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Group Assignment 2
Merger of ING Vysya Bank Ltd. with Kotak Mahindra Bank Ltd.
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Index
Announcement of the merger 2
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1. Announcement of Merger:
On November 20, 2014, Kotak announced the merger with ING Vysya in an all-stock deal worth
of Rs.148.51 billion or US$2.4 billion.
On regulatory approval, all of ING Vysya’s branches and businesses would merge with Kotak.
ING Vysya’s shareholders would get 0.725 share of Kotak stock for every one stock of ING Vysya
they held i.e., 725 shares of Kotak for every 1,000 shares of ING Vysya.
This exchange ratio indicated that the implied price of each stock of ING Vysya was Rs. 790 which
was based on the average stock price of Kotak and ING Vysya for one month – from October 20,
2014, to November 19, 2014 – which came to Rs.1089.50 and Rs.682 respectively.
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2. Introduction of Kotak Mahindra Bank:
Kotak Mahindra Bank is an Indian private sector bank headquartered in Mumbai, Maharashtra,
India. In February 2003, Reserve Bank of India gave the license to Kotak Mahindra Finance Ltd,
to carry on banking business.
Headquarters: Mumbai
Founder: Uday Kotak
Founded: 1985
Subsidiaries: Kotak Securities, Kotak Life Insurance
It offers a wide range of banking products and financial services for corporate and retail customers
through a variety of delivery channels and specialized subsidiaries in the areas of personal finance,
investment banking, life insurance, and wealth management.
Kotak Mahindra Bank has a network of 1,369 branches across 689 locations
In 2017, it is the third largest private bank in India by market capitalization of Rs.191342.91 cr.
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4. Details of the Deals in the Industry in India:
A highly regulated industry, the banking industry has seen very few mergers and acquisitions since
the privatization of the sector.
Traditionally most cases of bank mergers had taken place on the directions of RBI. Its ground was
to merge weak banks with the stronger banks to maintain a balance in the economy. Though not
very high in number, market led mergers and amalgamations have found their way in the banking
sector.
Statistically, since 1961, there have been 81 amalgamations in the Indian banking sector of which
47 had taken place before July 1969 i.e. before nationalization of banks. Out of the 34 remaining
mergers, 26 mergers had occurred between private sector banks and public sector banks and rest
were between two private sector banks. However, ever since the banking sector reforms, pursuant
to the Narasimhan Committee Report, in 1991, there have been 31 mergers / amalgamations in the
banking sector.18
The only mergers that the nationalized banks have seen are that of the merger of the New Bank of
India with the Punjab National Bank in 1993 and the acquisition by State Bank of India of State
Bank of Saurashtra19 and State Bank of Indore20 in 2008 and 2010 respectively.
One of the most contentious mergers in the private banking space was the acquisition of Bank of
Madura by ICICI Bank Limited in March 2001. While the merger enabled ICICI to expand its
branches, it assumed several liabilities as Bank of Madura had very high non-performing assets.
On the other hand, for the economy, the burden of one weak bank had reduced.21
Another important merger that resulted in many benefits to the merged entity was the merger of
HDFC Bank and Centurion Bank of Punjab in 2008. The resultant merged entity inherited a huge
asset base along with a wide network of branches. The other synergy included sharing of the varied
clientele of both the banks.22
The merger at hand which is being promoted as one beneficial to both the banks, comes after a 5
years long break in M&A activity in the banking sector. The last such merger was that of Bank of
Rajasthan with ICICI Bank in 2010.
