merger analysis of hdfc and cbop

8/12/2019 merger analysis of HDFC and CBOP

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A

ReportON

Merger and Acquisition

ForHDFC & CBoP

Submitted toSARDAR PATEL COLLEGE OF ADMINISTRATION & MANAGEMENT

Bakrol-Anand

Faculty

Ms. Varsha Kuchara(ASSOCIATE PROFESSOR)

Submitted by

Patel Prashant S. (2111)

Patel Hardik B. (2091)

Patel Unnati N. (2124)

Patel Priya J. (2112)Vahora Tasnim U.(2158)

M.B.ASemester IV2013-14


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INDEX

NO PARTICULARS PAGE

NO

1 INTRODUCTION OF COMPANY

2 BRIEF HISTORY OF BOTH COMPANY

3 REASON , NATURE AND OBJECTIVE OF

MERGER

4 PRE MERGER VALUATION OFCOMPANIES

5 POST MERGER VALUATION OF

COMPANIES

6 RATIO COMPARISON AFTER MERGER

7 VALUATION OF APPROACH FOR M & A

8 IMPACT OF THE DEAL ON HDFC BANK

9 CONCLUSION


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LIST OF TABLE

TABLE

NO

PARTICULARS PAGE

NO

1 Profile of Centurion Bank of Punjab and HDFCBank for the last three financial years is ending

before the merger announcement.

2 Combined Profile of Centurion Bank of Punjab andHDFC Bank for the last three financial years was

ending before the merger announcement.

3 Profile of HDFC Bank (Bidder Bank) for the nextthree financial years was ending after the merger

announcement.

4 Mean and Standard Deviation of Pre-merger andPost-merger Ratios of combined (CBOP &HDFC

Banks) and Acquiring Bank (HDFC Bank)

5 NOPAT and Cost of debt of HDFC bank

6 The Beta and cost of equity of HDFC bank


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LIST OF GRAPH

GRAPH

NO

PARTICULARS PAGE

NO

1 Combined Profile of Centurion Bank of Punjab and

HDFC Bank for the last three financial years was

ending before the merger announcement.

2 Profile of HDFC Bank (Bidder Bank) for the next

three financial years was ending after the merger

announcement.

3 Mean and Standard Deviation of Pre-merger and

Post-merger Ratios of combined (CBOP &HDFC

Banks) and Acquiring Bank (HDFC Bank)


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Introduction of company----------------------------------------------------------------------------------------------------------------------------

ABOUT HDFC BANKIn 1994, as a part liberalisation of banking industry by RBI the Housing DevelopmentFinance Corporation Limited (HDFC) was the first private bank to receive approval in

principle. The bank was incorporated in August 1994 in the name of HDFC Bank Limited.HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. TheBank provides a wide range of banking and financial services including commercial bankingand treasury operations. The Bank has one overseas wholesale banking branch in Bahrain, abranch in Hong Kong and two representative offices in UAE and Kenya. The Bank has twosubsidiary companies, namely HDFC Securities Ltd and HDB Financial Services Ltd. The

Bank has three primary business segments, namely banking, wholesale banking and treasury.The retail banking segment serves retail customers through a branch network and otherdelivery channels. This segment raises deposits from customers and makes loans and providesother services with the help of specialist product groups to such customers. The wholesale

banking segment provides loans, non-fund facilities and transaction services to corporate,public sector units, government bodies, financial institutions and medium-scale enterprises.The treasury segment includes net interest earnings on investments portfolio of the Bank. TheBank's shares are listed on the Bombay Stock Exchange Limited and The National Stock

Exchange of India Ltd. The Bank's American Depository Shares (ADS) are listed on the NewYork Stock Exchange (NYSE) and the Bank's Global Depository Receipts (GDRs) are listedon Luxembourg Stock Exchange.

In the year 1999, the Bank launched online, real-time Net Banking. In February 2000, TimesBank Ltd, owned by Bennett, Coleman & Co. / Times Group amalgamated with the Bank Ltd.This was the first merger of two private banks in India. The Bank was the first Bank to launchan International Debit Card in association with VISA (Visa Electron). In the year 2001, they

started their Credit Card business. Also, they became the first private sector bank to beauthorized by the Central Board of Direct Taxes (CBDT) as well as the RBI to accept direct

taxes. During the year, the Bank made a strategic tie-up with a Bangalore-based businesssolutions software developer, Tally Solutions Pvt Ltd for developing and offering productsand services facilitating on-line accounting and banking services to SMEs. During the year2001-02 the bank was listed on the New York Stock Exchange. Also, they made thealliancewith LIC for providing online payment of insurance premium to the customers.

During the year 2006-07, they commenced direct lending to Self Help Groups. Also, they

opened a dedicated branch for lending to SHGs, in Thudiyalur village (Tamil Nadu).

