INTRODUCTION OF BANKING SECTOR

A financial institution that is licensed to deal with money and its substitutes by
accepting time and demand deposits, making loans, and investing in securities. The
bank generates profits from the difference in the interest rates charged and paid. The
development of banking is an inevitable precondition for the healthy and rapid
development of the national economic structure. Banking institutions have contributed
much to the development of the developed countries of the world. Today we cannot
imagine the business world without banking institutions. Banking is as important as
blood in the human body. Due to the development of banking advances are increased
and business activities developing so it is rightly said, “The development of banking is
not only the root but also the result of the development of the business world." After
independence, the Indian government also has taken a series of steps to develop the
banking sector. Due to considerable efforts of the government, today we have a number
of banks such as Reserve Bank of India, State Bank of India, nationalized commercial
banks, Industrial Banks and cooperative banks. Indian Banks contribute a lot to the
development of agriculture, and trade and industrial sectors. Even today the banking
system of India possess certain limitations, but one cannot doubt its important role in
the development of the Indian economy.

Early history

Banking in India originated in the last decades of the 18th century. The first banks were
The General Bank of India which started in 1786, and the Bank of Hindustan, both of

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which are now defunct. The oldest bank in existence in India is the State Bank of India,
which originated in the Bank of Calcutta in June 1806, which almost immediately
became the Bank of Bengal. This was one of the three presidency banks, the other two
being the Bank of Bombay and the Bank of Madras, all three of which were established
under charters from the British East India Company. For many years the Presidency
banks acted as quasi-central banks, as did their successors. The three banks merged in
1921 to form the Imperial Bank of India, which, upon India's independence, became
the State Bank of India.

Indian Banking Sector

The Indian banking system consists of 27 public sector banks, 26 private sector banks,
46 foreign banks, 56 regional rural banks, 1,574 urban cooperative banks and 93,913
rural cooperative banks, in addition to cooperative credit institutions. Public-sector
banks control more than 70 per cent of the banking system assets, thereby leaving a
comparatively smaller share for its private peers. Banks are also encouraging their
customers to manage their finances using mobile phones.

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Banking Structure in India

RBI

SCHEDULE UNSCHEDULED
BANKS BANKS

CO-
COMMERICAL
OPERATIVE
BANKS
BANKS

PUBLIC PRIVATE FOREIGN

REGIONAL
SECTOR SECTOR SECTOR
RURAL BANKS
BANKS BANKS BANKS

SBI AND
ASSOCIATED
BANKS

OTHER
NATIONAL
BANKS

OTHER PUBLIC
SECTOR
BANKS

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 INTRODUCTION OF MERGER OF BANKS

What is merger?
A merger is an agreement that unites two existing companies into one new company.
There are several types of mergers and also several reasons why companies complete
mergers. Mergers and acquisitions are commonly done to expand a company’s reach,
expand into new segments, or gain market share. All of these are done to please
shareholders and create value.

What is merger of banks?

A bank merger occurs when banks join to become one. Many people think of bank
mergers as something that occurs between two banks, but it may involve more than two
in some cases. No matter how many banks are involved, the merger results in a single
bank with one identity rather than multiple banks with multiple identities. There are
two common ways in which a bank merger may be accomplished: one is through a
buyout and another is via cooperation
with bank shareholders.

To understand what a bank merger is, it

may be helpful to compare it to marriage. A marriage is the joining of two people while
a bank merger is the joining of two or more banks. When banks merge, the separate
banks lose their identities and take on a single identity. For example, the merged banks
may take on the name of one of the banks involved in the merger or they may create a
new name. In many cases, it is preferable to keep one bank's name for the new identity,
as it may have name recognition value.

The main benefit of a bank merger may be the ability of the merging banks to not only
pool their resources, but also expand their market share. At the same time, the merging
banks may enjoy a decrease in operating costs since they form a single bank rather than
multiple banks with separate operating costs. In many cases, there are tax benefits
involved in a bank merger as well.

Unlike takeovers, bank mergers are typically based on agreements. In most cases, the
management and stockholders agree to allow a merger. These mergers also differ from

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takeovers in the fact that the change is usually considered a friendly one, and both banks
usually stand to gain in the joining. With
takeovers, the gain isn’t usually mutual.

There are cons to bank mergers as well. In

some cases, the merger leads to job loss as the
new bank seeks to cut costs. Likewise, these
mergers may sometimes prove difficult as two or more banks have to work together to
minimize disruptions in operations, systems, and processes.

There are often few changes for shareholders and customers in mergers. Shareholders
are usually offered an equal amount of interest in the bank formed by the merger.
Customers may notice some changes in bank policies, but effort is usually made to
make the change as seamless as possible. For example, bank customers who have direct
deposit set up with one of the banks are often permitted to continue using the same
routing and account numbers. This saves customers the trouble of having their
employers arrange for direct deposits using new account and routing numbers.

Breaking Down 'Merger'

A merger is the voluntary fusion of two companies on broadly equal terms into one new
legal entity. The firms that agree to merge are roughly equal in terms of size, customers,
scale of operations, etc. For this reason, the term "merger of equals" is sometimes used.

Mergers are most commonly done to gain market share, reduce costs of operations,
expand to new territories, unite common products, grow revenues and increase profits,
all of which should benefit the firms' shareholders. After a merger, shares of the new
company are distributed to existing shareholders of both original businesses.

In 2015, there was a record $4.30 trillion worth of mergers and acquisitions announced.
Deal making continues to be a popular way to grow revenue and earnings for companies
of varying size.

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 OBJECTIVES OF MERGER

The theory that mergers do not enhance shareholder value but are done in pursuit of
other management objectives that are contrary to those of shareholders

This is an interesting question. You could argue mergers can benefit shareholders
because the new firm will be more profitable. This is because of:

 Economies of scale – bigger firms gains from lower average costs. Note: this will
particularly apply to horizontal mergers and in industries with high fixed costs e.g. if 2
car firms merged. However, in this case the economies of scale are limited to financial
and risk bearing because it is a conglomerate merger.
 Market Power. The main benefit of a merger is to gain more market share. This
increases a firms monopoly power and enables higher prices (this is why mergers are
often regulated by government.) However, it is debatable whether this particular merger
actually increases market power because the firms operate in different industries

However, it is important to bear in mind a new firm may suffer from:

 Dis-economies of scale – a firm can get too big, unwieldy and difficult to manage (this
could happen in this case)

Other Objectives of Mergers

1. More prestige. This merger creates a media giant. Perhaps managers like the prestige
of creating and working for a big company. Maybe this leads to a higher salary?
2. Risk Avoidance. Perhaps a fledgling internet company fears being swallowed up.
Certainly in 2000, many dot com firms were going to the wall. A merger might make
the firm feel safer.
3. Other Spheres of Influence. In the media world, a motive for a merger may be to create
more political power and influence. For example, in Italy, Berlusconi’s media empire
helped him gain political power.

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 BASIS OF CLASSIFICATIONS / TYPES OF MERGERS

Mergers can be differentiated into various types depending on the following:

Integration form
Mergers can be classified depending on how both the companies physically combine
themselves in the transaction to form one entity.

Relatedness of business activities

Mergers can be classified depending on how the business activities of both the
companies relate to each other. The economic function and the purpose of the
transaction define the types of mergers.

Classification by the form of integration

The mergers can be classified as follows on the basis of forms of integration:

Statutory merger
A statutory merger is one in which all the
assets and liabilities of the smaller
company is acquired by the bigger
(acquiring) company. As a result, the
smaller target company loses its existence
as a separate entity.
Company A + Company B = Company A

Subsidiary merger
A subsidiary merger is one in which the target company becomes a subsidiary of the
bigger acquiring company. This happens because the target company may have a
known brand or a strong image which would make sense for the acquiring company to
retain.

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Company A + Company B = (Company A + Company B)

Consolidation merger
A consolidation merger is one in which both the companies lose their identity as
separate entities and become a part of a bigger new
company. This is generally the case with both the
companies being of the same size.

Company A + Company B = Company C

Classification on the basis of relatedness of the business activities

The mergers can be classified as follows on the

basis of relatedness of the business activities:

Horizontal merger
A merger that happens between companies belonging
to the same industry. The companies have businesses in the same space and are
generally competitors to each other. A horizontal merger is a feature of an industry
which consists of a large number of small firms / fragmented industry. The level of
competition is high and the post-merger synergies and gains are much higher for
companies in such industries. The motivation behind such merger is economies of scale
and control of bigger market share.

Vertical merger
A vertical merger is a merger between companies that
produce different goods or offer different services for one
common finished product. The companies operate at different levels in the supply chain
of the same industry. The motivation behind such mergers is cost efficiency, operational
efficiency, increased margins and more control over the production or the distribution
process. There are two types of vertical mergers:
Backward integration
A vertical integration where a company acquires the suppliers of its raw materials.

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Forward integration
A vertical integration where a company acquires the distribution channels of its
products.