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Sr. No. Year of Objective of the acquisition
Acquiring bank Acquired bank
acquisition
1. Bank of Baroda Vijaya Bank, Dena Bank 2019 To strengthen banking sector
2. Bhartiya Mahila bank operational efficiency and
(BMB) synergy of operations
State Bank of Bikaner and
Jaipur (SBBJ)
State Bank of Hyderabad
(SBH)
State bank of India
State Bank of Mysore 2017
(SBM)
State Bank of Patiala
(SBP)
State Bank of Travancore
(SBT)
3. Kotak Mahindra …………..
ING Vysya bank 2014
bank
4. ICICI bank Bank of Rajasthan 2010 Expansion of size
5. Expansion of size and benefits
HDFC bank Centurion bank of Punjab 2008
of scope economics
6. Indian overseas bank Bharat overseas bank 2007 Restructuring of Weak Bank
7. Ganesh bank of Restructuring of Weak Bank
Federal bank 2006
Kurandwad
8. Industrial Restructuring of Weak Bank
development bank of United western bank 2006
India
9. Centurion bank of Expansion of size
Lord Krishna bank 2007
Punjab
10. ICICI bank Sangli bank 2006 Expansion of size
11. To achieve scale and scope
Bank of Punjab Centurion bank 2005
economics
12. Expansion of size and benefits
IDBI IDBI bank Ltd. 2004
of scope economics
13. South Gujarat local area Restructuring of Weak Bank
Bank of Baroda 2004
bank
14. Oriental bank of To achieve scale and scope
Global trust bank 2004
commerce economics
15. Punjab national Bank Nedungadi bank ltd 2003 Restructuring of Weak Bank
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16. To achieve the objective of
ICICI bank ICICI ltd 2002
universal banking
17. Bank of Baroda Banaras state Ltd bank 2002 Restructuring of Weak Bank
18. To achieve scale and scope
ICICI bank Bank of Madura 2001
economies
19. To achieve scale and scope
HDFC bank ltd Times bank ltd 2000
economies
20. Bank of Baroda Bareilly co-op ltd 1999 Restructuring of Weak Bank
21. Union bank of India Sikkim bank Ltd 1999 Restructuring of Weak Bank
22. Oriental bank of Restructuring of Weak Bank
Bari doab bank ltd 1997
commerce
23. Oriental bank of Restructuring of Weak Bank
Punjab co-op ltd 1996
commerce
24. State bank of India Kashinath state bank 1995 Restructuring of Weak Bank
25. Bank of India Bank of Karad ltd 1994 Restructuring of weak bank
26. Punjab national bank New bank of India 1993 Restructuring of Weak Bank
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5. Mergers and acquisitions in Banking industry around the world:
The trend towards banking consolidation, mainly cross-border mergers and acquisitions is moving
unavoidably ahead and key deals show to indicate a fundamental shift in the evolution of mergers
and acquisitions. It is the beginning of a new phase in banking structures, both in domestic and
global market. Cross-border banks deals have been evolving over recent years and have at this
time reached a take-off stage as the center of gravity of global finances shifts to accommodate the
growing wealth of China, India and the Gulf country along with other emerging economies across
the world. Banking sector has played a vital role in the overall economic development of this
country right from the time of nationalization. Due to globalization the Indian banking sector has
been facing keen competition from the foreign banks. The Reserve Bank of India (RBI), which is
equally protective of the Indian banking industry, has been already sounded a note of warning to
the foreign banks who suppose easier entry and takeover norms by 2009. The old and new private
sector banks will be prime targets after foreign banks are allowed to launch predatory forays in
Indian banking sector. The world is changing significantly and moving away from a US-centric
focus. Last October China’s bank, Industrial and Commercial Bank of China (ICBC), in a
landmark $ 5.6 billion deal, acquired a 20 per cent stake in South Africa’s Standard Bank. In India
a cross border M &A, The State Bank of India (SBI) acquired majority stakes in an Indonesian
bank Indo Monex. In another case SBI has acquired Mauritius based Indian Ocean and Kenya
Based GIRO Commercial Bank both in 2005
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6. Valuation of the Deal:
Transferee Bank: Kotak Mahindra Bank Limited
Transferor Bank: ING Vysya Bank Limited
Mode of Transaction: The deal was entirely carried out through a single scheme of amalgamation
merging ING Vysya into Kotak. The merger was carried out in accordance with Section 44A of
the Banking Regulation Act and the Merger Guidelines.
