Financial Analysis of ICICI Bank & Bank of Rajasthan Merger Case Study

This case study analyzes the merger between ICICI Bank and Bank of Rajasthan, examining the rationale, financing, and financial impact of the acquisition. It delves into the theories behind mergers and acquisitions, focusing on efficiency, market power, and bankruptcy avoidance. The study investigates the financing methods employed, primarily an all-stock plan involving equity swaps. A comparison of pre- and post-merger financial performance is conducted to determine the impact on shareholder value. The analysis also considers the regulatory context and the strategic motivations behind the merger, including ICICI Bank's expansion plans and the need to address non-compliance issues at Bank of Rajasthan. Ultimately, the study aims to provide insights for investors, policymakers, and strategists involved in M&A decisions, highlighting the importance of regulatory intervention and strategic planning in the banking sector.

Accounting
Assignment

1
ACCOUNTING & FINANCE ASSIGNMENT
Case studY
Name of the Student :
Date : 07th October,2018
Administrator
60
1 | P a g e

2
Background
Our Study is intended to focus the rationale behind one of the most commonly found practice in
the business world that is Merger& Acquisitions (M&A) along with the identification of the
possible sources of Funds to finance the process. It also makes a deep- rooted analysis of the
financial impact of the entire process by making a comparison of pre and post merger financial
figures and finally whether it succeeds in enhancement of the shareholder’s value or not. In order
to serve our purpose we have selected one of the largest Tech merger of ICICI Bank - Bank of
Rajasthan. The analysis explains the merger that has took place in the last 10 years and what are
the parameters and performance metrics that are seen while doing the merger. Since this is one of
the financial news, it is always expected that it would trigger the stock market when the news is
made public. In the given case as well, the reaction of the stock market and the prospective
investors has been captured in the report towards the end.
2 | P a g e

3
Contents
Cover Page………………………………………………………………………………………1
Background……………………………………………………………………………………...2
Introduction……………………………………………………………………………………..4
Justification for the choice of the Company and Sector………………………………………..5
Rationale & Theory of Merger and acquisitions……………………………………………….6
Examination of the Financing of the Merger and acquisitions…………………………………7
Financial Performance pre and post merger acquisitions………………………………………8
Impact of Financing announcement…………………………………………………………….9
Conclusion……………………………………………………………………………………10
3 | P a g e

4
Introduction
The practice of consolidation of companies is known as Merger and acquisition, that consists of
two words, first being merger, means combining two companies to form as one and single
company, whereas acquisition refers to the taking over of one company (Vendor company) by
another company (Purchasing Company). The basic objective behind our study is to cover the
various aspects of M&A such rationale behind M&A, how the justification for the M&A should
be provided after making a thorough analysis of pre and post merger effect, what are the various
sources of Funds to facilitate the process and finally how the final outcome of the entire process
results into the overall enhancement of shareholder’s value. In order to justify our study we have
selected the case study approach along with the questionnaire method by referring the merger of
ICICI Bank - Bank of Rajasthan. In this modern era of Banking Industry evidencing the dynamic
change in the financial world perhaps can provide the best evidence to justify the process of
acquisition.
In order to facilitate our study the major sources of financial data gathered are Annual reports of
both of the banks, website of the banks along with the relevant publications of the News journals.
The methodology selected here is the use of various financial ratios and common size financial
statements have been used to justify our study. All the relevant financial figures presented are the
parts of the secondary data collection.
4 | P a g e