Conglomerate merger
This is a merger between two or more companies engaged in unrelated business
activities. The firms may operate in different industries or different geographical
regions. A pure conglomerate involves two firms
that have nothing in common. A mixed
conglomerate, on the other hand, takes place
between organizations that, while operating in
unrelated business activities, are actually trying to
gain product or market extensions through the merger. Companies with no overlapping
factors will only merge if it makes sense from a shareholder wealth perspective, that is,
if the companies can create synergy. A conglomerate merger was formed when The
Walt Disney Company merged with the American Broadcasting Company (ABC).

Congeneric merger
A congeneric merger is also known as a Product Extension merger. It occurs when two
or more companies operate in the same market or sector with overlapping factors, such
as technology, marketing, production processes,
research and development (R&D), join to form a
new business entity. A product extension merger
is achieved when a new product line from one
company is added to an existing product line of
the other company. When two companies become one under a product extension, they
are able to gain access to a larger group of consumers and, thus, bigger market share.
An example of a congeneric merger is Citigroup's 1998 union with Travelers Insurance,
two companies with complementing products.

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Market extension mergers
This type of merger occurs between companies that sell the same products but compete
in different markets. Companies that engage in a market extension
merger seek to gain access to a bigger market and, thus, a bigger
client base. To extend their markets, Eagle Bancshares and RBC
Cantura merged in 2002.

Other classifications

Besides the above classifications, there are other characteristics of the deals also, that
may further define the types of mergers:

Complementary or supplementary merger

A complementary merger aims at compensating for some limitation of the acquiring
company. The acquisition of target company may be an attempt to strengthen a
‘process’ or enter a new market. A supplementary merger is one in which the target
company further strengthens the acquiring company. The target may be similar to the
acquiring company in this case.

Hostile or friendly merger

A merger can be hostile or friendly
depending on the approval of its directors. If the board of directors and the managers
of the company are against the merger, it is a hostile merger. If the merger is approved
by them, it is a friendly merger.

Arm’s length merger

This type of a merger is a merger that is approved both by the
disinterested directors and the disinterested stockholders.

Strategic merger
A merger of a target company with an aim of strategic holding over
a longer term. An acquirer may pay a premium to target in this
case.

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 STEPS IN A MERGER

There are three major steps in a merger transaction: planning, resolution, and
implementation.

1. Planning, which is the most complex part of the merger process, entails the analysis,
the action plan, and the negotiations between the parties involved. The planning stage
may last any length of time, but once it is complete, the merger process is well on the
way.

More in detail, the planning stage also includes:

 signing of the letter of intent which starts off the negotiations;

 the appointing of advisors who play the role of consultants, examining the strengths,
weaknesses, opportunities, and threats of the merger;
 detailing the timetable (deadline), conditions (share exchange ratio), and type of
transaction (merger by integration or through the formation of a new company);
 expert report on the consistency of the share exchange ratio, for all of the companies
involved.

2. The resolution is simply management's approval first, then by the shareholders

involved in the merger plan.

The resolution stage also includes:

 the Board of Directors calling an extraordinary shareholders’ meeting whose item

on the agenda is the merger proposal;
 the extraordinary shareholders’ meeting being called to pass a resolution on the
item on the agenda;
 any opposition to the merger by creditors and bondholders within 60 days of the
resolution;
 green light from the Italian Antitrust Authority, that evaluates the impact of the
merger and imposes any obligations as a prerequisite for approving the merger.

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3. Implementation is the final stage of the merger process, including enrolment of the
merger deed in the Company Register.

Normally medium-sized/big mergers require one year from the start-up of negotiations
to the closing of the transaction. This is because, in addition to the time needed
technically, there are problems relating to the share exchange ratio between the merging
companies which is rarely accepted by the parties without drawn-out negotiations.

During the merger process, share prices will adjust to the share exchange ratio. On the
effective date of the merger, financial intermediaries will enter the new shares with the
new quantities in the dossiers. The shareholders may trade without constraint the new
shares and benefit from all rights (dividends, voting rights).

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 BANK MERGERS AND THE CRITICAL ROLE OF
SYSTEMS INTEGRATION

Why Bank Mergers Can Fail?

There are numerous examples of unsuccessful bank mergers. One of the most
prominent is Bank of America’s acquisition of mortgage lender Countrywide in 2008,
which cost the bank more than US$40 billion. The merger
turned Bank of America into a big player in the mortgage
market right before the housing bubble burst. Since then, the
bank has suffered massive real estate losses and paid out huge

sums in legal fees and settlements with state and federal agencies.

Some of the major reasons why bank mergers fail are:

• Poor cultural fit. If the merging banks are not able to overcome differences in their
work cultures, the merged unit cannot function well as one entity.

• Poorly managed integration. Systems integration is a crucial factor that must be

addressed very carefully. A failed effort can have a cascading effect on customers, as
well as statutory and regulatory reporting — leading to confusion and potentially
irreparable damage to a bank’s reputation.

• Failure to set the pace for integration. The pace of integration of the merging banks
needs to be planned meticulously and carried out quickly and efficiently to avoid the
possibility of losing focus over time.

• Incomplete and inadequate due diligence. Due diligence by both bank businesses is
critical in determining if the merger will actually yield beneficial results.

• Failure to engage IT teams. Many bank mergers have failed because IT teams have
been brought into merger activities too late — compromising business continuity.

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Why Systems Integration is Crucial?

Any glitches or disruptions to business processes during a merger can have adverse —
sometimes disastrous — effects on a bank’s reputation, including loss of
customer trust and, as a result, lost business for the banks. The role
that systems integration plays in assuring business continuity
during and after mergers is critical — involving the integration of
infrastructure components such as data centers, operating
platforms and enterprise applications, and alignment of IT and business strategies of
the merging institutions. Although the integration process normally takes two to three
years post-merger, the impact of problems — loss of profitability and cost-efficiency,
for instance — can last well beyond this period.

Due Diligence and Planning

When it comes to bank mergers, the most important success factor is assuring the
functionality of the IT infrastructure, which directly affects the customer experience.
Hence, it is imperative that bank CTOs are involved in the planning of merger activities,
including performing due diligence of both entities’ IT landscape.

There are various scenarios related to the merging of IT infrastructures: • The IT system
of the principal entity is found to be robust, and can support the business of the merging
bank.

• The IT system of the merging entity is found to be robust, and can support the business
of the principal bank.

• The merged entity’s IT infrastructure is a combination of both institutions’ systems

environment — the goal being to take maximum advantage of both. This is helpful
when the business areas of both banks are different and the IT products are customized
to suit each one’s requirements.

• A new systems infrastructure offers all the necessary services to the customers of the
merged entity.

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To help ensure a successful merger from an IT perspective, the following
points must be considered:

• Is it better to select one of the existing IT landscapes, or opt for an altogether new IT
environment? The first approach will require less time and effort, since at least some
users will be familiar with the systems. Also, the expertise is already there, and can be
leveraged in the merger process to help save time and costs.
• The selection process should take into account the application group that best serves
the required functionalities — its cost; its training requirements; whether data from
other applications to be phased out can be successfully migrated to these systems; and,
finally, the degree of flexibility the application set offers for future requirements.
• The merging bank might have certain applications that are indispensable to sustaining
a competitive advantage. A robust IT architecture should be flexible enough to
incorporate those systems.
• The duration of any systems integration effort is an important consideration. The
longer it takes for it to happen, the longer the merged entity must bear the cost of
managing two separate infrastructures. At the same time, rushing such an undertaking
can be counterproductive. Sufficient time should be allotted to achieve goals of the IT
merger.

In the scenarios outlined above, the primary objective is to have a single IT environment
that is used by all employees of both banks, since the use of a single IT landscape further
strengthens the cultural integration of the merged institutions. Such an infrastructure
can be a combination of the applications from both of the merged banks

The main aim of an IT integration program is to make it as seamless as possible so that

customers are not inconvenienced. Hence, when performing IT due diligence, CTOs
must assure that all interfaces and delivery channels are thoroughly assessed.

Finally, the decision to take a particular IT path must take into account the following:
• The license fees and cost of the required infrastructure.
• The quality of data in the existing systems and the possibility of migrating that data
to the IT environment that will serve the merged entity.
• The time required to migrate data from one system to another, without impacting
regular business hours.
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• The training required for users.
• The extent to which the customer experience will be affected post-merger.

Execution

For banks, the systems integration process should involve the following steps:

• Creating the IT infrastructure that is finalized for the merged entity.

• Planning and imparting training to users who will be operating the new IT
environment.

• Data and product mapping of the merging entities to the new system.

• Identifying the time window when the actual migration will take place — preferably
over a weekend or an extended weekend — to ensure business continuity.

• Testing the migrated data before go-live and arriving at a go/no-go decision.

• Ensuring that all delivery channels are functional post-migration.

• Updating business-continuity and disaster recovery plans for the merged entity.

• Ensuring regulatory, statutory and legal compliance. Customer communication is a

key part of the systems integration process. In most IT integration activities, customers’
contact and account information, login IDs and passwords undergo some type of
change. The best way to handle this is to convey those changes to customers in advance.
The timing of these communications is of utmost importance, and must be determined
early on.

The actual process of integrating systems must have checks scheduled at regular
intervals to ensure that the infrastructure is ready for deployment, the users are
sufficiently trained to handle the new system, the migrated data is correct, all reports
are being generated, and all the delivery channels are operational post-migration. It is
equally important that customers and end-users have all the information they need to
use the banking services as usual, without interruption.

