mergers did help in strengthening financially, helped to avoid the complex processes
of restructuring the weaker of the units and foster financial stability and opened the possibility of
actively promoting universal banking. It is encouraging that these mergers were facilitated to a
large extent by banking sector reforms. However, there is little published empirical literature on
the impact of mergers in banking in India.

Case For Mergers:

The mergers and acquisitions can be thought of in India on merit, due to following
factors also:

Top 5-6 Indian banks have solid management and they can improve the functioning of some
of the smaller banks, through changes in their management.

Indian banks are scattered regionally and can consolidate to improve their client and industry
positions. There is an opportunity for smaller banks to become large and larger banks to
consolidate and become even larger.

There are other cost cutting opportunities in IT implementation, branch rationalization and
staff rationalization.

M & A provides a fast and easy method for many banks to enter areas where they lack a
presence. Structured framework of merger process : The 1st report of the Narasimham
Committee (Nov 1991) had recommended a broad pattern of the structure of the banking
system with 3 or 4 large banks (to become international in character), 8 to 10 national
banks (to have a network throughout the country & engaged in universal banking)
besides local banks and rural banks. In its 2nd report, the Committee had recommended
that the mergers between banks, DFIs and NBFCs, should be based on synergies and
must make sound commercial sense.

The Indian Banking Sector

The history of Indian banking can be divided into three main phases 1:
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) - Liberalization 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 Securitization, improved macroeconomic
conditions, diversification, interest rate spreads, and regulatory and policy changes (e.g.
amendments to the Banking Regulation Act).
Certain trends like growing competition, product innovation and branding, focus on

strengthening risk management systems, emphasis on technology have emerged in the recent
past. In addition, the impact of the Basel II norms is going to be expensive for Indian banks,
with the need for additional capital requirement and costly database creation and
maintenance processes. Larger banks would have a relative advantage with the incorporation
of the norms.

Motives Behind Consolidation

Based on the cases, we can narrow down the motives behind M&As to the following :

Growth - Organic growth takes time and dynamic firms prefer acquisitions to grow
quickly in size and geographical reach.

Synergy - The merged entity, in most cases, has better ability in terms of both revenue
enhancement and cost reduction.

Managerial efficiency - Acquirer can better manage the resources of the target whose
value, in turn, rises after the acquisition.

Strategic motives - Two banks with complementary business interests can strengthen
their

positions in the market through merger.

Market entry - Cash rich firms use the acquisition route to buyout an established player
in a new market and then build upon the existing platform.

Tax shields and financial safeguards - Tax concessions act as a catalyst for a
strong bank to acquire distressed banks that have accumulated losses and unclaimed
depreciation benefits in their books.

Regulatory intervention - To protect depositors, and prevent the de-stabilisation of the

financial services sector, the RBI steps in to force the merger of a distressed bank.

Future of M&A in Indian Banking

In 2009, further opening up of the Indian banking sector is forecast to occur due to the changing
regulatory environment (proposal for upto 74% ownership by Foreign banks in Indian banks).
This will be an opportunity for foreign banks to enter the Indian market as with their huge capital
reserves, cutting-edge technology, best international practices and skilled personnel they have a
clear competitive advantage over Indian banks. Likely targets of takeover bids will be Yes Bank,
Bank of Rajasthan, and IndusInd Bank. However, excessive valuations may act as a deterrent
especially in the post-sub-prime era.

Persistent growth in Indian corporate sector and other segments provide further motives for
M&As. Banks need to keep pace with the growing industrial and agricultural sectors to serve
them effectively. A bigger player can afford to invest in required technology. Consolidation with
global players can give the benefit of global opportunities in funds' mobilisation, credit disbursal,
investments and rendering of financial services. Consolidation can also lower intermediation cost
and increase reach to underserved segments.

The Narasimhan Committee (II) recommendations are also an important indicator of the future
shape of the sector. There would be a movement towards a 3-tier structure in the Indian banking
industry: 2-3 large international banks; 8-10 national banks; and a few large local area banks. In
addition, M&As in the future are likely to be more market-driven, instead of government-driven.

