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Declaration

I declare the following:

(1) that the material contained in this dissertation is the end result of my own work and that due acknowledgement has been given in the bibliography and references to ALL sources be they printed, electronic or personal.

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Executive Summary

Merger and acquisitions (M&A) activities have been a common form, staple transaction activity for more than four decades in North American and European markets before reaching its mature stage in the 1990s. In Asia, most of the M&A activities have taken place only after the Asian financial crisis in 1997. When an acquisition is announced, a considerable amount of information is revealed about the potential transaction and this information can be used to assess the stock market reaction to an acquisition announcement. This research focuses on two primary research objectives, as determine whether abnormal returns of target firms are significantly different from abnormal returns of acquiring firms and this information is readily available on the London Stock Exchange and determine the impact of Mergers and Acquisitions announcement on trading volume. The purpose of this paper is to explore various motivations of Merger and Acquisitions in the Indian banking sector. This includes the various aspects of banking Industrys Merger and Acquisitions. It also compares pre and post merger financial performance of merged banks with the help of financial parameters like Gross-Profit Margin, Net- Profit Margin, Operating Profit Margin, Return on Capital Employed (ROCE), Return on Equity (ROE) and Debt-Equity Ratio. Through literature review it comes to know that most of the work done high lightened the impact of Merger and Acquisitions on different aspects of the companies. The data of Merger and Acquisitions since economic liberalization are collected for a set of various financial parameters. This study also examines the changes occurring in the acquiring firms on the basis of financial ground and also the overall impact of Merger and acquisitions (M&As) on acquiring banks. The Researcher used independent t-test for testing the statistical significance and this test is applied not only for the ratio analysis but also to test the effect of Merger and Acquisitions on the performance of banks. This performance is being tested on the basis of two grounds i.e. Pre merger and Post merger. The result of the study indicates that the banks have been positively affected by the event of Merger and acquisitions

(M&As). These results suggest that merged banks can obtain efficiency and gains through Merger and Acquisitions (M&As) and passes the benefits to the equity share holders in the form of dividend.

Acknowledgment

Successful completion of this dissertation would not have been possible without the invaluable advice and assistance of many people. First and foremost, I would like to express my utmost gratitude to my principle supervisor _____________________for all the guidance and support that she has given me through the course of this project. Her suggestions regarding the framework and review of this dissertation have been greatly appreciated and acknowledged.

I would also like to express my deepest gratitude to my friends and classmates for their valuable support and motivation this project.

Finally, I would like to thank my teachers and my parents as without their blessings it was not possible for to complete this work. Their encouragement and assistance cannot be underestimated.

Table of Contents Declaration ......................................................................................................................... 1 Abstract..............................................................................Error! Bookmark not defined. Acknowledgment ............................................................................................................... 4 Table of Contents ............................................................................................................... 5 Chapter 1: Introduction...................................................................................................... 6 1.1 Introduction: ........................................................................................................ 6 1.2 Difference between Mergers and Acquisitions: ................................................. 7 1.3 Importance of the Research: ............................................................................... 9 1.4 Research Limitations: ........................................................................................ 10 1.5 Summary: ........................................................................................................... 11 Chapter 2: Literature Review ........................................................................................... 12 2.1 Introduction: ...................................................................................................... 12 2.2 Event studies:......................................................Error! Bookmark not defined. 2.2.1 Merger events .................................................Error! Bookmark not defined. 2.2.2 Post Merger Performance: .............................Error! Bookmark not defined. 2.3 Mergers & acquisitions overview: .................................................................... 13 2.4 Definition of mergers & acquisitions: ............................................................... 13 2.5 Objective of Mergers & Acquisitions: ............................................................... 13 2.6 Merger................................................................................................................ 15 2.7 Types of Merger:- .............................................................................................. 15 2.8 Valuation in a merger: Determination of share exchange ratio ...................... 19 2.9 Causes of merger: .............................................................................................. 21 2.10 Motives of merger: ........................................................................................ 23 2.11 Stock Market Reaction to Merger & Acquisition: ......................................... 29 2.12 Summary: ....................................................................................................... 33 Chapter 3: Research Methodology .................................................................................. 34 3.1 3.1 Introduction: ................................................................................................ 34 3.2 Research Gap: .................................................................................................... 34 3.3 Scope and Objectives of the Study: .................................................................. 34 3.4 Hypotheses .........................................................Error! Bookmark not defined. 3.5 Data and Methodology: .................................................................................... 35 3.5.1 Data Collection ............................................................................................... 35 3.5.2 Methodology .................................................................................................. 35 3.5.3 Ratios: ............................................................................................................. 35 Chapter 4: Data Analysis .................................................................................................. 37 Chapter 5: Conclusion and Remarks ................................................................................ 64

Chapter 1: Introduction

1.1 Introduction: Merger and acquisition has significance impact on the share prices of the company. Under the consideration of this impact this research study has been conducted to analyze the impact of merger and acquisition on share prices. As identified in the literature it that a great deal comes into the attention when a merger occurs actually and the event study technique is the basic method for analyzing the impact of merger and acquisition on share prices of both the acquirer and acquiree companies. On the other hand the assessment of post merger announcement can be checked by calculating the stock return values of both the acquired and acquiring firms. With this view this research study has been conducted to actually analyze the impact of merger and acquisition on share prices of the company.

Mergers and acquisitions represent a prevalent strategy in expanding distribution, or entering new markets across most industries. A popular belief is that mergers and acquisitions strengthen businesses by making their operations more synergetic Announcements of mergers and acquisitions immediately impact a target companys stock price, as induced reaction in the stock market cause investors to revise expectations about the companys future profitability (Panayides and Gong, 2002). According to the Efficient Markets Hypothesis, prices reflect all publicly available information on an underlying asset (Fama, 1970). Even t studies are frequently used to test market efficiency (Brown and Warner, 1985). An event study is a statistical method used to gauge the impact of a corporate event, such as stock splits, earnings announcements and acquisition announcements. The Synergy Trap Hypothesis posits that immediately before and after an acquisition announcement, the acquiring firms stock price is negatively affected and the target firms stock price is positively affected. This dissertation utilizes an event study methodology to empirically test the Synergy Trap Hypothesis using daily stock returns; its objective is to establish relationships

between abnormal returns. Abnormal returns are defined as the difference between actual and predicted returns surrounding a corporate event. Cumulative abnormal returns are the sum of abnormal returns in a given time period. Brown and Warner (1985), Davidson, Dutia and Cheng (1989) Mitchell, Pulvino and Stafford (2002) each utilize a similar event study approach to examine stock market reactions to acquisition announcements.

Mergers and Acquisitions (M&A) in a business environment are aimed at achieving increased importance and attention especially in the intensive world of globalization. This is a decisive move that accelerates our strategy and positions us to win by offering even greater value to our customers and partners. In addition to the clear strategic benefits of combining two highly complementary organizations and product families, we can create substantial shareowner value through significant cost-structure

improvements and access to new growth opportunities. view on M&A by Carly Fiorina, CEO Hewlett Packard. The term Mergers and Acquisitions (M&A) usually could be defined as the characteristics of corporate strategy, corporate finance and management dealing for the buying, selling and combining of different companies that could join hands, finance or even help a company grow in a particular industry much rapidly without creating another business unit (Johnston, 2002).

1.2 Difference between Mergers and Acquisitions: Mergers and Acquisitions are used in a same breath, as if they are synonyms, but in their true meaning they mean different things. In the instance of one company taking over another and establishing itself as a new owner, then the purchase is known as Acquisition and from a legal perspective a target company ceases to be in existence as the business line is acquired and the stocks of the buying company continues to trade in the market. Whereas in its pure sense of the term itself called Merger only happens when two companies of same or different size, mutually agreed to move forward and form a single new entity rather than maintaining separate entity and hence action of

this kinds are called "merger of equals" and in this case stocks or shares of each companies are surrendered and a new company stock or share is introduced in the market, traded also (Kaplan, 2002). In a practical world, non-performing assets or shares of a company are usually acquired or a larger firm acquires with the smaller firm and even though it is an acquisition, the process is termed as Mergers & Acquisition. The senior management tries to portray a deal as an agreeable and amicable one and tries to portray an interest for both the firms. An acquisition is also seen in the market, may or may not be a hostile one usually but most of these deals are acquisitions only. So most of it depends on how it is announced in the market (Koskela, 2007).

An Acquisition is usually termed as a Takeover, which means buying of one company, called as the target by another company and hence, an acquisition may be either friendly or a hostile one. In the case of a friendly takeover, the buying and selling company agrees and cooperates and also negotiates on a price and other legal as well as operational factors and the intimation of this acquisition are always an advanced informed one, whereas, hostile follows completely the reverse. The purpose of acquisitions differs for various aspects. It is usually referred to as a purchase of a smaller firm by a comparatively larger firm. However, at times a smaller firm is seen to acquire management control of a longer or established firm just to keep its brand association with the larger entity that is more like a Strategic Alliance and also known as Reverse Takeover (Levy, 2006). Research showed that around 50 percent or even more processes and objectives of acquisition have been difficult and un-successful. Generally and quite logically, the merger and acquisition processes are very complex with many dimensions and influencing to affect its outcome (Laufer & Alexander, 2007).

Mergers and Acquisitions (M&A) and Corporate Restructuring form a bigger part of the corporate world and its finances. Today almost every day Investment Bankers from Wall Street arrange for M&A transactions, which work towards bringing individual companies together to form a large entity. These make big news in todays business world and why

not because each deal could be worth hundreds and millions of dollars. They are so large in nature at times that they are even capable of dictating the fortunes of the business environment in its present as well as future situations (Subrahmanyam, 2007).

Major banks that have IN MERGERS AND ACQUISITIONS


Date of merger Acquirer bank Target bank Assets of target bank as % of acquiring banks assets August 2010 February 2008 ICICI Bank HDFC Bank Bank of Rajasthan Centurion Bank of Punjab April 2007 March 2007 ICICI Bank Indian Overseas Bank October 2006 IDBI Sangli Bank Bharat Overseas Bank United Western Bank 8 230 0.5 6 190 102 0.05 20 463 394 Number of branches of target bank

1.3 Importance of the Research: In the globalized economy, Merger and Acquisitions (M&As) acts as an important tool for the growth and expansion of the economy. The main motive behind the Merger and acquisitions (M&As) is to create synergy, that is one plus one is more than two and this rationale beguiles the companies for merger at the tough times. Merger and Acquisitions (M&As) help the companies in getting the benefits of greater market share and cost efficiency. Companies are confronted with the facts that the only big players can survive as there is a cut throat competition in the market and the success of the merger depends on how well the two companies integrate themselves in carrying out day to day operations.

1.4 Research Limitations: Numerous studies (Asquithe and Kim, 1982; Mitchell, Pulvino and Stafford, 2002) have established that target firms share price experience positive abnormal returns because of an acquisition announcement, and acquiring firms share price remains unaffected. Even though acquiring firms share experience no abnormal returns, there is a considerable spike in volume. Further research on this issue can be conducted for stock returns. In this case with most M&A researches, it is difficult to use larger samples because a securitys abnormal returns have to be calculated individually. Using larger samples, however, can allow us more robust tests of hypotheses. Finally, further research can be conducted by using a sample of similar size, but performing more extensive analysis and controlling for several variables would be difficult when analyzing the impact of a single variable.