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 BENEFITS OF MERGER

A merger occurs when two firms join together to form one. The new firm will have an
increased market share, which helps the firm gain economies of scale and become more
profitable. The merger will also reduce competition and could lead to higher prices for
consumers.

The main benefit of mergers to the public are:

 Economies of scale

This occurs when a larger firm with

increased output can reduce average
costs. Lower average costs enable
lower prices for consumers.

Different economies of scale

include:

 Technical economies; if the firm

has significant fixed costs then
the new larger firm would have lower average costs,
 Bulk buying – A bigger firm can get a discount for buying large quantities of raw
materials
 Financial – better rate of interest for large company
 Organisational – one head office rather than two is more efficient

A merger can enable a firm to increase in size and gain from many of these factors.

Note, a vertical merger would have less potential economies of scale than a
horizontal merger e.g. a vertical merger could not benefit from technical economies
of scale. However, in a vertical merger, there could still be financial and risk-
bearing economies.

Some industries will have more economies of scale than others. For example, a car
manufacturer has high fixed costs and so gives more economies of scale than two
clothing retailers. More on economies of scale.

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  International competition

Mergers can help firms deal with the threat of multinationals and compete on an
international scale. This is increasingly important in an era of global markets.

 Mergers may allow greater investment in R&D

This is because the new firm will have more profit which can be used to finance risky
investment. This can lead to a better quality of goods for consumers. This is important
for industries such as pharmaceuticals which require a lot of investment. It is estimated
90% of research by drug companies never comes to the market. There is a high chance
of failure. A merger, creating a bigger firm, gives more scope to tolerate failure,
encouraging more innovation.

 Greater efficiency

Redundancies can be merited if they can be employed more efficiently. It may lead to
temporary job losses, but overall productivity should rise.

 Protect an industry from closing

Mergers may be beneficial in a declining industry where firms are struggling to stay
afloat. For example, the UK government allowed a merger between Lloyds TSB and
HBOS when the banking industry was in crisis.

 Diversification

In a conglomerate merger, two firms in different industries merge. Here the benefit
could be sharing knowledge which might be applicable to the different industry. For
example, AOL and Time-Warner merger hoped to gain benefit from both the new
internet industry and an old media firm.

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Examples of mergers

2017 – Amazon merger with Whole Foods. Amazon

has knowledge and expertise in online shopping. Whole
Foods is a major food retailer. It is hoped the merger
will enable Whole Foods to benefit from Amazon’s
existing infrastructure and online delivery.

2000 Glaxo Wellcome Plc and SmithKline Beecham Plc –

became GlaxoSmithKline. Hoped larger firm more powerful
in developing R&D.

2014 Facebook – WhatsApp

2016 Microsoft acquired LinkedIn ($26.2 billion)

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THE RISKS ASSOCIATED WITH MERGERS AND HOW
TO MITIGATE THEM.

When two organisations decide to come together the journey can be

long, expensive and fraught with danger. There are no absolutes
here, each case must be assessed on its own merit, but there are some
important steps to take to ensure the right deal is done without
causing a lot of unnecessary hard work and heartache.
Reactive mergers are poor mergers; and mergers that are managed too slowly often lead
to poor outcomes. Too often a Chair or CEO will have a private chat to a friendly
organisation, follow this up with a bit of “due diligence” designed to come up with the
correct answer, and wham! Two unequal partners, a clunky structure, and a marriage
based on incompatible values.
And we often see mergers that could be done in months, take years. Extended merger
processes, disproportionate to the size of the organisations involved, carry great risk
and add significant burden to senior management and Boards.
The good news is that risks associated with non-profit mergers can be greatly reduced
when organisations:
i) adopt a proactive merger strategy to find the right partner, and
ii) have a clear and proportionate approach to implement the merger.
Inertia is the biggest risk to any successful merger. The tendency of organisations to
proceed in a straight line until gradually grinding to a halt can easily be avoided simply
by adopting a proactive merger strategy.
Before you start, be very clear about what you want to achieve, and then thoroughly
explore your options. Do not settle for the first partner who comes your way, and stay
open minded about other forms of collaboration. Your service users may gain as many
benefits from entering a Joint Venture, Alliance or Consortia, as from a merger.

Ask yourself the following basic questions.

• Where are we going?
• What are our objectives?
• Can a partnership get us there quicker?
• Are we being proactive to find the right partner?

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• Is this in the best long-term interests of our Service Users?
• Do we share the same values?
If the answers are yes, move on to planning and Due Diligence. This is often easier in
the charity sector because there is typically no money changing hands. After an initial
assessment to make sure there are no ‘show-stoppers’ (such as pension crystallisations),
and the governance documents of both organisations permit merger, you can progress
to Due Diligence proper. You can sum this up with two questions: “What is going to
make this deal work?” And “How do we test that?” The answer to the former will take
some thought, while the latter is frequently a matter of experimentation.
Before getting married, a couple can do a lot worse than take a two-week holiday
together. If they survive a fortnight in the Algarve, they can survive pretty much
anything life throws at them. So before taking the plunge with a merger, try the
relationship out. Run a small joint venture to see how both sides react, how they
interface, how problems are solved and how compatible you really are.
Assuming you pass the Algarve test, hone your vision of the merged organisation by
creating a clear and compelling narrative. This will serve you well as you are likely to
repeat it at many meetings during the process.
Use specialist advisers to help you refine the business case and advise on Governance,
Branding, Management, Staffing, Planning and Budgeting. Let them answer the
difficult questions – this is what they do best – and leave yourself clear to focus on
influencing and negotiation.

Common challenges
Prepare to address the most common risks, barriers and objections head on. Some of
the most common challenges you will face are:
 Building Trust:
If trust is not present from day one, it must develop very quickly. Encourage everyone
to be open about any concerns right from the start. Values and Cultural differences: If
you do not share the same values, the deal is likely to be problematic. Understand each
other’s culture and tackle fundamental differences right from the start. Create a new
culture based on the shared values of the two businesses and decide what you need to
do for the culture to survive long term.
 Fear of losing identity and independence:

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People can be very uncertain, especially at the start, so create an agreed and compelling
shared vision to act as a guiding light throughout the process. Once the merger has taken
place these concerns melt away very quickly. Self-interest of Trustees and Staff: Do
not underestimate peoples’ personal stake in the organisation. Identify senior peoples’
personal and emotional attachments and discuss how to mitigate these up front. Your
specialist advisers can help you here.
 Failures in planning and process:
Create a realistic and achievable plan and process, and keep it under review. If
momentum is lost the process can quickly become destabilised. Make sure there is a
compelling business case: The merging organisations must have complimentary or
similar activities, which result in added-value when brought together.
 Opposition to the concept:
Engage your most senior and influential opponents into the process as soon as possible.
They will not go away, so need to become converts.
 Cost and Resources:
Set a realistic budget, time and staffing plan. Ring-fence the resources necessary to plan
and implement the merger.
 Leadership:
Appointing the CEO at the end of the process creates two distracted CEOs during the
process – CEO’s who should be focused on managing the merger. This leadership gap
is one of the common reasons deals fail, so it’s better to have one highly motivated
CEO to drive the project through right from the start.
 Inability to integrate systems:
Integrating systems and processes post-merger is crucial. Failure means you are
unlikely to realise the full benefits of the merger.
 Poor appointments:
Don’t fall into the trap of appointing internal staff to positions that are unsuitable. Your
specialist adviser should make the difficult decisions. They will be more dispassionate
and pragmatic.

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Tips to create an efficient process
Mergers can be fast moving and confusing. There’s a lot to manage and communicate,
while trying to keep people focused on the day job. Here are some ways you can make
the process as painless as possible.
 Involve the Board Chair:
Early discussion is essential. Unless the board chair is willing to discuss a potential
merger there is little chance of success.
 Inform other Trustees:
Agree with the Chair how and when to involve the trustees. Make sure you have the
vision and narrative in place, to secure interest and confidence.
 Elicit Trustees’ concerns:
Both boards must be fully committed. Get an early feel for the issues and concerns and
make sure risks and deal-breakers are fully understood by both parties. Discuss these
and set up a risk register from the beginning.
 Be clear about leadership:
Nobody should be in any doubt about who is leading, and everyone involved needs to
be clear about the terms of reference of the joint steering group of trustees or other
management teams engaged in the process.
 Address capacity and cost issues:
Assess the time and funding implications, as trustees will want to know this. Budget
for specialist advice and draw on it at key moments to minimise the risks.
 Establish a joint steering group:
Mergers involve a lot of work, and those leading the process must have the skills and
energy to maintain momentum. Involve supporters and potential naysayers in the
steering group, to ensure relevant concerns are aired and addressed. Make sure the
communication process keeps Board members not involved in the steering group
informed.
 Involve Specialist Advisers early on:
Particularly helpful for addressing complex, awkward or politically charged issues, you
will need specialist advice on mergers and possibly on HR, Pensions, IT, and
Regulation.
 Be proportionate:

