Kotak-ING Vysya merger: Synergies

Kotak Bank will buy ING Vysya bank in an all-stock transaction that gives ING Vysya shareholders 725 shares of Kotak blogBank if they own 1000 shares of ING Vysya.

This will create a larger bank in assets; the new Kotak bank will be about 50% larger. However, the price increase in Kotak’s shares (to Rs. 1200) might have fully factored in the growth increase, without allowing for any issues in the merger going forward.

All ING Vysya branches and employees will become Kotak branches and employees” after the deal is completed,” the banks said in a statement yesterday. “Congratulations @udaykotak on a brilliant merger move. The enormous synergies are obvious,” industrialist Anand Mahindra tweeted after the deal was announced. 

Big companies like to acquire other companies and the reason that is often cited is synergy. But things are never very obvious, even though they may seem to be initially. The history of mergers and acquisitions is littered with examples of things going terribly wrong for companies. Nevertheless, the zeal to merge and acquire, and thus grow bigger in the process, doesn’t seem to die down with executives who always remain confident of making it work.

As Paul B Carrol and Chunka Mui write in Billion Dollar Lessons — What You Can Learn from the Most Inexcusable Business Failure of the Last 25 Years “Executives can be like Elizabeth Taylor, who has said that with each of eight marriages, she was convinced that somehow, someway, this marriage would work.”

Usually a merger is justified by harping on a particular synergy. And what exactly is this synergy? It could be something like the scenario that was used to justify Coca Cola buying Columbia Pictures—consumers while watching movies made by Columbia Pictures will drink Coke. Not surprisingly, this did not work out well and Coca Cola had to soon sell Columbia Pictures.

But on a more serious note what exactly is synergy? John Lanchester defines the term in his book How To Speak Money: “Synergy: Mainly BULLSHIT, but when it does mean anything it means merging two companies together and taking the opportunity to sack people.” He then goes on to explain the concept through an example.

As he writes “If two companies that make similar products merge, they will have a similar warehouse and delivery operations, so one of the two sets of employees will lose their jobs. The idea is that this will cut COSTS and increase profits, though that tends not to happen, and it is a proven fact that most mergers end by costing money…When two companies merge, the first thing that ANALYSTS look at when evaluating the deal is how many jobs have been lost: the higher the number, the better. That’s synergy.”

An interesting story here is that of Bank of America stepping into acquire Merrill Lynch around the time the current financial crisis broke out. Michael Lewis writes in Flashboys that Merrill Lynch ended up taking over the equity division of Bank of America and went about firing employees of the bank. Merrill Lynch employees also gave themselves huge bonuses. Lewis quotes John Schwall, who had for Bank of America for nine years, as saying: “It was incredibly unjust. My stock in this company I helped build for nine years goes into the shitter, and these assholes pay themselves record bonuses. It was a fucking crime.”

Also, even in cases of firms which are in the same line of business, things can turn out all wrong, even with all the projected synergy. As an article in a September 1994 edition of The Economist points out “Even complementary firms can have different cultures, which makes melding them tricky. And organising an acquisition can make top managers spread their time too thinly, neglecting their core business and so bringing doom. Too often, however, potential difficulties such as these seem trivial to managers caught up in the thrill of the chase…and eager to grow more powerful.” This is something that Kotak and ING Vysya will have to deal with. Essentially, what might seem like an extremely valuable operating synergy may simply evaporate because of the cultural differences that exist between the two firms.

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