1.5 Importance of the Research: The present study would go to investigate the detail of Merger and Acquisitions (M&As) with greater focus on the Indian banking sector in post liberalization regime The study will also discuss the pre and the post-merger performance of banks. An attempt is made to predict the future of the ongoing Merger and Acquisitions (M&As) on the basis of financial performance and focusing mainly of Indian banking sector The research will help investment banks to understand how the M&A impacts the banks profitability The research will analyze the fact that post-merger create additional value and shows the improvement of bidder firm with price to book ratio, used nonparametric test as most suitable method of testing post-merger performance.

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1.6 Summary: In a practical world, non-performing assets or shares of a company are usually acquired or a larger firm acquires with the smaller firm and even though it is an acquisition, the process is termed as Mergers & Acquisition. The purpose of acquisitions differs for various aspects. It is usually referred to as a purchase of a smaller firm by a comparatively larger firm. However, at times a smaller firm is seen to acquire management control of a longer or established firm just to keep its brand association with the larger entity that is more like a Strategic Alliance and also known as Reverse Takeover (Levy, 2006). Mergers and acquisitions represent a prevalent strategy in expanding distribution, or entering new markets across most industries. A popular belief is that mergers and acquisitions strengthen businesses by making their operations more synergetic Announcements of mergers and acquisitions immediately impact a target companys stock price, as induced reaction in the stock market cause investors to revise expectations about the companys future profitability. With this view this research work has been conducted to understand the impact of merger and acquisition on company share prices and trading volume. The next chapter discusses the literature review in the context of research objectives.

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Chapter 2: Literature Review

2.1 Introduction: Mergers and acquisitions (M&A) in the corporate world are achieving increasing importance and attention especially in the advent of intense globalization. This is evident from the magnitude and growth of deal values and resultant mega -mergers transacted in recent times. As expert advisory are sought in M&A activities to facilitate the undertaking and maximize the value of the transaction, advisory firms begin to play a more significant and at the same time lucrative role in M&A activities, to the extent of determining the outcome of such projects. Being an area of limited research, it is thus valuable to investigate what M&A advisory firms view as critical success factors to the projects they undertake. Mergers and Acquisitions (M&A) in a business environment are aimed at achieving increased importance and attention especially in the intensive world of globalization.

This is a decisive move that accelerates our strategy and positions us to win by offering even greater value to our customers and partners. In addition to the clear strategic benefits of combining two highly complementary organizations and product families, we can create substantial shareowner value through significant cost-structure

improvements and access to new growth opportunities. view on M&A by Carly Fiorina, CEO Hewlett Packard.

The term Mergers and Acquisitions (M&A) usually could be defined as the characteristics of corporate strategy, corporate finance and management dealing for the buying, selling and combining of different companies that could join hands, finance or even help a company grow in a particular industry much rapidly without creating another business unit (Johnston, 2002).

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2.2 Mergers & acquisitions overview: The topic of mergers & acquisitions (M&A) has been increasingly investigated in the literature in the last two decades (Appelbaum et al., 2007) in response to the rise in M&A activities as well as the increasing complexity of such transactions themselves (Gaughan, 2002). With the purpose of setting an M&A context for the thesis topic, we will explore M&A activities in terms of its definition and classification, motives, process, and later moving on to highlight the development of M&A over time.

2.3 Definition of mergers & acquisitions: Mergers & acquisitions (M&A), in the broad sense, may imply a number of different transactions ranging from the purchase and sales of undertakings, concentration between undertakings, alliances, cooperation and joint ventures to the formation of companies, corporate succession/ ensuring the independence of businesses, management buy-out and buy-in, change of legal form, initial public offerings and even restructuring (Picot, 2002). However, Nakamura (2005) explains that using a broad definition of M&A could lead to confusion and misunderstanding as it entails everything from pure mergers to strategic alliance. Therefore, this thesis adopts the definition of M&A in a narrower sense as clarified below.

2.4 Objective of Mergers & Acquisitions: Changes in the competitive environment resulting to increase in need for integration and globalization of financial markets or financial institutions making strategic alliances, mergers, and acquisitions are more prevalent today. This is a measure to growth in business, shareholders value, and market visibility clubbed with cu stomer awareness. Reasons for consolidation could be generated from economic strategies, business need, or even personal motives (Hawawini & Swaey, 2008). The primary desires amongst organizations are to improve the financial performance of their organization, cost

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optimization, economies of scale, profitability ratio, and creation of value at each level (Cornett & De, 2006).

Regardless of the various categories and structures of mergers and acquisitions they seem to possess a single common goal which creating synergy to enhance value and equity and the success or failure also depends on the fact how this synergy is achieved and made successful in a longer run. According to Chong (1991), M&A procedure could be divided into five stages to outline the importance of each of these steps and their interlinked importance and helps explaining how mergers and acquisitions are worked out or framed, organized, structured and what happens to the over all company structure post the deal: Corporate strategy development Organizing for acquisition Deal structuring and negotiation Post-acquisition integration Post- acquisition audit and organizational learning

When any company plans for internal growth it has advantages of choosing equipment, technology, location etc. according to their own decisions. And the disadvantages of choosing internal growth are longer implementation period, greater uncertainties, lack of funds etc.

However, choosing the external growth path i.e. mergers and acquisition strategy is also not so easy because first of all, all the costs incurred and benefits accrued are not quantifiable and secondly, there are lots of accounting, taxes and legal issues which are more complex then acquiring machinery

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2.5 Merger Merger refers to a situation when two or more existing firms combine together and form a new entity. Either a new company may be incorporated for this purpose or one existing company (generally a bigger one) survives and another existing company (which is smaller) is merged into it. Laws in India use the term amalgamation for merger. Merger through absorption Merger through consolidation

1.

Absorption :- An absorption is a combination of two or more companies into an existing company. All companies except one lose their identity in a merger through absorption. An example of this type of merger is the absorption of Tata Fertilisers Ltd.(TFL) TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired company ( a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

2.

Consolidation :- A consolidation is a combination of two or more companies into a new company .In this type of merger, all companies are legally dissolved and a new entity is created. In a consolidation, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. An example of consolidation is the merger of Hindustan Computers Ltd., Hindustan Instruments Ltd., and Indian Reprographics Ltd., to an entirely new company called HCL Ltd.

2.6 Types of Merger:There are four types of merger are as follows:

1.

Horizontal merger:-It is a merger of two or more companies that compete in the

same industry. It is a merger with a direct competitor and hence expands as the firms

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operations in the same industry. Horizontal mergers are designed to produce substantial economies of scale and result in decrease in the number of competitors in the industry.

2.

Vertical merger:-It is a merger which takes place upon the combination of two

companies which are operating in the same industry but at different stages of production or distribution system. If a company takes over its supplier/producers of raw material, then it may result in backward integration of its activities. On the other hand, Forward integration may result if a company decides to take over the retailer or Customer Company. Vertical merger may result in many operating and financial economies. The transferee firm will get a stronger position in the market as its production/distribution chain will be more integrated than that of the competitors. Vertical merger provides a way for total integration to those firms which are striving for owning of all phases of the production schedule together with the marketing network (i.e., from the acquisition of raw material to the relating of final products).

3.

Co generic Merger:-In these, mergers the acquirer and target companies are

related through basic technologies, production processes or markets. The acquired company represents an extension of product line, market participants or technologies of the acquiring companies. These mergers represent an outward movement by the acquiring company from its current set of business to adjoining business. The acquiring company derives benefits by exploitation of strategic resources and from entry into a related market having higher return than it enjoyed earlier. The potential benefit from these mergers is high because these transactions offer opportunities to diversify around a common case of strategic resources.

3.

Conglomerate merger:- These mergers involve firms engaged in unrelated type of business activities i.e. the business of two companies are not related to each other horizontally ( in the sense of producing the same or competing

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products), nor vertically( in the sense of standing towards each other n the relationship of buyer and supplier or potential buyer and supplier). In a pure conglomerate, there are no important common factors between the companies in production, marketing, research and development and technology. In practice, however, there is some degree of overlap in one or more of this common factors.

Demerger:- It has been defined as a split or division. As the same suggests, it denotes a situation opposite to that of merger. Demerger or spin-off, as called in US involves splitting up of conglomerate (multi-division) of company into separate companies. This occurs in cases where dissimilar business are carried on within the same company, thus becoming unwieldy and cyclical almost resulting in a loss situation. Corporate restructuring in such situation in the form of demerger becomes inevitable. A part from core competencies being main reason for demerging companies according to their nature of business, in some cases, restructuring in the form of demerger was undertaken for splitting up the family owned large business empires into smaller companies. The historical demerger of DCM group where it split into four companies (DCM Ltd., DCM shriram industries Ltd., Shriram Industrial Enterprise Ltd. and DCM shriram consolidated Ltd.) is one example of family units splitting through demergers. Such demergers are accordingly, more in the nature of family settlements and are affected through the courts order. Thus, demerger also occur due to reasons almost the same as mergers i.e. the desire to perform better and strengthen efficiency, business interest and longevity and to curb losses, wastage and competition. Merger Procedure:

A merger is a complicated transaction, involving fairly complex legal considerations. While evaluating a merger proposal, one should bear in mind the following legal provisions.

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Sections 391 to 394 of the companies act, 1956 contain the provisions for amalgamations. The procedure for amalgamation normally involves the following steps:

1.

Examination of object Clauses: The memorandum of association of both the

companies should be examined to check if the power to amalgamate is available. Further, the object clause of the amalgamated company (transferee company) should permit it to carry on the business of the amalgamating company (transferor company ) .If such clauses do not exists, necessary approvals of the shareholders, boards of directors and Company Law Board are required. 2. Intimation to stock Exchanges: The stock exchanges where the amalgamated

and amalgamating companies are listed should be informed about the amalgamation proposal. From time to time, copies of all notices, resolutions, and orders should be mailed to the concerned stock exchanges. 3. Approval of the draft amalgamation proposal by the Respective Boards: The

draft amalgamation proposal should be approved by the respective boards of directors. The board of each company should pass a resolution authorizing its directors/executives to pursue the matter further. 4. Application to the National Company Law Tribunal (NCLT): Once the draft of

amalgamation proposal is approved by the respective boards, each company should make an application to the NCLT so that it can convene the meetings of shareholders and creditors for passing the amalgamation proposal. 5. Dispatch of notice to shareholders and creditors: In order to convene the

meeting of shareholders and creditors, a notice and an explanatory statement of the meeting, as approved by the NCLT, should be dispatched by each company to its shareholders and creditors so that they get 21 days advance intimation. The notice of the meetings should also be published in two newspapers (one English and one vernacular). An affidavit confirming that the notice has been dispatched to the shareholders/creditors and that the same has been published in newspapers should be filed with the NCLT.

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6.

