Friday, October 06, 2006

M & A

classification of growth has lead to a very generic macro level perspective that can be compartmentalized as organic and inorganic. One where the company grows through its hard work and push, thereby improving systems within, and products leads to better profits and share value thereby a bigger market cap. This, I feel is a good way of growing, simply due to the fact that the possibility of learning during the process. This is much slower and has its own loopholes and downfalls, there by making this route to growth sometimes a harder path to take.

Another interesting path that is taken by many is the "inorganic" path. This mainly encompasses the M&A route that leads to a larger organization with a better market cap. However, mixing oil and water cannot happen by just mixing them, you need to add emulsified agents, or blend them in, like with mayonnaise. The acquiring company generally looks for a company that either compliments or supplements its existing talent pool thereby enabling itself to move into a relatively new market, or a new product or a another competitor. In essence, any M&A activity involves changing the 4Ps and creating a new set of 4Ps that are different from the company's existing ones.

So how does an M&A activity help a company? Well, like the points mentioned above:
1. The company sees great scope in a particular market, however, it does not posses the necessary talent or technology to enter this market, hence it decide to acquire a company that is doing well in this market for the same.
2. The company needs to grow to show that it is doing well, I call it the ford route, acquire other companies that will help add to your product portfolio and say very boldly to the world that my product portfolio has increased hence I am dong well.

there are many more reasons why M&A activities take place, but this is not the reason of this post. Many a time, actually majority of times the merger fails to take off, due to cultural or other factors, some notably good ones that lost value for the share holder rather than gained value are he AOL-time Warner merger, Daimler Chrysler,etc. etc

However, a symbiotic relationship need not necessarily exist purely through a merger or an acquisition. There are MoUs that can be signed by companies such that they can work with each other to help provide better services to their customers.

Cashnet, a common atm switch built for Indian banks is one such example where consolidation of infrastructure has worked well to better the customer experience. Cashnet is in direct competition to VISA/Maestro's switching and backbone networks, however, with the interconnect fees being charged per transaction, the possibility of moving customers from counter banking to ATM banking would have been tough with this as a deterrent. The average cost of servicing a customer at the branch works out to about Rs.200/- per transaction as opposed to Rs.20/- at the ATM and about 0.40P via the internet. Hence, embracing technology is a good way forward for the bank thereby allowing them to be able to spread their reach and improve the customer touch points.

Consolidation in t he banking industry has seen a string of mergers between banks and other institutes. The ICICI merger along with ICICI bank to result in a single entity, the same with HDFC and TimesBank resulting in HDFC bank, Global trust bank etc. This can be seen as a path forward to many banks.

Like with setting up any infrastructure, the costs involved are rather high, and the returns need not necessarily offset the investment. The greatest risk is the fact that a large percentage of the income is from interests generated via lending. India has the highest percentage of vehicles bought on loans. The worldwide average is about 70% vis a vis 80% in India.

The ability of the treasury in the bank to be able to roll the customers savings profitably is the key to survival of the banks. Hence, areas where the bank can save on infrastructure costs it will either outsource or work with other banks. In the case that the bank has decided to go on its own, eventually might lead to its collapse, and its assets being picked up by another bank.

The banking scene is fraught with trends of Mergers or acquisition or understandings within the community in order to survive against the big fish.

No comments:

Locations of visitors to this page