The banking industry is largely fragmented in India with more than half of the commercial banks being state-run entities. Also amongst them only two of them figure among the world’s 100 largest banks. Besides, there have not been many mergers in Indian banking space and the merger of ING Vysya Bank with Kotak Mahindra Bank is one of the major deals since private sector leader ICICI Bank’s takeover of Bank of Rajasthan about four years ago and Axis Bank acquiring erstwhile UTI Bank. The Kotak Mahindra and ING Vysya, both are private sector banks, run by professional managers, and similar in size with a degree of commonality in business and risk approaches.
The proposed merger is an all stock merger. 1000 shares of Rs.10 each of ING Vysya will receive 725 shares of Rs.5 each of Kotak Mahindra Bank.
This exchange ratio indicates an implied price of Rs.790 for each ING Vysya share based on the average closing price of Kotak shares during one month to November 19, 2014, which is a 16% premium to a like measure of ING Vysya market price. The proposed merger will result in issuance of approximately 15.2% of the equity share capital of the merged Kotak.
If we calculate the premium as on 01/12/2014:
|Price of 1 share of Kotak Mahindra Bank||Rs. 1200|
|Therefore the price of 725 shares||Rs. 8,70,000|
|Price of 1 share of ING Vysya Bank||Rs. 834|
|Price of 1000 shares||Rs. 8,34,000|
|Premium to shareholders will be Rs.36,000 which is 4.31%|
Amalgamation is subject to the approval of shareholders. Other approvals required are –
About Kotak Mahindra Bank:
Since the inception of the erstwhile Kotak Mahindra Finance Limited in 1985, it has been a steady and confident journey leading to growth and success.
Kotak Mahindra Bank Ltd is a one stop shop for all banking needs. The bank offers personal finance solutions of every kind from savings accounts to credit cards, distribution of mutual funds to life insurance products. Kotak Mahindra Bank offers transaction banking, operates lending verticals, manages IPOs and provides working capital loans. Kotak has one of the largest and respected Wealth Management teams in India, providing the widest range of solutions to high net worth individuals, entrepreneurs, business families and employed professionals.
About ING Vysya:
ING Vysya Bank Ltd is a premier private sector bank with retail, private and wholesale banking platforms that serve over two million customers. With over 80 years of history in India (former Karur Vysya Bank) and leveraging ING’s global financial expertise, the bank offers a broad range of innovative and established products and services. The Bank, which has close to 10,000 employees, is also listed in Bombay Stock Exchange Limited and National Stock Exchange of India Limited. ING Vysya Bank was ranked among top 5 Most Trusted Brands among private sector banks in India in the Economic Times Brand Equity – Nielsen survey 2011.
The bank was formed from the 2002 acquisition of an equity stake in Indian Vysya Bank by the Dutch ING Group.
About ING Group:
ING is a global financial institution of Dutch origin offering banking services through its operating company ING Bank and holds significant stakes in listed insurers NN Group NV and Voya Financial, Inc. ING Bank’s 53,000 employees offer retail and commercial banking services to customers in over 40 countries.
ING draws its experience and expertise, commitment to excellent service and its global scale to meet the needs of a broad customer base, comprising individuals, families, small, businesses, large corporations, institutions and governments.
Rationale of the Merger
1. Revenue Synergies & cost efficiency:
2. Benefits to Employees:
The employees of ING Vysya will also be at benefit as Mr Kotak has announced that there will be no drastic job cuts post-merger. Employees are the major concern in the service industry. As the employees will be satisfied, there will be no post-merger difficulties.
3. To Customers:
|Particulars||ING Vysya||Kotak||Kotak (Merged)|
After the acquisition, the prevailing interest rate of the acquiring bank is applicable on all savings accounts. So the account holders of the acquired bank could gain if the rate is higher than that offered by their existing bank. Since ING Vysya offers a 4 per cent annual interest rate and Kotak Mahindra gives 6 per cent for a balance of over Rs 1 lakh, the ING Vysya account holders stand to gain. For a balance of up to Rs 1 lakh, they can earn an interest rate of6 per cent per annum now.