On May 23, 2008, the merger of Centurion Bank of Punjab with HDFC Bank which isconsidered as one of the biggest merger in domestic banking was formally approved byReserve Bank of India to complete the statutory and regulatory approval process. Theshareholders of Centurion Bank of Punjab received 1 share of HDFC Bank for every 29shares of CBoP. The merger has been advantageous to HDFC Bank in terms of increased

branch network, geographic reach, and customer base, and a bigger pool of skilled manpower.In October 2008, the bank opened their first overseas commercial branch in Bahrain. Thebranch offers the bank's suite of banking services including treasury and trade finance

products for corporate clients and wealth management products for Non-resident Indians. Ason 31st March, 2012 the authorized share capital of the Bank is Rs. 550 crore. The paid-up


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capital as on the said date is Rs. 469,33,76,540. The net profit is Rs. 5,167 crore, with Total

deposits of Rs. 246,706 crore, and Total advances of Rs.195,420 crore. The bank is having astrong network with number of branches are 2544 of which 70% of bank branches are outside

metro areas and 8913 ATMs in 1399 cities.

ABOUT CENTURION BANK OF PUNJAB BANK

Centurion Bank of Punjab is one of the leading new generation private sector banks in

India. The bank serves individual consumers, small and medium businesses and large

corporations with a full range of financial products and services for investing, lending

and advice on financial planning. The bank offers its customers an array of wealth

management products such as mutual funds, life and general insurance and hasestablished a leadership 'position'. The bank is also a strong player in foreign

exchange services, personal loans, mortgages and agricultural loans. Additionally thebank offers a full suite of NRI banking products to overseas Indians. On August 29,

2007, Lord Krishna Bank (LKB) merged with Centurion Bank of Punjab, postobtaining all requisite statutory and regulatory approvals. This merger has further

strengthened the geographical reach of the Bank in major towns and cities across the

country, especially in the State of Kerala, in addition to its existing dominance in the

northern part of the country. Centurion Bank of Punjab now operates on a strong

nationwide franchise of 394 branches and 452 ATMs in 180 locations across thecountry, supported by employee base of over 7,500 employees. In addition to being

listed on the major Indian stock exchanges, the Banks shares are also listed on the

Luxembourg Stock Exchange.Brief Introduction


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Brief History of Both Company----------------------------------------------------------------------------------------------------------------------------

HDFC

Founded - August 1994 Indias largest private sector bank by market capitalization as of 25 th

September 2013, [152,815 (Rs.cr)]

Fifth largest bank in India by assets India's largest housing finance company As on August 2013:HDFC Bank has

754 branches

11,088 ATMs, in 1,891 cities in India

2000 -Times bank Limited was merged with HDFC Bank Ltd 2008- Centurion Bank of Punjab

CENTURION BANK OF PUNJAB BANK

Founded in 1994 (as Centurion bank) It operated on a strong nationwide 394branches and 452 ATMs in 180 locations across the country, 2005- Centurion Bank merge with Bank of Punjab and renamed as Centurion

Bank of Punjab

2006 CBoP acquired Lord Krishna Bank. As of March 31, 2008:Loans outstanding Rs. 161,818.7 millionDeposits outstanding Rs. 218,092.7 million


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Reason, Nature and Objective of Merger----------------------------------------------------------------------------------------------------------------------------

REASON / WHY HDFC BANK CHOSE CBoP

Cultural fit between the organizations The bank had a large nationwide network Strong leadership positions in retail segment Strong asset quality High earning growth Both the banks had a strong position in vehicle financing Attractive route to supplement HDFC Banks organic growth 7,500 talented employees

NATURE AND OBJECTIVE OF MERGER

Horizontal merger (Both the companies were from same industry)

Core objectives: Achieve economies of scale Widening the line of products To get more dominance on the market To face the competition posed by foreign banks and domestic banks

(ICICI)


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Pre-Merger valuation of Ratio----------------------------------------------------------------------------------------------------------------------------

Profile of Centurion Bank of Punjab and HDFC Bank for the last three financialyears is ending before the merger announcement. F inancial Ratios (in Percentage)


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Combined Profile of Centurion Bank of Punjab and HDFC Bank for the last threefinancial years was ending before the merger announcement.

