The ITC Classic Story

<< Previous

The Merger Post-Mortem

Media reports claimed that pressure from FIs coupled with desperation drove ITC to hand Classic on a platter to ICICI. K.V. Kamat, managing director, ICICI had maintained right from the beginning that he would consider the deal as long as it did not involve any cash outgo. The issues of ITC bringing in substantial funds, providing cushion against bad debts and loans and accepting an 'unfair' swap ratio kept surfacing in the media. The only silver lining for the unhappy Classic shareholders' seemed to be the fact that they could hope for a better future with ICICI.

Table I
Gainers and Losers

Source: Business Today, December 22, 1997.

As far as ICICI was concerned, it seemed to be a clear 'win' proposition. The biggest benefit for ICICI was Classic's retail network comprising eight offices, 26 outlets, 700 brokers and a depositor-base of 7 lakh investors. ICICI planned to use this to strengthen the operations of ICICI Credit (I-Credit), a consumer finance subsidiary that ICICI had floated in April 1997. Kamath said, "The retail network will help us save two to three years. Our estimate of opening 15-20 branches to reach a million people at the retail level required at least 2-3 years. This offer came our way, which had the retail network already in place." An additional benefit for ICICI was in the form of the Rs 110 crore tax-break because of Classic's losses and the provisions for bad loans. This was something ICICI badly needed since its net profits of Rs 572 crore during the first half of 1997-98 had increased by 71.77% per cent. While ICICI was happy over getting a large deposit base of about seven lakh, it seemed to have ignored the fact that the base was built on high interest rates offered by Classic - about 16%. ICICI was forced to give this promised interest while the going rates were much lower. Also, deposits aggregating Rs 550 crore were to mature by 1999, threatening to be a cash outflow burden on ICICI. However, ICICI tried to average out the interest outgo by asking the depositor coming in for renewals to switch over to ICICI books.

This was easy to do as the depositors got the security of an AAA-rated institution. ICICI soon began the 'clean-up operation' of Classic's balance sheet by substituting high-interest liabilities. As 75% of Classic's clients were ICICI clients as well, ICICI was confident of recovering 8-16% of the outstanding amounts from various parties. ICICI sources claimed that the Classic merger would not affect the dividend or the non-performing assets of ICICI. This was supported by his justification that Classic was a company with an asset base of just Rs 1000 crore, while ICICI's asset base was as large as Rs 41,000 crore.

Questions for Discussion

1. Analyze the reasons behind Classic's failure. Do you agree that the company's demise was largely due to ITC's poor handling of the company? Support your answer with reasons.
2. Explain the reasons behind ICICI agreeing to merge with the loss-making Classic. Was the merger truly a win-win situation for both the parties involved?
3. 'Classic should have stuck to its leasing and asset financing business rather than entering secondary market operations.' Critically comment on the above statement.