ASSIGNMENT ON MERGER OF CENTURIAN BANK OF PUNJAB BY HDFC BANK

SUBMITTED TO : Dr.G.S. BATRA

SUBMITTED BY AMARDEEP SINGH ROLL NO. 6354 MBA-II D

MERGER AND ACQUISITION

Mergers and acquisitions (M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. An acquisition, also known as a takeover or a buyout, is the buying of one company (the target) by another. The
acquisition process is very complex and various studies shows that only

50% acquisitions are successful. An acquisition may be friendly or hostile. In a friendly takeover a companys cooperate in negotiations. In the hostile takeover, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover.

Although merger and amalgamation mean the same, there is a small difference between the two. In a merger one company acquires the other company and the other company ceases to exist. In an amalgamation, two or more companies come together and form a new business entity. MERGERS - A merger is a combination of two companies into one larger company, which involves stock swap or cash payment to the target.

ACQUISITION - When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition.

CLASSIFICATIONS OF MERGERS
Horizontal merger is the merger of two companies which are in produce of Same products.This can be again classified into large horizontal merger and Small horizontal merger.Horizontal merger helps to come over from the competition between two companies merging together strengthens the company to compete with

other companies. Horizontal merger between the small companies would not effect the
industry in large. But between the larger companies will make an impact on the economy

and gives them the monopoly over the market. Horizontal mergers between the two
small companies are common in India. When large companies merging together we

need to look into legislations which prohibit the monopoly. Vertical merger If a merger between two companies producing different goods or services for one specific finished product. Vertical merger takes between the customer and company or a company and a supplier. IN this a manufacture may merge with the distributor or supplier of its products. This makes other competitors difficult to access to an important component of product or to an important channel of

distribution which are called as "vertical foreclosure" or "bottleneck" problem. Vertical merger helps to avoid sales taxes and other marketing expenditures.

Market-extension merger - is a merger of two companies that deal in same products in different markets. Market extension merger helps the companies to have access to the bigger market and bigger client base. Product-extension merger takes place between the two or more companies which sells different products but related to the same category. This type of merger enables the new company to go in for a pooling in of their products so as to serve a common market, which was earlier fragmented among them. This merger is between two companies that sell different, but somewhat related products, in a common market. This allows the new, larger company to pool their products and sell them with greater success to the already common market that the two separate companies shared. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.

Conglomeration - Two companies that have no common business areas. A conglomeration is the merger of two companies that have no related products or markets. In short, they have no common business ties. Conglomerate merger in which merging firms are not competitors, but use common or related production processes and/or marketing and distribution channels. Co generic merger: Merger between firms in the same general industry but having no Mutual buyer-seller relationship, such as a merger between a bank and a leasing company.

Purchase mergers - this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. Consolidation mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger. A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO. Accretive mergers are those in which an acquiring company's earnings per share (EPS) increase. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E

HDFC Bank acquired Centurion Bank of Punjab

HDFC BANK OVERVIEW

HDFC Bank Limited is an Indian financial services company based in Mumbai,

Maharashtra that was incorporated in August 1994. HDFC Bank is the fifth or sixth largest bank in India by assets and the first largest bank by market capitalization as of November 1, 2012. The bank was promoted by the Housing Development Finance Corporation, a premier housing finance company (set up in 1977) of India. As on December 2012, HDFC Bank has 2,776 branches and 10,490 ATMs, in 1,399 cities in India, and all branches of the bank are linked on an online real-time basis. As of December 2012 the bank had balance sheet size of Rs. 3837 billion. For the fiscal year 2011-12, the bank has reported net profit of 5167.07 crore (US$950 million), up 31.6% from the previous fiscal. On March 14, 2013 an online magazine named Cobrapost.com released video footage from Operation Red Spider showing high ranking officials and some employees of HDFC bank willing to turn black money into white which is violation of Money Laundering Control Act. After this The government of India and Reserve Bank of India have ordered an inquiry.

