The GTB-UTI Bank Merger Story

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Themes: Merger and acquisition takeover
Period : 2001
Organization : GTB
Pub Date : 2002
Countries : India
Industry : Banking

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Case Code : FINC004
Case Length : 07 Pages
Price: Rs. 200;

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Background Note

On January 24, 2001, when the merger was announced, the GTB stock hit the two upper circuit limits of 8% each on the BSE, and was locked at Rs 93.95. The trading volume pattern of GTB and UTI Bank stocks also showed a marked rise on the BSE. Did someone trading on the BSE know more than the others in the market? The price movement of the GTB, UTI Bank stocks had shown an interesting pattern since the beginning of 2001, with considerable increase in volumes at their counters.

GTB and UTI Bank were attracting meagre volumes till the first week of January. Trading volumes picked up, with average daily volumes on the GTB counter at BSE increasing from 20,000 shares to 1,57,000 shares on January 24. At NSE the trading volumes jumped fourfold, from 15,000 shares to close to 67,000 shares. The price of the stock also increased from Rs 81 to Rs 94. It was the same story in the case of UTI Bank shares. Trading volumes on the UTI counter at BSE rose from 34,000 shares to 2,58,000 shares on January 24 while at NSE the volumes shot up five times from an average of 45,000 to 2,70,00. The stock price marginally increased from Rs 45.75 to Rs 49.85. GTB was alleged to have rigged its own shares before the merger for negotiating a better swap ratio of 2.25 shares of UTI Bank for each GTB share. The matter was investigated by SEBI.

Questioning the Swap Ratio

Since the GTB scrip was suspected to have been manipulated prior to the deal, several questions had assumed importance. Some of the issues raised were: Was the merger scheme of GTB and UTI Bank-at 2.25 shares of UTI Bank for every one share of GTB worked out after conducting a ‘fair valuation' of these banks? Was it really a ‘fair swap ratio' for the merger? What weightage was given to the market prices of UTI Bank and GTB scrips for the purpose of arriving at the 2.25:1 swap ratio?

A study of certain key components of the Valuation Report prepared by SBI Caps revealed that SBI Caps used four methods to determine the value of the banks-maintainable profits method, book value method, price earnings multiple method and market price method. The swap ratio varied from 1.86:1 to 2.31:1 based on these four different methods, and the average swap ratio was 2.14:1. These ratios were also examined in conjunction with certain qualitative factors of GTB and UTI Bank so as to arrive at a swap ratio that was "fair to the shareholders of both banks".³

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3] This report was made available to the Hindu Businessline, a leading national business daily.