5 Minutes Read
M&A in the banking sector: Flashback and the road ahead
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
Listen to the Article (6 Minutes)
Summary
Mrutyunjay Mahapatra On March 31st, 2020, six PSU Banks were laid to rest as they amalgamated into four anchor banks. The process is done but not dusted. Before the amalgamation and after it, the media is curious about the way that it would play out. Stock market appeared more confused than usual. This state of …
Continue reading “M&A in the banking sector: Flashback and the road ahead”
Mrutyunjay Mahapatra
On March 31st, 2020, six PSU Banks were laid to rest as they amalgamated into four anchor banks. The process is done but not dusted. Before the amalgamation and after it, the media is curious about the way that it would play out. Stock market appeared more confused than usual. This state of uncertainty needs analysis of the design, best practices and experiences of amalgamation, so that the stakeholders as a larger group decide and express themselves well enough.
In his famous book “The Wisdom of Crowds”, James Srowiecki, tells that the knowledge of the leaders and decision makers is not enough for getting to the right solution and approach. It is always proven that larger groups of people are smarter than a few experts. So, we need to simplify the subject with background and fundamental knowledge.
Amalgamation, as a branch of study, belongs to the group called M&A, which has separate mathematics, economics, laws and its experts. Acquisition of a minority or a majority stake or an entire entity is driven by different considerations.
A Walmart’s acquisition of a Flipkart or an Infosys acquiring a Fintech are driven by different considerations from a Bank acquiring another. The unsuccessful attempt of India Bull Home Finance to acquire LMV, was probably a real M&A case study in the recent past in India. The amalgamations that got concluded recently were different from pure play amalgamation, which are aimed at and are anchored in pure economics of the transaction, often based on complex calculation of advantages present and future, but different from the most banking amalgamations that we have seen in India.
The recently concluded ones were more a reform and restructure to align the larger financial system to global experiences. The main owner of these Banks, that is the Government of India, based on larger intellectual consultations, designed and rolled out unification of entities, with a set of objectives. A few Banks were left out to pursue the regional character and to test the waters as smaller entities. The success of this ‘bimodal’ model will be research material for the future.
Looking at the last two decades of banking M&A in India, there are strong pointers to M&A activities in banking being anchored in rescue and rehabilitation. If we go slightly back in history from the BOB, Dena, Vijaya; and SBI associates mergers, HDFC Bank acquired Times Bank and Centurion Bank of Punjab (which had a triple amalgamation history of Bank of Rajasthan being taken over by Centurion Bank which later took over Lord Krishna Bank). In these cases, inorganic expansion of branch network, in addition to the financial status of the acquired entity were the ground trigger conditions.
Acquisitions of Bank of Madura, Bank of Rajasthan and Sangli Bank by ICICI Bank again were for similar considerations. Kotak Mahindra Bank acquiring ING Vyasa Bank in 2014, had a hint of economic M&A considerations, but the inorganic expansion combined with attractive value of the target due to financial consideration remained the main reason.
As compared to this, acquisition of GTB by OBC and Bharat Overseas Bank by IOB and the recent change in management of Yes Bank were all rescue acts. The change in management at RBL where a group of entrepreneurs came in to have management stake is an outlier of value creation through entrepreneurial intervention. So, what are common denominator and framework to examine the recent group of banking amalgamations along with whatever historical data that is available?
Nobel laureates Miller and Modigliani in 1961 propounded ‘Value creation’ as the core of all M&A activities. Value has very wider connotations. In his seminal work published by Mc Kinsey &Co, Tim Koller and is co-authors in recent days have elucidated the components of value, which mutatis mutandis, are applicable to all M&A, irrespective of the foundational objectives as discussed earlier in this article.
The difficulty of examining the real data in Indian banking M&A, to enable one to give a verdict on the success or failure of the transaction in achieving the objectives, is the lack of measurement and documentation of the actual results vis-à-vis what was projected at the time of the deal. Even in private sector deals, conclusion of the physical parts of the integration is often declared as a win.
Managements are loath to examine, much less publicize the difficulties and failures of their acquisitions. Even failed mergers like Centurion bank acquiring Bank of Punjab did not go beyond employee anecdotes.
What are the stated objectives of the current PSU amalgamations aimed at reform and restructure of the economy and the sector? Creating Banks of global scale and capital, a synergistic working rather than unnecessary competition in similar areas, Enhancement of capabilities of HR through lateral recruitment and better training, creating project funding and corporate credit skills beyond SBI, Rapid and at scale investment and implementation of
Digitalization for customer service, better ability to innovate products and processes and globally benchmarked risk management and compliance practices are some of the goals that these amalgamations aim to achieve.
If we examine the above from the framework of value creation, there are many convergences. Value creation is based on growth, risk management, rapid realignment of the business portfolios, properly leveraged capital structure, performance and cost management, transparency etc. Value gains in M&A are based on synergies, which are cost and revenue synergies, Cost and timing of the implementation and the processes to align and eliminate the divergences between intrinsic value and market value.
So, the integration committees formed in anchor and merging banks to align HR, financial, compliance, IT and other areas, will probably, in time or with some delay, complete the process. However, the aim is to get to the real value drivers as stated above. How soon, we could get to a level where number of project appraisal of large projects by different banks get aligned to their market share rather than 2 or 3 banks doing 95% of project appraisal.
Similarly, what is the time frame in which lateral movement of risk management and credit specialists shall be possible? Should the book value to market value ratios improve by 30 percent in the next two years in amalgamated Banks? What is the current aim to invest in digital, quantitatively and qualitatively? Should we have a separate ROI and valuation of the digital vertical pre and post amalgamation, so that we go beyond simplistic arithmetical sums? Tough questions, never answered in the past, but the whole aim is to get better! Unless managements and consultants create these matrices, the combined entities shall be bigger ones for sure, but objectives may remain unattained.
(The author is Former MD&CEO, Syndicate Bank and Former Deputy Managing Director SBI)
Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout
3 Mins Read
Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter
Daily Newsletter