Kotak Mahindra Bank Limited: (Pre-Merger)
The issued and subscribed equity share capital of KMBL as at 30th September is INR
385.6672785 million consisting of 771,334,557 equity shares of Face Value of INR 5 each. The
shareholding pattern is as follows:
Shareholding Pattern as on 30-09-2014 No. of Shares % Share Holding
IN addition, KMBL has Outstanding employee stock options (5,184,292) at a weighted average
price of INR 618.29 per share.
ING Vysya Bank Limited : (Pre-Merger)
The current issued and subscribed equity share capital of IVBL as at 30th September 2014 is INR
1902.9 million consisting of 190,292,161 equity shares of Face value INR 10 each. The
Shareholding pattern is as follows:
Shareholding Pattern as on 30-09-2014 No. of Shares % Share Holding
IN addition, IVBL has Outstanding employee stock options (10,249,637) at a weighted average
price of INR 465.75 per share.
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The management has informend that there would not be any capital variations in the companies
till the transaction becomes effective other than on account of existing ESOP Schemes.
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a. Estimating future free cash flows
b. Appropriate discounting rate to be applied to cash flow
Under the present case, The Discounted Cash Flow method is not used as the projections for
the same are not provided by the companies.
4. Net Asset Value (NAV) Methodology: The asset based valuation technique is based on the
value of the underlying net assets of the business, either on a book value basis or replacement
cost basis.
Under the present case NAV Method has been considered since both entities have significant
monetary assets on their balance sheet. The Net Asset Value of equity shares of the companies
as per balancesheet as at 30th september 2014 had been computed.
The fair exchange ratio has been arrived at on the basis of a relative equity valuation of the Companies
based on the various methodologies explained above and various quntitative factors relevant to each
company & the business dynamics nad growth potentials of the companies.
In the light of the above and on a consideration of all the relevant factors and circumstances, the fair
Exchange Ratio of the Equity Shares for the merger of IVBL into KMBL is
725 equity shares of KMBL (of INR 5/- each fully paid up) for every 1000 equity shares of IVBL
(of INR 10/- each fully paid up)
Therefore, Swap Ratio is : 0.725 : 1
The share exchange ratio is considered fair and reasonable given the underlying value of ING Vysya,
as also giving shareholders the ability to benefit from the potential that can be realised upon merging
into Kotak. Also, “Fractional Shares” were not granted and were instead pooled, sold and cash
consideration from the sale was distributed to shareholders proportionate to their fractional
entitlements.
7. Funding of Deal:
• Money raised from issue of fresh shares: This was an “All-Stock Amalgamation” which
means a full share deal worth of US$ 2.4 billion. This was the biggest deal in India which
resulted in the creation of 4th largest bank of the country. So, the Money raised from the
issue of fresh shares was around 15000 Crore.
• Cash used from internal accruals: Nil – As it was a full share deal.
• How much debt or loan / foreign currency loan/bridge loan/mezzanine loan: Nil – As it
was a full share deal.