Holding of Meetings of shareholders and creditors: A meeting of shareholders

should be held by each company for passing the scheme of amalgamation. At least 75 percent (in value) of shareholders in each class, who vote either in person or by proxy, must approve the scheme of amalgamation. Likewise, in a separate meeting, the creditors of the company must approve of the amalgamation scheme. 7. Petition to the NCLT for confirmation and passing of NCLT orders: Once the

amalgamation scheme is passed by the shareholders and creditors, the companies involved in the amalgamation should present a petition to the NCLT for confirming the scheme of amalgamation. The NCLT will fix a date of hearing. A notice about the same has to be published in two newspapers. After hearing the parties the parties concerned ascertaining that the amalgamation scheme is fair and reasonable, the NCLT will pass an order sanctioning the same. However, the NCLT is empowered to modify the scheme and pass orders accordingly. 8. Filing the order with the Registrar: Certified true copies of the NCLT order must

be filed with the Registrar of Companies within the time limit specified by the NCLT. 9. Transfer of Assets and Liabilities: After the final orders have been passed by the

NCLT, all the assets and liabilities of the amalgamating company will, with effect from the appointed date, have to be transferred to the amalgamated company. 10. Issue of shares and debentures: The amalgamated company, after fulfilling the

provisions of the law, should issue shares and debentures of the amalgamated company. The new shares and debentures so issued will then be listed on the stock exchange.

2.7 Valuation in a merger: Determination of share exchange ratio An important aspect of merger procedure relates to valuation of business relates to valuation of business in order to determine share exchange ratio in merger. Valuation is the means to assess the worth of a company which is subject to merger or takeover so that consideration amount can be quantified and the price of one company for other can be fixed. Valuation of both companies subject to business combination is required

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for fixing the consideration amount to be paid in the form of exchange of share. Such valuation helps in determining the value of shares of acquired company as well as acquiring company to safeguard the interest of shareholders of both the companies.

Broadly there are three(3) methods used for valuation of business: 1. Net Value Asset (NAV) Method:- NAV is the sum total of value of asserts (fixed assets, current assets, investment on the date of Balance sheet less all debts, borrowing and liabilities including both current and likely contingent liability and preference share capital). Deductions will have to be made for arrears of preference dividend, arrears of depreciation etc. However, there may be same modifications in this method and fixed assets may be taken at current realizable value (especially investments, real estate etc.) replacement cost (plant and machinery) or scrap value (obsolete machinery). The NAV, so arrived at, is divided by fully diluted equity (after considering equity increases on account of warrant conversion etc.) to get NAV per share. The three steps necessary for valuing share are: 1. 2. 3. Valuation of assets Ascertainment of liabilities Fixation of the value of different types of equity shares.

All assets (value by appropriation method all liabilities - preference shares) NAV = Fully diluted equity shares

3.

Yield Value Method:- This method also called profit earning capacity method is

based on the assessment of future maintainable earnings of the business. While the past financial performance serves as guide, it is the future maintainable profits that have to be considered. Earnings of the company for the next two years are projected (by

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valuation experts) and simple or weighted average of these profits is computed. These net profits are divided by appropriate capitalization rate to get true value of business. This figure divided by equity value gives value per share. While determining operating profits of the business, it must be valued on independent basis without considering benefits on account of merger. Also, past or future profits need to be adjusted for extra ordinary income or loss not likely to recur in future. While determining capitalization rate, due regard has to be given to inherent risk attribute to each business. Thus, a business with established brands and excellent track record of growth and diverse product portfolio will get a lower capitalization rate and consequently higher valuation where as a cyclical business or a business dependent on seasonal factors will get a higher capitalization rate. Profits of both companies should be determined a fter ensuring that similar policies are used in various areas like depreciation, stock valuation etc.

4.

Market Value Method:-This method is applicable only in case where share of

companies are listed on a recognized stock exchange. The average of high or low values and closing prices over a specified previous period is taken to be representative value per share. Now, the determination of share exchange ratio i.e., how many shares of amalgamating company, are to be exchanged for how many shares of amalgamated company.

2.8 Causes of merger: An extensive appraisal of each merger scheme is done to patternise the causes of mergers. These hypothesized causes (motives) as defined in the mergers schemes and explanatory statement framed by the companies at the time of mergers can be conveniently categorized based on the type of merger. The possible causes of different type of merger schemes are as follows:

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1.

Horizontal merger: These involve mergers of two business companies operating

and competing in the same kind of activity. They seek to consolidate operations of both companies. These are generally undertaken to: a) b) c) d) Achieve optimum size Improve profitability Carve out greater market share Reduce its administrative and overhead costs.

2.

Vertical merger:

These are mergers between firms in different stages of

industrial production in which a buyer and seller relationship exists. Vertical merger are an integration undertaken either forward to come close to customers or backwards to come close to raw materials suppliers. These mergers are generally endeavored to: a) b) c) Increased profitability Economic cost (by eliminating avoidable sales tax and excise duty payments) Increased market power

3.

Conglomerate merger: These are mergers between two or more companies

having unrelated business. These transactions are not aimed at explicitly sharing resources, technologies, synergies or product .They do not have an impact on the acquisition of monopoly power and hence are favored through out the world. They are undertaken for diversification of business in other products, trade and for advantages in bringing separate enterprise under single control namely: Synergy arising in the form of economies of scale. Cost reduction as a result of integrated operation. Risk reduction by avoiding sales and profit instability. Achieve optimum size and carve out optimum share in the market.

4.

Reverse mergers:- Reverse mergers involve mergers of profir making companies

with companies having accumulated losses in order to:

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Claim tax savings on account of accumulated losses that increase profits. Set up merged asset base and shift to accelerate depreciation.

5.

Group company mergers:- These mergers are aimed at restructuring the diverse

unitsof group companies to create a viable unit. Such mergers are initiated with a view to affect consolidation in order to: Cut costs and achieve focus. Eliminate intra-group competition Correct leverage imbalances and improve borrowing capacity.

2.9 Motives of merger: Mergers and acquisitions are strategic decisions leading to the maximization of a companys growth by enhancing its production and marketing operations. They have become popular in the recent times because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalization of business as a number of economies are being deregulated and integrated with other economies. A number of motives are attributed for the occurrence of mergers and acquisitions.

Synergies through Consolidation: Synergy implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It is defined as two plus two equal to five (2+2=5) phenomenon. Synergy refers to benefits other than those related to economies of scale. Operating economies are one form of synergy benefits. But apart from operating economies, synergy may also arise from enhanced managerial capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementarily of resources and skills and a widened horizon of opportunities.An under valued firm will be a target for acquisition by other firms. However, the fundamental motive for the acquiring firm to takeover a target firm may be the desire to increase the wealth of the shareholders of the acquiring firm. This is possible only if the value of the new firm is expected to be more than the sum of

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individual value of the target firm and the acquiring firm. For example, if A Ltd. and Ltd. decide to merge into AB Ltd. then the merger is beneficial if

V (AB)> V (A) +V (B)

Where V (AB) = V (A) V (B) = Value of the merged entity Independent value of company A

= Independent value of company B

A merger which results in meeting the test of increasing the wealth of the shareholders is said to contain synergistic properties. Synergy is the increase in the value of the firm combining two firms into one entity i.e., it is the difference value between the combined firm and the sum of the value of the individual firms. Igor Ansoff (1998) classified four different types of synergies. These are:

1.

Operating synergy: The key to the existence of synergy is that the target firm

controls a specialized resource that becomes more valuable when combined with the bidding firms resources. The sources of synergy of specialized resources will vary depending upon the merger. In case of horizontal merger, the synergy comes from some form of economies of scale which reduce the cost or from increase market power which increases profit margins and sales. There are several ways in which the merger may generate operating economies. The firm might be able to reduce the cost of production by eliminating some fixed costs. The research and development expenditures will also be substantially reduced in the new set up by eliminating similar research efforts and repetition of work already done by the target firm. The management expenses may also come down substantially as a result of corporate reconstruction.The selling, marketing and advertisement department can be streamlined. The marketing economies may be produced through savings in advertising (by reducing the need to attract each others

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customers), and also from the advantage of offering a more complete product line (if the merged firms produce different but complementary goods), since a wider product line may provide larger sales per unit of sales efforts and per sales person. When a firm having strength in one functional area acquires another firm with strength in a different functional area, synergy may be gained by exploiting the strength in these areas. A firm with a good distribution network may acquire a firm with a promising product line, and thereby can gain by combining these two strength. The argument is that both firms will be better off after the merger. A major saving may arise from the consolidation of departments involved with financial activities e.g., accounting, credit monitoring, billing, purchasing etc.

Thus, when two firms combine their resources and efforts, they will be able to produce better results than they were producing as separate entities because of savings various types of operating costs. These resultant economies are known as synergistic operating economies.

In a vertical merger, a firm may either combine with its supplier

of input (backward

integration) and/or with its customers (forward integration). Such merger facilitates better coordination and administration of the different stages of business stages of business operations-purchasing, manufacturing and marketing eliminates the need for bargaining (with suppliers and/or customers), and minimizes uncertainty of supply of inputs and demand for product and saves costs of communication.

An example of a merger resulting in operating economies is the merger of Sundaram Clayton Ltd. (SCL) with TVS-Suzuki Ltd. (TSL).By this merger, TSL became the second largest producer of two wheelers after Bajaj. The main objective motivation for the takeover was TSLs need to tide over its different market situation through increased volume of production. It needed a large manufacturing bas to reduce its production costs. Large amount of funds would have been required for creating additional

25

production capacity. SCL also needed to upgrade its technology and increase its production. SCLs and TCLs plants were closely located which added to their advantages. The combined company has also been enabled to share the common R&D facilities.

2.

Financial synergy:- Financial synergy refers to increase in the value of the firm

that accrues to the combined firm from financial factors. There are many ways in which a merger can result into financial synergy and benefit. A merger may help in: Eliminating financial constraint Deployment surplus cash Enhancing debt capacity Lowering the financial costs Better credit worthiness

3.

Managerial synergy :- One of the potential gains of merger is an increase in

managerial effectiveness. This may occur if the existing management team, which is performing poorly, is replaced by a more effective management team. Often a firm, plagued with managerial inadequacies, can gain immensely from the superior management that is likely to emerge as a sequel to the merger. Another allied benefit of a merger may be in the form of greater congruence between the interests of the managers and the shareholders.A common argument for creating a favorable environment for mergers is that it imposes a certain discipline on the management. If lackluster performance renders a firm more vulnerable to potential acquisition, existing managers will strive continually to improve their performance.

4.

