End Term Project Report_Satya

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“PRE AND POST MERGER SCENARIO ANALYSIS IN INDIAN

BANKS IN THE LAST 3 YEARS”

A PROJECT STUDY SUBMITTED IN PARTIAL FULFILLMENT

FOR THE REQUIREMENT OF THE TWO YEAR (FULL-TIME)

POST GRADUATE DIPLOMA IN MANAGEMENT 2007-2009

BY

SAUMYAJYOTI SATYABRATA

Roll No-58 / 07

UNDER THE GUIDANCE OF

Prof. Monika Goel

LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT, DELHI

1



MARCH 2009

LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT, DELHI

Sector-3, R. K. Puram, Delhi

Dated……………

CERTIFICATE

Certified that Saumyajyoti Satyabrata has successfully completed Project

Study entitled “Pre and post merger scenario analysis in Indian banks in

the last 3 years ” under my guidance. It is his original work, and is fit for

evaluation in partial fulfillment for the requirement of the Two Year (Full-

Time) Post Graduate Diploma in Management.

(Name of the Student (Name of the Guidewith Signature) with Signature)

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ACKNOWLEDGEMENT

A project is always dependent heavily on the suggestions, contributions and self-less

work of many people. So, the opportunity to thank all of them is well awaited. This

project is also possible because of contributions of many knowledgeable persons

towards whom I will always be indebted.

At this juncture I feel deeply honored in expressing my sincere thanks to Prof. Monika

Goel, Faculty, LBSIM and my project guide for giving me this opportunity to take up the

project.

Last but not the least I would also like to thank the library staff of LBSIM who allowed

me to search the appropriate books, journals and collect the data relevant for the study

and all others who took time out of their busy schedule and provided valuable inputs for

the study.

Name- Saumyajyoti Satyabrata Date-March 09, 2009

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LETTER OF TRANSMITAL

To: Prof. Monika Goel Date: March 09, 2009

The research project titled “Pre and post merger scenario analysis in Indian banks

in the last 3 years” was assigned to me.

The study primarily focused on finding out the pre-merger expectations which led to the

Indian banks getting merged and then finding if those were actually achieved. Along

with that the study also was done to find out what is in store for Indian banks in future as

far as mergers and acquisitions are concerned. The study included a secondary

literature review, preparation of the framework, finding which are the parameters to

apply in the study and an in-depth analysis of the results. The findings of the study

indicate that the net profit margin does fall immediately after a merger for banks. But,

overall current ratio increased and also net working capital increased after merger for

banks. This research also tries to find if the banks are successful in attaining the

synergies they aspire to have after merger. The research study is an original work and

has been supported by references at various times.

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PREFACE

The project deals with the issue of pre and post merger analysis of Indian banks in the

last 3 years, i.e. in the period of 2004-05 to 2007-08. The report has been divided into

six chapters along with an appendix.

Chapter 1 gives a brief introduction to the study. It contains the background to the study

along with a brief introduction of Indian banking industry, mergers and acquisitions in

Indian context and also it carries the conceptual framework to the study.

Chapter 2 gives the idea about the problem definition. That is, it has the objective of the

study and the hypotheses that are developed to test and find out the results.

Chapter 3 talks about the Research methodology used for the study. It touches in detail

all the steps that were followed to make such study possible. It has sources and

collection of data, period of study, tools used and sampling process of the study.

Chapter 4 presents the tests and analysis of the study.

Chapter 5 gives the findings, recommendations and the limitations of the project.

Bibliography gives a look at which are the references, books, journals, websites that

were used in this study.

APPENDIX gives a brief description of all the models used in the study

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Table of contents

P. No

Executive Summary………………………………...... 8

Chapter 1. Introduction……………………………... 9

1.1 Rationale of the Study

10

1.2 Banking in India

11

1.3 History of Indian Banking 11

1.4 Mergers & Acquisitions in Indian Context

15

1.5 Motives behind M&A

16

1.6 Types of Synergies 19

1.7 Conceptual Framework

23

Chapter 2.Problem Definition……………………… 27

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2.1 Objective of the Study

28

2.2 Hypotheses

28

Chapter 3. Research Methodology……………… 29

3.1 Sources and Collection of Data

30

3.2 Period of Study

30

3.3 Tools Used for Analysis

30

3.4 Sampling31

Chapter 4 Tests and Analysis…………………… 32

4.1 Tests of Hypotheses

33

4.2 Qualitative Analysis of Individual Mergers 41

Chapter 5 Findings and Recommendations…… 46

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5.1 Findings

47

5.2 Recommendations

47

5.3 Limitations 47

Bibliography 48

Appendix

• SPSS Outputs 49

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EXECUTIVE SUMMARY

At this juncture the Indian economy may be going through a bad patch but over thelast three to five years it has seen steady growth. This has resulted inunprecedented growth in income levels of households. With this the income levelof Indians are increasing but still the per capita savings and loans figures is verylow as compared to countries like USA, UK, China, Korea etc.

In the research I found out that the Indian government is encouraging banks to gofor mergers which would help the sector get some global and powerful brands. But,the million dollar question is that ‘Are all these bank mergers adding value to these

banks and the shareholders?’ Indian banks have been governed by RBI which is

pretty good in its approach and its practices have ensured that Indian banks havenot experienced the kind of situations that their American counterparts areexperiencing.

