This article is written by Shristi Roongta, pursuing an Introductory Course: Legal Writing For Blogging, Paid Internships, Knowledge Management, Research And Editing Jobs from LawSikho.
The banking system in India has earned numerous achievements beyond doubts and in a short span of time for the World’s largest and most diverse democracy. In Indian banking sector there has been several reforms and a few successful mergers and acquisition lead to growth of Indian banking. Mergers and Acquisition are the most and widely used strategy by the firms or companies to maintain and strength the position of the firms in the market. It is a faster and reliable method to expand into new markets and to incorporate new technologies. Hence, Mergers and Acquisition plays an important role in expanding the market power of banks and for closing such deal negotiation is also carried out. In this article, the strategies to effectively negotiate a bank merger and acquisition is discussed.
Merger and Acquisition in banking companies
The banking process of merger and acquisition is very complex and requires a great amount of time and efforts from both the parties. The Merger and Acquisition strategies hence become very important to derive the maximum benefit and especially in those deals which are being carried out at the very first time. Although, Mergers and Acquisition plays an important role in the banking industry which makes a good financial gains. The main aim of the merger and acquisition in a banking company is to improve their economies of scale.
The concept of merger and acquisition is not new in the banking sector. Merger is a process of combining two companies into one common company. It is same for banks, in banking merger an independent bank loses its charter and it becomes a neighborhood of an existing bank with one headquarter and a unified branch network. In acquisition, one company shops or takeovers a part of the another company. The banking merger is horizontal merge. For example, In 1993, Punjab National Bank obtained New Bank of India. During the last few years the banks in India has witnessed some high profile mergers, such as merge of ICICI Bank. Indian Bank merged with Allahabad Bank, Global Trust bank with Oriented Bank of Commerce and many such banks. In 2019, the Government merged 27 public sector banks and reduced the number to 12.
Some of the recent merger and acquisition in India:
- Kotak Mahindra bank- had acquisition by selling 4.5% stake in bank for around 1400 crore to Sumitomo Mitsui Financial Group Inc.
- Yes Bank- India’s 4th private sector lender with assets of nearly $11 billion is likely to buy local retail and commercial operations of Royal Bank of Scotland Group.
Section 44A of the Banking Regulation Act, 1949 which states that no banking companies shall amalgamate unless a scheme of such amalgamation is required to be approved by a two-third majority of shareholders of each amalgamating company.
Chapter XV, under the Companies Act, 2013 states that any merger proposed between a bank and a company, not engaged in a banking business, would at first instance require the approval of High Court and then subsequently by the Reserve Bank of India (RBI) in order to put the scheme into effect.
Negotiation in banking
Negotiation is the most important step in the process of execution of deal. The negotiation in merger and acquisition deal is sometimes perceived as simply a process of striking an agreement on the purchase price. Negotiations with banks is much more different than negotiating with a traditional seller for a potential deal. This type of negotiation definitely takes a certain amount of time with patience and persistence to complete a successful bank owned transaction. Even a rock solid deals may fall apart without the fault of any person in it. In negotiating process, one must see who provided the draft at first of the acquisition contract. Generally both the parties prefer to give the draft first which tends to give them a first mover advantage and greater negotiating headroom. Hence in order to prevent such situation planning strategically to carry out a deal of merger and acquisition in banking companies, effective negotiation is very much important.
The strategies to be opted while negotiating a deal are:
- Difference between merge and acquisition- it is important to know first whether a purchase is considered a bank merge or acquisition and also whether it maintains branded corporate identity to its customer and other stakeholders. A merge takes place when a bank purchases the identity of another bank and creates a new identity. In a merge, the target company is absorbed into buying bank and then convert it into a branch office. In a bank acquisition which is usually invisible to outside customers or stakeholders because the target bank is incorporated into a larger bank holding company.
- To keep the strategy and synergies as priorities- these are the two main reasons why the banks opt for merger and acquisition. As a merger and acquisition helps the banks to become more competitive and cost effective as a whole. The merger and acquisition helps a bank to gain a large market share and also eliminates the competitors. It becomes very important to keep the strategies and the synergies as the foremost priority.
- Observe and understand the opposition- the behavioural tendencies are difficult to predict but the habits are easy to understand as the humans are considered as habitual animals. During the negotiation, it is important to observe and understand these tendencies of the other party which can also leverage the person seeking favour on his side.
- Give and take– to make a negotiation most successful, both the parties must leave happy. In bank merger and acquisition negotiation, unlike the traditional sellers they have no connection to the property and takes a good amount of time of give and take. The banks do not have the history of years in the property regarding which they need to walk away from. In order to complete the negotiation deal in banking sector, the parties should have an agreed purchase price so that the parties can make concessions with the closing date and type of financing. The banks are eager to sell the property as early as possible.
- First offer- before allowing the opposition to show their terms, it is better to go first and make the first offer. This can be advantageous as the person making the first offer has a significantly better influence on the prices discussion. This also helps in building confidence as the other party will have a slight compulsion on them and on their pricing. Offering at first also gives a first mover advantage and the party can have the favour on their side.
- Know the “walk away” number– both the parties entering in a negotiation must m=understand a reasonable range in the sale price. Which price is highest or lowest must be known and also their “walk away number”. Walk away number is nothing but just a final amount or price for closing the deal which may also depend on the Best Alternative to a Negotiated Agreement (BATNA).
- Never say no immediately- in any negotiation it is important to keep the negotiation on and for that a immediate no does not look good. Even if the proposal sounds unreasonable or beyond the parties walk away number still “let me get back to you” sounds better than a complete NO.
- Don’t keep things for the last minute- in a negotiation, many issues can arise at the last moments such as issue for title, insurance and etc. and the deal is not closed until the parties sign their names at the closing table. In a banking merger and acquisition, the parties are often passed from one person to another without any prior notice and it is very important to keep themselves organized and keep all the necessary documents where one can easily access them. The parties must be ready with every document even if the document or the agreement is ready and suddenly anything crops up, the bank may have to suffer. The plans made by the parties must be kept at hands and should only be contingent on the current closing deal and the deal may not be closed until it is actually closed.
- Multiple offers- the parties should not rely on only one offer. There may be a situation where the current offer does not work or fails to work then they should be ready with other multiple offers. By keeping multiple offers ready, they can offer different things or a mixture of offers which can lead them to a better negotiations. Even if a party loses a deal, they will have another one to offer or to take one.
It can be concluded that negotiation is an important aspect in the procedure of merger and acquisition deal and a well planned strategy is needed to effectively execute any merger and acquisition deal which help the banks to retain their market power and also helps them in expanding their growth. Negotiation is an essential skills which is needed in any time of transaction deal though it is quite different from any traditional dealing and valuation is the first and foremost thing to be done in any deal execution and this is the phase where one’s negotiating skills comes and yields benefits.
- 8 Essential Tactics for M&A Negotiations https://www.axial.net/forum/ma-negotiations/
- Merger and Acquisition : Banking sector https://vidhisastras.com/mergers-and-acquisitions-banking-sector/
- 4 ways to improve your bank negotiation strategy https://www.fortunebuilders.com/4-ways-to-improve-your-bank-negotiation-strategy/
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