23
Trustees will be concerned about risks, but keep these in proportion. Compare the time
and energy involved in the merger to the benefits you plan to accrue.
 Future governance arrangements:
There will be winners and losers, but do not get drawn into protracted decision making
arrangements for purely short-term tactical reasons.
 Celebrate past achievements:
Celebrating past successes of both organisations is a good tactic to keep people onside.
It reduces resentment and creates less resistance.
 Reassure leavers about continued service provision:
Reassure those on their way out about the continued commitment to the services they
particularly valued.
Einstein’s advice to make things “as simple as possible but no simpler” is a salutary
reminder for the charity Board thinking about a merger journey.
A merger needs to be well managed, with clear leadership at Board level and executive
support right for the start. It needs a clear project plan, regular engagement and
communication to key stakeholders and a due diligence process that is both
comprehensive and proportionate.
Make the merger a project for a suitably experienced trustee with a small, empowered
decision-making group from both sides, and make use of specialist advisers. Mergers
can be fast moving and unpredictable. They require clarity of purpose, flexibility and a
willingness to make fast decisions. You probably won’t have the luxury of using
quarterly board meetings for decision-making, so think carefully about a process of
governance that aligns with your organisation.
And if you don’t have the right trustee in place, recruit one.
Finally, remember that inertia is as big as risk to your organisation’s survival as it is to
a merger. Perfectly reasonable men and women do not oppose progress because they
disagree with progress. It’s because our nature is to find comfort in the place we are
right now. As the funding climate changes dramatically, the not-for-profit sector has no
option but to find new ways to do things.
The private sector always seeks to grow in two ways, organically and by consolidation.
As not-for-profit leaders we should stir our people out of any inertia and invite them to
explore the possibilities of transforming our organisations through collaborative
growth.

24
 PROS AND CONS OF MERGERS

A merger involves two firms combining to form one larger company; it can occur due
to a takeover or mutual agreement.

The pros and cons in summary:

Advantages of mergers

 Economies of scale – bigger firms more efficient

 More profit enables more research and development.
 Struggling firms can benefit from new management.

Disadvantages of mergers

 Increased market share can lead to monopoly power and higher prices for consumers
 A larger firm may experience diseconomies of scale – e.g. harder to communicate and
coordinate.

When looking at mergers it is important to look at the subject on a case by case basis
as each merger has different possible benefits and costs – depending on the industry
and firms in question.

Pros of mergers

 Network Economies

In some industries, firms need to provide a national network. This means there are very
significant economies of scale. A national network may
imply the most efficient number of firms in the industry
is one. For example, when T-Mobile merged with
Orange in the UK, they justified the merger on the
grounds that:

“The ambition is to combine both the Orange and T-Mobile networks, cut out
duplication, and create a single super-network. For customers it will mean bigger

25
 network and better coverage, while reducing the number of stations and sites – which
is good for cost reduction as well as being good for the environment.”

 Research and development

In some industries, it is important to invest in research and development to discover

new products/technology. A merger enables the firm to be more profitable and have
greater funds for research and development. This is important in industries such as drug
research, where a firm needs to be able to afford many failures.

 Other economies of scale

Two smaller firms producing Q2 would have

average costs of AC2. A merger which led to a
firm producing at Q1 would have lower
average costs of AC 1.

The potential economies of scale that can arise

include:

 Bulk buying – buying raw materials in bulk enables lower average costs
 Technical economies – large machines and investment is more efficient spread over
larger output.
 Marketing economies – A tech firm bought by Google may benefit from Google’s
expertise and brand name.
 Examples of economies of scale.

In a horizontal merger, economies of scale can be quite extensive, especially if there

are high fixed costs in the industry. For example, aeroplane manufacture is now
dominated by two large firms after a series of mergers.

If the merger was a vertical merger (two firms at different stages of production) or
conglomerate merger, the scope for economies of scale would be lower.

 Avoid duplication:

Too many bus companies can cause congestion – would one be more
efficient?

26
In some industries, it makes sense to have a merger to avoid duplication. For example,
two bus companies may be competing over the same stretch of roads. Consumers could
benefit from a single firm with lower costs. Avoiding duplication
would have environmental benefits and help reduce congestion.

 Regulation of Monopoly

Even if a firm gains monopoly power from a merger, it doesn’t have to lead to higher
prices if it is sufficiently regulated by the government. For example, in some industries,
the government have price controls to limit price increases. That enables firms to
benefit from economies of scale, but consumers don’t face monopoly prices.

Cons of Mergers

 Higher Prices

A merger can reduce competition and give the new firm monopoly power. With less
competition and greater market share, the new firm can usually increase prices for
consumers. For example, there is opposition to the merger between British Airways
(parent group IAG) and BMI. (link Guardian) This merger would give British Airways
an even higher percentage of flights leaving Heathrow and therefore much scope for
setting higher prices. Richard Branson (of Virgin) states:

“This takeover would take British flying back to the

dark ages. BA has a track record of dominating
routes, forcing less flying and higher prices. This
move is clearly about knocking out the competition.
The regulators cannot allow British Airways to sew
up UK flying and squeeze the life out of the
travelling public. It is vital that regulatory authorities, in the UK as well as in Europe,
give this merger the fullest possible scrutiny and ensure it is stopped.”

 Less choice

A merger can lead to less choice for consumers.

27
 A merger can lead to less choice for consumers. This is important for industries such
as retail/clothing/food where choice is as important as price

 Job Losses

A merger can lead to job losses. This is a particular cause for concern if it is an
aggressive takeover by an ‘asset stripping’ company – A firm
which seeks to merge and get rid of under-performing sectors
of the target firm. On the other hand, other economists may
argue this ‘creative destruction’ of job losses will only lead to
temporary job losses and the unemployed will find new jobs in more efficient firms.

 Diseconomies of Scale.

The new larger firm may experience dis-economies of scale from

the increased size. After a merger, the new bigger firm may lack
the same degree of control and struggle to motivate workers. If
workers feel they are just part of a big multinational they may be
less motivated to try hard. Also, if the two firms had little in
common then it may be difficult to gain the synergy between the two companies

Evaluation – The desirability of a merger depends upon:

1. How much is competition reduced by? E.g. A merger between Tesco and Sainsbury’s
would lead to a significant fall in competition amongst UK supermarkets. This would
lead to higher prices for basic necessities.
2. How significant are economies of scale in the industry? A merger between Tesco
and Sainsbury’s may enable some economies of scale, but it would be relatively low
compared to two oil drilling companies. The fixed costs in oil exploration are much
higher. Therefore, there is more justification for a merger in oil exploration than in
supermarkets.
3. How Contestable is the market? After the merger can new firms still enter or are
barriers to entry sufficiently high to deter new firms?

28
 POSITIVE AND NEGATIVE IMPLICATIONS AND
CONSEQUENCES OF MERGERS

S
Favourable Effects Adverse Effects
No
Overall view
1 The size of each business entity after It will be difficult to precisely
merger is expected to add strength to the assess the impact of mergers in
Indian Banking System in general and quantitative terms, at this
Public Sector Banks in particular. juncture. We must know the
terms of merger, before
embarking on such exercise.
2 Indian Banks can slowly and gradually Nevertheless, this process may
evolve/transform themselves into global take another 5 to 10 years.
banks.
3 After merger, Indian Banks can manage Mergers will result in
their liquidity – short term as well as long shifting/closure of many ATMs,
term – position comfortably. Thus, they Branches and controlling offices,
will not be compelled to resort to overnight as it is not prudent and
borrowings in call money market and from economical to keep so many
RBI under Liquidity Adjustment Facility banks concentrated in several
(LAF) and Marginal Standing Facility pockets, notably in urban and
(MSF). metropolitan centres. Though the
closure or merger of a large
number of branches will not
happen all of a sudden, it is bound
to happen over a period of next 5
years.
4 The number of public sector banks will Mergers will result in immediate
come down, perhaps to 6 or 7, after the job losses on account of large
proposed consolidation of banks. This number of people taking VRS on
will end the unhealthy and intense one side and slow down or
competition going on even among public stoppage of further recruitment
sector banks as of now. While on the other. This will worsen the
professional competition in the market unemployment situation further
place is welcome, unhealthy competition and may create law and order
leads to many unethical practices and problems and social disturbances.
regulatory violations as noticed at present.

The plight of people taking pre-

mature retirement (through VRS
route or otherwise) will turn more
pitiable than being envisaged.

29
5 Even now, public sector banks in India
hold 77% market share. Therefore, the new
banks, after merger, will give the private
sector banks a good run for their money.
6 The volume of inter-bank transactions will
come down, resulting in saving of
considerable time in clearing and
reconciliation of accounts.
7 The burden on the central government to
recapitalize the public sector banks again
and again will come down substantially.
Financial inclusion plans may be
affected and their deadline for
their implementation may be
delayed. ‘Direct Benefit
Transfer’ (DBT) of government
aid, subsidies and grants also will
be affected.
The Head Office of the banks
after merger will be situated at a
far off place, may be more than
thousand kilometres away from
different branches situated at
different corners of the country.
Different banks have different
goals, priorities and business
strategies.