The study was started with an exploratory research and for that I studied secondaryliterature data from various sources like websites, databases, newspapers, booksand journals. Then data collection was done from Prowess Corporate Database and

banks’ websites regarding EPS, current ratio, capital adequacy ratio, net interestmargin, net profit etc.

This research helped me in finding that the the net profit margin has actually gonedown immediately after a merger as compared to pre-merger times. Current ratioand net working capital have increased after merger which shows that there isincrease in current assets. EPS values showed that there was mixed results withsome banks achieving better EPS while some got lower EPS after the merger.

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CHAPTER 1

INTRODUCTION

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1.1 Rationale Of The Study

Mergers and acquisitions have been happening in Indian banks quite frequentlylately. The government of India has supported mergers of Indian banks for themere reason that it wants globally powerful brands while current scenario showsmany small players.

India’s economy is in a strong state despite current hiccups created by globalfactors like sub-prime crisis, crude-oil prices, US economy slowdown etc. Prior to2008, the economy has been growing at a fast clip for the last 5-6 years. Indian

banking sector also has been on the upward trend. Of late, i.e. in the last 10 years,mergers & acquisitions have been quite frequent in the banking sector. The Indiangovernment also supports these as according to them there are many players in thisfield who are quite small as compared to their global counterparts. So, mergers canhelp create globally powerful brands in Indian banking sector. Whether we take thecase of Centurion Bank and Bank of Punjab, Global Trust Bank and Oriental Bank of Commerce, Times Bank and HDFC Bank or any other instance, we will findthey all have found government support.

The Indian government wants to see powerful global brands in banking sector

which would lead to economic growth. The banks of India are now moving performing various function such as insurance, venture capital, mutual funds,credit cards, microfinance etc. Also, to adhere to the new basel norms and increasetheir customer base, the banks need huge amount of resources. So, mergers can

provide a solution to them. Mergers can help them in diversifying into variousservices as well.

My objective is to study if the post-merger scenario complies with the pre-merger expectations or it has been a failure. Only the recent instances are taken, i.e., the

mergers & acquisitions in the last 3 years (2004-05 to 2007-08) in the Indian banking sector, so that the financial data is available and reliable. The pre-merger expectations and post-merger achievements have to be tested to see if the banks of India are gaining from mergers.

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1.2 Banking In India

Banking in India started at the end of the 18th century. The oldest bank in Indiathat still exists is the State Bank of India, a government-owned bank and the largestcommercial bank in the country. Reserve Bank of India (RBI) is the central bank,which in 1935 formally took over the responsibilities from Imperial Bank of India,relegating it to commercial banking functions. The Reserve Bank was nationalizedand given more powers after India's independence in 1947. In 1969, 14 largest

commercial banks were nationalized and then the next six largest were nationalizedin 1980.

Currently, India has a total of 88 scheduled commercial banks (SCBs) whichconsist of 27 public sector banks (Government of India holding a stake), 29 private

banks (Not having government stake, though may be publicly listed and traded onstock exchanges) and 31 foreign banks. The combined network is spread over 53,000 branches and 17,000 ATMs. The public sector banks hold over 75 percentof total assets of the banking industry, while the private and foreign banks have18.2% and 6.5% respectively(according to a report by a leading rating agency

ICRA Limited).

1.3 History of Banking in India

Banking in India started way back in the last decades of the 18th century. The

General Bank of India(started in 1786) and the Bank of Hindustan were the first banks to start formal operation, but are now non-existent. Among the existing banks, the oldest is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This

bank along with the Bank of Bombay and the Bank of Madras, constituted thePresidency banks. All of them were established under charters from the BritishEast India Company. For many years they acted as quasi-central banks and then

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http://en.wikipedia.org/wiki/Bank_of_Madras

http://en.wikipedia.org/wiki/Bank_of_Madras



they merged in 1925 to form the Imperial Bank of India, which, upon India'sindependence, became the State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in1848 because of economic crisis of 1848-49. The Allahabad Bank, established in1865 and still functioning today, is the oldest Joint Stock bank in India. When theAmerican Civil War stopped the supply of cotton to Lancashire from theConfederate States, promoters opened banks to finance trading in Indian cotton.With large exposure to speculative ventures, most of the banks opened in Indiaduring that period failed. The depositors lost money and lost interest in keepingdeposits with banks. Subsequently, banking in India remained the exclusivedomain of Europeans for next several decades until the beginning of the 20thcentury.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. TheComptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry followed. Calcutta wasthe most active trading port in India, mainly due to the trade of the British Empire,and so became a banking center.

The Bank of Bengal, which later became the State Bank of India. Around the turnof the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social,industrial and other infrastructure had improved. Indians had established small

banks, most of which served particular ethnic and religious communities.

By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank in 1895 in Lahore and Bank of India in 1906 in Mumbai. Punjab National Bank was the first Swadeshi Bank founded by the leaders like Lala LajpatRai, Sardar Dyal Singh Majithia. A number of banks established then havesurvived to the present such as Bank of India, Corporation Bank , Indian Bank ,Bank of Baroda, Canara Bank and Central Bank of India.The fervour of Swadeshimovement lead to establishing of many private banks in Dakshina Kannada andUdupi district which were unified earlier and known by the name South Canara( South Kanara ) district.Four nationalised banks started in this district and also aleading private sector bank. Hence undivided Dakshina Kannada district is knownas "Cradle of Indian Banking".