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8. Financial Statements of Acquirer Company (KMBL):
Balance Sheet
Mar 15 14-Mar 13-Mar Mar 12 11-Mar
EQUITIES AND
LIABILITIES
SHAREHOLDER'S FUNDS
Equity Share Capital 386.18 385.16 373.3 370.34 368.44
Total Share Capital 386.18 385.16 373.3 370.34 368.44
Revaluation Reserve 15.05 0 0 0 0
Reserves and Surplus 21,752.09 18,690.85 14,876.49 12,530.70 10,594.51
Total Reserves and Surplus 21,767.14 18,690.85 14,876.49 12,530.70 10,594.51
Employees Stock Options 3 8.53 17.53 34.82 36.92
Total Share Holders Funds 22,156.31 19,084.53 15,267.33 12,935.87 10,999.86
Minority Interest 335.69 270.89 208.72 160.06 107.21
Policy Holders Funds 13,792.61 11,014.56 10,077.27 9,011.53 8,145.20
Deposits 72,843.46 56,929.75 49,389.14 36,460.73 27,312.98
Borrowings 31,414.88 29,007.14 36,171.96 29,194.69 22,073.32
Other Liabilities and Provisions 8,032.81 5,929.76 4,720.24 4,586.52 5,042.56
Total Capital and Liabilities 148,575.76 122,236.63 115,834.66 92,349.39 73,681.13
ASSETS
Cash and Balances with Reserve 3,945.12 2,960.51 2,220.76 2,030.63 2,114.86
Bank of India
Balances with Banks Money at 2,958.33 3,682.60 2,297.49 1,545.20 879.4
Call and Short Notice
Investments 47,350.87 38,791.05 40,907.24 31,658.43 26,048.99
Advances 88,632.21 71,692.52 66,257.65 53,143.61 41,241.95
Fixed Assets 1,384.97 1,264.09 619.9 615.29 600.42
Other Assets 4,304.27 3,845.87 3,531.63 3,356.22 2,795.51
Total Assets 148,575.76 122,236.63 115,834.66 92,349.39 73,681.13
CONTINGENT
LIABILITIES,
COMMITMENTS
Bills for Collection 10,791.16 7,271.59 6,470.50 6,166.00 4,470.06
Contingent Liabilities 60,075.93 41,550.73 37,509.95 36,055.94 33,223.43
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Profit & Loss Statement
Mar '14 Mar '13 Mar '12 Mar '11 Mar '10
Mar '15
Income
Interest Earned 13,318.89 11,985.90 10,837.87 8,470.42 5,973.11 4,601.16
Other Income 8,152.20 5,282.39 5,112.41 4,543.40 5,089.85 4,714.05
Total Income 21,471.09 17,268.29 15,950.28 13,013.82 11,062.96 9,315.21
Expenditure
Interest expended 6,966.10 6,312.12 6,024.49 4,541.96 2,668.24 1,772.86
Employee Cost 2,375.46 1,915.12 1,773.50 1,601.54 1,522.34 1,260.95
Selling, Admin & Misc. 8,827.55 6,321.66 5,769.03 4,855.46 5,150.80 4,811.12
Expenses
Depreciation 236.89 207.86 179.03 164.33 152.35 142.92
Operating Expenses 9,749.26 6,951.71 6,598.42 5,716.62 5,999.73 6,194.54
Provisions & Contingencies 1,690.64 1,492.93 1,123.14 904.71 825.76 20.45
Total Expenses 18,406.00 14,756.76 13,746.05 11,163.29 9,493.73 7,987.85
2,511.54 2,204.21 1,850.53 1,569.24 1,327.36
Net Profit for the Year 3,065.08
Minority Interest 59.51 62.17 49.33 52.84 26.35 18
Share Of P/L of Associates -39.88 -15.62 -33.58 -34.55 -23.86 2.36
Net P/L After Minority 3,045.45 2,464.99 2,188.46 1,832.24 1,566.74 1,307.00
Interest & Share of
Associates
Profit brought forward 9,719.19 7,882.07 6,296.17 4,962.62 3,720.29 2,691.30
Total 12,784.27 10,393.61 8,500.38 6,813.15 5,289.53 4,018.66
Equity Dividend 82.07 63.08 52.38 44.49 36.88 29.66
Corporate Dividend Tax 14.56 12.03 9.04 9.08 9.3 0.01
Per share data (annualized)
Earnings Per Share (Rs) 39.68 32.6 29.52 24.98 21.3 38.13
Book Value (Rs) 286.63 247.64 204.25 174.18 148.78 228.81
Appropriations
Transfer to Statutory 709.84 473.59 472.77 282.09 235.56 213.02
Reserves
