India has not seen a merger of this size, resulting in the creation of the Kotak Moment or in other words making of the India's fourth largest private lender, since the 2008 global meltdown. On Thursday, Kotak Mahindra Bank board approved merging ING Vysya Bank with itself in an all share deal. As per the swap ratio, every 1,000 shares of ING Vysya Bank, with a face value of Rs 10, will fetch 725 shares of Kotak Mahindra Bank, with a face value of Rs 5 each. The other talked about mega wedding in the banking sector include HDFC Bank acquiring Centurion Bank of Punjab in 2008 and IDBI Bank buying United Western Bank in 2006. Both deals were done prior to the great Lehman Brothers collapse that triggered a meltdown worldwide. Post that event, two more mergers happened in 2010 — ICICI Bank-Bank of Rajasthan and State Bank of Indore-SBI — but the scale was nowhere near the Kotak-ING Vysya marraige.
Read out what the two Udays, specifically, Uday Kotak Executive VC & MD, Kotak Mahindra Bank and Uday Sareen CEO Designate, ING Vysya Bank hve to about the deal that has kept the market afloat on Friday. Vaughn Nigel Richtor, Director, ING Vysya Bank also joins in the discussion.
Q: You have clearly taken advantage of someone in distress. HDFC paid four times for Centurion, you have paid only 2.2 times, clearly you have taken advantage of someone in distress?
Kotak: Let me assure you that there is no question of any distress with anybody. This is a deal on the merits of it. I genuinely believe and so does the board of ING Vysya Bank which is an independent board believes that this is a fair ratio in the interest of all the stakeholders of both entities and the combined entity. Q: ING was or still is in need of cash so you had to agree to any deal, you couldn’t wait to get three times?
Sareen: On the contrary I think just the complementarity makes immense strategic rationale. If you look at the 30 day average of ING Vysya Bank share price, this is a 16 percent premium to that. There is no better match in the Indian banking system today. 80 percent of all of Kotak's branches are in North and West.
Q: ING will get only 6.5 percent of that. The stake in the combined entity is only going to be 6.5 percent. So, in any case if you had waited for three times you could have got it isn’t it?
Sareen: If you look at ING Vysya Bank all the stakeholders, be it shareholders, employees and clients, I think there is perfect complementarity. It gives ING Vysya Bank stakeholders to be a part of one of India's largest financial services conglomerate and I think that is an exciting journey. Q: Why did you ask them to keep a one year lock in. If it was such a compelling proposition they would have stayed anyway?
Kotak: In my view ING group was very comfortable with that. It is a way of signalling contrary to what you may have felt that this is not a distress deal at all. They believe in the combined synergies and actually it is a big signal that ING group is committed to make the merger work, to have a one year lock in post merger as a sign of commitment. Q: HDFC Bank grew at about 30 percent between the years 2003 and 2008. Even without a merger it could take a substantial market share away from the state owned banks and it did. Organically without this cost and without the possible cultural conflicts that may come you could still have grown at 30 percent?
Kotak: No, we are confident that our business model had the growth potential. This is perfect complimentarity. Our brand synergies are just awesome. It is like, if both of us had a plain piece of paper as Uday rightly said, it is a perfect fit and it saves time in a competitive marketplace which is going to get more competitive as new players come as banks get more aggressive. So, we see this as huge complimentarity, synergy transformation and significant time to market advantage. Q: There will be problems of cultural management, salaries to be matched, hierarchies to be matched. Kotak: We believe diversity is good. Sareen: As you would know we are an extremely diverse bank both from a clients perspective and employees perspective. We have a strong franchise on SME driven by lot of it in South. Q: We are not talking about businesses. I am only talking about the fact that merging two hierarchies is going to take away something in terms of some people wanting to walkout or a heartburn in terms of not getting the same scales as Kotak Bank? Sareen: If there is one bank that has actually managed diversity it is ING Vysya Bank. We have an international connect, we serve clients in Amsterdam, Brussels and at the same time we serve clients in the heart of Andhra Pradesh where we have 175 branches. So, we understand managing diversity and that is the richness of heritage. Q: Kotak is the man who is going to own 34 percent stake. This is your first merger, it is not a skill proved. So, for you it is going to be an acid test. Do you have the confidence you will be able to work?
Kotak: I worked many partnerships. Kotak Mahindra Bank has started out of a relationship between Anand Mahindra and myself long time ago. We have had joint ventures which have been very successful with Goldman Sachs, Ford. Therefore making relationships work is at the core of who we are. We actually feel that this is a way for us to really build something synergistic and quick.
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Q: ROE for Kotak Bank last available number is 13.8 that is FY14 standalone and historical it is 10.29. So how much time would you need, what would be the immediate merged ROE and how much time will you take to get to 15?
Kotak: We think over time 1 plus 1 will be more than 2 and our combined ROE if I had to take a medium term will be higher than 15.
Q: That would be over medium term but how much will you need to get back to the 15 percent consolidated?
Kotak: As I mentioned to you there is significant synergies and cost savings into the branch networks. For our branch networks we are spending Rs 200-250 crore a year to get to thousand. So a lot of that gets saved straight away.
Q: I am not denying that, but I am just asking even then how much time do you think you need to get to an ROE of 15 percent?
Kotak: We think we will get to higher ROEs and we will come back to you soon with a game plan.
Q: By what time?
Kotak: I don’t want to rush in on the date of announcement. We will come back to you about our vision and strategic execution in due course.
Q: Has Mr Kotak been in touch with ING unions, have you all taken them on board about this merger?
Richtor: That is something you should address to the management. As a board, we had our meeting recently a few hours ago as I said to consider that.
Q: What about your management, Uday Sareen did they take their unions or board, could there be some problems convincing them?
Richtor: That is something that has to be looked at going forward and see how we can make sure that everybody benefits from this transaction.
Q: When from ING you took over Vysya and you were trying to iron out the merger you did have a lot of cultural problems, are they completely ironed out now?
Richtor: If you look at the performance of ING Vysya over the last 7 or 8 years I think you have seen a very significant improvement in performance and that is largely with the existing staff we had. I think what we have been able to do there is to bring in a new strategy, a strategy focused on growth, broadening out our product and distribution and that has worked very well and the staff has been a great contributor to that.
Q: You are locked-in for one year. Thereafter would you want to really continue here at all because you have come down from 43 percent stake to a 6 percent stake in an Indian entity. So, after one year you would really want to evaluate whether you want to stay on at all?
Richtor: When we look at this, we are looking at it because we think that the value derived from this would be greater than simply being on our own. Basically what we are saying is one plus one is going to more than two. However we look at all our investments and we look at all our partnerships in terms of the performance they have had. So, we will continue to evaluate the performance going forward. However we hope that we will accelerate.
Q: In previous mergers, a common example is the Centurion Bank because there is a common factor of Shailendra Bhandari heading both and it is a more recent merger of two new banks coming together. Many of the top management left, Bhandari included, and a lot of the treasury guys. Would not that get repeated this time as well?
Richtor: One of the great benefits of this is there is so little overlap unless we discuss there is not much duplication. So what we see is actually the ability to accelerate the growth on the combined businesses and as I said, one plus one is greater than two.
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