Employees will be spared the pink slips post the three-way merger of Vijaya Bank and Dena Bank with Bank of Baroda, as per the diktats of political expediency. But the deal certainly isn’t good for shareholders.
The merger of Vijaya Bank and Dena Bank with the Bank of Baroda has been formally approved by the Cabinet. The merged entity will be India’s second largest public sector lender after SBI. The three-way merger is also the first of its kind in India.
The new bank will have an aggregate lending portfolio of over Rs 7.8 lakh crore, 9,475 branches and 13,544 ATMs.
On the management issue, the matters are still relatively hazy. BoB CEO P S Jayakumar’s tenure ended in October 2018, and the government gave him a one-year extension to ensure smooth integration. Vijaya Bank MD & CEO R A Sankara Narayanan ends his tenure in January 2020 and Karnam Sekar of Dena Bank will stay on till June 2020. The government, which owns 65.74% of the merged entity, could possibly decide to let Vijaya Bank and Dena Bank separately as business units for now to ensure minimum disruption.
Finance minister Arun Jaitley had said, “Two strong banks can absorb a third bank to create a globally competitive bank.” The merger is mainly viewed as a rescue for Dena Bank, which last posted losses of Rs 1,923 crore. The bad loan ratio of Dena Bank had reached 23.64% in the quarter ending September 2018. Vijaya Bank is the only one among the three that registered a profit in 2017-18.
For shareholders, the merger isn’t as much of a good deal though. Shareholders of the three banks will be given shares of the Bank of Baroda. The swap ratio for 1,000 shares of Vijaya Bank will be 402 shares of BoB. For Dena Bank shareholders, on the other hand, the ratio will be 110 shares of BoB for their 1,000 shares.
But according to an analysis by Mint, Dena Bank shareholders are the worst affected as they lose Rs 4.8 per share. Vijaya Bank shareholders on the other hand take a hit of Rs 3 per share, based on the closing market price on Wednesday. While BoB shares declined by 3% to close at Rs 119.4 per share, Vijaya Bank and Dena Bank were relatively flat at Rs 51.05 and Rs 17.95, respectively.
Shareholders of BoB are in a relatively better position as the bank is structurally stronger. Dena Bank shareholders can still take respite from the fact that the bank was already in a precarious position. But shareholders of Vijaya Bank may have a reason to feel shortchanged in particular, since the bank was doing relatively better than the other two in terms of profitability.
On the issue of employees, the government has clarified that there will be no job losses – every permanent employee of the other two banks will be an employee of BoB and will be entitled to benefits that are at least at par with what they were getting.
Despite the obvious redundancies on their payrolls, three mega public sector banks get merged without handing out a single pink slip. How an entity like this will perform in terms of value creation is anyone’s guess. It is way off the mark in terms of the M&A rule book. But political expediency obviously wins the day.