MERGER AND ACQUISITION OF FINANCIAL

INSTITUTIONS

INTRODUCTION

In the last decade the most conspicuous change in the financial sector is the increasing
convergence of banks and insurance companies. Nowadays many banks offer insurance while
insurance company products compete with bank savings. As a consequence of the product
range widens, the services becoming more complex, the regulation is liberalized and the
merger wave of corporations, financial suppliers also became more complex and their activity
structure became more diversified.

Mergers and acquisitions are the important process in the banking industry to make financial
gains enormously. Main aim of merger and acquisition in the banking sectors is to improve
the economies of scale. A merger means combination of two companies into one company.
During the merging process one company survives and the other company loses their
corporate existence. On the other hand, acquisition means takeover. Mergers and acquisitions
are these days, common choices for business survival and development. They imply the
difference of enterprises to new conditions being one in every of them, the mixing of the
enterprises concerned within the deal. That integration is achieved through strategic actions
in structure processes and structures, in addition as through the management of the subjective
conditions that support human performance. one in every of these conditions is that the
individual and team identities. The identity plays a vital mediating role within the adaptation
and integration as a result of the mutual acknowledgment of the self and therefore the different
in any social interaction has the facility to influence the social interaction. Mergers and
acquisition bank not only gets new brand name, new structures, product offerings but
additionally give opportunities to cross sell the new accounts acquired. The process of mergers
and acquisition is not new in the banking industry.

In India, the concept of mergers and acquisitions was initiated by the government bodies.
Some well-known financial organizations also took the necessary initiatives to restructure the
corporate sector of India by adopting the mergers and acquisitions policies. The Indian
economic reform since 1991 has opened up a whole lot of challenges both in the domestic and

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international spheres. The increased competition in the global market has prompted the Indian
companies to go for mergers and acquisitions as an important strategic choice. The trends of
mergers and acquisitions in India have changed over the years. The immediate effects of the
mergers and acquisitions have also been diverse across the various sectors of the Indian
economy. Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises
was not so common. The situation has undergone a sea change in the last couple of years.
Acquisition of foreign companies by the Indian businesses has been the latest trend in the
Indian corporate sector.

CHANGES IN BANKING SCENARIO

Like all business entities, banks need to safeguard against risks, as well as exploit obtainable
opportunities indicated by existing and expected trends. M&As in the banking sector are on
the increase within the recent past, each globally and in India. During this background of
emerging world and Indian trends within the banking sector, this article illuminates the key
problems encompassing M&As during this sector with the focus on India. It seeks to clarify
the motives behind some M&As that have occurred in India post-2000, analyze the advantages
and costs to each parties concerned and the consequences for the integrated entity. A look at
the future of the Indian banking sector, and a few key recommendations for banks, follow
from this analysis. The International banking situation has shown major turmoil within the
past few years in terms of mergers and acquisitions. Deregulating has been the most driver,
through three major routes - dismantlement of interest rate controls, barriers that has been
leads to disintermediation, investors hard-to-please high returns, price cutting war, reduced
margins, falling spreads and competition across geographies forcing banks to appear for brand
new ways. Consolidation has been a serious strategic tool for this and has become a worldwide
development, driven by apparent edges of scale-economies, geographical diversification,
lower costs through branch and worker’s rationalization, cross-border enlargement and market
share concentration. The new metropolis II norms have additionally diode banks to ponder
M&As. M&As that have happened post-2000 in India to grasp the intent (of the targets and
to boot the acquirers), succeeding synergies (both operational and financial), modalities of the
deal, harmony of the strategy with the vision and goals of the involved banks, and to boot the
long haul implications of the merger.

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 M&A turned out to be significant form of corporate restructuring in post globalization period
in Indian industries. The phenomenon is considered to be the most important strategy for
gaining competitive advantage for firms. This study attempts to find out the determinants of
M&A in Indian pharmaceutical industry. We use the PROWESS database provided by the
Center for Monitoring Indian Economy for the period of 2001-2010. The results of the Logit
analysis suggest that large and multinational affiliated firms are investing more in M&A
activities. Similarly, firms reporting excess capacity and high R&D investments are relying
heavily on M&A to and consolidate their position in the industry.