5
The ICICI Bank, acquirer was formed in the year 1955 with the initiatives taken by the
government of India, representatives of the Industries along with the World Bank collaboration
in order to serve the long and medium term project Financing to the Indian Business. A major
transformation was noticed in the year 1990 when it converted itself into a developmental
financial institution by offering services directly as well as through its various subsidiaries.
The major reason behind selecting the merger of ICICI Bank - Bank of Rajasthan is nothing but
to bring out the Instance of compulsory merger option exercised by the various regulatory
authorities on the promoters of the Bank of Rajasthan since 2009 as there were lot of evidences
showing severe noncompliance by the Bank of Rajasthan. Because of which no option left for
the promoters other than to restructure the same. This case study is also an indication towards the
fact that Indian Banking Industry still have a strong enough regulatory system for its future
survival.
Justification for the choice of the Company and Sector
The major reason behind choosing the merger of ICICI Bank- Bank of Rajasathan to prove its
worth for our study is enumerated as follows.
1. This merger is the best evidence to establish the power of regulatory intervention in
the Indian Banking Industry to strengthen the Indian Banking system
5 | P a g e

6
2. It is the best example of the strategic move taken by the ICICI bank to establish itself
to be a market leader (Kusnadi & Wei, 2017).
3. This merger evidences the recapitalization of the weaker bank as per Basel II norms.
It is because of this reason that the approval of the board on the merger could be
aviailed quickly (Kang, Yu, & Lee, 2016).
4. This study further showed that how the policy of liberalization adopted by the
government of India and Reserve Bank of India helped to increase the profitability of
the ICICI Bank.
5. This also shows that how the Bank can target the local population for enlarging its
local customer database. The ICICI bank planned to increase the number investors in
the local region and also to increase the level of comfort for local community and the
number of branches and the linking of bank accounts was made easy through this.
The number of facilities that could be given to the potential as well as existing
customers was increased (Johan, 2018).
6. It provides the guidance to investors, strategy and policy makers to make relevant
decision in M & A Cases (Charles H, Giovanna, Dennis M, & Robin W, 2015).
Rationale & Theory of Merger and acquisitions
The major theories of takeover applicable in the case of acquisition of Mindmeld by
CISCO are enumerated hereunder:
1. Efficiency Theory
6 | P a g e

7
2. Market Power Theory
3. Bankruptcy Avoidance Theory
1. Efficiency Theory
The efficiency theory of takeover is again of two types, i.e. differential efficiency
theory and inefficiency management theory. In the case of Bank of Rajasthan’s
acquisition by ICICI Bank is based on inefficient management theory (Svahn,
Mathiassen, & Lindgren, 2017) . The reason behind this is that ICICI Bank in the
given case is a strong market player, but the Bank of Rajasthan was blamed for lot of
non compliances by the various regulatory authorities and consequently the promoters
of the Bank sold majority of their stake, there was great risk from operations
associated with the Bank of Rajasthan. Hence assigning the leadership in the hands of
ICICI Bank would lead to ensure the smooth operation by the merged group.From the
various non compliances like decrease in the shareholdings of the promoters of the
bank and various penalties imposed by the SEBI on the BOR it was quite evident that
the inefficiency in performance of BOR was made public as in the same
circumsatnces its acquirer was performing much better. At the same time this deal
offered the benefit of synergy to the ICICI which simply aimed at combining the best
elements of both of the banks and removing the worst part associated with
them.Synergy is achieved only when the merged valuation of the firm goes higher in
comparison to their individual valuation that happened in this case by increase in the
valuation of shares post merger (Egelund-Mu¨ller, Elsman, Henglein, & Ross, 2017).
7 | P a g e

8
In this case the inefficiency of the BOR was replaced by the addition of employees by
the ICICI with a view to providing much better delivery of products and services.
Because of which the ICICI also got a scope to serve the rural customer.
Again the ICICI raised the level of corporate culture in the BOR through the
implementation of CASA principles.
2. Market Power Theory
Market power theory ensures the control of quality, price and supply of the products
services in the market to be achieved through the acquisition process. The benefit
through merger is the benefit of synergy in operations thereby increasing the
operational performance of the ICICI bank by way of reducing the operation cost. In
the given case the new customer base and raise in the amount of deposit together with
the better outreach to a large group of customer helped the ICICI to gain the market
leadership. due to which not only the profitability of the Bank increased but also the
barrier to enter the rural market was also removed (Ghofiqi, 2018).It could be
evidence from its past history that for gaining the market power it made a number of
M&A in past too.
3. Bankruptcy Avoidance Theory
As BOR had been facing huge allegations from various regulatory authorities hence
there was a possibility that a time might come to these authorities to declare it an
8 | P a g e