Transfer to Other Reserves 94.04 79.16 68.38 163.02 42.68 35.32
Proposed Dividend/Transfer 96.63 75.11 61.42 53.57 46.18 29.67
to Govt
Balance c/f to Balance 11,864.13 9,719.19 7,882.07 6,296.17 4,962.62 3,720.29
Sheet
Total 12,764.64 10,347.05 8,484.64 6,794.85 5,287.04 3,998.30
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Cash Flow Statement
15-Mar 14-Mar 13-Mar 12-Mar Mar 11
Financial Ratios
2015 2014 2013 2012 2011
Net Interest Margin 4.93% 4.97% 4.70% 4.83% 5.23%
Return on average assets 2.30% 2.10% 2.10% 2.20% 2.40%
Return on equity 14.80% 14.00% 15.60% 15.40% 16.40%
Capital adequacy ratio 17.60% 18.90% 17.00% 17.90% 19.50%
Gross NPA in crores 1392 1178 848 700 712
Net NPA in crores 697 634 261 273 243
Gross NPA ratio 1.60% 1.60% 1.30% 1.30% 1.70%
Net NPA ratio 0.80% 0.90% 0.60% 0.50% 0.60%
Book value per share in Rs 287 248 204 174 149
EPS in Rs 89.4 32.1 29.3 24.7 21.6
Cost to income ratio 52.00% 50.00% 51.00% 53.00% 54.00%
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9. Financial Statements of Target Company (IVBL):
Balance Sheet
Mar '14 Mar '13 Mar '12 Mar '11 Mar '10
Assets
Cash & Balances with RBI 3,295.20 1,944.72 1,982.37 2,183.78 2,329.59
Balance with Banks, Money at 2,530.87 888.75 1,248.19 337.64 697.46
Call
Advances 35,828.85 31,772.03 28,721.40 23,602.14 18,507.19
Investments 16,720.76 18,278.23 12,715.50 11,058.27 10,472.92
Gross Block 505.82 483.74 490.22 489.25 773.73
Revaluation Reserves 0 0 0 0 108.02
Accumulated Depreciation 0 0 0 0 485.4
Net Block 505.82 483.74 490.22 489.25 180.31
Capital Work In Progress 18.69 15.86 10.58 13.58 207.6
Other Assets 1,513.04 1,453.12 1,815.50 1,329.30 1,377.15
Total Assets 60,413.23 54,836.45 46,983.76 39,013.96 33,772.22
130,267.11 124,227.95 124,224.35 62,364.28 72,851.44
Contingent Liabilities
Bills for collection 0 0 0 0 4,570.43
Book Value (Rs) 374.84 298.73 265 216.75 185.04
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Profit and Loss Statement
Mar '14 Mar '13 Mar '12 Mar '11 Mar '10
Income
Interest Earned 5,205.22 4,861.58 3,856.81 2,694.06 2,232.89
Other Income 867.12 726.88 669.76 654.96 620.22
Total Income 6,072.34 5,588.46 4,526.57 3,349.02 2,853.11
Expenditure
Interest expended 3,452.07 3,322.95 2,648.46 1,687.54 1,403.05
Employee Cost 903.4 750.69 651.03 605.66 428.85
Selling, Admin & Misc. 1,001.81 850.88 720.96 689.45 738.02
Expenses
Depreciation 57.21 50.97 49.81 47.73 40.96
Operating Expenses 1,492.73 1,272.81 1,110.21 1,026.02 1,037.72
Provisions & Contingencies 469.69 379.73 311.59 316.82 170.11
Total Expenses 5,414.49 4,975.49 4,070.26 3,030.38 2,610.88
657.85 612.96 456.3 318.65 242.22
Net Profit for the Year
Profit brought forward 1,108.77 765.45 517.46 330.22 206.53
Total 1,766.62 1,378.41 973.76 648.87 448.75
Equity Dividend 114.26 85.17 68.71 36.3 29.99
Corporate Dividend Tax 19.98 13.82 10.9 5.89 5.1
Per share data (annualized)
Earnings Per Share (Rs) 34.87 39.58 30.4 26.34 20.19
Equity Dividend (%) 60 55 40 30 25
Book Value (Rs) 374.84 298.73 265 216.75 185.04
Appropriations
Transfer to Statutory Reserves 188.9 170.65 128.71 89.22 83.45
Transfer to Other Reserves 0.01 0 -0.01 0 -0.01
Proposed Dividend/Transfer to 134.24 98.99 79.61 42.19 35.09
Govt
Balance c/f to Balance Sheet 1,443.47 1,108.77 765.45 517.46 330.22
Total 1,766.62 1,378.41 973.76 648.87 448.75
