The Acquiring of Bank of Rajasthan by ICICI

3.1 DEAL STRUCTURE

The acquiring of Bank of Rajasthan by ICICI was a no cash deal. The deal was valued at Rs.3041 Cr. Each share of Bank of Rajasthan was valued at Rs.189/giving a premium of around Rs.90 per share. Table no. 3.1 showing Deal valuation

Particulars	Swap Ratio	Outstanding Shares(Cr.)	Price before announcement	Market Cap	Deal Value(Cr.)
ICICI	25	111	889.35	99921	3042
BANK OF RAJASTHAN	118	16	99.5	1527

Interpretation

• The deal was done by stock swap. It was thought to be 1:3, but later the swap ratio was decided at 25:118 as mentioned; means 25 shares of ICICI for 118 shares of Bank of Rajasthan.

• The swap ratio was at around 90% premium over the market pricing of Bank of Rajasthan. As the deal was a no-cash deal , ICICI had to dilute 3% equity for the deal.

• The net worth of Bank of Rajasthan at the time of merger was estimated to be around Rs 760 Cr. and that of ICICI Bank Rs 5,17,000 Cr.. In the quarter ending Dec 2009, Bank of Rajasthan reported a loss of Rs 44 Cr. on an income of Rs 373 Crores. So, ICICI Bank had to take in these losses too.

3.1.1 Multiples Method Value based on comparable P/B

The table gives P/B ratio of some banks which can be compared with the BANK OF RAJASTHAN( I have excluded some high profile banks like HDFC, ICICI, Axis Bank etc) Table no. 3.2 showing P/B ratio of BoR acquisition

Bank	P/B Ratio
Dhanalakshmi Bank Ltd	2.2
Karur Vysya Bank Ltd	2.0
City Union Bank Ltd	1.9
ING Vysya Bank Ltd	1.7
Development Credit Bank Ltd	1.4
United Western Bank Ltd	1.2
Jammu and Kashmir Bank Ltd	1.2
South Indian Bank Ltd	1.2
Federal Bank Ltd	1.1
Karnataka Bank Ltd	1.1

Interpretation

• The average price to book ratio comes to be around 1.5. Using the ratio and book value of 1048.8 Cr. value of BANK OF RAJASTHAN = 1.5 x 1048.8 = 1573 Cr.

• The deal value of more than 3000 Cr. is quite costly in this regard which values BANK OF RAJASTHAN at almost double the current value.

3.1.2 CALCUATION OF INCOME PER BRANCH Table 3.3 showing income per branch

Total deposits(in Crs)

15187

CDR

74.20%

spread on money they can lent

3.50%

Spread on money they can’t lent

-2.05%

Money which they can lent

(15187*CDR)

11268.75

Money which they can’t lent

(15187*(1-CDR))

3918.246

Number of branches

463

Income on money they can lent

0.85185

Income on money they can’t lent

-0.17348

Total Income

Income on money they can lent = = 0.85185

Income on money they can’t lent == (-0.173486)

Total Income = 0.85185+ (-0.173486) = 0.678364

Interpretation

• Even if they would have gone natural growth and built all the branches, it would have cost them a mere Rs 1911 Cr. which is way below the valuation that they paid to acquire bank of Rajasthan.

• Thus the deal is absolutely overpriced and it would have resulted in some value destruction for the ICICI shareholders.

3.2 RATIO ANALYSIS PROFITABILITY RATIO

• OPERATING PROFIT MARGIN
• NET PROFIT MARGIN

These ratios measure the ability of the firm to generate profits. These ratios are of interest to investors who would like to invest in the most profitable companies around.