Sales synergy:- These synergies occurs when merged organization can benefit

from common distribution channels, sales administration, advertising, sales promotion and warehousing.The Industrial Credit and Investment Corporation of India Ltd. (ICICI)

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acquired Tobaco Company, ITC. Classic and Anagram Finance to obtain quick access to a well dispersed distribution network. B. Diversification :- A commonly stated motive for mergers is to achieve risk reduction through diversification. The extent, to which risk is reduced, depends upon on the correlation between the earnings of the merging entities. While negative correlation brings greater reduction in risk, positive correlation brings lesser reduction in risk. If investors can diversify on their own by buying stocks of companies which propose to merge, they do not derive any benefits from the proposed merger. Any investor who wants to reduce risk by diversifying between two companies, say, ABC Company and PQR Company, may simply buy the stocks of these two companies and merge them into a portfolio. The merger of these companies is not necessary for him to enjoy the benefits of diversification. As a matter of fact, his home -made diversification give him far greater flexibility. He can contribute the stocks of ABC Company and PQR Company in any proportion he likes as he is not confronted with a fixed proportion that result from the merger.Thus, Diversification into new areas and new products can also be a motive for a firm to merge an other with it. A firm operating in North India, if merges with another firm operating primarily in South India, can definitely cover broader economic areas. Individually these firms could serve only a limited area. Moreover, products diversification resulting from merger can also help the new firm fighting the cyclical/seasonal fluctuations. For example, firm A has a product line with a particular cyclical variations and firm B deals in product line with counter cyclical variations. Individually, the earnings of the two firms may fluctuate in line with the cyclical variations. However, if they merge, the cyclically prone earnings of firm A would be set off by the counter cyclically prone earnings of firm B. Smoothing out the earnings of a firm over the different phases of a cycle tends to reduce the risk associated with the firm. Thus, firms diversify to achieve:

Sales and growth stability Favorable growth developments

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Favorable competition shifts Technological changes

C. Accelerated Growth :- Growth is essential for sustaining the viability, dynamism and value-enhancing capability of company. A growth- oriented company is not only able to attract the most talented executives but it would also be able to retain them. Growing operations provide challenges and excitement to the executives as well as opportunities for their job enrichment and rapid career development. This helps to increase managerial efficiency. A company can achieve its growth objective by: Expanding its existing markets Entering in new markets.

A company may expand and/or diversify its markets internally or externally. If the company cannot grow internally due to lack of physical and managerial resources, it can grow externally by combining its operations with other companies through mergers and acquisitions. Mergers and acquisitions may help to accelerate the pace of a companys growth in a convenient and inexpensive manner. D. Increased Market power :- A merger can increase the market share of the merged firm. The increased concentration or market share improves the profitability of the firm due to economies of scale. The bargaining power of the firm with labour, suppliers and buyers is also enhanced. The merged firm can also exploit technological breakthroughs against obsolescence and price wars. Thus, by limiting competition, the merged firm can earn super normal profit and strategically employ the surplus funds to further consolidate its position and improve its market power.

The acquisition of Universal Luggage by Blow Plast is an example of limiting competition to increase market power. Before the merger, the two companies were competing fiercely with each other leading to a severe price war and increased marketing costs. As a result of the merger, Blow Plast has obtained a strong hold on the market and now

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operates under near monopoly situation. Yet another example is the acquisition of Tomco by Hindustan Lever. Hindustan Lever at the time of merger was expected to control one-third of three million tonne soaps and detergents markets and thus, substantially reduce the threat of competition.

Merger is not only route to obtain market power. A firm can increase its market share through internal growth or ventures or strategic alliances. Also, it is not necessary that the increased market power of the merged firm will lead to efficiency and optimum allocation of resources. Market power means undue concentration which could limit the choice of buyers as well as exploit suppliers and labour.

2.10

Stock Market Reaction to Merger & Acquisition:

Fauzias (1992) in testing the efficiency of the Malaysian stock market reaction with regard to acquisition announcement uses the daily common stock returns of Kuala Lumpur Stock Exchange (KLSE) for a period ranging 200 days before and 200 days after the acquisition announcement date. In her study, Fauzias suggests that the bidder could have overestimated the value of the shares, which may result in paying too much for the assets. The increase in share prices prior to the announcement may also be due to the information leakage, which forces prices to move up before the announcement is made.

Another study also done by Fauzias (1993) examines the effects of acquisition announcement on the price behavior of the Malaysian bidders and target firms by employing three alternative models, (1) one factor market model; (2) Capital Asset Pricing Model (CAPM); and (3) the regression estimation in the model. The results show that the targets insignificant negative returns and the bidders significant negative returns after the announcement date. A recent study by Fauzias and Ruzita (2003) show that all of the information of three announcements in corporate restructuring significantly conveyed to the market for each announcement. The results indicate that

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the market react to initial restructuring announcement, increase in the second announcement, but produce mixed results in the third announcement.

Houston et al. (2001) examine the factors that explain merger gains in 64 large banks and find that the bulk of the gains are from cost reductions particularly through reduction in geographical overlapping. Rhoades (1998) also investigates the efficiency effect of bank mergers by using case studies of nine mergers in America. He employs the same basic analytical framework in all of the case studies, such as financial ratios, econometric cost measures and the effect of the merger announcement on the stock of the acquiring and acquired firms. All nine of the mergers resulted in significant cost cutting in line with pre-mergers projections. Four of the nine mergers were clearly successful in improving cost efficiency but five were not. The most frequent and serious synergies experienced in bank mergers that increase bidder returns relative to nonfinancial mergers was unexpected difficulty in integrating data processing systems and operations. While, Kim and Singal (1993) use the direction of the post-merger price change as an indicator for efficiency effect or market power effect. Their results show that share price increases after merger, therefore the market power effect exists.

Houston, James, and Ryngaert (2001) examine the factors that explain merger gains in 64 large banks and find that the bulk of the gains are from cost reductions particularly through reduction in geographical overlap. Rhoades (1998) investigates the efficiency effect of bank mergers by using case studies of nine mergers in America. He employs the same basic analytical framework in all of the case studies, such as financial ratios, econometric cost measures, and the effect of the merger announcement on the stock of the acquiring and acquired firms. All nine of the mergers resulted in significant cost cutting in line with pre-mergers projections. Four of the nine mergers were clearly successful in improving cost efficiency but five were not. The most frequent and serious synergies experienced in bank mergers that increase bidder returns relative to non-

30

financial mergers was unexpected difficulty in integrating data processing systems and operations

Merger and acquisitions (M&A) activities have been a common form, staple transaction activity for more than four decades in North American and European markets before reaching its mature stage in the 1990s. In Asia, most of the M&A activities have taken place only after the Asian financial crisis in 1997. M&A activities have not only captured the interest and attention of a broad segment of the community but have also attracted the scrutiny of governments in Asian economies. The reasons are that: first, most of the Asian governments encouraged the M&A of companies so as to raise competitiveness and to reduce cost. Economic power would be concentrated to a few multinational enterprises (MNCs) due to M&A activities. Secondly, as the Asian stock markets become more developed, shareholders knowledge about the market has improved substantially. Small investors are often in a dilemma when they are forced to decide whether or not to sell their shares in facing of a bid as they do not have the knowledge about the gain-loss circumstances of the M&A game. By the same token, managers of a target company might not know if there exists any gain when they face a bid. Most of the time, it is the preferences of bidding firm managers and target firm managers who have the controlling rights that determine the form of payment in an acquisition. (see Ghosh and Ruland (1998)). In general, risk reduction and value acquisition are the main reasons for bidding firms to launch takeovers. So far, most studies about the effects of M&A announcements focus on North American and European markets, there were few studies on M&As and their resulting abnormal returns in Asian markets. The objectives of this study are to examine empirically whether M&A activitiy creates abnormal returns to shareholders of companies concerned around the M&A announcement period in Asian markets, including Hong Kong, China, Taiwan, Singapore, South Korea and Japan, over the period from 1 January 2000, to 31 December 2007. Our result indicates that information concerning a forthcoming corporate takeover is considered good news for the shareholders of

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bidding firms but not regarded as good news for the shareholders of the target firms. In addition, we confirm the hypothesis that the abnormal return for both the shareholders of bidding firms and target firms at the announcement period do not depend on the type of acquisition, form of target firms or mode of payment.

There are a number of studies about the effects of M&A announcements. Dodd and Ruback (1977) analyzed abnormal returns around the time of a takeover announcement and found that both the target and bidding firms shareholders earned positive and significant gains from a successful takeover. Langetieg (1978) measured shareholder gains from the mergers and found an insignificant post-merger excess returns. Asquith and Kim (1982) examined returns to stock holders of target firms around the date of the initial announcement or completion of a merger. They concluded that the stockholders of target firms gained, while those of bidding firms did not. Jensen and Ruback (2003) reviewed 13 studies on the abnormal returns around takeover announcements. They found that the average excess returns to target firms stockholders are of 30% and 20% for the successful tender offers and mergers, respectively; while bidding firms stockholders gained an average of 4% around tender offers but no abnormal return around the merger. Frank et al. (1991), however, found no evidence to support significant abnormal returns of acquiring firms over a three-year period after the bid date. Agrawal et al. (1992) concluded that bidding firms lost from the acquisitions over several years but Ruback (1977), Kummer and Hoffmeister (1978) and Dodd (1980) indicated that bidding firms gained from the acquisitions. Travlos and Papaioannou (1991) examined the impacts of method of payment on bidding firms stock return at the initial announcement of takeover bids. They found that the abnormal return of bidding firms on the announcement day were -1.3% for stock exchange and 0.8% for cash offers. Suk and Sung (1997) looked at the effects of method of payment, form of acquisition and type of offer on target firms abnormal returns around the takeover announcement. They showed that there was no difference in premiums between a stock offers and cash offers. Chang (1998) examined bidder returns at the

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announcement of a takeover proposal when target firms were privately held. He indicated that bidders experienced no abnormal return in cash offers but a positive abnormal return in stock offers. The monitoring activities and information asymmetries were reasons for a positive wealth effect. Knapp (2006) concluded that post-merger abnormal return of bank related companies was significantly larger as compared with the industry mean in the first 5 years after a merger. Recently, Al-Sharkas et al (2008) showed that mergers could improve the cost and profit efficiencies of banks and provided an economic rational for future mergers in the banking industry.

2.11

Summary:

Whether the M&A is local or cross-border also plays a role in post-merger returns: contrary to the evidence for local acquisitions, Doukas and Travlos (1988) find significant and positive abnormal returns for US companies that acquire firms in other countries (Markides and Ittner, 1994; Kang, 1993; Eun et.al. 1996; Gonzalez et.al. 1998; Chari et. al. 2004). Manzon et.al. (1994) argue that this type of abnormal return is related to international tax differences (Cebenoyan et al., 1992), while Bjorvatn (2004) shows that cross-border M&As may be triggered by economic integration. Travlos (1987)

distinguishes between acquirers that make cash offers and acquirers making stock offers: whereas the former achieve normal returns for their shareholders the later achieve negative returns (Huang and Walkling, 2009; Andrade et.al. 2001) a result consistent with the signalling hypothesis (Myers and Majluf, 1984). Martin (1996) also shows that firms that use shares as a form of payment tend to have lower book-tomarket ratios than firms that use cash. Loughran and Vijh (1997) find a relation between the form of payment and the long run returns following an acquisition: on average, firms that complete stock mergers earn negative excess returns of about - 25% whereas firms that complete cash tender offers earn positive excess returns of about 62%. Draper and Paudyal (1999) also find that the magnitude of the gains to shareholders is dependent on the method of payment and that, for both bidders and acquirers, trading activity, liquidity, and the bid-ask spreads are affected by the form of payment.