F inancial Ratios (in Percentage)

0

50

100

150

200

250

300

Gross Profit Net profit Operating

Profit

ROCE ROE D/E Ratio

2005 72.33 20.23 51.52 1.24 169.19 109.97

2006 68.43 18.81 42.42 1.17 218.79 153.77

2007 69.88 15.48 46.32 1.15 256.25 182.54

In%

Pre merger


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Post-Merger valuation of Ratio----------------------------------------------------------------------------------------------------------------------------

Profile of HDFC Bank (Bidder Bank) for the next three financial years was endingafter the merger announcement. F inancial Ratios (in Percentage)HDFC

0

100200300400500

600700800

900

Gross

Profit

Net profit Operating

Profit

ROCE ROE D/E Ratio

2009 74.76 13.75 54.61 1.22 527.75 342.04

2010 74.66 18.23 51.12 1.32 644.18 393.93

2011 76.29 19.7 54.53 1.41 843.96 497.29

In%

Post -merger


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Pre and Post Merger valuation of Ratios----------------------------------------------------------------------------------------------------------------------------

Mean and Standard Deviation of Pre-merger and Post-merger Ratios ofcombined (CBOP &HDFC Banks) and Acquiring Bank (HDFC Bank)

70.21

18.84

46.76

1.18 2.18 1.49

75.24

17.23

53.43

1.32

6.724.05

Gross Profit Net profit Operating

profit

ROCE ROE D/E Ratio

MEANPre-merger Post-Merger


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Except Gross profit margin all other ratios Net profit margin, Operating profitmargin, Return on capital employed, Return on equity and Debt-Equity ratio the p-value is greater than 5 percent, it can be concluded that there is no significant

difference in these ratios before after merger.

1.97 3.37 4.56

0.05

48.04

36.55

0.91 3.1 1.99 0.09

159.93

69.3

Gross Profit Net profit Operating profit ROCE ROE D/E Ratio

Std.Deviation

Pre-merger Post-Merger


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1. NOPAT and Cost of debt of HDFC bank:

The cost of debt is showing a continues increase because of the monetarypolicies of the Reserve Bank of India

The NOPAT of the bank was increasing at a higher rate before merger.2. The Beta and cost of equity of HDFC bank:

The 4 years average Beta of HDFC bank before merger was 0.63 which isincrease to 0.72 after merger.

The 4year average cost of equity before merger was 24% which is decreasedby 2.14% in past four year after merger (4year average after merger is

21.86%)


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Valuation of Approach for M &A

-----------------------------------------------------------------------------

Pre- merger analysis of the year 2007

Total number of shares in the merged entity=

319389608 + (0.03448* 1698989540) = 377975454 shares

POST MERGER EPS(2012)

= ( 11414500000 + 123800000) / 377975454 = 33.41

EPS HDFC CBOP

Pre merger 35.74 0.72

Post merger 33.41 1.15

From the eps analysis we can say that the acquiring company HDFC losses.So theremay be some synergy losses for the HDFC bank.In pre merger the hdfc EPS is 35.74

pershare.After merger the EPS for HDFC is fall to 33.41 per share.thats why the

shareholder of HDFC bank do not have the interest for merging with CBOP in HDFC

bank.

particulars Earning(rs) NES EPS(premerger)(rs) EXCHANGE

RATIO

HDFC 11414500000 319389608 35.74 0.03448(1/29)

CBOP 123800000 1698989540 0.72


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Impact of the deal on HDFC bank----------------------------------------------------------------------------------------------------------------------------

Positive impact: Increased geographical presence Recorded growth figures as follows: [by march-2013]Net profit by 44.6% to Rs. 4.6 billion

Net Interest Income by 74.9% to Rs.17.2 billion

Advances grew by 79.8% & deposits by 60.4%

Negative impact: High level of write-offs due to bad asset quality of CBoP in personal

loan and 2 wheeler loans

Gross profit is increased but net profit is decreased because of thehuge expenses.

Very costly merger in term of the ratio is 1:29 for CBoP.


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Conclusion----------------------------------------------------------------------------------------------------------------------------

The banking industry is one of the rapidly growing industries in India. It hastransformed itself from a sluggish business entity to a dynamic industry. The growth

rate in this sector is remarkable and it has become the most preferred bankingdestinations for international investors. In the last two decades, there have been

paradigm shift in Indian banking industries. The Indian banking sector is growing at

an astonishing pace. A relatively new dimension in the Indian banking industry has

accelerated through mergers and acquisitions.

Mergers in banking sector are a form of horizontal merger because the merging

entities are involved in the same kind of activity. By the way of Mergers andacquisitions in the banking sector, the banks can achieve significant growth in their

operations, minimize their expenses to a considerable extent and also competition is

reduced because merger eliminates competitors from the banking industry. Based on

the analysis of 4 years pre and post merger financial ratios merger data of Indian

overseas bank, it can be concluded that Net profit margin, Operating profit margin,

Return on capital employed, Return on equity and Debt- Equity ratio there is

significant difference but no significant difference with respect to Gross profit margin.Based on the analysis of 3 years financial ratios pre and merger data of HDFC bank

data it can be concluded that Net profit margin, Operating profit margin, Return oncapital employed, Return on equity and Debt-Equity ratio there is no significant

difference in these ratios before after merger. However, significant difference withrespect to Gross profit margin.

merger analysis of hdfc and cbop

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