9
insolvent one, but before this the decision to merge it with ICICI Bank made a
miracle.Generally merging a weaker Bank has also a lot of positive and negative
effect. Because there will be very few amount of bidder who would like to bid for
it.Hence in this case merger was seen as an alternative to Bankruptcy.ICICI though
paid 90% Premium on the share of BOR as the Bank didn’t have to search for its
target, but BOR had to merge with icici as a result of regulatory provision (Grundy,
Held, & Bero, 2017).
4.
Unique reason which necessitated the merger of ICICI Bank- Bank of Rajasthan
The major reasons why the merger of ICICI Bank -Bank of Rajasthan are as follows:
i) The growing instances of non compliances made by Bank of Rajasthan made it an
instance of compulsory merger for which the best leader in form of ICICI Bank
was chosen (Iggers, 2018).
ii) This merger indicates towards the possible reasons for the weakness in the Indian
Banking sector that makes it a target of the strong Bank.
iii) The smart strategic move of a bank in industry to strengthen its position by
correctly identifying the target bank to be merged has become evident from the
initiative taken by ICICI Bank through its expansion plan (Kaufmann, 2017).
9 | P a g e

10
iv) ICICI wants its presence in the northern part of India serving the rural customer as
a part of its strategy that was fulfilled by this merger.
v) The ICICI bank planned to increase the number investors in the local region and
also to increase the level of comfort for local community and the number of
branches and the linking of bank accounts was made easy through this. The
number of facilities that could be given to the potential as well as existing
customers was increased (Hansen, Otley, & Stede, 2003).
Examination of the Financing of the Merger and acquisitions
The Bod of directors of both of the banks approved the scheme of merger as on 18 th
May,2010 on the basis of an all stock plan. The merger of ICICI Bank-Bank of Rajasthan was
approved by the Board of directors of the second largest private sector Bank of India,i.e. the
ICICI Bank was approved to be a non cash deal involving the equity that was swap option in the
ration of 1: 4.72 resulting into the allotment of 25 shares by the ICICI for every 118 shares of the
Bank of Rajasthan. This is how the purchase consideration of the company was decided and
being paid off (Kusolpalalert, 2018).
In terms of Purchase consideration to be paid to BoR was valued for Rs.30.41 billion, for which
each of its share was valued at Rs.189/- plus an amount of Rs.90/- per share ((approx.) as
premium.
At the time of merger the total number of outstanding shares of ICICI was 111 crores, whereas
for BoR it was 16 crores only and the market capitalization of the former was Rs.99221/-crores,
10 | P a g e

11
whereas for later it was Rs.1597/- crores (Webster, 2017). Thus, it can be said that the entire
purchase consideration was being settled off in terms of equity arrangements and debt was not
required. In the financials of ICICI bank post merger, it was shown as equity financing as the
balance of equity increased rather than det. So it qualifies as on all equity deal. In the given case,
working capital finance was not required as by ICICI bank as the entire thing as being paid off in
the form of equity shares.
Financial Performance pre and post merger acquisitions
The following figures also provide major indication towards the fact that the said merger
didn’t bring any major changes in the overall financial performance of the Bank, instead
it has affected the financial performance in terms of profitability of the ICICI Bank. All
the major ratios have been computed for ICICI bank post merger to show the impact of it
on the overall business. This was one of the instrumental mergers and brought ICICI
bank into one of the top banks in the country with a huge addition in the list of customers
served.
Pre and Post Merger analysis through the Profitability Ratio
ICICI Bank(Pre merger)
11 | P a g e