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Chapter 3: Research Methodology

3.1 3.1 Introduction: This chapter outlines the research objectives and model specifications. The event study model used tests the null hypothesis of no abnormal returns for target and acquiring firms around an acquisition announcement.

3.2 Research Gap: It is seen that, most of the works have been done on trends, policies & their framework, human aspect which is needed to be investigated, whereas profitability and financial analysis of the mergers have not give due importance. The present study would go to investigate the detail of Merger and Acquisitions (M&As) with greater focus on the Indian banking sector in post liberalization regime. The study will also discuss the pre and the post merger performance of banks. An attempt is made to predict the future of the ongoing Merger and Acquisitions (M&As) on the basis of financial performance and focusing mainly of Indian banking sector.

3.3 Scope and Objectives of the Study: To find the scrip return of each individual company in selective days of pre merger period. To find the scrip return of each individual company in selective days of post merger period. To find out the impact of the merger on scrip return by comparing the performance of the scrip return in the given period of study. To compare the ratios of the company after the merger and before the merger for a particular time period.

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3.4 Data and Methodology: 3.4.1 Data Collection For the purpose of evaluation investigation data is collected from Merger and Acquisitions (M&As) of the Indian banking industry in post liberalization regime. The financial and accounting data of banks is collected from companies Annual Report to examine the impact of M&As on the performance of sample banks. Financial data has been collected from Bombay Stock Exchange (BSE), National Stock Exchange (NSE), Securities and Exchange Board of India (SEBI) & money control for the study.

3.4.2 Methodology To test the research prediction, methodology of comparing the pre and post performances of banks after Merger and Acquisitions(M&As) has been adopted, by using following financial parameters such as Gross profit margin, Net profit margin, Operating profit margin, Return on capital employed, Return on equity, and Debt equity ratio. Researcher has taken two cases of Merger and Acquisitions (M&As) randomly as sample, one from public sector bank and the other from private sector bank in order to evaluate the impact of M&As. The pre merger (4 years prior) and post merger (after 4 years) of the financial ratios are being compared. The observation of each case in the sample is considered as an independent variable. Before merger two different banks carried out operating business activities in the market and after the merger the bidder bank carrying business of both the banks. Keeping in view the purpose & objectives of the study independent t- test is being employed under this study. The year of merger was considered as a base year and denoted as 0 and it is excluded from the evaluation. For the pre (3 years before) merger the combined ratios of both banks are considered and for the post merger (after 3 years) the ratios of acquiring bank were used.

3.4.3 Ratios: Gross Profit Margin = Gross Profit/Sales 100 Net Profit Margin = Net Profit/Sales 100

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Operating Profit Margin = Operating Profit/Sales 100 Return on Capital Employed (ROCE) =Net Profit/Total Assets 100 Return on Equity (ROE) =Net Profit/Equity Share Holders Funds 100 Debt Equity Ratio (Pure Ratio) = Total Debt/ Share Holder Equity

3.4.4 Scrip Price Return: Scrip price return of acquirer firm before 30 days and after 30 days from the merger date has been calculated by using the below formula:

Scrip Return = [(Current day price previous day price)/previous day price] x 100

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Chapter 4: Data Analysis In Table 1, researcher selected five cases for study, first the merger of the Indian Overseas Bank and Bharat Overseas bank, second the merger of the CBOP and the HDFC bank Ltd. on 23 May, 2008 and third the Bank of Rajasthan and ICICI Bank on 13 August 2010, fourth the merger of ICICI Bank and Sangali Bank and fifth IDBI Bank and United Western Bank and analyzed all the five cases as considered one public and other from private sector bank. In order to analyze the financial performance of banks after Merger and Acquisitions (M&As). The financial and accounting ratio like Gross profit margin, Net profit margin, Operating profit margin, Return on capital employed, Return on equity, and Debt equity ratio have been calculated. In the first case, Table 2 indicated the profile of both banks before merger. Table 3, shows the post-performance of bidder bank after merger. Table 4, shows the combined performance of both banks prior to merger. Similarly, in second case, Table 5 depicts the profile of both the banks before merger, Table 6 indicates the performance of acquiring bank after merger and Table 7 shows combined financial performance of both the banks before merger. Similarly, in second case, Table 8 depicts the profile of both the banks before merger, Table 9 indicates the performance of acquiring bank after merger and Table 10 shows combined financial performance of both the banks before merger. In all three cases all financial and accounting ratios have computed by the researchers. In first case, the merger of the Bharat Overseas Bank with the Indian Overseas Bank is shown and then the financial performance between the Pre & Post merger has been compared on the basis of key ratios. It is found that there is no difference in the mean of gross profit margin (76.2193 percent Vs 74.6209 percent) and t-value 1.125. It is seen that the mean value of gross profit margin has decline so it is considered that it does not effect by merger, so it is not shows significant, however the net profit margin statistically confirmed highly significance with mean value (7.5965 percent Vs 15.3128 percent) and t- value -8.683.

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Table 1: Case Selected


SL. Case Case Case Case Case NO 1 2 3 4 3 Bidder Bank Indian Overseas HDFC ICICI ICICI IDBI Target Bank Bharat Overseas Centurion Bank of Punjab Bank of Rajasthan Sangali Bank United Western Bank Date Announcement 12-Mar-08 23-May-08 13-Aug-10 19-Apr-07 3-Oct-06 of

Table 2:- Profile of HDFC Bank and Centurion Bank of Punjab for the last three financial years ending before the merger announcement. Financial Ratios (in Percentage)
HDFC Bank (Bidder Bank) 2005 2006 74.17189 71.12331 21.51485 19.45729 53.1167 46.00834 1.29413 1.18463 214.77991 278.08009 134.38834 192.74861 Centurion Bank of Punjab (Target Bank) 2005 2006 2007 12.23 5.92 3.78 7.25 8.28 5.96 15.69 10.85 11.02 1.16 1.12 0.96 8.69 9.42 4.25 10.65 10.09 5.98

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio

2007 69.94028 16.56912 47.93091 1.2511 357.38438 222.65358

Graph - 1

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In table 2 and graph 1, individual profile of bank ratios are calculated. GPM of HDFC bank in 2005 is higher than other two years, and same is applicable for CBOP NPM of HDFC bank in 2005 is higher than other two years, and same is applicable for CBOP OPM of HDFC bank in 2005 is higher than other two years, and same is applicable for CBOP ROCE of HDFC bank in 2005 is higher than other two years, and same is applicable for CBOP ROE of HDFC bank in 2005 is higher than other two years, and same is applicable for CBOP HDFC bank has more debt in 2005 than 2007 however CBOP has more equity than debt

Table 3:- Combined profile of HDFC Bank and Centurion Bank of Punjab for the last three financial years ending before the merger announcement. Financial Ratios (in Percentage)
2009 72.32917 20.22659 51.51849 1.24143 169.19017 109.9669 Combine Profile 2010 68.42877 18.81694 42.42082 1.17079 218.79419 153.77339 2011 69.88274 15.4805 46.32579 1.15097 265.25583 182.54902

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio

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Graph - 2 In table 3 and graph 2, Combine profile of HDFC bank and CBOP bank ratios are calculated.

GPM of HDFC bank in 2009 is higher than other two years NPM of HDFC bank in 2009 is higher than other two years OPM of HDFC bank in 2009 is higher than other two years ROCE of HDFC bank in 2009 is higher than other two years ROE of HDFC bank in 20011 is higher than other two years HDFC bank has more debt in 2009 than 2011

Table 4:- Profile of ICICI Bank and Bank of Rajasthan the last three financial years ending before the merger announcement. Financial Ratios (in Percentage)

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio

ICICI Bank (Bidder Bank) 2009 2008 12.36 12.99 5.63 5.66 14.13 14.45 9.9 10.62 7.59 8.94 4.42 5.27

2007 9.45 6.67 11.31 5.49 11.51 4.26

Bank of Rajasthan (Target Bank) 2009 2006 2007 8.85 10.2 15.7 7.81 9.75 12.56 9.66 11.21 17.13 9.35 8.6 8.04 18.29 21.75 28.83 23.6 26.15 25.37

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120 100 80 60 40 20 0 23.6 4.42 7.59 9.9 14.13 5.63 12.36 2009 5.27 8.94 10.62 14.45 5.66 12.99 2008 ICICI Bank (Bidder Bank) Debt equity Ratio Operating Profit Margin Return on Equity Net Profit Margin 4.26 11.51 5.49 11.31 6.67 9.45 2007 18.29 9.35 9.66 7.81 8.85 2009 26.15 21.75 8.6 11.21 9.75 10.2 2006 25.37 28.83 8.04 17.13 12.56 15.7 2007

Bank of Rajasthan (Target Bank) Return on Capital Gross Profit Margin

Graph - 3 In table 4 and graph 3, individual profile of bank ratios are calculated. GPM of ICICI bank in 2008 is higher than other two years, and GPM is higher for BOR in 2007 than other two years NPM of ICICI bank in 2007 is higher than other two years, and same is applicable for BOR OPM of ICICI bank in 2008 is higher than other two years, , and OPM is higher for BOR in 2007 than other two years ROCE of ICICI bank in 2008 is higher than other two years, and same is applicable for BOR ROE of ICICI bank in 2008 is higher than other two years, and ROE is higher for BOR in 2007 than other two years ICICI bank has more debt in 2008 than 2007 and 2009 and same is applicable for BOR

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Table 5:- Combined profile of ICICI Bank and Bank of Rajasthan for the last three financial years ending before the merger announcement. Financial Ratios (in Percentage)
2012 20.68 16.14 21.99 9.1 7.59 4.23 Combine Profile 2011 2010 21.06 15.06 15.91 12.17 22.8 16.95 8.41 8.9 8.94 11.51 4.1 3.91
22.8 21.99 16.14 15.91 12.17 16.95 9.18.418.9 11.51 8.94 7.59 4.234.13.91

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio
25 20 15 10 5 0 Gross Profit Margin

21.06 20.68 15.06

Net Profit Margin

Operating Profit Margin

Return on Capital

Return on Equity

Debt equity Ratio

ICICI Bank (Bidder Bank) 2012

ICICI Bank (Bidder Bank) 2011

ICICI Bank (Bidder Bank) 2010

Graph - 4 In table 5 and graph 4, Combine profile of ICICI bank and BOR bank ratios are calculated.