Banks Financial Health

1 For meeting more stringent norms under The weaknesses of the small
BASEL III, especially capital adequacy banks may get transferred to the
ratio, the larger banks need not struggle. bigger bank also. The
amalgamation of Global Trust
Bank with Oriental Bank of
Commerce in 2004 is a case in
point.
S
Favourable Effects Adverse Effects
No
2 Synergy of operations and scale of We cannot prevent lethargy,
economy in the new entity will result in discontentment and conflicts
savings and higher profits. among the staff. To tackle this
problem, many staff-friendly
steps on the H.R. front are
essential.

3 Many controlling offices have to be This may result in data losses on

closed. one side and dilution of control on
the other.

30
4 A great number of posts of CMD, ED,
GM and Zonal Managers will be
abolished, resulting in savings of crores of
Rupee.
5 Similarly, in many banks, the GOI’s
nominee and RBI’s representative on the
bank boards will lose their jobs. This will
not only save considerably huge money,
but reduce their unnecessary interference
in day to day affairs of the banks.
Organisational Climate/Culture
1 Casteism and Provincialism will diminish
to a great extent. A semblance of
cosmopolitan outlook and culture will
unfold.
2 The new organizational entity will be able
to take bold and quicker decisions,
provided there is adequate clarity in
communication coupled with
decentralization and delegation of
authority.
3 Fresh blood and fresh thinking will get
infused in the new entity. Better systems
also may be introduced, to make the work
life of the employees more comfortable
and enjoyable.
4 Individual employees may not get
noticed, even when they are successful,
unless they have a godfather in the
organisation.
Human Resources
1 After mergers, bargaining Banks will be compelled to offer another
strength of bank staff will round of VRS, especially to those above 50
become more and visible. Bank years of age and to those having more than 25
staff may look forward to better years of experience in the same bank.
31
For the top positions of the banks,
whose number will get reduced in
the post-merger scenario, there
will be tough and ugly
competition.
This may loosen the control of
RBI over larger banks. There is
also a likelihood of a large scale
irregularity escaping the
immediate notice of RBI, but
surfacing much later. This will
spoil the reputation and credibility
of individual banks and the
regulator (RBI).
New power centres will emerge in
the changed environment.
Since the number of bank
branches will be large, managing
them may pose greater
challenges. It is estimated that
each bank will have not less than
8,000 branches, after merger.
Mergers will result in clash of
different organizational cultures.
Conflicts will arise in the area of
systems and processes too.
Over-importance given to systems
and procedures will result in
absence of human touch in each
and every function of the new
entity.
 wages and service conditions in
future.
2 Though VRS this time may not
be a ‘golden handshake’ like the
one offered in 2001, it will
definitely be a better offer than
the ordinary VRS now available
under pension regulations.
3 The wide disparities between the
staff of various banks in their
service conditions and monetary
benefits will narrow down.
4 As the network of branches, after
mergers, will be evenly
distributed across the country,
the threat of transfers to far off
places will diminish for officers
up to MMGS III.
5 Banks can spend more money
and other resources, for the
training and development of
their employees and officers.
6 Employees will get wider
exposure in the changed
environment and new
opportunities will open up for
them.
S
Favourable Effects
No
Trade Unions
1 Trade Unions will have more
numerical strength in the new
organisation.
2 Trade Unions will be flush with
funds.
Banks will lose thousands of talented and
experienced personnel at a time, resulting in
serious crisis at the middle and senior
management levels.
People working in the larger bank (acquiring
bank) will try to dominate the personnel
working in the smaller bank (acquired
bank). Thus, the latter will be treated as
second class citizens in the new, merged
entity.
Staff identified as surplus in many pockets
(urban and metros) will be transferred to far
off places. This will create turmoil and
widespread protests. It will take minimum 3
years for the disturbances to subside and for
the peace to return in the new organizational
space.
Promotional avenues for staff after merger
will come down. In promotions, the staff of
the acquiring bank will have a lion’s share,
leading to strong discontentment, rivalry and
open disputes.
Too much dependence on more sophisticated
technology will result in loss of human
values.
Adverse Effects
The trade union leaders will become more
arrogant and self-centred.
Many Trade Union leaders will lose their
prominence and even positions, in the new
set up.
32
3 In the Trade Unions, dominance Representatives of both the officers and
of one section, one linguistic award staff in the old/acquired banks
group and one geographical functioning as Bank Directors will lose
region will come down. their director post.
Customer Services
1 Customers will have access to The customers do not have any say in
fewer banks offering them wider deciding the identity of the bank with
range of products at a lower cost. which their existing bank is going to be
merged.
2 Customer service will improve Initially, the customers of both the banks
vastly due to advanced will find it difficult to deal with new set of
technology, improved systems people, their attitude and style of
and better ambience of bank functioning.
branches.
Monitoring, Regulation &
Control
1 From regulatory perspective, For 2 years from the date of merger, several
monitoring and control of less problems will crop up in the area of
number of banks will be easier reconciliation of accounts, updation of
after mergers. This is at the records etc. Especially in Suit Filed
macro level. Accounts, SARFAESI/DRT Cases,
Written off Accounts, this problem will be
acutely felt. In the meantime, cases of
fraud,and misappropriation/embezzlement
may also be reported.
2 Larger banks will have more When a big bank books huge loss or
stability and strength, making the crumbles, there will be a big jolt in the
job of the regulator easier. entire banking industry. Its repercussions
will be felt everywhere.
Shareholders
1 The fall in the share price is only After merger, the share price of the merged
temporary and within a few entity will fall immediately.
months, the prices will recover
automatically.
2 The loss on account of decrease The rate of dividend also will diminish
in dividend amount will be soon during the first two or three years following
be made up by appreciation of mergers.
stocks in the market.
General Public
1 After mergers, all public sector There will be some confusion initially. It
banks will be extending all types will be difficult to remember the name of
of services. the banks which have been grouped
together and amalgamated.
2 While deposit interest rates may Poor people will hesitate to step into bank
go up marginally, loans may premises that wear rich looks and display
become cheaper. posh furniture. Fully air-conditioned
branches will increase exponentially.

33
 CASE STUDY

Bank consolidation: 5 mergers from the past

The SBI merger with associate banks is the latest instance of PSU bank merger in
India.

Mumbai: This is not the first time that the idea of merging state-owned banks has
gained momentum. In his path-breaking 1991 report on banking sector reforms, M.
Narasimham, a former Reserve Bank of India governor, had recommended mergers to
form a three-tier structure with three large banks with international presence at the top,
eight to 10 national banks at tier two, and a large number of regional and local banks at
the bottom. Later, the P.J. Nayak Committee had also suggested that state-run banks
should either be merged or privatized. Indeed, according to Indian Banking Association
data, there have been at least 49 mergers since 1985. Here’s a quick look at five of
them:

SBI merger with associate banks and Bharatiya Mahila Bank (2017)
As the largest lender, State Bank of India was
already designated a systemically important
institution. It just became bigger this April
after swallowing five associates and the
Bharatiya Mahila Bank. The merger helped
SBI gain a spot among the top 50 banks
globally. However, as the June quarter results how, bad loans have now climbed to
almost one-tenth of its loan book. The overall picture of the impact of merger will
become clearer in the coming quarters.

State Bank of India and State Bank of Saurashtra (2008)

This was the first of the seven mergers between SBI and its associate banks. After the
banking sector was opened to foreign banks in 2009, consolidation of SBI with
associates was actively considered in order to increase its competency vis-à-vis entry
of foreign banks.

34
Bank of Saurashtra was chosen first as it was fully owned by SBI, was smaller than
other associates and it would enhance SBI’s limited presence in Saurashtra region.

Oriental Bank of Commerce (OBC) and Global Trust Bank (2004)

This one was a shotgun merger like many bank mergers have been in India. It was
proposed in order to protect
the interests of the depositors
of GTB. The bank had
suffered massive losses and
its net worth wiped off. The
merger allowed OBC, a
public sector bank to expand in south India and gain a million depositors. However,
profits took some beating and capital adequacy fell on account on higher provisioning
for non-performing assets.

Bank of Baroda (BoB) and Benares State Bank Ltd (2002)

This was another bailout in the form of a merger. BoB bailed out the Uttar Pradesh-
based private sector lender which had been
incurring losses. A 20 October 2001 Business
Standard report said the government was in favour
of liquidating the insolvent banks, however, the
merger was initiated keeping in mind upcoming state elections in Uttar Pradesh. BoB
gained 105 branches and a small customer base. The deal did not bring any significant
benefits to the public sector lender.

Punjab National Bank (PNB) and New Bank of India (NBI) (1993-1994)
This was the first ever merger between two nationalized banks. NBI, nationalized in
1980, was loss making and its capital and deposits had
eroded. The bank had a loan book of close to Rs1,000
crore compared to PNB’s Rs12,000 crore. Also, this was
a case of a stronger bank protecting a weaker one.

35
As a result of this merger, some employees of NBI were found surplus who were shifted
to various PNB branches. These transfers were challenged by the All India New Bank
of India Employees Federation and NBI Employees Union in the Allahabad high court.

When SBI, associate banks merge

The government has set the date for the record merger of the State Bank of India
with its five associate banks on April 1, 2017. The five associate banks are the
State Bank of Bikaner and Jaipur (SBBJ), the State Bank of Mysore (SBM), the
State Bank of Travancore (SBT), the State Bank of Hyderabad (SBH) and the State
Bank of Patiala (SBP).