CHAPTER 3

INTRODUCTION ON KOTAK MAHINDRA BANK AND ING

VYASYA BANK

Kotak Mahindra Group

Established in 1985, the Kotak Mahindra Group is one of Indias leading financial
servicesconglomerates. In February 2003, Kotak Mahindra Finance Ltd. (KMFL), the Groups
flagship company, received a banking licence from the Reserve Bank of India (RBI). With this,
KMFL became the first non-banking finance company in India to become a bank Kotak
Mahindra Bank Limited.
The consolidated balance sheet of Kotak Mahindra Group is over Rs. 1.34 lakh crore and
theconsolidated net worth of the Group stands at Rs. 20,554 crore (approx US$ 3.3 billion) as
onSeptember 30, 2014. The Group offers a wide range of financial services that encompass
everysphere of life. From commercial banking, to stock broking, mutual funds, life insurance and
investment banking, the Group caters to the diverse financial needs of individuals and the
corporate sector. The Group has a wide distribution network through branches and franchisees
across India,and international offices in London, New York, Dubai, Abu Dhabi, Mauritius and
Singapore.
Kotak Mahindra Bank
Kotak Mahindra Bank (KMB) offers complete retail financial solutions for varied customer
requirements

The Savings Bank Account goes beyond the traditional role of savings, and provides awide range
of services through a comprehensive suite of investment services and other
transactionalconveniences like Online Shopping, Bill Payments, ASBA, Netc@rd, ActivMoney
(Automatic TD sweep-in and Sweep-out) etc.KotaksJifi, a first-of-its-kind fully integrated
Social Bank Account,redefines digital banking by seamlessly incorporating social networking
platforms like Twitter and Facebook with mainstream banking.KayPay, the worlds first bank
agnostic payment product for Facebook users enables millions of bank account holders transfer
money to each other at any hour of the day or night, without the need of net banking, or knowing
various bank account related details of the payee.
KMBL also offers an Investment Account where Mutual Fund investments are recorded and can
be viewed in a consolidated fashion across fund houses & schemes. Further, the Bank offers loan
products such as Home Loans, Personal Loans, Commercial Vehicle Loans, etc. Keeping in mind
the diverse needs of the business community, KMBL offers comprehensive business solutions
that include Current Account, Trade Services, Cash Management Services and Credit facilities.

Kotak Mahindra Bank is the fourth largest Indian private sector bank by market capitalization,
Head quartered in Mumbai, Maharashtra. The banks registered office (headquarters) is located
at 27BKC, Bandra Kurla Complex, Bandra East, Mumbai, India.

In February 2003, Kotak Mahindra Finance Ltd, the group's flagship company was given the
licence to carry on banking business by the Reserve Bank of India (RBI). Kotak Mahindra
Finance Ltd. is the first company in the Indian banking history to convert to a bank.
As on September 30, 2014, Kotak Mahindra Bank has over 641 branches and over 1,159 ATMs
spread across 363 locations in the country.

HISTORY OF KOTAK MAHINDRA BANK

Kotak Mahindra group, established in 1985 by Uday Kotak, is one of Indias leading financial
services conglomerates. In February 2003, Kotak Mahindra Finance Ltd. (KMFL), the Groups
flagship company, received a banking licence from the Reserve Bank of India (RBI). With
this,KMFL became the first non-banking finance company in India to be converted into a bank
Kotak Mahindra Bank Limited (KMBL).
In a study by Brand Finance Banking 500, published in February 2014 by the Banker magazine
(from The Financial Times Stable), KMBL was ranked 245th among the worlds top 500 banks
with brand valuation of around half a billion dollars ($481 million) and brand rating of
AA+. KMBL is also ranked among the top 5 Best Ranked Companies for Corporate Governance
in IR Global Ranking.

ING VYASYA BANK

ING Vysya Bank Ltd is a premier private sector bank with retail, private and wholesale banking
platforms that serve over two million customers. With over 80 years of history in India and
leveraging INGs global financial expertise, the bank offers a broad range of innovative and
established products and services, across its 573 branches. The Bank, which has close to 10,000
employees, is also listed in Bombay Stock Exchange Limited and National Stock Exchange of
India
Limited. ING Vysya Bank was ranked among top 5 Most Trusted Brands among private sector
banks in India in the Economic Times Brand Equity Nielsen survey 2011.
ING is a global financial institution of Dutch origin offering banking services through its
operating company ING Bank and holds significant stakes in listed insurers NN Group NV and

Voya Financial, Inc. ING Banks 53,000 employees offer retail and commercial banking services
to customers in over 40 countries.
ING Vysya Bank was a privately owned Indian multinational bank based in Bangalore, with
retail, wholesale, and private banking platforms formed from the 2002 purchase of an equity
stake in Vysya Bank by the Dutch ING Group. This merger marks the first between an Indian
bank and a foreign bank.Prior to this transaction, Vysya Bank had a seven-year-old strategic
alliance with erstwhile Belgian bank BanqueBruxelles Lambert, which was also acquired by ING
Group in 1998.