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http://en.wikipedia.org/wiki/Lancashire

http://en.wikipedia.org/wiki/Confederate_States

http://en.wikipedia.org/wiki/Kolkata

http://en.wikipedia.org/w/index.php?title=Comptoire_d%27Escompte_de_Paris&action=edit&redlink=1

http://en.wikipedia.org/wiki/Mumbai

http://en.wikipedia.org/wiki/Chennai

http://en.wikipedia.org/wiki/Pondichery

http://en.wikipedia.org/wiki/British_Raj

http://en.wikipedia.org/wiki/State_Bank_of_India

http://en.wikipedia.org/wiki/Punjab_National_Bank


http://en.wikipedia.org/wiki/Bank_of_India



http://en.wikipedia.org/wiki/Corporation_Bank

http://en.wikipedia.org/wiki/Indian_Bank

http://en.wikipedia.org/wiki/Bank_of_Baroda

http://en.wikipedia.org/wiki/Canara_Bank

http://en.wikipedia.org/wiki/Central_Bank_of_India

http://en.wikipedia.org/wiki/Dakshina_Kannada

http://en.wikipedia.org/wiki/Udupi_district

http://en.wikipedia.org/wiki/Lancashire

http://en.wikipedia.org/wiki/Confederate_States

http://en.wikipedia.org/wiki/Kolkata

http://en.wikipedia.org/w/index.php?title=Comptoire_d%27Escompte_de_Paris&action=edit&redlink=1


http://en.wikipedia.org/wiki/Chennai

http://en.wikipedia.org/wiki/Pondichery

http://en.wikipedia.org/wiki/British_Raj







http://en.wikipedia.org/wiki/Corporation_Bank

http://en.wikipedia.org/wiki/Indian_Bank

http://en.wikipedia.org/wiki/Bank_of_Baroda

http://en.wikipedia.org/wiki/Canara_Bank

http://en.wikipedia.org/wiki/Central_Bank_of_India

http://en.wikipedia.org/wiki/Dakshina_Kannada

http://en.wikipedia.org/wiki/Udupi_district



From World War I to Independence

The period during the First World War (1914-1918) through the Second World War (1939-1945) to the independence of India were challenging for Indian

banking. The years of the First World War took its toll with banks simplycollapsing . At least 94 banks in India failed between 1913 and 1918.

Post-independence

In 1947 the economies of Punjab and West Bengal were adversely impacted due tothe partition of India stopping banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. TheGovernment of India initiated measures to play an active role and the IndustrialPolicy Resolution adopted in 1948 envisaged a mixed economy. This resulted into

greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

• In 1948, the Reserve Bank of India was nationalized.• In 1949, the Banking Regulation Act was enacted which empowered the

Reserve Bank of India (RBI) to regulate, control, and inspect the banks inIndia.

• The Banking Regulation Act also ensured that no new bank or branch of anexisting bank could be opened without a license from the RBI, and no two

banks could have common directors.

However, despite these provisions, control and regulations, banks in India exceptthe State Bank of India, continued to be owned and operated by private persons.This changed with the nationalisation of major banks in India on 19 July, 1969.

Nationalisations

By the 1960s, the Indian banking industry has become an important factor of theIndian economy. At the same time, it was a large employer and a debate has

ensued about the possibility to nationalise the banking industry. Indira Gandhi, thePrime Minister, expressed the intention of the government in the annual conferenceof the All India Congress Meeting which was received with positive enthusiasm.Thereafter, her move was swift and the governmant issued an ordinance andnationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Within two weeks of the issue of the ordinance, the Parliament passed

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http://en.wikipedia.org/wiki/First_World_War