FACTORS AFFECTING M&A OF FINANCIAL INSTITUTIONS

Mergers and acquisitions are one of the main bank responses to higher competitive pressures
in banking industry. New forces of changes are related to globalization, structural
deregulation, prudential reregulation and technology developments. It is a risky way to
growth, but there are various factors that give rise to successful M&A strategies. 1

i. Operating Synergy – The operating synergy encircles a rise in the economies of scale and
economies of scope. It enhances the value of the institution, there is wider access to human
capital, capabilities and skills and lastly assists the financial institution to enter new region
swiftly and smoothly. The economies of scope encompass the profit expectations and
expansion in the product/service being offered.

ii. Financial Synergy- Through an M&A, the institution is entrusted with more stabilized returns
due to the diversification in the market and their product/service developments. The market
power due to the anti-competitive effects is increased.2 As a result of these, there occurs cost
efficiency.
iii. Due to the optimization of the distribution channel, the focus on the customer needs, services
and preferences is paid more attention to, due to the increase in work force it becomes easier
to achieve the goals and tasks set.

1
Pinter Eva, Mergers and Acquisitions in the Financial Services Industry, International Journal of Social Sciences
and Humanity Studies, Vol.3, No. 1, 2011
2
Fiordelisi F, Mergers and Acquisitions in European Banking, Palgrave Macmillan Studies in Banking and
Financial Institutions, England, 2009

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 When any institution or a company announces its new merger or acquisition, their main aim
is that the newly created business unit, economies of scale provided by the realization of cost
synergies will be able to. The reason behind is that the larger units can be more efficient than
the smaller ones. This is due to the fact that for many institutions the cost of operation does
not increase proportionally with the size of the company. It is easier to attract adequate
employees, equity capital and equity funding on merging with the larger companies. e. If the
mergers and acquisitions are successful, - the efficiency increases - then the product or service
mix improving, and have better access to customers, and all the shareholder value and return
on equity increases.

Moreover, when a group diversifies the risks of diversified business lines, it usually reduces
the volatility of profits, and thus the capital cost. In addition, if the groups are showing an
intensive financial strength, this means they take a lot of advantage. They will be able to share
capital, and obtaining other external sources for lower cost, to carry out easier investments
and divestments. Arising equity markets and low interest rates generate favorably
environment for mergers and acquisitions. The recovery of stock markets blows up the capital
base of undervalued companies is particularly favorable target for the expanding groups.
Mergers and acquisitions integrate the know-how in one organization, but it can also cause
major problems of integration. Any alternative costs occurring in acquisition, it should be
compared with the costs that are occurring in the case of new entry. In many cases, new entry
provides more flexibility in planning new services.

BENEFITS OF M&A

Selling or buying a business can be a lucrative but risky transaction. It's all too easy to sell
yourself short or to overpay as the buyer. If a person wants to avoid the costly mistakes that
many business owners make in M&A transactions, this book is for such person. It provides
valuable guidance on how to prepare for and negotiate the deal, and how to leave the
bargaining table with more money in their pocket.

i) Efficiency

A larger and bigger bank or a financial institution has a lower aggregated risk since a large
number of similar risks, previous debts decrease on an overall basis the institutional risks. In

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 terms of the banking operations, the efficiency also upsurges in terms of compliance, risk
management, accounting as the merger or the acquisition enables consolidation and
administration of the operational infrastructures.

ii) Business Gap is Filled

Merger and Acquisition of banks or financial institutions enable them to fill their product and
technology gaps. Acquiring a smaller bank that offers a unique revenue model or financial
product is sometimes easier than building that business unit from scratch. And, from the
technology perspective, being acquired by a larger bank might allow your institution to
upgrade its technology platform significantly.

iii) Upgradation of Talent and the Team

An M&A offers a plethora of possibilities of bolstering the sales and the strength of the top
managers where the bank or the financial institution benefits because of the boost in talent at
the leadership disposal.

iv) An M&A helps the institution to scale up rapidly and gain a large number of the new
customers instantly. The same also acts as a major source of capital and investments while
working with lending and investments, which also provides a broader and wider geographic
footprint in which to operate.
v) Corporate friendliness

Although it's rare but it's true that business homes exhibit degrees of cooperative spirit despite
fight in providing rescue to each completely different from hostile takeovers and cultivate
things of collaboration sharing goodwill of each various to realize performance heights
through business combination. the corporate aim at circular combos by following this
objective.

vi) Financial Strength

The major benefit is of the financial strength that the merged firm receives, which is the
financial strength. It is to improve the liquidity and have direct access to the cash resources.
Its objective is to utilize the tax benefits and dispose of surplus and outdated assets for cash
out of combined companies.