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Cash Flow Statement
Mar '14 Mar '13 Mar '12 Mar '11 Mar '10
977.76 901.44 654.17 483.86 371.5
Net Profit Before Tax
Net Cash from Operating -1930.36 -1215.65 -1720.59 -924.12 -37.61
Activities
Net Cash (used in)/from -82.3 -50.36 -47.51 -42.68 -100.32
Investing Activities
Net Cash (used in)/from 5005.26 868.92 2477.24 461.18 883.35
Financing Activities
Net (decrease)/increase In Cash 2992.6 -397.09 709.14 -505.62 745.42
and Cash Equivalents
Opening Cash & Cash 2833.47 3230.56 2521.42 3027.04 2281.63
Equivalents
Closing Cash & Cash 5826.07 2833.47 3230.56 2521.42 3027.04
Equivalents
Financial Ratios:
2014 2013 2012 2011
Net Interest Margin 12.63% 12.60% 11.83% 11.82%
Return on average assets 1.22% 1.26% 1.09% 0.89%
Return on equity 9.53% 14.22% 12.73% 12.83%
Gross NPA in crores 16.76% 13.24% 14.00% 12.94%
Net NPA in crores 6442 5702 5629 5532
Capital adequacy ratio 1020 91 525 918
Gross NPA ratio 1.77% 1.76% 1.92% 2.30%
Net NPA ratio 0.21% 0.03% 0.18% 0.39%
Book value per share in Rs 369.5 292.1 258.2 208.3
EPS in Rs 34.87 39.58 30.4 26.34
Cost to income ratio 56.51% 56.18% 59.11% 61.75%
Price to earnings in Rs. 14.19 11.28 12.39 13.06
Cost to net income ratio 54.5 56.2 59.1 61.8
Other income to net income ratio 33.08% 32.07% 33.65% 39.41%
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10. Pre shareholding structure of the company:
Shareholding in Kotak before the Merger:
Promoter Group: 40.02%
Public Shareholding: 59.98%
• FIIs: 36.85%
• Mutual Funds/ UTI: 1.65%
• Financial Institutions/ Banks: 0.21%
• Foreign Banks: 4.25%
• Foreign Bodies: 2.04%
• Bodies Corporate: 3.30%
• Individuals: 10.27%
• Others: 1.41%
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11. Post-merger Shareholding in Kotak:
Promoter Group: 33.99%
Public Shareholding: 66.01%
• ING Group: 6.48%
• FIIs: 33.58%
• Domestic: 19.12%
• FDI: 6.83%
Post-Merger synergy:
• The merger increased the geographical presence and further deepened Kotak’s network
because of complementary network of ING Vysya. The merger increased Kotak’s number
of branches and its ATMs network by 47% and 35% to 1,214 and 1,794.
• Before the merger, 80% of the Kotak’s branches were in the western and northern parts of
the country and only 15% were in the southern part of India. On the other hand, ING Vysya
had a greater presence in the southern part of the country with 64% of its branches located
there and only 32% its branches in the western and northern parts of the country. Using
this Kotak bank can balance its presence in all parts of India.
• Increase in customer base for Kotak bank.
• Access to International business: In the past, ING Vysya has served a number of large
international corporates in India. The merged entity will leverage ING Group’s
international expertise and presence to Kotak bank.
Deposits and advances: As on 30th Sep 2014, the advances and deposits of ING Vysya bank
were Rs.39558 crore and Rs.44652 crore respectively. The corresponding figures for Kotak
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Mahindra bank were 81,418 crore and Rs.66311 crore. Current Accounts/ Savings Accounts
(CASA) were approximately 33% of ING’s deposit base and about 29% of Kotak’s. The merged
entity is expected to have a wider network
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