http://en.wikipedia.org/wiki/Second_World_War


http://en.wikipedia.org/wiki/Indian_independence_movement

http://en.wikipedia.org/wiki/Punjab,_India

http://en.wikipedia.org/wiki/West_Bengal

http://en.wikipedia.org/wiki/Partition_of_India


http://en.wikipedia.org/wiki/Laissez-faire

http://en.wikipedia.org/wiki/Government_of_India

http://en.wikipedia.org/wiki/Mixed_economy

http://en.wikipedia.org/wiki/Reserve_Bank_of_India


http://en.wikipedia.org/wiki/Indian_economy

http://en.wikipedia.org/wiki/Indira_Gandhi

http://en.wikipedia.org/wiki/Prime_Minister_of_India


http://en.wikipedia.org/wiki/Nationalisation

http://en.wikipedia.org/wiki/July_19


http://en.wikipedia.org/wiki/1969

http://en.wikipedia.org/wiki/Parliament_of_India

http://en.wikipedia.org/wiki/First_World_War




http://en.wikipedia.org/wiki/Punjab,_India

http://en.wikipedia.org/wiki/West_Bengal

http://en.wikipedia.org/wiki/Partition_of_India


http://en.wikipedia.org/wiki/Laissez-faire


http://en.wikipedia.org/wiki/Mixed_economy

http://en.wikipedia.org/wiki/Reserve_Bank_of_India


http://en.wikipedia.org/wiki/Indian_economy

http://en.wikipedia.org/wiki/Indira_Gandhi

http://en.wikipedia.org/wiki/Prime_Minister_of_India


http://en.wikipedia.org/wiki/Nationalisation



http://en.wikipedia.org/wiki/1969

http://en.wikipedia.org/wiki/Parliament_of_India



the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and itreceived the presidential approval on 9 August, 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980.The stated reason for the nationalization was to give the government more controlof credit delivery. With the second dose of nationalization, the Government of India(GOI) controlled around 91% of the banking business of India. After this,until the 1990s, the nationalised banks grew at a pace of around 4%, closer to theaverage growth rate of the Indian economy.

Liberalisation

In the early 1990s, the Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known

as new generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks), which later amalgamated with Oriental Bank of Commerce, UTI Bank (now re-named as Axis Bank ), ICICI Bank and HDFC Bank .This move, along with the rapid growth in the economy of India, revitalized the

banking sector in India, which has seen rapid growth with strong contribution fromall the three sectors of banks, i.e. government banks, private banks and foreign

banks.

The next stage for the Indian banking has been setup with the proposed relaxationin the norms for Foreign Direct Investment, where all Foreign Investors in banks

may be given voting rights which could exceed the present cap of 10%, at presentit has gone up to 49% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till thistime, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methodsof working for traditional banks.All this led to the retail boom in India. People not

just demanded more from their banks but also received more.

Banking in India is now fairly mature in terms of supply, product range and reach,even though reach in rural India still remains a challenge for the private sector andforeign banks. In terms of quality of assets and capital adequacy, Indian banks areconsidered to have clean, strong and transparent balance sheets relative tointernational counterparties. The Reserve Bank of India is an autonomous body,with minimal pressure from the government. The stated policy of the Bank on theIndian Rupee is to manage volatility but without any fixed exchange rate.

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http://en.wikipedia.org/wiki/President_of_India

http://en.wikipedia.org/wiki/Narsimha_Rao

http://en.wikipedia.org/wiki/Liberalization

http://en.wikipedia.org/wiki/UTI_Bank

http://en.wikipedia.org/wiki/Axis_Bank

http://en.wikipedia.org/wiki/ICICI_Bank

http://en.wikipedia.org/wiki/HDFC_Bank

http://en.wikipedia.org/wiki/Economy_of_India

http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/President_of_India

http://en.wikipedia.org/wiki/Narsimha_Rao

http://en.wikipedia.org/wiki/Liberalization

http://en.wikipedia.org/wiki/UTI_Bank

http://en.wikipedia.org/wiki/Axis_Bank

http://en.wikipedia.org/wiki/ICICI_Bank

http://en.wikipedia.org/wiki/HDFC_Bank

http://en.wikipedia.org/wiki/Economy_of_India

http://en.wikipedia.org/wiki/India



With the growth in the Indian economy expected to be strong despite thedownward slide of global economy, demand for banking services, especially retail

banking, mortgages and investment services are expected to grow. Banks may alsolook for mergers and acquisitions to seek consolidation and diversification.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase itsstake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first timean investor has been allowed to hold more than 5% in a private sector bank. RBIand the government are now seeking more stability in banking sector and globally

powerful brands which can be possible by mergers and acquisitions.

In recent years critics have charged that the non-government owned banks are tooaggresive in their loan recovery efforts in connection with housing, vehicle and

personal loans. There are press reports that the banks' loan recovery efforts have

driven defaulting borrowers to suicide. So, RBI is setting up norms for all theseissues.

1.4 Mergers and Acquisitions in Indian Context

The phrase mergers and acquisitions or M&A refers to the aspect of corporatefinance strategy and management dealing with the merging and acquiring of

different companies as well as other assets. Usually mergers occur in a friendlysetting where executives from the respective companies participate in a duediligence process to ensure a successful combination of all parts. On other occasions, acquisitions can happen through a hostile takeover by purchasing themajority of outstanding shares of a company in the open market. Historically,mergers have often failed to add significantly to the value of the acquiring firm'sshares. Corporate mergers may be aimed at reducing market competition, cuttingcosts (for example, laying off employees), reducing taxes, removing management,"empire building" by the acquiring managers, or other purposes which may not be

consistent with public policy or public welfare.

Merger

A "merger" or "merger of equals" is often financed by an all stock deal (a stock swap). An all stock deal occurs when all of the owners of the outstanding stock of either company get the same amount (in value) of stock in the new combined

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http://en.wikipedia.org/wiki/Retail_banking






company. The terms "demerger," "spin-off" or "spin-out" are sometimes used toindicate the effective opposite of a merger, where one company splits into two, thesecond often being a separately listed stock company if the parent was a stock company. Merger is a legal process and one or more of the companies lose their identity.

Classifications of mergers

• Horizontal mergers take place where the two merging companies producesimilar product in the same industry.

• Vertical mergers occur when two firms, each working at different stages inthe production of the same good, combine.

• Conglomerate mergers take place when the two firms operate in differentindustries.

