The promoters of the Times Bank were known to be actively scouting around for a buyer for their stake in that bank. Thus an opportunity presented itself to HDFC Bank to expand rapidly. But why a merger? HDFC Bank could have opted for buying the promoters stake in TimesBank. But that would have then involved mounting an open offer, involving a significant cash outflow as well as the burden of having minority shareholders and trying to manage a subsidiary company with a different corporate identity. This is definitely a cheaper and more sensible alternative.

The ostensible reason for the merger is that HDFC Bank has been one of the fastest growing Indian banks and it would like to maintain that tempo of growth. This obviously can be best achieved through a cost effective route such as a merger even though the additions to NPAs will have to be accounted for. It has been estimated that HDFC Bank's net NPAs will rise to 1.7 per cent from 0.7 per cent at present following the merger. But on several other parameters its does not appear as if HDFC Bank has got such a fantastic deal.

While it is unlikely that TimesBank's asset base is attractive to HDFC Bank, their claim seems to be on the retail deposit base of Times Bank. HDFC Bank has a relentless focus on increasing its retail base of depositors which carry a significantly lower cost. But whether TimesBank's network will complement HDFC Bank's low cost base could be questioned. The interest expended by TimesBank as a percentage of total assets is 7.09 per cent as compared with 5.27 per cent by HDFC Bank for 1998-99. Similarly the interest spread is 3.38 per cent for HDFC Bank versus 1.66 per cent for TimesBank.

The net NPA levels of TimesBank are also significantly higher at 3 per cent. Even the efficiencies of the two banks can be contrasted. While TimesBank has a significantly higher business per employee of Rs 7.3 crore (Rs 5.2 crore for HDFC Bank) its profit per employee is half of that of HDFC Bank at Rs 5 lakh per employee. The merger is quite likely to be approved by the TimesBank shareholders. The valuation of TimesBank has been adequately pegged at Rs 16.7 per share which can be considered a very good price and anyway holding HDFC Bank shares will be more valuable to TimesBank shareholders.

Along with the operational synergies the merger throws up an interesting question over the holding of the promoters of TimesBank in HDFC Bank which amounts to 7.5 per cent of the post merger equity. The idea behind selling out of TimesBank was to get out the banking business. Besides the holding is too insignificant to be of any use to the TimesBank promoters. Selling the stake to HDFC would then force that company to make an open offer to its own shareholders, since they would have acquired in excess of 5 per cent of its outstanding equity. Now the stake could be sold to the two funds advised by Indocean Chase Capital Advisors (who cannot be considered promoters even though they purchased three quarters of Natwest's stake in HDFC Bank and are thus out of the 5 per cent acquisition straightjacket), but this in unlikely to go down well with HDFC, which will barely have a controlling stake post merger. The likely answer is a gradual disinvestment through the secondary market, which if spread over a period oftime, is unlikely to affect the stock price too much.