MANAGEMENT RESEARCH PROJECT

Interim Report

Consolidation in Indian banking industry

Merger of SBS with SBI

Submitted by:
Sachin Jakhar1
Enrollment No-07BS-3664
ON

24th October 2008

I.B.S, Hyderabad

1
Student IBS, Hyderabad, Class of 2009
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 Objective of the Project
The idea behind the research project is to study Merger and Acquisition and based on the study
finding out the main reason a firm goes for a merger. Also will try to find if the M&A is always
beneficial or it backfires also and the reason for the same. I will be developing a case study on the
proposed merger of SBS with SBI the study will help in finding the main reason behind the merger
and the advantages and benefits which SBI will derive and the cost it will pay if it goes haywire.

Methodology
The project will start with the study of literature (theory and various research papers on ―Mergers
and Acquisitions‖). The study of work of various researchers and scholars will help me to have the
overview of M&A, how it has evolved and what are the rationale behind the process, motives,
benefits and opportunities. Also the problems faced by the firm going for it and the ex-efficiencies
developed by the firms during the process. To cover the part related to the literature I will go
through books on M&A and the research papers downloaded from internet. Then I will try to
narrow down my approach to Indian context. I will study one recent M&A in Indian Banking
industry. Finally I will try to develop a case study regarding the proposed merger of the SBS and
SBI. As throughout the project I shall be making use of secondary data. So the report will be true
only to the extent of the information available on the net.

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 LITERATURE REVIEW

Mergers and acquisitions in the Spanish banking industry: some empirical

evidence-
The paper studies the impact of the consolidation process on the monetary transmission mechanism,
the degree of competition in banking markets and the performance of banking institutions. It studies
impact that mergers and acquisitions may have had on interest rates set by banks.
Five indicators are used in study.
First is to measure profit generating capacity; second indicates level of efficiency and
productivity; third, indicates changes in market share; fourth, indicates business structure; and
lastly, indicators of capital adequacy.

Implications of the bank merger wave for competition and stability- Elena
Carletti, Philipp Hartmann, Giancarlo Spagnolo (July/August 2002)

Paper discusses the effects of bank consolidation on competition and stability in the banking
sector. Many papers have been referred but none of these papers, however, addresses how
competition affects banks’ liquidity management and the functioning of the interbank market.

Motives for mergers and acquisitions in the indian banking sector – a note
on opportunities & imperatives- Jay Mehta & Ram Kumar Kakani (SPJCM Working
Paper: 06-13 (Nov.))

Paper talks about various motivations for mergers and acquisitions in the Indian Banking sector.
The reasons include:
(a) Fragmented nature of the Indian banking sector resulting in poor global competitive
presence and position.
(b) Large intermediation costs and consequent probability in increasing its risk profile.
(c) To meet the new stringent international regulatory norms.

The economic impact of merger controls what is special about banking? -

Elena Carletti, Philipp Hartmann and Steven Ongena (working paper series NO.786 / JULY 2007)

The paper attempts to shed some new light on by looking at the role legal and other institutional
arrangements play in governing the review of mergers and acquisitions (M&As). Causes and
consequences of banking mergers and identifying efficiency gains in bank mergers, except for gains
in mergers among relatively small banks as studied by Berger and Humphrey (1991) and
Wheelock and Wilson (2001) or efficiencies obtained in risk management studied by Hughes and
Mester (1998).
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Efficiency and productivity effects of bank mergers: evidence from the
Greek banking industry- Anthony N. Rezitis (University of Ioannina, Accepted 27 April
2007)

The paper examines the impact of M&A’s on the technical efficiency and total factor productivity
of the Greek banking sector during the period 1993–2004. It used financial performance ratios and
the stochastic output distance function approach.

Efficiency effects of bank mergers and acquisitions in Europe-

H.P. Huizinga, J.H.M. Nelissen, R. Vander Vennet (TI 2001-088/3, Tinbergen Institute Discussion
Paper)

The paper analyzes the efficiency effects of 52 horizontal bank mergers over the period 1994-
1998; dynamic merger analysis indicates that the cost efficiency of merging banks is positively
affected by the merger, while the relative degree of profit efficiency improves only marginally.

Do mergers improve the x-efficiency and scale efficiency of U.S. banks-

Stavros Peristiani, (Federal Reserve Bank of New York Research Paper No. 9623, August 1996)

The paper discusses the issue currently debated among bank analysts and economists i.e. Do
mergers enhance the efficiency of surviving banks? This paper investigates the post merger
performance of acquiring banks that participated in a merger during 1980-90. The evidence
suggests that acquiring banks failed to improve post merger X-efficiency. Paper uses regression
analysis to identify factors influencing the performance of bank merger survivors.

Banking consolidation- Simon Kwan (FRBSF economic letter, No. 2004-15,

June 18, 2004)

There are a number of possible economic drivers for megamergers, from economic efficiency to
the self interest of bank management four economic forces that may be driving large bank mergers.
Economies of scale—the relationship between the average production cost per unit of output
and production volume.
Economies of scope.
Potential for risk diversification.
Bank managements’ personal incentives.

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The impact of mergers and acquisitions in the banking and insurance
sector- Tina Weber, ECOTEC, Prof. Andrew Leyshon, University of Nottingham, Prof. Hans
Schenk, Tilburg University ( January 2000).

The paper looks at the outcome of M&A’s on shareholders. It concludes that it is unlikely that
mergers among large banks, as well as take-over’s of small banks by large banks, are able to create
much economic wealth. Most of the studies the underlying assumption is that improved stock
performance (ex-ante studies) or improved profitability (ex-post studies) are best indicators of true
performance increases.

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