As of March 2013, ING Vysya is the seventh largest private sector bank in India with assets
totaling 54836 crore and operating a pan-India network of over 1,000 outlets, including 527
branches, which service over two million customers. ING Group, the highest-ranking
institutional shareholder, currently holds a 44% equity stake in ING Vysya Bank, followed by
Aberdeen Asset Management, private equity firm Chrys Capital, Morgan Stanley, and Citigroup,
respectively.

ING Vysya has been ranked the "Safest Banker" by the New Indian Express and among "Top 5
Most Trusted Private Sector Banks" by the Economic Times.

HISTORY OF ING VYASYA BANK

Established in 1930s, Vysya Bank was formally incorporated in the city of Bangalore, Karnataka.
The state of Karnataka is known as the "cradle of Indian banking" due to the region's bygone
banking relationship with several European East India Companies during the 17th, 18th and 19th
centuries. Seven of the country's leading banks (Canara Bank, Syndicate Bank, Corporation
Bank, Vijaya Bank, Karnataka Bank, State Bank of Mysore, and ING Vysya Bank) were
originally established in Karnataka.
From the 1930s through the 1950s, Vysya Bank built its banking business organically in southern
India. The bank concentrated on serving the Vysya community, a merchant/trading community
operating across Karnataka and Andhra Pradesh. In 1958, the bank was licensed by the Reserve
Bank of India (RBI) to expand its banking operations nationwide. In 1972, the RBI upgraded
Vysya Bank to a national B class bank.

In 1987, Vysya Bank established two independently operating subsidiaries providing equipment
leasing and home mortgaging services (Vysya Bank Leasing Ltd and Vysya Bank Housing
Finance Ltd, respectively). In 1994, Vysya Bank began marketing several innovative financial
products to the fast-growing Indian middle-class segment.

CHAPTER 4

MERGER OF ING VYASYA INTO KOTAK MAHINDRA BANK

The Rs 15,000 crore Kotak Mahindra Bank - ING Vysya Bank merger, creating India's fourth
largest private sector lender, has received RBI approval and the rebranding process is already
underway. While the combined entity coming into existence, the complete amalgamation of
operations and staff integration will happen over the course of one year.
After the merger, ING Vysya's around 547 bank branches will be re-branded as Kotak Mahindra
Bank outlets. The customers of the ING Vysya Bank are getting cheque books and other facilities
of Kotak Mahindra Bank, said Kotak Mahindra Bank CFO Jaimin Bhatt. "The process of rebranded has already started and it will be complete in the reasonable timeframe," he told in
Times of India.
The combined banking entity will have a network of 1,214 branches across the country. "The
scheme of amalgamation shall come into effect from April 1, 2015," Kotak Mahindra Bank said
in a statement quoting RBI approval
It got RBI approval for the merger. Following the merger, all the tangible and intangible assets
have been transferred to Kotak Mahindra Bank. ING Vysya had around 10,000 employees, while
Kotak Bank has around 29,000. "We estimate that complete integration would take place in the
next 9-12 months. The merger deal between Kotak Mahindra and ING Vysya got the
Competition Commission approval in February. In an order dated February 12, the CCI said that
share of both entities in various relevant markets is "insignificant". In this case, the regulator
took into account multiple relevant markets including those for deposits, home loans, agricultural
banking and card business.
This is the first amalgamation of a profit earning entity post global financial meltdown in 2008.

Kotak Mahindra stock price On August 13, 2015, Kotak Mahindra Bank closed at Rs 719.35,
up Rs 1.60, or 0.22 percent. The 52-week high of the share was Rs 744.45 and the 52-week low
was Rs 423.58. The company's trailing 12-month (TTM) EPS was at Rs 8.90 per share as per the

quarter ended June 2015. The stock's price-to-earnings (P/E) ratio was 80.83. The latest book
value of the company is Rs 77.78 per share. At current value, the price-to-book value of the
company is 9.25