Initially, SBI had seven associate banks — two of them, the State Bank of Indore
and the State Bank of Saurashtra, were merged earlier.

What’s the big deal?

No Indian bank features among the top 50 banks globally. With the huge financing
needs that the country faces, infrastructure in particular, size is important. With the
merger, the SBI could break into the list of top 50 banks of the world, in terms of
asset size.

The merged entity will have one-fourth of the deposit and loan market, as the SBI’s
market share will increase from 17% to 22.5-23%. SBI chairperson Arundhati
Bhattacharya recently said the consolidated balance sheet of the merged entity
would be ₹32 lakh crore from ₹23 lakh crore now. The merged entity would have
deposits worth ₹26 lakh crore and nearly ₹18.76 lakh crore worth advances on its
books.

The business mix of the five associate banks is around ₹10 lakh crore, which is
almost equal to the size of the second largest bank of the country, Punjab National
Bank. So, the distance between the SBI and the second largest bank, PNB, will
increase further and the latter will be one-fourth of the SBI. The merged entity
would have close to 24,000 branches and an employee strength of 2,71,765.

36
What will happen to shares?
From April 1, all shares of these associate banks will cease to exist as individual
entities and will be transferred to the SBI.

The SBBJ, the SBM and the SBT are listed entities, while the SBH and the SBP
are unlisted. According to the share-swap ratios announced last August, SBBJ
shareholders will get 28 shares of SBI for every 10 shares. Investors in the SBM
and the SBT holding 10 shares will get 22 SBI shares each.

The merger will also mean that all SBI associate bank customers will become SBI
customers and all associate bank employees will become SBI employees. So, all
associate bank employees will be eligible for the same retirement benefits as SBI
employees. SBI employees get three retirement benefits (provident fund, gratuity
and pension), while associate bank staff members get two retirement benefits.

What does it mean for banking?

The merger of associate banks with the SBI kicks-starts the long pending
consolidation exercise among public sector banks, but the bigger question is
whether a similar move will be successful between other state-run banks.

The merger of weaker banks with stronger banks was mooted by the BJP
government at the Centre during the first edition of bankers’ retreat — Gyan
Sangam — in 2015, but the plan faced opposition from bankers, who claimed the
time was not ripe since the balance sheets of all public sector banks had weakened
by a sharp rise in non-performing assets. At the next bankers’ retreat, the
government was keen on pushing through consolidation as it planned to identify
six to eight anchor banks which would lead the exercise. Recently, the newly
appointed Deputy Governor of the Reserve Bank of India, Viral Acharya, revived
consolidation talks and said the banking system would be better off if there were
fewer, but healthier, public sector banks.

“As many have pointed out, it is not clear why we need so many public sector
banks,” he said in his maiden address to bankers.

Mr. Acharya suggested that voluntary retirement schemes be offered to manage

the headcount and usher a younger, digitally savvy talent pool into these banks.

37
Amid consolidation talks, preparations are on for the third edition of Gyan
Sangam. While further consolidation among public sector banks is on the agenda,
it is not clear whether it will remain at the discussion stage or the government will
be able to move forward with some concrete action.

'Customers benefit with the subsidiaries’ merger with SBI'

Interests are lower by 0.5 percent to 1 percent in the SBI on all types of loans.

State Bank of Travancore (SBT), the only public sector bank

head-quartered in Kerala, was established in 1945 as the
Travancore Bank Ltd. It became a subsidiary of State Bank
of India (SBI) under the SBI Subsidiary Banks Act, 1959,
enacted by the Parliament. Its newly appointed Managing
Director C.R. Sasikumar spoke on the benefits of the proposed merger of the five
subsidiaries, including SBT, with SBI.

What is the rationale behind the merger of SBI’s subsidiaries with

the parent?

It is generally accepted that the multiplicity of about 27 Banks in the Public sector,
which contributed to the growth of the economy from the ‘70s has not been able
maintain the growth trajectory in recent times. Despite having many Banks in the
Top 1000 Banks in the world, none of the Indian Banks is in the Top 50 Banks of
the world.

As part of larger plan orchestrated by the government, the acquisition of Associate

Banks by the parent State Bank of India is the first in the series of steps being
kicked off to have 4-5 large Banks in the country which will be among the Top
100 Banks of the world.

The customers stand to gain when the SBT merges with the SBI. Interests are lower
by 0.5 percent to 1 percent in the SBI on all types of loans. The SBI is also far
ahead in facilities including internet banking and mobile banking.

Once the SBI moves into a new technology, it takes one or two years to introduce
that same technology to the SBT. We would not have to wait any longer. If a
38
customer has accounts in both the SBI and the SBT, the accounts will be brought
under the same identification number. The Reserve Bank of India has directed that
two accounts in the same bank should be integrated.

If customers benefit, why is there opposition to this?

SBT is no doubt a household name in the state and people have a sentimental
attachment to it. But it must not be forgotten that four-fifths of
SBT is owned by SBI and officials from SBI have led SBT for
decades. The acquisition is only a technical one, as the group
runs on common technology platform, have similar policies,
processes and procedures. In my view, apprehensions about
the merger in the minds of the people are more an emotional response than a
rational one.

Post-merger, what would be the size of the merged entity?

The proposed merger of five small banks with SBI will raise our market share by
about 5 per cent, which will make the merged entity 3 times bigger than the nearest
competitor. Several duplicated costs which persist today will be reduced as well as
repetitive cost will also come down.

The merger will result in the new banking behemoth with assets worth Rs 37 lakh
crores – one-fifth the size of India’s GDP.

SBI was at rank 52 in the world in terms of assets in 2015, according to Bloomberg,
and this merger will see it break into the top 50. All else remaining the same, the
combined entity would be ranked 45th.

39
Employee unions are against the merger. What do they fear?

There is no need to worry. We will hold talks with employees, shareholders and
major customers as soon as we receive the permission for the
merger.

The merger will be done only after protecting their interests.

We will decide on the deployment of employees before
identifying the branches to be closed down. We will retain all
1,700 ATMs in the state. Of the 1,177 SBT branches, about 800 are situated in
Kerala. About 25 per cent employees are working outside Kerala. The merger is
not expected to hit any technical glitches because we use the same accounting
software. We are only left with minor things like changing the accounts and boards.
Two branches in the same location will have to be integrated. Their audit is yet to
start.

In the earlier merger of two subsidiaries of SBI, what benefits were

seen?

The previous mergers were smooth as the technology platform was the same and
employee interests were also taken care of.

The RBI is taking steps to curtail NPAs. Is it helping?

The Reserve Bank of India (RBI) on Monday allowed banks to conduct deep
restructuring of large accounts to revive projects that can be saved, effectively
throwing a lifeline to promoters who risked losing their companies. In short, only
those promoters, whose companies contribute to stressed assets of banks, and who
have shown no malfeasance in their actions while running the show, can ask for
the permission to continue with the management, even if they get reduced to
minority shareholders in the process of restructuring.

The two sectors which would benefit are steel and power.

Some of the completed projects in these sectors were hit by external factors. Deep
restructuring is done to ensure long-term sustenance.

40
The strategic debt restructuring (SDR) scheme was of limited use in such cases.
Under it, banks could convert debt into equity and take control of a company and
sell off the assets. However, if they were not able to dispose of the assets within
18 months, the lenders had to incur heavy provisions.

Why is credit off-take in the country still tardy?

There has been a noticeable slowdown in the demand for credit in

the past couple of years due to the deceleration of the economy.

With green-field investment pipeline drying, fresh demand has practically come to
a standstill. The situation was further aggravated by fast growing segments like
steel and power coming against road blocks like fall in process, regulatory issues
etc.

SBI -Associates Mega Merger: Focus Shifts To People, Jobs And

Technology

The merger involves integrating the role and services of 70,000 staff and 7,000
branches; analysts say the process could take up to three years to complete

The move comes at a time when SBI—like several other state-run banks—is struggling
to cope with rising bad loans. Its net profit for the three months ended March 31, 2016
slumped 66 percent from the year-ago period, due to higher provisioning for bad loans.

Three of the associate banks, SBBJ, SBT and SBM, are listed on the stock exchanges
and investors have cheered the merger move. Stocks of the associate banks moved up
sharply when the cabinet clearance for the move came on June 15, but have retraced
since then, partly due to profit
booking and also due to fears of a
British exit from the European
Union.

SBT stock is up 1.3 percent, SBM up

12.12 percent and SBJJ up 2.4
percent since the merger was
41
approved by the cabinet. SBI’s stock, on the other hand, has shed 1.2 percent in the
period.

There are some very clear long-term benefits from the merger, but it will come with
short-term pain. Cost savings will come from common treasury operations and audits.
Branch rationalisation will also be a medium- to long-term benefit. But there will be
tricky issues which SBI and the government will have to face, relating to integration of
manpower, restructuring job profiles and remuneration to staff.

Some analysts ‘Forbes India’ spoke to say the merger could be complete in about three
years time. Investors will watch for the share-swap ratio and what SBI will have to pay
to buy out the remaining stake in the associate banks. These details will emerge in about
three weeks. SBI’s associate banks largely operate as independent banks, but
considering that SBI already owns between 75 and 90 percent in these five banks, there
are inefficiencies and overlap of operations, which could lessen with the merger.