Acquisition

An acquisition (of un-equals, one large buying one small) can involve a cash anddebt combination, or just cash, or a combination of cash and stock of the

purchasing entity, or just stock. In addition, the acquisition can take the form of a purchase of the stock or other equity interests of the target entity, or the acquisitionof all or substantially of its assets.

According to Indian Companies Act 1956, and Income Tax Act 1961, a merger inIndia is termed as amalgamation. Income Tax Act defines the amalgamation as amerger of one or more companies (called amalgamating companies) with another company (called amalgamated company) or the merger of two or more companiesto form a new company in such a way that all the assets and liabilities of theamalgamated company and the shareholders holding not less than nine – tenths invalue of the amalgamated company.

1.5 Motives behind M&A

These motives are considered to add shareholder value:

• Economies of scale: This refers to the fact that the combined company canoften reduce duplicate departments or operations, lowering the costs of the

17



company relative to theoretically the same revenue stream, thus increasing profit.

• Increased revenue/Increased Market Share: This motive assumes that thecompany will be absorbing a major competitor and increasing its power (bycapturing increased market share) to set prices.

• Cross Selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can signup the bank's customers for brokerage accounts. Or, a manufacturer canacquire and sell complementary products.

• Synergy: Better use of complementary resources.

• Taxes: A profitable company can buy a loss maker to use the target's taxwrite-offs. In the United States and many other countries, rules are in placeto limit the ability of profitable companies to "shop" for loss makingcompanies, limiting the tax motive of an acquiring company.

• Geographical or other diversification: This is designed to smooth theearnings results of a company, which over the long term smoothes the stock

price of a company, giving conservative investors more confidence ininvesting in the company. However, this does not always deliver value toshareholders (see below).

These motives are considered to not add shareholder value:

• Diversification: While this may hedge a company against a downturn in anindividual industry it fails to deliver value, since it is possible for individualshareholders to achieve the same hedge by diversifying their portfolios at amuch lower cost than those associated with a merger.

• Overextension: Tend to make the organization fuzzy and unmanageable.

• Manager's hubris: Manager's overconfidence about expected synergies

from M&A which results in overpayment for the target company.

• Manager's Compensation: In the past, certain executive managementteams had their payout based on the total amount of profit of the company,instead of the profit per share, which would give the team an incentive to

18



buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders); althoughsome empirical studies show that compensation is rather linked to

profitability and not mere profits of the company.

• Vertical integration: Companies acquire part of a supply chain and benefitfrom the resources.

At present, the process by which a company is bought or sold can prove difficult,slow and expensive. A transaction typically requires six to nine months andinvolves many steps. Locating parties with whom to conduct a transaction formsone step in the overall process and perhaps the most difficult one. Qualified andinterested buyers of multimillion dollar corporations are hard to find. Even more

difficulties attend bringing a number of potential buyers forward simultaneouslyduring negotiations. Potential acquirers in industry simply cannot effectively"monitor" the economy at large for acquisition opportunities even though somemay fit well within their company's operations or plans.

An industry of professional "middlemen" (known variously as intermediaries, business brokers, and investment bankers) exists to facilitate M&A transactions.These professionals do not provide their services cheaply and generally resort to

previously-established personal contacts, direct-calling campaigns, and placingadvertisements in various media. In servicing their clients they attempt to create aone-time market for a one-time transaction. Many but not all transactions useintermediaries on one or both sides. Despite best intentions, intermediaries canoperate inefficiently because of the slow and limiting nature of having to relyheavily on telephone communications. Many phone calls fail to contact with theintended party. Busy executives tend to be impatient when dealing with sales callsconcerning opportunities in which they have no interest. These marketing problemstypify any private negotiated markets.

The market inefficiencies can prove detrimental for this important sector of the

economy. Beyond the intermediaries' high fees, the current process for mergers andacquisitions has the effect of causing private companies to initially sell their sharesat a significant discount relative to what the same company might sell for were italready publicly traded. An important and large sector of the entire economy isheld back by the difficulty in conducting corporate M&A (and also in raisingequity or debt capital). Further, it is likely that since privately-held companies areso difficult to sell they are not sold as often as they might or should be. Previous

19



attempts to streamline the M&A process through computers have failed to succeedon a large scale because they have provided mere "bulletin boards" - staticinformation that advertises one firm's opportunities. Users must still seek other sources for opportunities just as if the bulletin board were not electronic. Amultiple listings service concept has not been applicable to M&A due to the needfor confidentiality. Consequently, there is a need for a method and apparatus for efficiently executing M&A transactions without compromising the confidentialityof parties involved and without the unauthorized release of information. One partof the M&A process which can be improved significantly using networkedcomputers is the improved access to "data rooms" during the due diligence process.

1.6 Types Of Synergies

It is here clear that mergers do create extra value through synergies. Let us seedifferent types of synergies.

1. Operating Synergy

Operating synergy theory assumes that economies of scale do exist in the industry

and that prior to the merger the firms are operating at levels of activity that fallshort of achieving the potential. These arise from indivisibilities, such as people,equipment and overhead which provide increasing returns if spread over largeoutput. Operating synergy may be realized as complimentarity, managerialeconomies, vertical integration or economies of scope. Merging firms maystrengthen each other’s weak areas thus complementing each other. Managerialeconomies in production, research, marketing, or finance are sometimes referred toas economies in specific management functions.