• OPERATING PROFIT MARGIN

Operating profit OPERATING MARGIN RATIO = X 100 Sales ICICI BANK Table 3.4 showing Operating profit of ICICI Bank

Year	2006-07	2007-08	2008-09
Operating Margin (%)	28.87	26	26.22

Graph 3.1 showing Operating profit of ICICI Bank Significance: This ratio establishes the relationship between total operating expenses to sales. It shows the operating efficiency of the firm. When the operating ratio is less it indicates higher operating profit and vice versa. Interpretation: The Operating profit margin has decreased from 28.87% in 2006 to 26% in 2007.It increased in 2008 to 26.22 % . The average pre merger ratio is 27.03%. This indicates that the operating margin is not stable. BANK OF RAJASTHAN Table 3.5 showing Operating profit of BoR

Year	2006-7	2007-8	2008-9
Operating Margin (%)	28.84	21.18	21.12

Graph 3.2 showing Operating Profit of BoR Interpretation: The Operating profit margin of BoR has decreased from 28.84% in 2006 to 21.18% in 2007.It decreased slightly in 2008 to 21.12 % . The average pre merger ratio is 23.71%. This indicates that the operating margin is not stable. NET PROFIT MARGIN PROFIT AFTER TAX NET PROFIT MARGIN RATIO = SALES ICICI BANK Table 3.6 showing Net Profit Margin of ICICI Bank

Year	2006-07	2007-08	2008-09
Net Profit Margin (%)	10.81	10.51	9.74

Graph 3.3 showing Net Profit of ICICI Bank Significance: This ratio is an indicator of operational efficiency or in-efficiency. Higher the ratio better is the operational efficiency. Interpretation: The Net profit margin has decreased from 10.81% in 2006 to 10.51% in 2007.It decreased in 2008 to 9.74 % . The average pre merger ratio is 10.35%. This indicates that the net profit margin is not stable but the rate is acceptable. BANK OF RAJSTHAN Table 3.7 showing Net Profit Margin of BoR

Year	2006-07	2007-08	2008-09
Net Profit Margin (%)	12.96	9.75	7.81

Graph 3.4 showing Net Profit of BoR Interpretation: The Net profit margin has decreased from 12.56% in 2006 to 9.75% in 2007.It decreased in 2008 to 7.81 % . The average pre merger ratio is 10.04%. This indicates that the net profit margin is not stable. RETURN ON INVESTMENT Earnings Initial Investment x 100 ROI = Initial Investment ICICI BANK Table 3.8 showing ROI of ICICI Bank

Year	2006-07	2007-08	2008-09
Return On Investment (%)	82.46	62.34	56.72

Graph 3.5 showing ROI of ICICI Bank Interpretation: The ratio has been 82.46% in the year 2006, decreasing to 62.34% in 2007.Then, decreasing to 56.72% in 2008. The average rate is 67.17% which is very good for a company. BANK OF RAJASTHAN Table 3.9 showing ROI of BoR

Year	2006-07	2007-08	2008-09
Return On Investment (%)	140.81	173	185.2

Graph 3.6 showing ROI of BoR Interpretation: The ratio has been 140.81% in the year 2006, increasing to 173% in 2007.Then, further increasing to 185.2% in 2008. The average rate is166.44% which is excellent for a company. SOLVENCY RATIO DEBT EQUITY RATIO This ratio throws light on the long-term solvency of the firm reflecting its capability to assure the long period creditors with regards to payment of interests and loan repayment of principal on maturity at due dates.

• DEBT EQUITY RATIO

DEBT DEBT-EQUITY RATIO = EQUITY ICICI BANK Table 3.10 showing Debt Equity Ratio of ICICI Bank

Year	2006-07	2007-08	2008-09
Debt Equity Ratio	9.5	5.27	4.42

Graph 3.7 showing Debt Equity Ratio of ICICI Bank Significance: It shows the relative claims of creditors and owners against the assets of the firm .It also indicates the relative proportions o debt and equity in financial the firm’s assets. Interpretation: This ratio has been declined over the years from 9.50 to 4.42. The pre merger average comes out to be 6.39. BANK OF RAJASTHAN Table 3.11 showing Debt Equity Ratio of BoR