The last merger in the SBI group was a small one: Two branches of the State Bank of
India Commercial and International Bank Ltd (SBICI) merged with the parent in 2011.
Prior to this, in 2010, was the much larger merger of State Bank of Indore’s 470
branches with SBI. The latest merger involves integrating the role and services of
70,000 people and about 7,000 branches.

“We would be sceptical about SBI’s ability to rationalise branch network or employee
base immediately given the unionised structure of the employees. On the flip side, SBI’s
cost per employee is significantly higher than its subsidiaries and we would expect an
increase in employee cost post-merger as all the employees would likely push for [pay]
parity,” Santosh Singh and Manjith Nair of Haitong Securities said in a May note to
clients, prior to the merger approval.

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Some employee unions of the associate banks last week opposed the merger decision
and strikes are planned.

But the rumbling by unions does not diminish the need to merge. “There was no best
time to merge. SBI anyway runs these banks, it makes sense [to merge],” says Singh,
who is head of research at Haitong Securities in India. SBI is a preferred bank amongst
the basket of state-owned banks, for Haitong Securities.

Saswata Guha, director of financial institutions at Fitch Ratings in Mumbai believes

that “post merger, SBI’s standalone balance sheet will look like an [earlier]
consolidated balance sheet. The associate banks will get a larger canvas to play around
with.” “It is like inducting your children into your own house,” he says.

“The merger of SBI and its associate banks is a win-win for both. While the network of
SBI would stand to increase, its reach would multiply,” SBI chairman Arundhati
Bhattacharya had said earlier in a statement. “One can expect efficiencies to be created
from rationalisation of branches, common treasury pooling and proper deployment of
a large skilled resource base.” She also said that post merger; the cost-to-income ratio
(a company’s cost of operations in relation to its income) will come down by 100 basis
points in a year.

The merger will obviously create a banking behemoth. Post merger, SBI’s balance sheet
will grow to Rs 37 lakh crore from a standalone Rs 27 lakh crore, according to data
from SBI. It would also push SBI into the top 50 banks in the world (by asset size). At
present, no Indian bank features in this list.

Post merger, SBI would have aggregate deposits of over Rs 21 lakh crore, advances of
Rs 18 lakh crore and a combined net profit of Rs 11,589 crore.

43
How does capital adequacy and asset quality of the associate banks and the parent
match up? What will the merged entity look like? According to Dhananjay Sinha, head
of institutional research, economist and strategist with Emkay Global Financial
Services, at this stage, the associated banks have a better capital adequacy and non-
performing assets (NPA) levels. “The merged entity will look somewhat better,” says
Sinha

“Integration of 70,000 employees [34 percent of the parent workforce; size of business
is 25 percent of the parent’s] will be a key challenge,” an Emkay note to clients says.
But even while the long-term synergy benefits outweigh near-term challenges, Emkay
has kept SBI’s target price of Rs 220 unchanged as earlier, because they valued the
bank on a consolidated basis.

From a valuation perspective, the associate banks stand to gain, based on current trading
multiples. The associated banks are trading at 0.6x their price-to-book value, compared
to 0.9x for SBI, analysts said.

SBI insiders are confident that the parent will gain strength from the merger. “All the
stakeholders will benefit. If they were to continue to operate on their own, they would
find it difficult to invest in technology,” says Neeraj Vyas, deputy managing director,
SBI, who is in charge of associates and subsidiaries.

Vyas is not too concerned about integrating the core banking operations of the associate
banks with the parent. “Core banking operations are about 96 percent common to SBI
and the associates. He said that “some more work” would be required relating to ATMs,
internet and mobile-banking.

The merger process relating to manpower will be trickier, involving integrating

different formulas for pension, superannuation and gratuity, into one system.
“Retrenchment will be there, it is more like trimming the excess flab off,” Vyas says.

Integration of some technology processes, such as SBI InTouch could come with a time
lag for the associate branches.

44
Government and regulatory (Reserve Bank of India) approvals will be required as the
merger process gathers shape and is finalised. The true proof of the pudding would be
when SBI can truly manage to reduce costs and boost employee efficiency across
branches, while expanding digitally. As the government and the regulator push for
further consolidation in the banking system, what the country could do with most at this
stage is fewer but well-managed banks.

What is the impact of the SBI merger on the Indian economy?

State bank of India, the country’s largest lender, in August 2016, approved the merger
of its operations with five of its associate banks. With this, State Bank of Travancore,
State Bank of Mysore, State Bank of Bikaner and Jaipur, State Bank of Hyderabad,
State Bank of Patiala and Mahila Bank stand merged with SBI.

For economy:

 The merger benefits include getting economies of scale and reduction in the
cost of doing business.
 Technical inefficiency is one of the main factors responsible for banking
crisis. The scale of inefficiency is more in case of small banks. Hence, merger
would be good.
 The size of each business entity after merger is expected to add strength to
the Indian Banking System in general and Public Sector Banks in particular.
 After merger, Indian Banks can manage their liquidity – short term as well as
long term – position comfortably. Thus, they will not be compelled to resort
to overnight borrowings in call money market and from RBI under Liquidity
Adjustment Facility (LAF) and Marginal Standing Facility (MSF).
 Synergy of operations and scale of economy in the new entity will result in
savings and higher profits.
 A great number of posts of CMD, ED, GM and Zonal Managers will be
abolished, resulting in savings of crores of Rupee.

45
  Customers will have access to fewer banks offering them wider range of
products at a lower cost.
 Mergers can diversify risk management.

The SBI merger result in job cuts?

As proposed last year by the SBI Board, the largest lender of the country is soon going
to subsume the five associate banks in its fold since the Finance Ministry has also
approved of the same. This is going to create a combined entity that is going to have a
balance sheet size of Rs 37 lakh crore and an employee base of around 3.25 lacs. The
number of branches is expected to touch around 19000 in India and abroad for the new
entity. This has created a fear in the minds of the employees that many will lose their
jobs due to rationalisation of expenses and operational guidelines. However, both SBI
and Finance Ministry have time and again reiterated that there will be no job loss due
to a merger in the banking sector.

SBI Merger: The Real Picture

SBI is going to become a single entity with all the associate banks as well as Bharatiya
Mahila Bank getting merged into it. It will create a balance sheet of 37 lakh crore for
the combined entity and the real estate price will be 3500 crore to 4500 crore after the
merger. Many are apprehensive about the merger thinking about the duplication of posts
resulting in job loss. However, the scenario is completely different:

 Retirement is going to eat a lot of skilled employees: Well not

literally but if you look at the retirement picture in all these
banks you will see a number close to 15000 retiring every
year creating vacancy and these posts need to be filled up by
the management.

 Recruitment from market will decrease: This is going to be a reality since there will
be surplus staff in the combined entity and this may affect further hiring from the
market. There is a possibility that the vacancy decreased at the PO level for next few
years.

46
 Rationalization of branches: Branches need to be closed down in many areas since
you will see many branches of both SBI and any of the associated bank together at a
place and after the merger, these branches will have to be closed down resulting in
less requirement of staff.

 Customer base will increase and so more staff

required: With the combined entity being the
largest in India, the customer base will increase
as well and serve them a huge number of
employees will be required. However, with
many more employees coming into the SBI fold, no fresh hiring is expected to meet
this demand.

 The SBI brand will attract more customers and more credit growth: With the
combined entity being the largest, it will be able to provide more credit to customers
as well more improved service to them. This can be done using the existing
technology only and no need to do something in this regard.

 There will be challenges at HR level: HR Level challenges will be the biggest ones
due to this merger. They need to create new areas and designations to accommodate
people. They need to come out with
comprehensive VRS package to attract more
employees towards it. HR needs to chalk out a
strategy to close down branches and re-
deployment of staff in other areas. It is not possible
to please everybody but there should be enough on
everyone’s plate so that nobody gets injustice.

The SBI Merger in the short run may decrease the level of recruitment done in the
banking behemoth. It will take at least 1-2 years to sort out things after the merger so
that the management can take a concrete decision regarding employee rationalisation
in the new entity. In the short run, get ready for very few vacancy at SBI but with
retirements coming up, this scenario is going to change very soon as well.

47
SBI Merger To Create Banking Powerhouse
SBI has indicated it wants to complete the merger in 2016-17. While India's largest
lender would reap benefits of scale and a larger balance sheet, it will be a major
challenge to integrate staff and rationalise branches. In the near term, SBI would
concentrate on valuation to finalise the swap ratio for merger. The valuation process
would take about two months, SBI managing director (associates and subsidiaries) V
G Kannan said. SBI Chairman Arundhati Bhattacharya said the merger is a win-win
scenario for both SBI and the associate banks. Not only will the SBI network expand,
its reach would multiply. "The group will get the benefit of efficiencies to be created
from rationalisation of branches, common treasury pooling and proper deployment of
a large skilled resource base," the SBI chief said. A significant aspect of employee
rationalisation will be aligning the pay structures. The associates have a little over
70,000 employees, or 34 per cent of SBI's employee base. While SBI employees receive
pension, provident fund and gratuity, those at associate banks do not receive
contributory provident fund. The actual incremental employee cost will depend on their
internal arrangement and negotiations.

