india going global.indd - The IIPM Think Tank

MERGERS & ACQUISITIONS
Consolidation is a dominant feature of the banking
sector in most countries today. A major
Process of Mergers and Acquisitions (M&A) has
helped in consolidation of the banking industry. Most
large banks in the world have been acquiring repeatedly
smaller and larger banks in their countries and elsewhere
and the process of integration has been generally smooth
and successful. This has given a further impetus to this
the consolidation activity in banks through M&A. While
a merger involves a marriage of two or more banks, an
acquisition involves one bank taking over ownership of
the other. It is generally accepted that mergers and acquisitions
promote synergies and economies of scale. The
basic idea is that the combined entity will create more
value than the individual banks operating independently
not only for the stakeholders, but also for customers and
the industry in general.
In Asia, Malaysia has reduced the number of banks
from 55 to 10, Taiwan is working towards bringing down
the number of state banks from to 6 from 12 this year
and the Singapore Government has guided the system
down to three players with DBS being supported to
become a regional leader. Similar initiatives are being
taken in Indonesia, South Korea and Japan.
Only 22 of the Indian banks figure among the top
1,000 banks in the world. In Asia, State Bank of India
(SBI), the largest in India, is the only entity that has made
it to the top-25 list. In comparison, China’s fourth-largest
bank is 2.5 times that of SBI. The market capitalization
of the entire Indian banking sector is about $40-45 billion,
which would make the entire Indian banking sector
rank after the 30 largest banks in the world.
The present capital structure of public sector banks
will make them vulnerable to takeovers unless M&As
take place on a significant scale. It is necessary for Indian
banks to complete these M&A activities by 2008-09, to
ensure that they have the strength and size to take on
competition from foreign banks, once sector opens up
almost completely to foreign banks.
Foreign banks are eagerly waiting for the regulator
to open up the sector in April 2009, when RBI is set to
review bank ownership norms. Meanwhile, these banks
are gradually buying minor stakes upto permitted levels
in local banks and also setting up non-bank finance
companies (NBFCs), which can perform most banking
functions except for opening and maintaining savings
bank accounts.
Just as in any other sector, consolidation in the banking
industry, in India and elsewhere, provides for value
maximization as well as non-value maximization and is
also of great relevance for the long term growth prospects
of the national economy.
The major gains perceived from bank consolidation
are the ability to withstand the pressures of emerging
global competition, to strengthen the performance of
the banks, to effectively absorb the new technologies
and demand for sophisticated products and services, to
enable funding for major development products in the
realm of infrastructure, telecommunication, etc. which
require huge financial outlays and to streamline human
resources functions and skills in tune with the emerging
competitive environment.
Also, Basel II norms on capital adequacy, capitalization
and risk management, which will require banks to
have minimum CAR of 12.5% as against the present
9%, will encourage the banks to move towards consolidation.
Profit maximization is no longer the only objective
No. of M&As
35
30
25
20
15
10
5
M&A Activity before Nationalisation of Indian Bank:
0 1961 1962 1963 1964 1965 1966 1967 1968 1969
Source : Banknet India
for banks, wealth maximization (that is increasing the
wealth of shareholders) and protecting the interest of
shareholders by ensuring financial stability is the new
goal. Consolidation will enable banks to have a much
stronger balance sheet thereby increasing value to shareholders.
July-October - 2007 Need the Dough
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