CENTURION BANK OF PUNJAB

The Centurion Bank of Punjab (formerly Centurion Bank) was an Indian private sector bank that provided retail and corporate banking services. It operated on a strong nationwide franchise of 403 branches and had over 5,000 employees. The Bank's shares were listed on the major Indian stock exchanges and on the Luxembourg Stock Exchange. On 23 May 2008 HDFC acquired Centurion Bank of Punjab.

BENEFITS FROM THIS DEAL

The corporate world is a place where only the vigilant, the sharp and the spontaneous can explore their way up the ladder, while the remaining admire or envy the success of the former . Here, every second tests the mental acumen of the professionals by putting them into various odd situations which demand spontaneous, impromptu decisions to be crafted, keeping a long-term perspective in sight. The expected merger of the HDFC Bank with the Centurion Bank of Punjab (CBoP) is believed to broaden the scope and reach of HDFC by crediting to its already welldistributed network. The HDFC Bank, which currently spans India with its chain of 746 branches, will add to itself 394 branches of the CBoP to itself, to make its network bigger and stronger. The merger talks between the two banks began in January 2008, after the principal shareholders of CBoP Bank Muscat with 14.02 per cent stake, Sabre Capital with 3.48 per cent stake and the Kephinance Investment (Mauritius) with 6.13 per cent stake decided to move away from this partnership. The HDFC Bank is further expected to pay Rs 100 billion to Rs 120 billion in shares for acquiring the CBoP. In what claims to be the largest ever private bank merger, the share swap ratio stands at 1:29, that is every shareholder of CBoP will get one share of HDFC Bank for every 29 shares of CBoP owned. Though this ratio is believed to have been worked out after rigorous discussions among the Board of Directors of both the banks, it has failed to receive a positive reaction from the CBoP shareholders. It has come as a yet another setback for them after a volatile period witnessing a decline in CBoP shares and an unstable management. The HDFC Bank which presently enjoys the 10th position in the list of largest banks in India on the basis of assets, and with this merger, will now witness a jump to the 7th position. At the same time, the current stake of HDFC in the CBoP, which is 23.38% is projected to fall to about 19% on completion of the deal.Another important concern that rises with such mergers is the question of blending the two distinct and diverse styles of functioning and ensuring a smooth transition to a new work culture, absorbing the strengths of both the merging companies. It is a meticulous task to ensure that the fundamental ways of working and the ideology of the two companies supplement the growth of each other rather than leaving any one of the potential organizations obsolete. This merger has come after a series of activities marking an eventful past for CBoP, which include acquiring the Lord Krishna Bank and the Bank of Punjab. As the CBoP stands at a new dawn, we wish it brings some reason to rejoice for the shareholders that have stood through its history of highs and lows.

EFFECT OF MERGER AND ACQUISITION OF HDFC AND CBOP

HDFC Bank's ability to grow at over 30 per cent annually in the last nine years, along with superior credit risk management practices, which have helped it maintain asset quality, would ensure that it will be among the least affected in a slowdown.

The bank's focus on technology and superior margins with support from low-cost deposits will ensure profitable growth in the future. The merger of retail focused-Centurion Bank of Punjab (CBOP) with HDFC Bank effective May 23, 2008, will shore up revenues in the medium-term. However, the synergies from the merger with start reflecting over 12-24 months, and boost profitability. Put together, the gains from organic and inorganic initiatives will help the bank sustain growth rates in excess of its historical average of 29-30 per cent, and in a profitable manner.

POST-MERGER
The inherent synergies of HDFC Bank and CBOP in their retail focus was the driver for the merger, which added around 400 branches to HDFC Banks' branch strength of 760 (as on March 2008) along with a 15-20 per cent increase in the asset base to more than Rs 1.7 lakh crore. While the merger has helped increase the size of HDFC Bank, it has also led to some pressure on key ratios (see Merger Effects) for the combined entity; CBoP ratios were lower than that of HDFC Bank. The next pertinent question is the pace of integration, and how fast HDFC Bank can ramp up efficiency levels of CBOP to its own benchmarks. The integration plan is on schedule. The re-branding of CBOP was completed in May itself; training processes to assign all the employees of CBOP in their new roles is marching ahead with almost 90 per cent of the people retrained. With regards the systems, treasury, wholesale banking and retail loan segments, they have already been integrated with HDFC's platform, while the overall retail banking is expected to be completed in the next two months.