In the recent past, SBI merged two of its erstwhile associate banks with itself - State
Bank of Saurashtra in 2008 and State Bank of Indore in 2010. Former SBI Chairman P
Chaudhuri suggested that one associate bank should be merged with the parent every
year to ensure healthy and smooth integration. Chaudhuri was involved in merger of
State Bank of Saurasthtra with the SBI. Global rating agency Moody's, in its report last

48
month, said the merger will have limited impact on SBI's credit metrics, given that SBI
already fully owns SBH and SBP and has majority stakes in the other three associate
banks. In addition, BMB only started operations in 2013 and accounts for less than 0.1
per cent of SBI's total assets. The implementation of the merger is likely to be
challenged by strong employee unions.

The staff unions of the associate banks went on a one-day strike last month and have
threatened to launch a larger protest in near future. The five associate banks are State
Bank of Bikaner & Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of
Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT). In
the last financial year, only SBP posted a loss, while all others were in profit. SBP had
posted a net loss of Rs 972 crore in FY16, against a net profit of Rs 362 crore in FY15.
SBH posted highest net profit of Rs 1,065 crore in FY16 among the peers. SBI and its
subsidiaries witnessed hectic buying after the Cabinet decision, surging up to 20 per
cent. Shares of SBM jumped 20 per cent to Rs 547.90, SBT zoomed 19.99 per cent to
Rs 478.90 and SBBJ soared 19.99 per cent to Rs 599.60 on BSE. All these banks hit
their highest trading permissible limit for the day on the bourse. The scrip of SBI also
moved up by 3.90 per cent to Rs 215.65.

49
SBI Associate Bank To Offer VRS Before Merger With SBI

State Bank of India BSE 0.04 % (SBI) associate banks have started preparations to
unveil voluntary retirement schemes (VRS) for their employees before the proposed
merger with the parent banks.

State Bank of Hyderabad (SBH) board has approved

the VRS while other associate banks will place the
scheme before their boards in the next few days,
according to two senior SBI group officials.

The VRS in associate banks would help SBI curb in

staff cost escalation after the merger. SBI’s staff expense was Rs 6,853 crore in the
September quarter, rising 11.6% year-on-year. SBI’s pension obligation is estimated to
be around Rs 3,500 crore. This would rise once associate bank employees come under
SBI fold.

SBI has nearly 2.02 lakh employees while its associate banks have a cumulative
headcount of 70,000. SBH, the largest among all the five associate banks, has around
18,000 employees. State Bank of Patiala has around 15,000.

The details of VRS is not known as yet. Sources in the SBI said all associate bank
employees opting for it would get similar benefits. A good chunk of them are likely to
go for VRS as there has been apprehensions across levels about their pecking order
under the State Bank Of India.

Some senior officials have also raised voices against the proposed merger. State Bank
of Travancore BSE 1.27 % chief general manager S Adikesavan has been transferred
to Hyderabad for reportedly questioning the merger process.

The government approved the merger in August while the exercise is likely to be over
by March 2017. The integration of IT platform -- a key aspect to SBI’s merger with

50
associate banks State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank
of Mysore BSE 1.36 %, State Bank of Patiala and State Bank of Travancore – is in the
final stages. SBI chairman Arundhati Bhattacharya earlier said there would be no pay
cut and job loss for associate bank employees after the merger.

At the time of State Bank of Saurashtra and State Bank of Indore's merger with SBI,
there was allegations that fairness was compromised demotivating associate bank
employees.

As on September 30, associate banks cumulatively have Rs 5,21,344 crore of deposits

and Rs 3,92,436 crore in advances. This will get added to SBI’s Rs 18,58,999 crore of
deposits and Rs 14,81,832 crore of advances, making the group's total business nearly
five times of ICICI Bank's business of Rs 9,03,371 crore.

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 MY SUGGESTIONS

 The government shall not have any hidden

political agenda, in bank mergers.

 All stakeholders must be taken into confidence,

before the merger exercise is started.

 After mergers, shares of public sector banks shall not be sold to foreign banks,
foreign institutions and Indian corporate entities, beyond certain limit.

 Whenever further divestment (dilution of government holdings) takes place, the

government shareholdings shall not fall below 51% under any
circumstances. This will ensure that the ownership and control of public sector
banks remain with the government.

 The restrictions on voting rights as existing now must continue, without any
change.

 The central government shall not rush through the process of bank mergers. It
requires a careful study in depth and sufficient time to implement the scheme of
mergers. In my assessment, a 2 year time horizon is reasonable and adequate
for this purpose.

 The decision with regard to selection of smaller/weaker banks for merger with
larger/stronger banks is to be taken carefully and grouping of various banks for
this purpose is the key issue involved. The government shall not yield to
pressure from any political or social groups.

 The acquiring bank shall not attempt to dominate or subsume the acquired
bank. Good aspects of both the banks before merger shall be combined, in order
to instil confidence in all stakeholders and to produce better results.

 Personnel absorbed from the smaller bank (acquired bank) will be required to
undergo brief, intermittent training programs to get acquainted with the
philosophies, processes and technology in the new environment. The

52
 management must be ready with a good roadmap for this and allot considerable
budgetary resources for this purpose.

 In case of shareholders, proper swap ratio (one share of the new entity for so
many shares of the banks before merger) must be fair and acceptable to all.

 The inconvenience and discomfort caused to bank staff shall be kept at the bare
minimum level and job losses/reduction on account of VRS or resignation shall
be factored in on a realistic basis and adequate compensation must be awarded
to those who quit their service, for whatever reasons, after the mergers.

 There shall be conscious and organized efforts to synthesize the differing

organizational cultures, for the mergers to yield the desired results.

53
 CONCLUSION

Globally it has been found that the mergers and acquisition have become one of the
major ways to corporate restructuring which has also struck the financial services
industry which has experienced merger waves leading to the emergence of huge banks
and financial institutions. The main reason for mergers is intense competition among
the companies in the same industry which put focus on economies of scale, efficiency
in cost and profitability. Some other factors leading to the mergers is the 'too big to fail'
principle followed by the authorities. In few countries like Germany, weak banks were
forcefully merged to avoid the problem financial distress arising out of bad loans and
erosion of capital funds. Several academic studies have analysed merger related gains
in banking and these studies have adopted two approaches. The first approach deals
with evaluating the long term performance of the merger by analysing the accounting
information such as return on assets, operating costs and efficiency ratios. A mergers is
considered to have led to improved performance if the change in the accounting based
performance is superior to the changes in the performance of the comparable banks that
were not involved in the merger activity during that period. Another approach is to
analyse the gains in stock price of the bidder and the target company around the
announcement of the merger. In this approach the merger is assumed to create value if
the combined value of the bidder and target banks increase on the announcement of the
merger and the consequent and the stock prices reflect the potential value of the
acquiring banks.

The objective of this paper is to present a panoramic view of merger trends in India and
to ascertain two important perceptions of stake-holders, shareholders and managers and
to discuss dilemmas and other issues of this topic of Indian banking.

Restructuring of weak Indian Banks

Amongst other routes government of India has adopted mergers as a means to achieve
restructuring of the Indian banking system. Many banks which are small in size and are
weak are merged with other banks which are stronger and are larger to protect the
interest of the depositors and also to avoid financial distress. These types of mergers
can be termed as forced mergers. Hence when a banks shows symptoms of sickness
like increasing size of NPAs, reduction in the net worth and substantial decline in

54
capital adequacy ratio, RBI forces moratorium under the section 45(1) of the Banking
Regulation act 1949 for a specified period on the activities and the operations of the
working of the sick bank. In this period a strong bank is identified and asked to prepare
and present a scheme of merger with the weak bank. In this case the acquirer banks
takes hold of all the assets of the weak bank and ensures the depositors of their money
in case they want to withdraw. The mergers which took place in the pre-reform period
fall into this category. In the post reform period 21 mergers have taken place out of
which 13 are forced mergers where RBI has intervened. The main reason for these
mergers was the protection of the depositor's interest and avoids the financial distress.

Mergers which took place voluntarily

Apart from forced mergers there have been few mergers in which expansion,
diversification and growth were the major motives and in which RBI did not intervene
or force. The first merger of this kind took place in 1993 when the Times Bank was
acquired by HDFC bank which was followed by acquisition of Bank of Madura by the
ICICI Bank. The latest of these is merger of Lord Krishnan Bank with Centurion Bank
of Punjab. Although in all these deals the target bank suffered with low profitability,
Increase in NPA and lack of alternate revenues in order to provide cushion for capital
adequacy but these mergers were not forced. There was no regulatory intervention in
these mergers however the motives behind these mergers may not necessarily be scale
of economies and achieving market power. For instance ICICI bank acquired bank of
Russia with a motive of entry in to Russia although it just had one branch. SBI acquired
51% stake in Mauritian Bank through Indian Ocean International Bank which will be
integrated with the State Bank of India's International business as a subsidiary.

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 BIBILOGRAPHY

Websites:

 www.wisegeek.com
 www.allbankingsolutions.com
 www.efinancemanagement.com
 www.economicshelp.org
 www.cognizant.com
 www.thehindu.com
 www.forbesindia.com
 www.business-standard.com

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