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 RECENT CASES

 The government by the end of March 2020, has unveiled a mega plan to merge 10 public sector
banks into four new set of mergers. Punjab National Bank, Oriental Bank of Commerce and
United Bank of India will combine to form the nation's second-largest lender; Canara Bank and
Syndicate Bank will merge; Union Bank of India will amalgamate with Andhra Bank and
Corporation Bank; and Indian Bank will merge with Allahabad Bank.
Post the mega merger, here are the six PSU banks that will remain independent: Indian Overseas
Bank, Uco Bank, Bank of Maharashtra and Punjab and Sind Bank, which have strong regional
focus, will continue as separate entities. Bank unions, however, opposed the mega merger move
saying it lacks any rationale.

 Bank of Baroda, Vijaya Bank and Dena Bank

In 2018, the three banks of India, Bank of Baroda, Vijaya Bank and the Dena Bank were
proposed to be merged by the Government of India, where the merged entity will have total
assets of over Rs. 14 Lakh Crore ($190 Billion), thus making it the third-largest lender after
the State Bank of India and HDFC Bank. The merger is of great benefit to Dena Bank, whose
performance was the least impressive while the other two Bank of Baroda and the Vijaya Bank
have a stronger footing the market. Dena bank in the posted a net loss of Rs. 721 Crore, while
Vijaya Bank and Bank of Baroda stood at a profit of Rs. 144 Cr and Rs. 528 Cr.

 The SBI Merger

In 2017, the State Bank of India, the five associate banks; State Bank of Patiala, State Bank
of Hyderbad, State Bank of Bikaner and Jaipur and the State bank of Travancore along with
the Bharatiya Mahila Bank merged with State Bank of India (SBI). They together contributed
about 15 percent to SBI’s total Rs 20.44 lakh crore loans and nearly 20 percent to Rs 27.06
lakh crore deposits as of March. According to the annual report, the six entities added: Rs 5.41
lakh crore to deposits.

With this six-way mega merger, SBI displayed its ability to change and evolve in order to
continue as the country champion among banks in India and to create enduring value. The
merger made the bank join the league of to 50 Banks Globally in terms of assets. The total

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 customer base of the bank will reach 37 crores with a branch network of around 24,000 and
nearly 59,000 ATMs across the country. Post-merger, the bank rationalized its branch network
by relocating some of the branches to maximize reach. This will help the bank optimize its
operations and improve profitability. As on March 31, 2018, the count of their branches rose
22,414.3

By 2020, the bank targets a credit growth of 10-12 percent by reorganizing its corporate
banking portfolio and bringing down the credit risk-weighted assets to total advances ratio.
While the bank calls the progress of the resolution of stressed assets satisfactory, it said the
positive outcome will take “some more time” to reflect in the profit and loss account. “The
structural transformation of banks must move beyond the NPA resolution and address other
pressing issues such as frauds, customer retention and servicing, human resource, cyber
security and governance.”4

CONCLUSION

The Banks and the financial institutions in order to be competitive need to broaden their
activities, but their success shall depend on several factors as stated above, and on aligning
the people, organizational, cultural and financial assets. The concept of merger and acquisition
between two or more companies can turn out to be a successful merger and acquisition. The
merging and the acquisition process is accepted in India by the Companies Act, 2013 and for
the company to get merge with another company, it is important, for the company to follow
the procedure explained in the same Companies Act, 2013. When the company acquire merger
and acquisition it depends upon its planning and strategies whether they will profitable or in
losses. India has many cases through which they proved its not lagging in this aspect of merger
and acquisition from worldwide. The concept of merger and acquisition can also be a risky
process which has to be adopted, as it may bring various problems to the company in terms of
the management, it working, etc.

REFERENCES

3
No Retrenchment after merger of SBI, The Economic Times (visited on 27/03/2019, at 7:00pm)
4
How India;s Biggest Merger Worked for SBI, BllombergQuint (visited on 28/03/19 at 11:00pm)

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 Articles and Journals

 Pinter Eva, Mergers and Acquisitions in the Financial Services Industry, International Journal
of Social Sciences and Humanity Studies, Vol.3, No. 1, 2011
 Fiordelisi F, Mergers and Acquisitions in European Banking, Palgrave Macmillan Studies in
Banking and Financial Institutions, England, 2009
 K Subhashree, Merger and Acquisition in Banking Industry, International Journal of Pure and
Applied Mathematics, Vol.119, 2018.

Newspaper Articles by
 Economic Times
 The Hindu
 Bloomberg Quint

Books Referred
 Taxman, Merger and Acquisition and Corporate Restructuring – Strategies and Practices, 3rd
Edition, 2017
 Kapil Sheeba, Mergers and Acquisition, 4th Edition, 2016
 Sridharan and Pandian, Takeover and Merger, 4th Edition 2017

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