It has also been suggested that economies may be achieved in generic managementactivities such as planning. Vertical integration offers synergies by combiningfirms at different stages of an industry and allowing more efficient coordination atdifferent levels. This is achieved by reduction in costs of communication andvarious forms of bargaining (Arrow, 1975). Economies of scope are another typeof operating synergy. If a firm has developed capability to produce some products,this capability can be extended to related products.

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2. Financial Synergy

Financial synergies result from lower overall cost of capital to the firm causing

value of the firm to rise. One source of financial synergy is the lower cost of external financing versus external financing. Firms with large internal cash flowsand small investment opportunities (as in mature or declining in industries) haveexcess cash flows. Firms with low internal funds generation and large growthopportunities (as in growing industries) have needs for additional financing.Combining the two may result in advantages from lower cost of internallyavailable funds. Studies report that there is often a redeployment of hinds from theacquirer’s industry to the acquired firm’s industry. Another proposition is that thedebt capacity of the combined firm can be greater than the sum of the two firms’capacities before the merger, and this provides tax savings on investment income.

Further, economies of scale may be present in floatation and transaction costs of securities.

3. Differential Efficiency

Efficiency improvements can result from combining firms of unequal managerialcapabilities. The differential efficiency theory states that more efficient firms willacquire less efficient firms and realise gains by improving their efficiency. Thisimplies excess managerial capabilities in the acquiring firm. differential efficiency

is most likely to be a factor in mergers between firms in related industries wherethe need for improvement could be more easily identified. The related inefficientmanagement theory suggests that target management is so inept that virtually anymanagement could do better, and thus could be an explanation for mergers

between firms in unrelated industries.

4. Strategic Realignments

The theory of strategic realignment to changing environment states that mergerstake place in response to environmental changes. External acquisition of neededcapabilities allows firms to adapt more quickly and with less risk than developingcapabilities internally.

5. Diversification

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Diversification as a motive for mergers differs from shareholder portfoliodiversification. Shareholders can efficiently spread their investments and risksamong industries, so there is no need for firms to diversify for the sake of shareholders. Managers and other ‘employecs are, however, are at greater risk if the single industry in which their firm operates should decline. Their firm specifichuman capital is not transferable. Therefore, firms may diversify to encourage their firm specific human capital investments that make their employees more

productive and valuable, and to increase the probability that the organization andreputation capital of the firm will be preserved by transfer to another line of

business owned by the firm in the event of its initial industry decline.

6. Information

The information theory attempts to explain why target shares seem to be permanently revalued upward in a tender offer whether or not it is successful. Theinformation hypothesis says that the tender offer conveys information to the marketthat the target shares are undervalued. Alternatively, the tender offer sendsinformation to target management that inspires them to implement a more efficientstrategy on their own. Another school holds that the revaluation is not really

permanent, but only reflects the likelihood that another acquirer will, materializefor a synergistic combination. Some studies based on this hypothesis found thatshare prices of the target firms that did not subsequently receive acquisition offer

within five years of the initial unsuccessful offer kit back to their preoffer level.The share prices of those firms that received a subsequent hid increased further.

7. Winner’s Curse & Hubris

The winner’s curse concept originated from auctions. When there are many biddersor competitors for an object of highly uncertain value, a wide range of bids islikely to result. The highest bidder will bid and typically pay in excess of theexpected value of the benefits obtainable from the property. The winning bidder istherefore “cursed” in the sense that its bid exceeds the value of the property, so thefirm loses money. Empirical studies have estimated the excess value paid by thewinning bidder as a function of the degree of uncertainty involved and the number of bidders. This ratio can go upto 3.5 times and more.

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Roll (1986) analysed this effect in M&A activity. Postulating strong marketefficiency in all markets, the prevailing market price of the target already reflectedthe true value of the firm. the higher valuation of the bidders over the targets trueeconomic value, he states, results from hubris - their excessive self confidence(pride, arrogance). Hubris is one of the factors that caused the winner’s curse

phenomenon to occur. Even if there were svnergies, competition between bidderswas likely to rush in paying too much. And even without competition, Roll (1986)hypothesized that managers committed errors of over optimism in evaluatingmerger opportunities due to hubris.

8. Agency Problems

An agency problem arises when managers own only a fraction of ownership shares

(or none at all) of a firm. This partial ownership may cause managers to work lessvigorously than otherwise and /or to consume more perquisites (luxurious offices,company cars, etc.) because the majority owners bear most of the cost.Furthermore, the argument goes, in large corporations with widely dispersedownership there is not sufficient incentive for individual owners to expend thesubstantial resources required to monitor the behaviour to managers. Agency

problems arise basically because contracts between managers (decision or controlagents) and owners (risk bearers) cannot be costlessly written and enforced.Resulting agency costs include:

1. Costs of structuring a set of contracts.2. Costs of monitoring and controlling the behaviour of agents by principals.3. Costs of bonding to guarantee that agents will make optimal decisions or

that principal will be compensated for the consequences of suboptimaldecisions.