Year	2006-07	2007-08	2008-09
Debt Equity Ratio	25.37	26.15	23.6

Graph 3.8 showing Debt Equity Ratio of BoR Interpretation: This ratio has almost constant. It increased in 2007 to 26.15 and again fell to 23.6 in 2008. The average is 25.04 which is quite stable. EPS Earning Per Share is defined as ratio of profit after tax to the number of ordinary shares i.e. Net Profit after tax and preference dividend EPS = ---Number of ordinary shares So, when the income on equity (EPS) of a particular company increases the position of the company is considered to be favorable. On the other hand, if the rate of return to equity hare holder falls, or if the interest bearing securities get a big share into hearing of the firm, then the position of the company will be unfavorable. ICICI BANK Table 3.12 showing EPS of ICICI Bank

Year	2006-07	2007-08	2008-09
EPS	34.59	37.37	33.76

Graph 3.9 showing EPS of ICICI Bank Interpretation: The EPS of ICICI Bank increased in 2007 from 34.59 to 37.37 and again fell to 33.76. it could mean that the shareholders had retained some profits to make the company stronger. BANK OF RAJASTHAN Table 3.13 showing EPS of BoR

Year	2006-07	2007-08	2008-09
EPS	10.28	8.57	7.3

Graph 3.10 showing EPS of BoR Interpretation: The EPS of BoR decreased in 2007 from 10.28 to 8.57and again fell 7.3. It could mean that the shareholders had retained some profits to make the company stronger with an average of 8.72. DIVIDEND PAYOUT RATIO This is also known as payout ratio. It calculates the association between the earnings belonging to ordinary shareholder and the dividend paid to them. In other words Dividend Payout Ratio shows the percentage share of the net profits after tax and preference bonus is paid out as dividend to equity shareholders. It can be calculated by dividing the total bonus paid to the owners by the total profits / earnings available to them. Alternatively it can be found out by dividing the bonus per ordinary share by the EPS. Thus, Total dividend paid to equity holders Dividend Payout Ratio = ____________________________________ Earnings available to equity share holders ICICI BANK Table 3.14 showing Dividend Payout Ratio of ICICI Bank

Year	2006-07	2007-08	2008-09
Dividend Payout Ratio	28.91	29.43	32.58

Graph 3.11 showing Dividend Payout Ratio of ICICI Bank Interpretation: The average dividend payout ratio turned out to be 30.31%. It has increased over time from 28.91% to 29.43% and finally to 32.58%. BANK OF RAJASTHAN Table 3.15 showing Dividend Payout Ratio of BoR

Year	2006-07	2007-08	2008-09
Dividend Payout Ratio	19.45	5.83	2.74

Graph 3.12 showing Dividend Payout Ratio of BoR. Interpretation: The dividend payout ratio has decreased over time for BoR from 19.45% to 2.74% in 2008-09. It is not a good sign as the shareholders are not getting enough dividends. OVERALL RATIO: Graph 3.13 showing Pre and Post Merger Ratios Interpretation-

• The above graph shows the position of ICICI Bank and BANK OF RAJASTHAN during pre and post merger period. The acquisition raised share value to new heights and making ICICI Bank more stronger.

POST MERGER RATIOS OF ICICI BANK: Table 3.16 showing Post Merger Ratios of ICICI Bank

Ratio	Post Merger Period
	2010-11	Average
Operating profit ratio	24.81	24.81
Net profit ratio	15.91	15.91
Return on investment	42.97	42.97
earnings per share	44.73	44.73
Dividend Payout Ratio	31.29	31.29
Debt Equity ratio	4.1	4.1

Graph 3.14 showing Post Merger Ratio of ICICI Bank Interpretation

• The above table shows the post merger ratios of ICICI bank.
• The merger has benefitted the company and it looks to be more stronger compared to its pre merger scenario.

3.3 T Test:

• H0 : There is no considerable difference between pre and post merger financial performance.

• H1 : There is a considerable difference between pre and post merger financial performance.

