Is ICICI Bank committing a mistake in acquiring BoR?

Thursday, May 20, 2010 Posted by sauravtibrewal

There is a saying in the modern corporate world, “Lunch or be lunch”. The quotation is apt with the recent trend of mergers and acquisitions. ICICI Bank, India’s biggest private sector bank is all set to make its third acquisition this year. After taking over Sangli Bank and Bank of Madura, it has offered to acquire Bank of Rajasthan. After HDFC Bank acquired Centurion Bank of Punjab in 2007, it is the biggest M & A in Banking Industry.

ICICI Bank has offered a swap deal of 25:118. This means that Bank of Rajasthan shareholders will get 25 shares of ICICI Bank for every 118 shares of Bank of Rajasthan. The swap ratio will value BOR at about 3000 crores which is nearly 1.5 times its current market capitalization. I would have mentioned almost double, had this post been written two days back.

Now, let us do an analysis of the merger with the little information we have. Has ICICI Bank taken the right decision to acquire BOR?

For the merger

1. Increased number of branches and presence in Rajasthan

BOR has currently 463 branches, which will take the tally of ICICI Bank’s branches to nearly 2470 after merger. More than that, it will give the acquirer much needed sizeable presence in northwestern desert state of Rajasthan.

2. Encountering competition

ICICI Bank is facing stiff competition from HDFC Bank and also the resurging Axis Bank. To remain as the top private player, it needs to grow bigger and what better way to grow than the path of acquisition.

Against the merger

1. Expensive Deal

ICICI Bank has valued BOR at a whopping 3000 crores which is much more than its market capitalization. It values the acquired bank at 2.9 times the book value in comparison to 1.89 times, which is the Indian Banking average. At a time, where the picture of global financial world again seems to be shallow with Greece crisis, this expensive deal may decrease EPS of ICICI Bank.

The market gave its judgment on the day of announcement when the shares of ICICI bank were down by over 7% and BoR’s shares hit an upper circuit of 20%. The shareholders of BOR are to reap benefits as their per share value has been valued at Rs. 188.42 as compared to Rs. 80 on the end of17th May, the day previous to the day of announcement.

2. Cultural Differences

BOR, though being a private bank, has been managed like a public sector bank, where the jobs were safe and the productivity per employee was low.

ICICI Bank may probably pay them higher but again the expectations to perform will go up. Even, the average age of employees in BOR is around 40 as compared to young age group of ICICI Bank. BoR had a profit per employee of Rs Rs 2.89 lakh for the financial year up to March 31, 2009, compared to Rs 11 lakh for ICICI Bank.

The staff union at BOR is opposing the merger and has even threatened to take legal action against the promoters, if the merger goes ahead.

3. Ownership not transparent

Tayal Family had been the promoters of Bank of Rajasthan holding 28.6 percent stake in the bank. But according to a SEBI order, they, in coalition with related parties, set to hold 55% shares in the company. Tayal family has been barred by SEBI ti access capital markets and deal in securities.

The SEBI investigation is in progress and thus the possibility of a scam in the said bank cannot be ignored.

4. RBI guidelines violation

A penalty of Rs. 25 lakhs was imposed on them for violating RBI norms of illegal acquisition of immovable property, non compliance with Know Your Customer guidelines, deletion of certain records and data in Bank’s IT system.

Thus, in a nut shell, it can be said that all is not well with the bank and it was highly mismanaged. After the merger, ICICI Bank may have to bear the brunt of many such things.

5. Low operating income

Bank of Rajasthan’s profit has increased over the years. But still, it has a low EPS and net profit margin. The profit till nine months ended in a negative of Rs. 44 crores for nine months ended December 2009 against a profit of Rs. 117 crores in the year ended March 2009.

Thus, the above indicates the pros and cons of this merger but apparently it seems that the arguments against the merger are higher. We have seen certain expensive deals in the recent past which has affected the acquirer in a pretty big way. Will this merger also go down as one of the worst deals or will ICICI bank prove analysts and critiques wrong needs to be seen?

Saurav Tibrewal
MBA (IB) 2009-11 Batch
IIFT, Delhi


  1. Srinivas said...

    3000 crores on the ICICI balance sheet is not a big deal, they probably lost a lot more during the 2008 housing meltdown, but managed to survive. ICICI is tapping the rural and semi urban market a lot these days for cheap CASA funds, and you should know what CASA especially the SA of CASA contain!, its a very easy way to get funds and is an unlimited resource, hope you get the drift :)

  2. Ankur Dhebri said...

    Hi Saurav,

    Very good insight into the current acquisition of BoR...

    Can you come up with details on how is BoR valued at Rs. 188.42 per share.

    Can you also put some light on how does ICICI Bank plan to finance this acquistion and also quantify the post acquisition EPS numbers.



  3. sauravtibrewal said...

    One more positive for ICICI Bank, they can sell ICICI prudential and ICICI Lombard's products too from here.. so thats an added advantage

  4. nitesh said...

    feeling bad i should have brought BOR shares 3 months ago when i was planning to :(
    any ways nice article consolidation phase in indian banks
    We are also expecting few more banking licenses to be given by RBI probably in june

  5. sauravtibrewal said...

    Hey Ankur,

    The valuation regarding BoR shares at Rs. 188 was computed at a particular day.

    Today, if suppose the price of ICICI Bank share is Rs.820 and BoR is 120, then valuation of BoR share will be 820*25/118 = 173.72

    So, this valuation of 188 was computed taking a particlular set of share prices of both the banks. This valuation is bound to change every moment.

    Regarding financing, ICICI Bank is giving equity shares to BoR, so I guess they not paying hard cash to the promoters. Thus, financing will not be a concern.

    Regarding Post Merger EPS, its pretty easy to compute. You can take the current EPS of both the banks and multiply it with the swap ratio and will get the post merger EPS.

    I will get back to you with the original numbers.

    Hope I anwered your queries.



  6. sauravtibrewal said...


    As far as my knowledge goes, post merger EPS of ICICI Bank as at 31st March 2009 can be computed as below

    16.135 cr shares = BoR
    111.329 cr shares = ICICI bank

    EPS of ICICI bank and BoR are 36.1 and 7.30 respectively

    Post merger earnings = 111.329*36.1+16.135*7.3 = rs. 4136.7624 crores

    This amount should be divided by 111.329+25/118*16.135 = 114.7474 cr shares

    So, post merger EPS should be Rs. 4136.7624/114.7474 = Rs. 36.05

    Its absolutely as perb my knowledge and is subjected to contradictions



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