4. The residual loss is the welfare loss experienced by principals, arising fromthe divergence between agent’s decisions and decisions to maximise

principal’s welfare. The residual loss can arise because the costs of enforcement of contracts exceed the benefits.

9. Tax Shields

Tax effects can be important in M&A, although they do not play a major role inexplaining the M&A activity overall. Carryover of net operating losses and taxcredits are among the important tax motivations for mergers.

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The market power theory holds that merger gains are the result of increasedconcentration leading to collusion and monopoly effects. Evidence in this regard isnot conclusive.

1.7 CONCEPTUAL FRAMEWORK

Mergers and acquisitions have been happening in Indian banks quite frequentlylately. The government of India has supported mergers of Indian banks for thesheer reason that it wants globally powerful brands while current scenario shows

many small players.

Overall the market capitalization of BFSI industry of India is around $165 billion.(Source-Morgan Stanley) If we compare it with the global players then we find thatIndustrial & Commercial Bank of China is almost 80% bigger than this BFSIindustry of India. Total asset size of financial services in India is less than that of the 20th largest bank in the world Fortis Bank. (Source-Bloomberg) But, still driven

by increasing GDP and income level of Indian households, the banking industry isset to grow at a fast clip from here. Global majors are expected to grow at 8%-10%

while Indian majors are expected to grow at 20%-25% for next some years. Also,there will be relaxation in regulations in the banking industry in India in early 2009which may pave the way for better growth. Thus, SBI, HDFC, ICICI are some of the players that are in the race to be global majors in the coming years. (Source-

FICCI) For all this to happen, the Indian banks have to be bigger in their size andimpact. This can come from mergers with other players. Thus, realizing this, thegovernment is encouraging bank mergers and many have taken place in the recentyears. But, the main concern is whether these mergers have been able to fulfilltheir requisites.

The big reason why the Indian government wants to see more mergers in the banking sector is that this would lead to more powerful global brands and thusstrengthening of the economy as well. On August 28,2004 at the annual generalmeeting of the Indian Banks' Association (IBA), Union Finance Minister P.Chidambaram announced that public sector banks would be encouraged to merge.

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On September 9, speaking after a meeting with chief executives of PSBs, he saidthe government would review legislation that would enable consolidation amongPSBs. (Source-www.hinduonnet.com)

If we analyze many mergers such as Bank of Punjab & Centurion Bank, HDFCBank & Centurion Bank of Punjab, Global Trust Bank & Oriental Bank of Commerce etc , then we can see they all were targeting synergy and economicvalue addition for the participants. Part of this synergy seeking can be attributed tothe fact that the banks are now moving from mere savings-cum-lending function tovarious function such as insurance, venture capital, mutual funds, credit cards,microfinance and so on. Also, to adhere to the new basel norms, the banks needhuge amount of resources. So, consolidation through mergers can provide asolution. Mergers can also provide a solution if banks are looking to add services

such as m-banking, e-banking etc or tapping rural markets or swift distribution andmany more.

For example, when HDFC Bank and Centurion Bank of Punjab (CBOP) decided tomerge, then they knew that their combined network would be much larger. CBOPhad strong presence in Punjab, Maharashtra and in Kerala (acquisition of LordKrishna Bank) while HDFC Bank had presence in all over the country. WhileHDFC Bank has a strong deposit franchise, CBOP has a strong loan franchise.Hence, they will both have advantage from the merger. Also, now they will havealmost 1150 branches in India with 750 of HDFC and 394 of CBOP. By this theyhave become the largest private bank in India in terms of branch network crossingICICI Bank which has nearly 900 branches. (Source-

www.valuenotes.com/edelweisss)

Naturally, both sides of an M&A deal will have different ideas about the worth of the target company: its seller will tend to value the company at as high a price as

possible, while the buyer will try to get the lowest price it can. There are,

however, many legitimate ways to value companies. The most common method isto look at comparable companies in an industry, but deal makers employ a varietyof other methods and tools when assessing a target company.

1. Comparative Ratios - The following are two examples of the manycomparative metrics on which acquiring companies may base their offers:

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o Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, anacquiring company makes an offer that is a multiple of the earnings of the target company. Looking at the P/E for all the stocks within thesame industry group will give the acquiring company good guidancefor what the target's P/E multiple should be.

o Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, theacquiring company makes an offer as a multiple of the revenues,again, while being aware of the price-to-sales ratio of other companiesin the industry.

2. Replacement Cost - In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of acompany is simply the sum of all its equipment and staffing costs. Theacquiring company can literally order the target to sell at that price, or it willcreate a competitor for the same cost. Naturally, it takes a long time to

assemble good management, acquire property and get the right equipment.This method of establishing a price certainly wouldn't make much sense in aservice industry where the key assets - people and ideas - are hard to valueand develop.

3. Discounted Cash Flow (DCF) - A key valuation tool in M&A, discountedcash flow analysis determines a company's current value according to itsestimated future cash flows. Forecasted free cash flows (net income +depreciation/amortization - capital expenditures - change in working capital)are discounted to a present value using the company's weighted averagecosts of capital (WACC). Admittedly, DCF is tricky to get right, but fewtools can rival this valuation method.