MERGER EFFECTS
Rs crore Net Int. Income Other Income Net Profit Cost/income (%) NIM (%) CASA (%) Net NPA (%) CAR (%) CBOP ** 9 Mths 505 459 123 63.0 3.6 24.5 1.7 11.5 HDFC Bank** 9 Mths 3,586 1,734 1,119 49.7 4.3 50.9 0.4 13.8 Standalone FY 08 5,228 2,283 1,590 49.9 4.4 55 0.5 13.6 Post-merger H1 FY09 3,590 1,237 992 55.4 4.2 44.0 0.6 11.4

The actual benefits will start to filter in the next 12-24 months, with improved productivity in terms of net revenue (net interest income and other income) and CASA (the ratio of low cost deposits to total deposits) growth of CBoP branches on par with HDFC outlets. But before that to happen, HDFC bank will have to shoulder the pressure in the medium-term. For instance, on the efficiency front, the cost to income ratio has also increased from 50 per cent in March, 2008 to around 55 per cent in Q2 FY09 on the back of higher employee costs and integration costs, post the merger. The integration of the two banks' technology-based platforms is expected to be completed by the end of this fiscal, and will improve the cost efficiencies going forward. Likewise, the capital adequacy ratio (CAR) dropped to 11.4 per cent in Q2 FY09; this can partially be attributed to the merger blues and also organic growth of loan book. However, it is comfortably above the regulatory requirement of 9 per cent. Notably, CAR will improve and provide capital for future growth, if the promoters exercise their right to convert warrants and infuse Rs 3,500 crore (warrants already issued, conversion price of Rs 1,500 per share, deadline is December 2009).

MERGER POSITION
HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab (CBoP) for Rs 9,510 crore in one of the largest merger in the financial sector in India. CBoP shareholders will get one share of HDFC Bank for every 29 shares held by them. HDFC Bank and Centurion Bank of Punjab have agreed to the biggest merger in Indian banking history, valued at about $2.4 billion. It is likely the beginning of a wave of M&A deals in the financial services industry, as India prepares to ease restrictions on bank ownership in 2009. This will be HDFC Banks second acquisition after Times Bank. HDFC Bank will jump to the 7th position among commercial banks from 10th after the merger. However, the merged entity would become second largest private sector bank.

The merger will strengthen HDFC Bank's distribution network in the northern and the southern regions. CBoP has close to 170 branches in the north and around 140 branches in the south. CBoP has a concentrated presence in the in the Indian states of Punjab and Kerala. The combined entity will have a network of 1148 branches. HDFC will also acquire a strong SME (small and medium enterprises) portfolio from CBoP. There is not much of overlapping of HDFC Bank and CBoP customers.

The entire process of the merger had taken about four months for completion. The merged entity will be known as HDFC Bank. Rana Talwar's Sabre Capital would hold less than 1 per cent stake in the merged entity from 3.48 in CBoP, while Bank Muscat's holding will decline to less than 4 per cent from over 14 per cent in CBoP. HDFC shareholding falls to will fall from 23.28 per cent to around 19 per cent in the merged entity. Rana Talwar, chairman of Centurion Bank of Punjab, says, I believe that the merger with HDFC Bank will create a world-class bank in quality and scale and will set the stage to compete with banks both locally as well as on a global level.

According to HDFC Bank Managing Director and Chief Executive Officer Aditya Puri, Integration will be smooth as there is no overlap. In an interview, he mentioned that at 40% growth rate there will be no lay-offs. The integration of the second rung officials should be smooth as there is hardly any overlap.

The boards of the two banks had meet on February 28 to consider the draft scheme of amalgamation, which will be subject to regulatory approvals. HDFC Bank will consider making a preferential offer to its parent Housing Development Finance Corp Ltd (HDFC). The move would allow HDFC to maintain the same level of shareholding in the bank.