RAJ BANK MERGER – GAIN FOR ALL STAKE HOLDERS

[Dr. Sanjiv Agarwal]

It's official now. The two banks - The Bank of Rajasthan Ltd and ICICI Bank Ltd, the two private sector banks, one old generation and the other new generation bank are set to marry soon. While the board of both banks have approved the in principle merger, it may take couple of months to get shareholder's approvals (meetings planned for 21^st June) regulatory clearances and other procedural hurdles cleared. The general meetings of the shareholders are scheduled to be held on 21^st June 2010 at Mumbai to approve the merger proposal.

 

 

The Bank of Rajasthan is a Rajasthan based private bank in operation since 1943, promoted by Manisngka Brothers of Bhiliwara (Rajasthan) . However, promoters later changed hands to Bangurs and then Tayals who are now said to be responsible for the circumstances leading to present merger. Today bank has a nation vide presence with over 460 branches (110 ATMs) with prominence in the state of Rajasthan. The bank is credited with loyal customers, its own brand equity and even its logo comprises of a victory tower, a rising sun and a coin with stronghold in Rajasthan . It also pioneered mobile banking way back in 1960. The bank has a sponsored rural bank , Mewar Anchlic Gramin Bank since 1983 and is also a SEBI registered merchant banker, banker to issue and a depository participant with a capital base of Rs 160 crore and total business of over Rs 25000 crores (deposits and advances).

 

On the other hand, ICICI Bank is the largest private sector bank and second largest bank in India. It has a assets base of Rs 3634 billion and a branch network of over 2000 branches, 5219 ATMs and presence in 18 countries. Unlike Bank of Rajasthan which is only listed in India, ICICI Bank's ADR's are also listed at New York Stock Exchange. The bank has significant profit reported in March 2010 at Rs 40.25 billion where as Rajasthan Bank reported loss in December 2009. The Bank of Rajasthan has posted a loss of over Rs 100 crore for 2009-10 due to additional provisioning requirements

 

There have been certain problems of mis-management and governance at the Bank of Rajasthan which led to the circumstances resulting in the proposed merger. The merger also suggests that all is not well in the bank. Earlier in January this year, the banking regulator brought in a new managing director and CEO from State Bank group to take over and clear the mess. Today with five RBI nominated director (which is a rare case), the management of bank is virtually at RBI's oversight. The promoter group (Tayals) face investigations and enquiries, both from Reserve Bank and Capital Market Regulator, SEBI. Infact, SEBI has already issued a restrain order against the Tayals from dealing in securities market. The merger may not affect the bank imposed by SEBI on the promoters of Bank of Rajasthan post merger. SEBI may take a view on the same as merger may dilute the gravity of offence itself.

 

 

 

Though there were so called 'independent directors' on the Board of the Bank of Rajasthan, it is understood that there were several instances where it was observed that either they did not acted in the larger interest of the organization or their independence it self was at stake. Had they played a role expected of them, RBI would not have sent a fleet of new directors to oversee the board functioning. As a cumulative effect, the financials and business had been adversely affected which is also reflected in the results. The growth is negative, bank is into losses and assets are impaired. Not only this, it also dents the trust of all stakeholders , particularly the depositors, customers and borrowers.

 

In order to salvage the bank from further sinking and to save guard the interests of all concerned including employees, perhaps, merger seems to be a wise idea. The option of ICICI Bank or any other bank is not the issue here. If Bank of Rajasthan was to survive, the merger became inevitable and this has been done timely at an appropriable moment.

 

ICICI Bank has entered into an agreement with certain shareholders ( promoter group ) for the proposed amalgamation at a share exchange ratio of 25 shares of ICICI Bank for 118 shares of Rajasthan Bank ( a ratio of 1:4.72). This merger is going to be on a going concern basis and existing shareholders of both banks would gain handsomely . If one looks at BOR's share prices, they have been going up and up and in last three trading sessions, the prices have shot up by over 60 % to Rs 166.70 (as on 24.5.2010) where as price of ICICI Bank stood at Rs 832 on 24 the May 2010. Post merger, the value of ICICI Bank shares will also go up as the business grows and the advantages of merger start accruing.