GPM of ICICI bank in 2011 is higher than other two years NPM of ICICI bank in 2012 is higher than other two years OPM of ICICI bank in 2011 is higher than other two years ROCE of ICICI bank in 2012 is higher than other two years ROE of ICICI bank in 2010 is higher than other two years ICICI bank has more debt in 2012 than 2011 and 2010

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Table 6:- Profile of Bharat Overseas Bank and Indian Overseas Bank for the last three financial years ending before the merger announcement. Financial Ratios (in Percentage)
Indian Overseas Bank (Bidder Bank) 2005 2006 2007 76.56032 75.0357 76.91365 7.91805 7.90724 8.4597 62.44347 61.75684 62.20639 0.75401 0.73008 0.77129 192.3011 218.45081 264.9783 226.8453 267.64196 304.0522 Bharat Overseas Bank (Target Bank) 2005 2006 2007 89.67408 52.9425 94.39294 9.01361 -38.25537 0.81756 67.79003 36.60779 49.30475 0.84123 -3.56673 0.08052 143.43137 -664.70588 12.45098 157.82352 172.53823 141.596

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio

Graph 5

In table 6 and graph 5, individual profile of bank ratios are calculated. GPM of INDIAN OVERSEAS BANK in 2007 is higher than other two years, and GPM is higher for BHARAT OVERSEAS BANK in 2007 than other two years NPM of INDIAN OVERSEAS BANK in 2007 is higher than other two years, and NPM is higher for BHARAT OVERSEAS BANK in 2007 than other two years OPM of INDIAN OVERSEAS BANK in 2005 is higher than other two years, , and OPM is higher for BHARAT OVERSEAS BANK in 2005 than other two years

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ROCE of INDIAN OVERSEAS BANK in 2007 is higher than other two years, and ROCE is higher for BHARAT OVERSEAS BANK in 2005 than other two years ROE of INDIAN OVERSEAS BANK in 2007 is higher than other two years, and ROE is higher for BHARAT OVERSEAS BANK in 2005 than other two years INDIAN OVERSEAS BANK has more debt in 2007 than 2005 and 2006 and same is applicable for BHARAT OVERSEAS BANK

Table 7:- Combined profile of Bharat Overseas Bank and Indian Overseas Bank for the last three financial years ending before the merger announcement. Financial Ratios (in Percentage)
2009 76.96064 7.95149 62.60668 0.75673 190.06024 223.68036 Combine Profile 2010 74.38446 6.55287 61.01898 0.6052 177.9536 263.28097 2011 77.31276 8.2852 61.9118 0.75667 253.39866 296.60281

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio

Graph - 6

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In table 7 and graph 6, Combine profile of INDIAN OVERSEAS BANK and BHARAT OVERSEAS BANK bank ratios are calculated.

GPM of INDIAN OVERSEAS BANK in 2011 is higher than other two years NPM of INDIAN OVERSEAS BANK in 2011 is higher than other two years OPM of INDIAN OVERSEAS BANK in 2009 is higher than other two years ROCE of INDIAN OVERSEAS BANK in 2009 is higher than other two years ROE of INDIAN OVERSEAS BANK in 2011 is higher than other two years INDIAN OVERSEAS BANK has more debt in 2011 than 2009 and 2010

Table 8:- Profile of ICICI Bank and Sangali Bank for the last three financial years ending before the merger announcement. Financial Ratios (in Percentage)
ICICI Bank (Bidder Bank) 2004 2005 2006 9.39 9.87 7.18 4.28 4.30 5.07 10.74 10.98 8.60 7.52 8.07 4.17 5.77 6.79 8.75 3.36 4.01 3.24 Sangali Bank (Target Bank) 2004 2005 2006 7.08 8.16 12.56 6.248 7.8 10.048 7.728 8.968 13.704 7.48 6.88 6.432 14.632 17.4 23.064 18.88 20.92 20.296

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio

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Graph - 7 In table 8 and graph 7, individual profile of bank ratios are calculated. GPM of ICICI BANK in 2005 is higher than other two years, and GPM is higher for SANGALI BANK in 2006 than other two years NPM of ICICI BANK in 2006 is higher than other two years, and NPM is higher for SANGALI BANK in 2006 than other two years OPM of ICICI BANK in 2005 is higher than other two years, , and OPM is higher for SANGALI BANK in 2006 than other two years ROCE of ICICI BANK in 2005 is higher than other two years, and ROCE is higher for SANGALI BANK in 2004 than other two years ROE of ICICI BANK in 2006 is higher than other two years, and ROE is higher for SANGALI BANK in 2006 than other two years ICICI BANK has more debt in 2005 than 2004 and 2006 and same is applicable for SANGALI BANK

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Table 9:- Combined profile of ICIC Bank and Sangali Bank for the last three financial years ending before the merger announcement. Financial Ratios (in Percentage)
2010 15.06 12.17 16.95 8.9 11.51 3.91 ICICI Bank (Bidder Bank) 2009 12.36 5.63 14.13 9.9 7.59 4.42 2008 12.99 5.66 14.45 10.62 8.94 5.27

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio

Graph 8 In table 9 and graph 8, Combine profile of ICICI BANK and SANGALI BANK ratios are calculated.

GPM of ICICI BANK in 2010 is higher than other two years NPM of ICICI BANK in 2010 is higher than other two years OPM of ICICI BANK in 2000 is higher than other two years ROCE of ICICI BANK in 2008 is higher than other two years ROE of ICICI BANK in 2010 is higher than other two years ICICI BANK has more debt in 2008 than 2009 and 2010

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Table 10:- Profile of IDBI Bank and United Western Bank for the last three financial years ending before the merger announcement. Financial Ratios (in Percentage)
United Western Bank (Target Bank) 2003 2004 2005 22.42 13.24 23.60 2.25 -9.56 0.20 16.95 9.15 12.33 0.21 -0.89 0.02 35.86 -166.18 3.11 39.46 43.13 35.40

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio

2003 19.14 1.98 15.61 0.19 48.08 56.71

IDBI (Bidder Bank) 2004 18.76 1.98 15.44 0.18 54.61 66.91

2005 19.23 2.11 15.55 0.19 66.24 76.01

Graph - 9 In table 10 and graph 9, individual profile of bank ratios are calculated. GPM of IDBI bank in 2005 is higher than other two years, and GPM is higher for UWB in 2005 than other two years NPM of IDBI bank in 2005 is higher than other two years, and NPM is higher for UWB in 2003 than other two years OPM of IDBI bank in 2003 is higher than other two years, , and OPM is higher for UWB in 2003 than other two years ROCE of IDBI bank in 2005 and 2003 is higher than other 2004, and same is applicable for UWB

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ROE of IDBI bank in 2005 is higher than other two years, and ROE is higher for UWB in 2003 than other two years IDBI bank has more debt in 2005 than 2003 and 2004 and same is applicable for UWB

Table 11:- Combined profile of IDBI Bank and United Western Bank for the last three financial years ending before the merger announcement. Financial Ratios (in Percentage)
2007 20.01 2.07 16.28 0.20 49.42 58.16 Combine Profile 2008 19.34 1.70 15.86 0.16 46.27 68.45 2009 20.10 2.15 16.10 0.20 65.88 77.12

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio

Graph - 10 In table 11 and graph 10, Combine profile of IDBI bank and UWB bank ratios are calculated.

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GPM of IDBI bank in 2009 is higher than other two years NPM of IDBI bank in 2009 is higher than other two years OPM of IDBI bank in 2007 is higher than other two years ROCE of IDBI bank in 2009 is higher than other two years ROE of IDBI bank in 2009 is higher than other two years IDBI bank has more debt in 2009 than 2007 and 2008

In first case, the merger of the Centurion Bank of Punjab and the HDFC Bank, the comparison between pre and post merger performance we seen that the mean value of gross profit margin (70.2136 percent Vs 75.2397 percent) has increased with t-value 4.008 which shows significance improvement in the gross profit margin after merger but in net profit margin and operating profit margin you can see the decline in the mean of both parameters that indicates that there is no change in the performance of banks net profit margin and operating profit margin after merger and result shows that there is no significance with mean (18.8413 percent Vs 17.2268 percent) and t-value 0.610 and (46.7550 percent Vs 53.4248 percent) and t-value -2.319 and the mean return on capital employed (1.1877 percent Vs 1.3220 percent) and t-value -2.182 which is also not significant statically and shows that no change has been seen in term of investment after the merger. The mean of return on equity and debt equity ratio shows improvement, and statically conformed significant to mean value (2.1775 percent Vs 6.7197 percent) and t-value -4.711 and (1.4876 percent Vs 4.0509 percent) and t-value 5.667. The mean value of equity in post merger has been increased so it increased the shareholder return so it also shows the improved performance of bank after merger. Similarly the debt equity ratio also improved after the merger the mean value shows the change in debt equity ratio after merger. So we conclude that some ratios indicate no effect but most of ratios shows the positive effect and increased the performance of banks after the merger.

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Table 12:- Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined Banks (HDFC Bank and Centurion Bank of Punjab) and Acquiring Bank (HDFC).
Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio Pre Post Pre Post Pre Post Pre Post Pre Post Pre Post Mean 70.2136 75.2397 18.8413 17.2268 46.755 53.4248 1.1877 1.322 2.1775 6.7197 1.4876 4.0509 Std Deviation 1.97113 0.91303 3.37311 3.10326 4.564 1.99513 0.04755 0.09541 48.0414 159.92827 36.54953 69.30134 T-test -4.008 0.61 -2.319 -2.182 -4.711 -5.667 Significance 0.016 0.575 0.081 0.095 0.009 0.005

In table 12, the t-test value for GPM, OPM, ROCE, ROE and DER is negative except the NPM. It shows that HDFC bank ratios were not changed significantly after merger.

Table 13:- Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined Banks (ICICI Bank and Bank of Rajasthan) and Acquiring Bank (ICICI).

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio

Pre Post Pre Post Pre Post Pre Post Pre Post Pre Post

Mean 11.6 18.9 6.0 14.7 13.3 20.6 8.7 8.8 9.3 9.3 4.7 4.1

Std Deviation 1.9 3.4 0.6 2.2 1.7 3.2 2.8 0.4 2.0 2.0 0.5 0.2

T-test 9.761 11.456 11.246 42.950 8.129 43.911

Significance 0.010 0.008 0.008 0.001 0.015 0.001

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In table 13, the t-test value for GPM, NPM, OPM, ROCE, ROE and DER is positive. It shows that ICICI bank ratios were changed significantly after merger.

Table 14:- Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined Banks (Bharat Overseas Bank & Indian Overseas Bank) and Acquiring Bank (INDIAN OVERSEAS).

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio

Pre Post Pre Post Pre Post Pre Post Pre Post Pre Post

Mean 76.2193 74.6209 7.5965 15.3128 61.8458 55.7335 0.7062 1.0637 2.0714 4.4054 2.6119 3.5762

Std Deviation 1.59873 1.87081 0.9191 1.23472 0.7959 3.78482 0.08747 0.06536 40.51807 20.14562 36.50625 37.3932

T-test 1.125 -8.683 2.737 -5.671 -8.934 -3.196

Significance 0.324 0.001 0.052 0.005 0.001 0.033

In table 14, the t-test value for GPM and OPM is positive except NPM, ROCE, ROE and DER is positive. It shows that IOB ratios were changed significantly after merger however NPM, ROCE, ROE and DER were unchanged.