Highlight: The company from Indian Banking sector was merged with a stake of 100 %. OPERATING PROFIT RATIO OF ICICI BANK Table 3.17 showing T test of Operating profit of ICICI Bank

Period	N	Mean	Sd	t	Result
Premerger	3	27.03	1.597	1.204	NS
Post merger	1	24.81	0

Graph 3.15 showing Pre and Post Merger Operating Ratio of ICICI Bank Interpretation

• The operating profit ratio of ICICI Bank before merger was 27.03. After mergering, it was decreased to 24.81. The test of difference of mean was found to be non significant as t=1.204 < tab= 2.920 at 5% level of significance.
• The hypothesis taken that there is considerable difference between pre and post merger financial performance is proved to be accepted.

NET PROFIT RATIO OF ICICI BANK Table 3.18 showing T test of Net profit of ICICI Bank

Period	N	Mean	Sd	t	Result
Premerger	3	10.35	0.552	-8.719	S
Post merger	1	15.91	0

Graph 3.16 showing Pre and Post Merger Net Profit Ratio of ICICI Bank Interpretation-

• The net profit ratio of ICICI Bank before merger was 10.35. After merging, it was increased to 15.910. The test of difference of mean was found to be significant as t=8.719 < tab= 2.920 at 5% level of significance.
• The hypothesis taken that there is considerable difference between pre and post merger financial performance is proved to be rejected.

EPS OF ICICI BANK Table 3.19 showing T test of EPS of ICICI Bank

Period	N	Mean	Sd	t	Result
Premerger	3	35.24	1.891	-4.347	S
Post merger	1	44.73	0

Graph 3.17 showing Pre and Post Merger EPS of ICICI Bank Interpretation

• The earning per share of ICICI Bank before merger was 35.240. After mergering, it was increased to 44.73. The test of difference of means was found to be significant as t=4.347 < tab= 2.920 at 5% level of significance.

• The hypothesis taken Mergers in Indian Corporate Sector in general resulted in value addition to shareholders is rejected.

ROI OF ICICI BANK Table 3.20 showing T test of ROI of ICICI Bank

Period	N	Mean	Sd	t	Result
Premerger	3	67.17	13.534	1.549	NS
Post merger	1	42.97	0

Graph 3.18 showing Pre and Post Merger ROI of ICICI Bank Interpretation

• ROI of ICICI Bank before merger was 67.17. After merging, it was decreased to 42.97. The test of difference of mean was found to be non significant as t=1.549 < tab= 2.920 at 5% level of significance.

• The hypothesis taken Mergers in Indian Corporate Sector in general resulted in value addition to shareholders is accepted.

DIVIDEND PAYOUT RATIO OF ICICI BANK Table 3.21 showing T test of Dividend Payout Ratio of ICICI Bank

Period	N	Mean	Sd	t	Result
Premerger	3	30.31	1.986	-0.429	NS
Post merger	1	31.29	0

Graph 3.19 showing Pre and Post Merger Dividend Payout Ratio of ICICI Bank Interpretation

• The dividend payout ratio of ICICI Bank before merger was 30.30 After merging, it was slightly increased to 31.29. The test of difference of mean was found to be non significant as t=0.429 < tab= 2.920 at 5% level of significance.

• Hence the hypothesis taken that Mergers in Indian Corporate sector in General resulted in value addition to shareholders is accepted.

DEBT EQUITY RATIO OF ICICI BANK Table 3.22 showing T test of Debt Equity Ratio of ICICI Bank

Period	N	Mean	Sd	t	Result
Premerger	3	6.39	2.721	0.731	NS
Post merger	1	4.1	0

Graph 3.20 showing Pre and Post Merger Debt Equity Ratio of ICICI Bank Interpretation

• The debt equity ratio of ICICI Bank before merger was 6.39. After merging, it was decreased to 4.10. The test of difference of mean was found to be non significant as t=0.731 < tab= 2.920 at 5% level of significance.

• Hence the hypothesis taken that There is considerable difference between pre and post merger financial performance is accepted.

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