 

The Merger Matrix

Factor	BOR	ICICI
Branches	463	2209
ATMs	110	5219
Financial Results	Loss in December 2009	Continuous profits
Listing	BSE, NSE	BSE, NSE, NYSE
Share price (24.5.2010)	Rs 166.70	Rs 832
One year high	Rs 166.70 (24.5.2010)	Rs. 1009 (6.4.2010)
Share exchange ratio	118 (4.72)	25 (1)
Value base on 24.5.2010	Rs. 19670	Rs. 20800

 

So far as share exchange (swap ratio) is concerned, the present shareholders of BOR tend to gain in money terms considering the present price or even the price on the date of announcement in the board meetings of two banks. The share price of BOR has been jumping by 20 percent since then and even then at present prices, it gives a monetary gain .

For shareholders, it is believed that the merged entity would provide value to shareholders in medium to long run. For ICICI bank, the benefits will start accruing immediately as there is going to be no cash outflow (only share exchange will take place) and benefits from operational performance will be immediate adding to top line as well as bottom-line. Since BOR now also operates on modern technology, some capital expenditure on information technology may be required to align it with that of ICICI. The customers of BOR may now enjoy would class personal banking experience, but of course, at a cost. While 'personal touch' of BOR may be missing, one can then feel 'professional touch' in banking relationships. ICICI lays emphasis on personal banking relationships where as customer loyalty has been a USP of Bank of Rajasthan . Those loyalties will have to be tested now. Those customers who are averse to dealing with private banks may shift to other public sector banks, and in this back drop, bank like state bank of Bikaner and Jaipur may have an edge, given its size and presence in the state of Rajasthan. The fixed deposits may also witness some shift . Undoubtedly , customers will have rich choice of innovative as well as customized products and corporate customers shall immensely   gain out of such products adding to their efficient cash management . BOR has considerable business of state government corporations and bodies (eg, roadways , JDA, University, RIICO etc). While ICICI would benefit out of this, a question may arise in these corporations to continue banking relations with a new generation private bank or switch over to any other public sector bank.

 

The most sensitive part of this merger would be handling of human relations. The employees of BOR will resist such a merger for obvious   reasons as it makes them in secure, fragile and brings in fear of relocation, branch closure and rationalization besides discrimination in treatment, positions, packages etc. The most challenging task before BOR employees would be to adjust to new target oriented professional work culture where performance is rewarded and every team member has to contribute in tangible terms to organizational growth. Those who are able to change would survive and also rediscover their talent and those who wont would find such merger really difficult to cope with . The writing is on the wall and this change (merger) seems to be inevitable. The softer part of the merger is not yet out but it would be desirable for ICICI Bank to value the BOR's brand as well as human resource when the final valuation exercise is done and finally approved by the shareholders of both banks.

 

BOR's slogan says 'together we prosper' which seems to be coming really true now. ICICI may or may not continue Hema Malini, brand ambassador of   BOR post merger and it is only she who tends to loose the job. Of course, she won't complain as she has other better jobs to perform. 

In a recent development, Supreme Court has refused to hear the petition against the merger unless the petitioner disclosed his shareholding in the bank. The court observed that any one can buy a share worth Rs 10 in a company and the credit problems for it every where and for everybody in the country.

 

 

Given the market value of immovable properties and other assets (brand, goodwill) it is a win-win situation for both the banks- a value buying for ICICI and a graceful face saving for Bank of Rajasthan. However, a seven decade old bank would loose its identity and name for ever- the cost it paid for the governance. The BOR- ICICI merger is perhaps a live example of what a poor corporate governance can cost to the organization.

 

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