Merger terms
The Kotak and ING Vysya respectively considered the results of a due diligence review covering
areas such as advances, investments, deposits, properties & branches, liabilities, material
contracts etc.
S.R.Batliboi & Co., LLP, Chartered Accountants, and Price Waterhouse & Co LLP, the
independent valuers appointed by Kotak and ING Vysya respectively, have recommended a share
exchange ratio, which has been accepted by the respective Boards. Avendus Capital Private Ltd.
provided a Fairness Opinion to Kotak on the share exchange ratio and Edelweiss Financial
Services Ltd. provided a Fairness Opinion to ING Vysya.
Accordingly ING Vysya shareholders will receive 725 shares in Kotak for 1,000 shares of ING
Vysya .The share exchange ratio is considered fair and reasonable given the underlying value of
ING Vysya ,as also giving shareholders the ability to benefit from the potential that can be
realised upon merging into Kotak.
This exchange ratio indicates an implied price of Rs.790 for each ING Vysya share based on the
average closing price of Kotak shares during one month to November, which is a 16% premium
to a like measure of ING Vysya market price.
The proposed merger would result in issuance of approximately 15.2% of the equity share capital
other, merged Kotak. One of ING Vysyas directors will be joining the Board of Directors of
Kotak.

CHAPTER 5

AFTER MERGER MOMENT

The Reserve Bank of India (RBI) approved the merger of Kotak Mahnindra Bank and ING
Vysya Bank. From now on, all ING branches will function as Kotak branches.
The acquisition will make Kotak Mahindra Bank the fourth largest private sector lender in the
country, will have about 1,200 branches and a total business of Rs 2.25 lakh crore, and a
combined market capitalisation of close to Rs 1.25 lakh crore.
There would be a total of 30,000 employees in the bank after the merger, while at the group
level, there would be 40,000 employees.

Kotak Mahindra had announced it was acquiring Bengaluru-headquartered ING Vysya in an allstock deal. With respect to the branches, had already begun and the process would be completed
within a month. For ATMs, too, the same has started. The deal implies a price of Rs 790 for each
ING Vysya share, based on the average closing price of Kotak shares during the month to
November, valuing the deal at about Rs 15,000 crore. That was a 16 per cent premium to a like
measure of ING Vysya market price, Kotak Bank had stated.

ING Group, which owns 43% in ING Vysya, has indicated that it supports the proposed
transaction. ING Group will become the largest non-promoter shareholder in combined Kotak.
ING Group and Kotak intend to explore areas of cooperation in cross border business, on the
basis of a Framework for Future Cooperation that has been entered into, subject to mutual
agreement on specific terms and all laws and regulations.

ADVANTAGES OF MERGER

Kotak, with 641 branches and relatively deeper presence in the West and North, has a
differentiated proposition for various customer segments including HNIs, deep corporate
relationships including emerging corporates, a wide product portfolio, including agricultural
finance and consumer loans and a robust capital position.
ING Vysya has a strong customer franchise for over 8 decades, with a national branch network of
573 branches and deep presence in South India, particularly in Andhra Pradesh, Telengana and
Karnataka. ING Vysya has a large customer base across all segments. It is particularly noted for
abest-in-class SME Business, as also for serving large international corporates in India by access
to the international relationships of ING Group.
The combined Kotak will have 1,214 branches, with a wide-spread pan-India network, getting
both breadth and depth given the strong geographic complementarity between Kotak and ING
Vysya. Substantial efficiencies will arise out of the proposed merger, which is likely to result in
significant benefits for all stakeholders, be it shareholders, employees or customers, and
ultimately the banking industry:
Customers and employees will benefit from the combined Kotak having a wider geographical
spread, expertise across customer segments, such as SME, HNI, Corporates, and on products
such as private banking, asset management, insurance, investment banking, NRI offerings etc.
Kotaks strong capital position potentially avoids capital raising and attendant dilution in the near
to medium term for ING Vysya shareholders. Additionally, with ING Vysya nearing the cap for
foreign shareholding, the merger would yield more liquidity with significant foreign headroom in
Kotak even after merger, with foreign shareholding at 47%.