Table 15:- Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined Banks (ICICI & Sangali Bank) and Acquiring Bank (ICICI).
Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Pre Post Pre Post Pre Post Pre Mean 8.8 13.5 4.5 7.8 10.1 15.2 6.6 Std Deviation 1.4 1.4 0.4 3.8 1.3 1.5 2.1 T-test 5.86 6.87 6.75 25.77 Significance 0.01 0.00 0.00 0.00

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Return on Equity Debt equity Ratio

Post Pre Post Pre Post

9.8 7.1 9.3 3.5 4.5

0.9 1.5 2.0 0.4 0.7

4.88 26.35

0.01 0.00

In table 15, the t-test value for GPM, NPM, OPM, ROCE, ROE and DER is positive. It shows that ICICI bank ratios were changed significantly after merger.

Table 16:- Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined Banks (IDBI & United Western Bank) and Acquiring Bank (IDBI).

Gross Profit Margin Net Profit Margin Operating Profit Margin Return on Capital Return on Equity Debt equity Ratio

Pre Post Pre Post Pre Post Pre Post Pre Post Pre Post

Mean 19.82 19.40 1.98 3.98 16.08 14.49 0.18 0.28 0.54 1.15 0.68 0.93

Std Deviation 0.42 0.49 0.24 0.32 0.21 0.98 0.02 0.02 10.53 5.24 9.49 9.72

T-test 0.29 -2.26 0.71 -1.47 -2.32 -0.83

Significance 0.08 0.00 0.01 0.00 0.00 0.01

In table 16, the t-test value for GPM and OPM is positive except NPM, ROCE, ROE and DER is positive. It shows that IDBI ratios were changed significantly after merger however NPM, ROCE, ROE and DER were unchanged.

Results - Ratios The result suggest that the performance of the INDIAN OVERSEAS after acquired the Bharat Overseas Bank has been improved in terms of Net Profit Margin with t-value 8.683 which leads to the conclusion that the difference is statistically significant therefore, the H1 (Alternative Hypothesis) is accepted which say that there is 53

significance difference between the pre and post-merger net profit margin. The performance of the Indian Overseas Bank in terms of Return on Capital Employed has been improved after the merger with t-value -5.671 which is significant. The bank performance is improved after merger in relation to the Return on Equity with t- value 8.934 which leads to the conclusion that the difference is statistically significant. In the Debt Equity Ratio, the performance of bank after the merger seems improvement with t-value -3.196 which shows significant statistically, which leads to the conclusion that there is a significance difference between pre and post merger Debt Equity Ratio. All the Alternative Hypothesis is accepted in case of the Indian Overseas Bank and the Bharat Overseas Bank, so the conclusion suggest that the merger of banks has been beneficial to the Equity share holders and increases the overall bank performance in terms of profitability. Similarly in the case of the Centurion Bank of Punjab and the HDFC Bank, the Net Profit Margin does not shows any change after the merger with t-value 0.610 which is statistically insignificant which leads to the conclusion that there is no difference between pre and post merger net profitability. The Return on Capital Employed also shows no change after the merger with t- value -2.182 which is statistically insignificant which also leads to the conclusion that there is no significance difference between pre and post merger Return on Capital Employed. The Return on Equity shows improvement after the merger with t- value -4.711 which is statistically significant, which leads to the conclusion that there is significance difference between pre and post merger Return on Equity. The performance of bank also improved in terms of Debt Equity Ratio with t-value -5.667 which is statistically significant, which leads to the conclusion that there is significance difference between pre and post-merger Debt Equity Ratio. The results suggest that the performance of banks has been improved in terms of Return on Equity and Debt Equity Ratio, but no change have been seen in Net Profit Margin and Return on Capital Employed. It may be possible the performance of bank in terms of net profitability will increase in longer run.

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T-test Analysis for Script Returns: Table 17: Share price movement of HDFC Bank 30 days before and after the merger:
Dates 20 Jun, 2008 19 Jun, 2008 18 Jun, 2008 17 Jun, 2008 16 Jun, 2008 13 Jun, 2008 12 Jun, 2008 11 Jun, 2008 10 Jun, 2008 9 Jun, 2008 6 Jun, 2008 5 Jun, 2008 4 Jun, 2008 3 Jun, 2008 2 Jun, 2008 30 May, 2008 29 May, 2008 28 May, 2008 27 May, 2008 26 May, 2008 Scrip Prices 30 days before 219.65 224.4 233.01 242 229.21 225 230.4 238 227.22 236 246.4 247.28 243.25 253.2 262 275.6 265.2 270.62 266.4 273 Return Dates -0.021 22 May, 2008 -0.037 21 May, 2008 -0.037 20 May, 2008 0.056 16 May, 2008 0.019 15 May, 2008 -0.023 14 May, 2008 -0.032 13 May, 2008 0.047 12 May, 2008 -0.037 9 May, 2008 -0.042 8 May, 2008 -0.004 7 May, 2008 0.017 6 May, 2008 -0.039 5 May, 2008 -0.034 2 May, 2008 -0.049 30 Apr, 2008 0.039 29 Apr, 2008 -0.020 28 Apr, 2008 0.016 25 Apr, 2008 -0.024 24 Apr, 2008 -0.016 23 Apr, 2008 Variable 1 Variable 2 -0.0107 -0.002 0.031 0.019 21 21 -0.0086 0.037 -1.042 2.086 0.31 20 Scrip Prices 30 days before 278.34 282.6 293 300 295.5 293 295.61 293.3 290.62 301.51 307 308.96 303.24 306.41 301.42 310 308 298.98 289.6 288.2 Return -0.003 -0.015 -0.035 -0.023 0.015 0.009 -0.009 0.008 0.009 -0.036 -0.018 -0.006 0.019 -0.010 0.017 -0.028 0.006 0.030 0.032 0.005

Mean Standard Deviation N Paired Means Difference Paired STD Deviation t-calculated t-tabulated Sig. (2-tailed) DF

In table 17, the t value is less than the calculated value therefore the return on scrip prices after the merger is not statistically significant than the return on pre-merger.

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Average Return
0.080 0.060 0.040 0.020 0.000 -0.020 -0.040 -0.060

Table 18 - Share price movement of ICICI Bank 30 days before and after the merger:
Scrip Prices 30 days before Return 1,097.30 0.044 1,050.75 0.025 1,025.30 -0.010 1,036.10 -0.002 1,037.70 0.038 999.65 -0.003 1,002.85 0.008 994.6 0.018 977.3 0.009 968.15 0.010 958.1 -0.028 986.1 0.002 984.1 -0.017 1,000.80 -0.009 1,010.15 0.016 994.5 -0.018 1,012.55 0.044 970.05 0.010 960.1 0.003 957 -0.019 1,097.30 0.012 Variable 1 Mean 0.0063 Standard Deviation 0.02 Dates 13 Sep, 2010 9 Sep, 2010 8 Sep, 2010 7 Sep, 2010 6 Sep, 2010 3 Sep, 2010 2 Sep, 2010 1 Sep, 2010 31 Aug, 2010 30 Aug, 2010 27 Aug, 2010 26 Aug, 2010 25 Aug, 2010 24 Aug, 2010 23 Aug, 2010 20 Aug, 2010 19 Aug, 2010 18 Aug, 2010 17 Aug, 2010 16 Aug, 2010 13 Aug, 2010 Dates 12 Aug, 2010 11 Aug, 2010 10 Aug, 2010 9 Aug, 2010 6 Aug, 2010 5 Aug, 2010 4 Aug, 2010 3 Aug, 2010 2 Aug, 2010 30 Jul, 2010 29 Jul, 2010 28 Jul, 2010 27 Jul, 2010 26 Jul, 2010 23 Jul, 2010 22 Jul, 2010 21 Jul, 2010 20 Jul, 2010 19 Jul, 2010 16 Jul, 2010 15 Jul, 2010 Variable 2 0.004 0.017 Scrip Prices 30 days before 963.95 971.1 989.1 980.45 951.85 956.05 970.15 962.1 939.75 904.45 926.5 909.1 924.15 915.85 911.55 908.95 902.8 889.4 900.4 902.45 881.95 Return -0.007 -0.018 0.009 0.030 -0.004 -0.015 0.008 0.024 0.039 -0.024 0.019 -0.016 0.009 0.005 0.003 0.007 0.015 -0.012 -0.002 0.023 -0.010

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N Paired Means Difference Paired STD Deviation t-calculated t-tabulated Sig. (2-tailed) DF

21 0.00238 0.02959 0.369 2.086 0.716 20

21

In table 18, the calculated t value is less than the tabulated value therefore the return on scrip prices after the merger is not statistically significant than the return on premerger.

0.060 0.040 0.020 0.000 -0.020 -0.040

Average Return

Table 19 - Share price movement of INDIAN OVERSEAS Bank 30 days before and after the merger:
Dates 5/3/2007 6/3/2007 7/3/2007 8/3/2007 9/3/2007 12/3/2007 13/03/2007 Scrip Prices 30 days before 98.2 97.15 95.1 95.7 95.75 96.3 97.3 Return -3.93 -7.06 -3.67 -4.20 -3.13 -1.67 Dates 2/4/2007 3/4/2007 4/4/2007 5/4/2007 9/4/2007 10/4/2007 11/4/2007 Scrip Prices 30 days before 96.3 98.9 97.55 99.6 99.75 98.3 99.65 Return 1.53 -3.83 1.66 -0.10 -3.18 1.00

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14/03/2007 15/03/2007 16/03/2007 19/03/2007 20/03/2007 21/03/2007 22/03/2007 23/03/2007 26/03/2007 20/05/2010 29/03/2007 30/03/2007 Mean Standard Deviation N Paired Means Difference Paired STD Deviation t-calculated t-tabulated Sig. (2-tailed) DF

94.55 94.65 95.85 96.2 99.4 103 106.35 104.05 102.55 104.6 103.2 102.75

-8.36 -5.24 -2.90 -3.44 2.62 6.50 9.50 1.84 1.09 6.56 1.84 2.31

12/4/2007 13/04/2007 16/04/2007 17/04/2007 18/04/2007 19/04/2007 20/04/2007 23/04/2007 24/04/2007 25/04/2007 26/04/2007 27/04/2007

97.1 97.95 99.65 104.45 105.3 103.9 107.1 106 111.55 113.6 118.9 117

-5.53 -1.18 1.36 9.05 6.11 2.55 10.09 4.96 16.53 15.40 23.36 15.38

Variable 1 Variable 2 -0.630 5.286 4.94 8.067 18 18 -5.91 6.18 -4.061 0.065 0.001 17

In table 19, the calculated t value is less than the tabulated value therefore the return on scrip prices after the merger is not statistically significant than the return on premerger.