4. Wider Coverage and Balanced Footprint:
|Branch Density Complementary in Key Cities Branches||ING Vysya1||Kotak||Kotak (Merged)|
If we go through the table of branch density, number of branches of ING Vysya are more in South Region. As far as Kotak Mahindra is concerned it has less number of branches in South Region whereas branch density in west and North Region is more. The merger would give Kotak Mahindra a wider coverage and balanced footprint in three regions.
Financial Comparison of Kotak Mahindra Bank:
(Rs. In crores)
|Particulars||2013-2014||2013-14 ( Merged)||Percentage increase|
|Net Total Income||10,923||13,576||24.29%|
|Profit After Tax||2,465||3,169||28.56%|
Comparison for half yearly results for FY 2015:
(Rs. In crores)
|Particulars||H1FY15||H1FY15 ( Merged)||Percentage increase|
|Net Total Income||6,617||8,057||21.76%|
|Profit After Tax||1,416||1,740||22.88%|
It seems that in both of the cases, the percentage of Increase in PAT is more than Net Total Income.
After announcement of merger share price Of Kotak Mahindra Bank rose from Rs.1078 to Rs.1200 and the share price of ING Vysya increased from Rs.728 to Rs.816.
As banks are not companies registered under The Companies Act, 1956, it needs to follow the separate procedure for approval of the merger from the shareholders.
The first thing both banks need is approval from their shareholders. That approval threshold is based on those present and voting at the shareholder’s meeting. The resolution needs approval of ‘a majority in number representing two-thirds in value of the shareholders’ of those present and voting including proxies. Two-thirds, that is 67 percent, which in the case of both banks would have been easy in the ordinary case, because in each case the promoter owns approximately 40 percent. So in both cases, assuming full attendance at the meeting of every owner of every share – the maximum public support needed would be 27 percent or even less. But banking regulations cap an individual’s voting rights in a bank to 10 percent, which means Uday Kotak cannot exercise full 40 percent vote and nor can ING. Hence in both cases they will need public support than they would have needed otherwise.
Illustration: Imagine that Kotak Bank equity capital was 100 shares and all 100 shares were present at shareholder meeting. 67 shares would need to vote in favour of the deal. Of that 67, Uday Kotak has 40 shares, so public shareholder support needed would be 26. But Uday Kotak cannot exercise all 40 shares, he can vote on only 10. Hence, the base become 70 shares as 30 are non-voting. 2/3rds of 70 is 47 shares. Of that 47, Uday Kotak has 10. So he now needs 37 public shares in his favour. Same is the case for ING.
The two largest private banks in the country, HDFC Bank and ICICI Bank, have taken over small banks in the past. The Reserve Bank of India has also had to prescribe direct mergers of banks to ensure that one of the merging entities do not collapse. But the Kotak-Vysya marriage is completely voluntary and has been made for strategic reasons. After evaluating the transaction, we can conclude that merger is done from the view of cost avoidance rather than cost efficiency. It will help both banks, their shareholders and customers and the industry in general. Both banks have different geographical bases and customer segments. The limited reach in terms of presence and profiles had constrained both of them. The merger will enable them to complement each other and make a good business fit. It is acquisition by Kotak of 573 branches which is much cheaper than cost of setting up new branch. The deal also addresses requirement that promoters’ holding in the bank should come down.
Banking industry is one, where having a critical mass is the sine qua non for meeting competition. Regardless of the other factors how so ever meritorious, without the critical mass the best of the banks is bound to either vegetate or be a target for getting gobbled up by a larger bank sooner or later. The main aspect of the critical mass is the geographical spread and man power, which this deal seeks to address more than anything else. ING Vysya is firmly grounded in the South with a well experienced human resource and Kotak Mahindra in the West and North. Together they will stand up to any competition if they continue to focus on their strengths and carve out a niche for themselves.
Dr. Haresh Shah FCA; LLB; PhD (M&A) – Author is the Chairman at HU Consultancy Pvt. Ltd., a Consultancy Firm dealing in Corporate Restructuring, JV’s and Financial Re-Engineering. For queries, author can be reached at email id: firstname.lastname@example.org
This article is originally published in M & A Critique December 2014 Issue. To subscribe to such articles and more please visit www.mergersindia.com to keep yourself updated with M & A Activity in India and around the world.
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