The Making of a merger  

When IDFC bank was in talks to acquire some of Shriram Group’s financial services businesses last year, many in the industry were sceptical. Analysts felt IDFC Bank, one of India’s newest banks, was trying to bite off a lot more than it could chew. The merger was eventually called off over valuation concerns.

IDFC Bank, primarily an infrastructure financier, was still in the market, wanting to get into retail lending. Luckily for it, Capital First, a Mumbai-based non-banking finance company (NBFC) focussed on retail lending, saw merit in turning into a fullfledged bank. Last month, IDFC Bank and Capital First began the journey to realise their ambitions when they announced a merger to form a combined entity with assets under management of Rs 88,000 crore.

It is a win-win. V. Vaidyanathan, chairman and managing director of Capital First, who will be the boss of the combined entity, spelled out the advantages for both sides in an email to Capital First employees. He said the two would complement each other as IDFC Bank had exceptional skills in wholesale and infrastructure financing, while Capital First had expertise in retail consumer and MSME (micro, small, and medium enterprises) financing. “With the merger, we would get increased scale, wider suite of products, (and) a more diversified balance sheet,” Vaidyanathan wrote.

IDFC Bank has certainly chosen well this time. For one, Capital First is a much simpler entity. Operationally, Shriram Group, an old business house, would have come with its own legacies. And in Vaidyanathan, IDFC Bank will be in the hands of a seasoned banker who is credited with building ICICI Bank’s retail, SME, and rural franchise.

The strong technology focus of both will help IDFC Bank achieve its ambition to shed its infrastructure banker tag and transform itself into more of a diversified universal bank. “It will bring two tech-savvy, culturally aligned platforms to come together to create a diversified and fast growing universal bank with a national footprint,” Rajiv Lall, IDFC Bank’s managing director and CEO, said while announcing the merger.

Analysts believe that the merger favours Capital First even though it brings more strategic value to IDFC Bank. Bhaskar Basu and Harshit Toshniwal, equity analysts at Jefferies Group, an investment banking company, say Capital First stands to gain on valuations as its shareholders will get 13.9 shares of IDFC Bank against one share. “But we think (the) deal brings in more strategic positives for IDFC Bank versus Capital First,” they said. For Capital First, the most visible synergy lies in lower cost of funds and access to growth capital as a bank. Given IDFC Bank’s limited retail franchise, this would be contingent upon how fast the new management can scale up the retail liability base, they add.

Clearly, the merger might be in line with their plans, but integrating two entities always comes with its own set of challenges.

( The article was originally published in the February 2018 issue of the magazine.)