The GTB-UTI Bank Merger Story

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Questioning the Swap Ratio Contd...

Under the maintainable profits method, the average maintainable rate of return on net worth was ascertained. This was worked out by dividing the average profit for the last three years by the average net worth. The weighted average rate of return was computed by providing weightages to each of the three years' profit and net worth, wherein a higher weightage was given to the more recent accounting years. The cost of equity was computed on the basis of the capital asset pricing model (CAPM). In terms of this, the cost of equity for GTB was placed at 17.56%, while that of UTI Bank was placed at 15.16%. These values were divided by the number of equity shares of the respective banks for arriving at the yield value per share. The maintainable profits method placed the yield value per share of GTB at Rs 72.10 and of UTI Bank at Rs 33.24, and the ratio arrived at was 2.17:1. An SBI Caps official said, "the availability of adequate capital was not just essential to provide a cushion against the losses but also to ensure that future growth in assets was not restricted to the background of the regulatory norms on capital adequacy ratio. The book value method captures the real strength of a bank's capital."

Under this method, the book value was calculated by dividing the net worth⁴ of each bank by the number of equity shares. Based on the annualized financial results for the period ended December 2000, the book value of GTB stood at Rs 52.16 and of UTI Bank at Rs 22.58, thereby placing the ratio at 2.31:1. The price earnings multiple method was used to derive the P/E ratios. Using this method weighted average over the previous three years was considered, with higher weightage given to the recent earnings. The value of GTB based on the sector P/E stood at Rs 51.40, while that of UTI Bank stood at Rs 23.10, taking the ratio to 2.22:1.

The market price of the merging entities was taken into consideration in the last method of valuation-the market price method. For this, the average market prices of GTB and UTI Bank scrips were considered with January 19, 2001 as the cut-off date. Under this method, the average market price of GTB stood at Rs 75.48 and of UTI Bank at Rs 40.62, indicating a ratio of 1.86:1- the lowest ratio among the four methods. An SBI Caps official said, "After completing the exercise using the four methods and taking into account the qualitative factors, SBI Caps has recommended a fair swap ratio of between 2 and 2.5 shares of UTI Bank for every share of GTB. Subsequent to the negotiations between the promoters of these two banks, the swap ratio of 2.25:1 was finalised".

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4] The sum of equity plus reserves and surplus.