Average Return
25.00 20.00 15.00 10.00 5.00 0.00 -5.00 -10.00

Axis Title

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Table 20 - Share price movement of ICICI Bank 30 days before and after the merger:
Scrip Prices 30 days before Scrip Prices 30 days before 42.55 42.64 42.41 40.6 39.5 38.8 38.92 38.64 38.36 37.71 37.47 36.53 36.75 39.49 39.3 39.55 40.75 40.85 40.41

Dates

Return Dates 0.014 18-Apr-07 18-May-07 47.85 -0.010 17-Apr-07 17-May-07 47.19 0.070 16-Apr-07 16-May-07 47.66 0.018 13-Apr-07 15-May-07 44.53 0.042 12-Apr-07 14-May-07 43.75 0.030 11-Apr-07 11-May-07 41.97 -0.032 10-Apr-07 10-May-07 40.74 0.013 9-Apr-07 9-May-07 42.09 0.007 5-Apr-07 8-May-07 41.57 -0.014 4-Apr-07 7-May-07 41.28 0.002 3-Apr-07 4-May-07 41.86 0.014 2-Apr-07 3-May-07 41.78 0.022 30-Mar-07 2-May-07 41.19 -0.015 29-Mar-07 1-May-07 40.29 -0.086 28-Mar-07 30-Apr-07 40.92 -0.036 27-Mar-07 27-Apr-07 44.77 -0.002 26-Mar-07 26-Apr-07 46.45 0.026 23-Mar-07 25-Apr-07 46.52 0.040 22-Mar-07 24-Apr-07 45.35 Variable 1 Variable 2 Mean 0.0059 0.0052 Standard Deviation 0.033 0.024 N 20 20 Paired Means Difference 0.0007 Paired STD Deviation 0.0351 t-calculated 0.089 t-tabulated 0.230 Sig. (2-tailed) 0.930 DF 19

Return -0.002 0.005 0.045 0.028 0.018 -0.003 0.007 0.007 0.017 0.006 0.026 -0.006 -0.069 0.005 -0.006 -0.029 -0.002 0.011 0.002

In table 20, the calculated t value is less than the tabulated value therefore the return on scrip prices after the merger is not statistically significant than the return on premerger.

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Average Return
0.100 0.050 0.000 -0.050 -0.100 21-Mar-07 23-Mar-07 25-Mar-07 27-Mar-07 29-Mar-07 31-Mar-07 2-Apr-07 4-Apr-07 6-Apr-07 8-Apr-07 10-Apr-07 12-Apr-07 14-Apr-07 16-Apr-07 18-Apr-07 20-Apr-07 22-Apr-07 24-Apr-07 26-Apr-07 28-Apr-07 30-Apr-07 2-May-07 4-May-07 6-May-07 8-May-07 10-May-07 12-May-07 14-May-07 16-May-07 18-May-07

Table 21 - Share price movement of IDBI Bank 30 days before and after the merger:
Dates 1-Nov-06 31-Oct-06 30-Oct-06 27-Oct-06 26-Oct-06 23-Oct-06 20-Oct-06 19-Oct-06 18-Oct-06 17-Oct-06 16-Oct-06 13-Oct-06 12-Oct-06 11-Oct-06 10-Oct-06 9-Oct-06 6-Oct-06 5-Oct-06 4-Oct-06 Mean Scrip Prices 30 days before 82.4 82.15 85.1 87 82.4 81.25 80.25 78.4 80.35 80.8 82.5 82.15 82.2 81.35 83.35 84.2 84.25 84.4 83.3 Variable 1 -0.0012 Return Dates 0.003 28-Sep-06 -0.035 27-Sep-06 -0.022 26-Sep-06 0.056 25-Sep-06 0.014 22-Sep-06 0.012 21-Sep-06 0.024 20-Sep-06 -0.024 19-Sep-06 -0.006 18-Sep-06 -0.021 15-Sep-06 0.004 14-Sep-06 -0.001 13-Sep-06 0.010 12-Sep-06 -0.024 11-Sep-06 -0.010 8-Sep-06 -0.001 7-Sep-06 -0.002 6-Sep-06 0.013 5-Sep-06 -0.012 4-Sep-06 Variable 2 0.0131 Scrip Prices 30 days before 82.7 79.6 73.65 73.45 73.1 75.2 73.9 70.95 71.2 70.05 68.65 71.25 62.25 62.15 65.75 65.55 67.25 66.7 66 Return 0.039 0.081 0.003 0.005 -0.028 0.018 0.042 -0.004 0.016 0.020 -0.036 0.145 0.002 -0.055 0.003 -0.025 0.008 0.011 0.004

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Standard Deviation N Paired Means Difference Paired STD Deviation t-calculated t-tabulated Sig. (2-tailed) DF

0.020 0.043 19 19 -0.0142 0.011 -1.260 0.076 0.224 18

In table 21, the calculated t value is less than the tabulated value therefore the return on scrip prices after the merger is not statistically significant than the return on premerger.

Average Return
0.200 0.150 0.100 0.050 0.000 2-Oct-06 4-Oct-06 6-Oct-06 8-Oct-06

10-Oct-06

30-Oct-06

12-Oct-06

14-Oct-06

16-Oct-06

18-Oct-06

20-Oct-06

22-Oct-06

24-Oct-06

26-Oct-06

20-Sep-06

10-Sep-06

12-Sep-06

14-Sep-06

16-Sep-06

18-Sep-06

22-Sep-06

24-Sep-06

26-Sep-06

28-Sep-06

-0.050 -0.100

Results Average Return The merger and acquisition announcements impact on the stock prices return was tested by t-test. Stock price data for acquirer banks before and after 30 days from the announcement date has been captured and t-test applied on the average return. It has been observed that none of the five cases have significant change the return as t calculated values is less than the t tabulated value. On the event day the beta value is 0.16 and highly significant with the t-statistics 13.19. The abnormal volume is decreasing after reaching its peak but continue to be positive post event period. Table 4.10 provided that at day -5 and -4, the coefficient of dummy is negative and stand at -

30-Sep-06

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28-Oct-06

1-Nov-06

4-Sep-06

6-Sep-06

8-Sep-06

1.014597 and -0.013202 and then positive at 0.730607 on day -3 and then become negative on -2 day then after it is continuously positive and reached at its peak on day 1 just after the event day, 0 day where the coefficient value is 2.05091. On -5 day, the tstatistics is insignificant as the value is less than 1.96 however there after the t-statistics is highly significant on day 3 and reached at its peak on day 3 which shows that the trading volume has been increased significantly after the event day. The abnormal volume is decreasing after reaching its peak but continue to be positive post event period. It has been observed from table 4.11 that the at day -5, the coefficient of dummy is 2.285 which is significantly decreasing every day however reached at its peak on event day, 0 where the coefficient value is 1.127. On -5 day, the t-statistics is highly significant as the t value is greater than 1.96 stood at 16.5 and continued to be significant which shows that the trading volume has been increased starting from the event period. The abnormal volume is decreasing after reaching its peak but continue to be positive post event period. Table 4.12 it has been observed that the at day -5, the coefficient of dummy is negative with the value of -0.210441 which is significantly decreasing every day and instantly increase on day 1 just after the event day reached at its peak where the coefficient value is 0.05891 and t values are statistically insignificant throughout the event period except day 4. On the event day the beta value is -0.3625 and highly insignificant with the t-statistics -7.0162. The abnormal volume is decreasing throughout the event period and continues to be negative positive post event period except day 4. The regression line for any of the index does not pass the normality test and even the residual square values are also insignificant. Therefore these results conclude that the merger and acquisition has impact on the average return of stock prices.

Discussions: After the merger we will see that in various financial parameter of the bank performance have improved in both cases and some parameter have shown no change but it may be possible that improved performance of merged Bank will show in later

62

years the profit are not visible because we compared only three years financial ratios, it may be possible that profit will be seen in future. There are various motives, which attract the bank for merger but it is not necessary to achieved all objectives after merger, the size of the bank will increase but no guarantee to increase net profitability after merger. The success of merger is dependent upon synergy gains created after the merger and overall performance of bank, the financial performance of the Indian Overseas Bank have been improved after the merger and was affected positively, the reaction comes out in terms of Net Profit Margin ,Return on Capital Employed, Return on Equity and Debt Equity Ratio. But in the case of the Centurion Bank of Punjab with the HDFC Bank, the financial ratios were not positively affected by merger and show no relation between pre and post-merger performance and may require due time for showing profitability. Finally the Indian Banking Sector has used Merger and Acquisitions (M&As) as a tool to expand and global recognition. Sick bank survived after merger, enhanced branch network, rural reach, increase market share and improve infrastructure all achieved through Merger and Acquisitions (M&As). For the level of high competition this strategy is also appearing as a mode of survival in the present market.

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Chapter 5: Conclusion and Remarks

This research verifies that merger announcements are events which frequently cause investors to revise their estimates of the future profitability of participating firms. The methodology adopted shows that there is a spike in volume of shares traded due to an acquisition announcement.

Following an acquisition announcement, the target companys stock typically trades at a discount to the price offered by the acquiring firm. The difference between the acquiring firms offer price and the target firms current price is known as the arbitrage spread.3 as the merger approaches its completion date, this spread diminishes (Mitchell, Pulvino and Stafford, 2002), and because market participants adjust their expectations by buying the target firms stock till the targets stock price reaches equilibrium. In this case, equilibrium price can be understood as the price offered by the acquiring firm for each share of the target firms stock on announcement date. Thus, if the merger is successful an arbitrageur can captures the arbitrage spread by purchasing the target firms stock - while it is still trading at a discount compared to the price offered the acquiring firm- and liquidate those shares once the merger consummates. However, if a merger fails, then the target firms stock price often falls dramatically (Davidson, Dutia and Cheng, 1989). Merger arbitrageurs are rewarded for bearing the risk of an acquisition transaction not materializing. Acquiring firms may finance their transaction using cash, cash with some equity or only equity. The trading strategies for merger arbitrageurs vary depending on the acquirers financing method.

The research found, as hypothesized, that abnormal returns of target firms are significantly different from acquiring firms. In the sample of 330 acquisitions announcements, target firms experienced positive abnormal returns irrespective of deal specifications. Acquiring firms experienced negative, significant abnormal returns in stock financed transactions on event day. Acquiring firms in hostile transactions

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experienced negative, significant abnormal returns on Day 1 as opposed to event day, and acquiring firms in friendly transactions experienced no abnormal returns. By analyzing publicly available information, this research has analyzed the stock market reaction to acquisition announcements and identified the deal premium as an important determinant of abnormal returns.

Merger and Acquisition is the useful tool for growth and expansion in the Indian banking sector. It is helpful for survival of weak banks by merging into larger bank. This study shows the impact of M&As in the Indian banking sector and researcher took two cases for the study as sample and examine that merger led to a profitable situation or not. For this a comparison between pre and post-merger performance in terms of gross profit margin, net profit margin, operating profit margin, return on capital employed, return on equity, and debt equity ratio. The combined performance of both bank (three years before) merger and the performance of acquiring bank (after three years) merger have compared. In case I the merger of Bharat Overseas bank and INDIAN OVERSEAS net profitability, return on capital employed, return on equity and debt equity ratio and case II the return on equity, debt equity ratio and gross profit margin has shown the improvement after the merger, and for the purpose and objective of the study investigator apply independent t-test for analyzing the pre and post-merger performance of the banks. And results suggest that after the merger the efficiency and performance of banks have increased. The most important is that to generate higher net profits after the merger in order to justify the decision of merger undertaken by the management to the shareholders.

Researcher suggests, for future research in this area could be the study of impact of merger only on acquiring banks by comparing pre and post-merger performance and take more banks to a larger sample concerning a longer time period for the study which would have given better result.

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