OTHER THINGS BENEFIT THE MERGER DEAL

1) Stock swap:

Deals can be conducted in cash or by exchange shares. The Kotak-ING Vysya deal will purely an
exchange of stocks. Investors in ING Vysya will get 725 Kotak Mahindra Bank shares for every
1000 ING Vysya shares they held. This means, every Kotak share is worth nearly 1.4 shares of
ING Vysya. The deal values each share of ING Vysya at Rs 790, much lower than its Thursday
closing price of Rs 816.95. However, it is 16% more than the average share price of the ING
stock. This means, Kotak is paying slightly more than the market price to buy the smaller bank.
The entire deal would be valued at over Rs 15,000 crore or $2.4 billion, one of the largest ever.
2) Fourth biggest private bank: The acquisition will create the fourth largest private sector
bank in India in terms of branch network. The combined entity will have a market capitalisation
of Rs 1 lakh crore. This is lower than the market capitalisations of HDFC Bank (Rs 2.2 lakh
crore), ICICI Bank (Rs 1.98 lakh crore) and Axis Bank (Rs 1.14 lakh crore) three of the largest
private sector banks in India.
3) Shareholding: Uday Kotak will remain to be the key promoter, holding around 34% stake in
the merged bank. This is down from 40%. As per shareholding rules, he has to reduce his stake
further to 20% over the next four years. Dutch lender ING Groep NV will be the second largest
shareholder in the new Kotak Mahindra bank after the deal. It held nearly 43% stake in ING
Vysya. Its shareholding in the new entity would be nearly 25.3%, according to an Economic
Times report.
4) Brokerages give thumbs up: Most analysts and brokerage firms cheered the deal. This is
because they expect the deal to improve Kotak Mahindras bank business by expanding its
branch network as well as improving its loan portfolio. The deal also happens at a time when the
economy is showing signs of improvement. This means, Kotak will be in a better position to take
advantage of any rise in demand for loans, analysts said. The deal is likely to increase Kotaks
loan book by nearly two-thirds (75%), brokerages said.
5) Branch network: The merger is expected to double Kotaks branch network from 641 to
1,214 having nearly 40,000 employees. ING Vysya current has about 573 branches in the
country, most of which are situated in the South. This is good news is because Kotak was

predominantly present in North India. This means the two banks branches do not overlap. The
merger also means the combined entity will have a far wider reach in the country than earlier.
Kotak is expected to gain 2 million customers from the merger.
6) SME banking: ING Vysya also brings its SME banking platform to the table. This will help
Kotak in the long run. As of September, ING Vysya lent about 70% of its total loans to small and
medium enterprises (SME) and large companies. In contrast, Kotak lent only 55%. The merger is
thus likely to strengthen Kotaks corporate lending business. All of this is expected to increase
Kotaks total earnings by one-fifth or 20%, experts suggest

IMPACT AFTER MERGER

Kotak Mahindra Bank, its quarterly net profit go down by 56 percent in the June-ended quarter,
after accounting for the acquisition of ING Vysya Bank.
The bank in its first earnings for the merged entity - reported a standalone net profit of Rs
189.78 crore, less than half of Rs 429.8 crore in the corresponding quarter a year earlier. This
was largely due to higher provisioning costs which it accounted for relating to its acquisition of
ING Vysya Bank. Kotak Mahindra Bank completed the merger in April.
Kotak Mahindra Bank made three provisions: The first was towards retirement benefits of
employees of the former ING Vysya Bank. This related to provisioning for pensions, leave and
gratuity, for which ING in the previous year had allocated in its books. The second provisioning
was of Rs 305 crore towards non-performing assets . The bank also made a provision of Rs 63
crore towards integration costs . At the time of the merger, Kotak calculated the integrated costs
of the merger at Rs 200 crore. The bank also provides for additional interest on savings accounts
of Rs 30 crore was third provision.
ING Vysya merger bites Kotak Bank's bottomline as Net dips 26% . In its first earnings report
after its merger with ING Vysya Bank, Kotak Mahindra Bank reported a 26 per cent fall in
consolidated net profit at Rs 517 crore in the June quarter, hit by massive provisions for the
South India-based lender's stressed assets and retirement benefits. On a standalone basis, the net
profit plunged to Rs 190 crore in quarter under review from Rs 429 crore in the same period a
year ago.

CONCLUSION
Banking industry is one, where having a critical mass is the sine qua non for meeting
competition. Regardless of the other factors how so ever meritorious, without the critical mass
the best of the banks is bound to either vegetate or be a target for getting gobbled up by a larger
bank sooner or later. The main aspect of the critical mass is the geographical spread and man
power, which this deal seeks to address more than anything else. ING Vysya is firmly grounded
in the South with a well experienced human resource and Kotak Mahindra in the West and North.
Together they will stand up to any competition if they continue to focus on their strengths and
carve out a niche for themselves.