Synergy: The Premium for Potential Success for the most part, acquiringcompanies nearly always pay a substantial premium on the stock market value of the companies they buy. The justification for doing so nearly always boils down tothe notion of synergy; a merger benefits shareholders when a company's post-merger share price increases by the value of potential synergy.

It would be highly unlikely for rational owners to sell if they would benefit more by not selling. That means buyers will need to pay a premium if they hope toacquire the company, regardless of what pre-merger valuation tells them. For sellers, that premium represents their company's future prospects. For buyers, the

premium represents part of the post-merger synergy they expect can be achieved.The following equation offers a good way to think about synergy and how to

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determine whether a deal makes sense. The equation solves for the minimumrequired synergy:

In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action. However, the practical constraints of mergersoften prevent the expected benefits from being fully achieved. So, the synergy

promised by deal makers might just fall short. It's hard for investors to know whena deal is worthwhile. The burden of proof should fall on the acquiring company.To find mergers that have a chance of success, investors should start by looking for some of these simple criteria:

• A reasonable purchase price - A premium of, say, 10% above the market price seems right. A premium of 50%, on the other hand, requires synergy of huge proportions for the deal to make sense.

• Cash transactions - Companies that pay in cash tend to be more careful whencalculating bids and valuations come closer to target. When stock is used asthe currency for acquisition, discipline can go by the wayside.

• Sensible appetite – An acquiring company should be targeting a companythat is smaller and in businesses that the acquiring company knowsintimately. Synergy is hard to create from companies in different business

areas. (Source-www.investopedia.com)

Now, if we examine the parameters they take into consideration for the mergersthen we will see they not only take P/E ratio, P/B ratio, enterprise value to salesratio (EV/Sales), Discounted Cash Flow (DCF) and many financials but also takemarketing, HR, IT, engineering and operation issues. They try to find financial andoperational synergy from the merger.

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CHAPTER 2

PROBLEM DEFINITION

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2.1 Objective of the Study

This study is mainly aimed at studying if there are synergies attained from bank mergers. So, with the help of financial ratios this study will provide the base to testwhether it is achieved.

1. To evaluate the financial performance of various banks before and after mergersand acquisitions

2. To see if bank mergers in India are able to deliver according to the pre-merger

expectations and thus are they desirable in the future

2.2 Hypotheses of the Study

The study tests the following null hypotheses for each of the sample banks:

1.H0: The merged banks did not achieve better liquidity.

2.H0: The merged banks did not achieve better solvency after merger.

3.H0: The merged banks were not able to improve upon their pre-merger profitability.

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CHAPTER 3

RESEARCH

METHODOLOGY

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Research Design

Firstly, exploratory research was done where I studied various books, journals,websites etc. After that qualitative research, data collection was done. Then, I didthe descriptive research on the quantitative data of merged banks. As this researchwas based on secondary data, so there was no causal research involved.

3.1 Sources and collection of data

This study is mainly based on secondary data collected from the ProwessCorporate Database Software, banks’ websites, journals, books, newspapers in theform of annual reports, research reports etc. All those data were collected andanalyzed for further interpretation.

3.2 Period of study

This study is intended to examine the performance of banks which merged in thelast 3 years, i.e. in the period of 2004-05 to 2006-07. The period has been chosenso that there is easy availability of financial data and also the merger has taken itsfull effect. I have avoided taking mergers like HDFC Bank- Centurion bank of Punjab, State Bank of India- State Bank of Saurashtra etc as these took place in thefinancial period of 2008-09 and it is difficult to find the full effect of these

mergers.

3.3 Tools used for analysis

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This study examines the financial performance of banks through various tools likeratio analysis, standard deviation, paired sample ‘t’ test, correlation etc. Further,ratio analysis includes liquidity ratio, leverage ratio, profitability ratio etc. SPSSand MS Excel have been used for the analysis of the merger effectiveness alongthese parameters.

3.4 Sampling

Here the sampling was judgmental. This means, after going through the merger

and acquisition deals in Indian banks in this period, I chose four merger dealsaccording to the easy availability of financial data like share price, financial ratios,

balance sheet, cash flow statement etc. The mergers chosen were:

1. ICICI Bank and Sangli Bank (19th April, 2007)2. IDBI Bank and United Western Bank (3rd October, 2006)3. Oriental Bank of Commerce and Global Trust Bank (14th August, 2004)4. Bank of Baroda and South Gujarat Local Bank (25th June, 2004)

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CHAPTER 4

TESTS AND ANALYSIS

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4.1 Test of Hypotheses

In order to test the validity of the null hypotheses, the following parametershave been selected to test the results of pre and post merger periods:

A. Shareholder value: I. EPS

B. Liquidity Parameters: II. Current ratio, III. Net working capitalC. Leverage Parameters: IV. Capital adequacy ratioD. Profitability: V. Net Interest Margin, VI. Net profit

All these are tested at 95% confidence level. The average of two years’ data prior to the merger and then average of two years’ data after merger have been takeninto consideration.

Test for EPS

Earnings per share is a very important indicator which shows the rate of return for ordinary shareholders. In case of mergers, it is even more important to find out asto see if the merger has actually contributed in increasing shareholders’ wealth.The formula for EPS is:

EPS= (Net income-Preference dividends)/ Average outstanding shares

Name of Bank Average EPS beforemerger

Average EPS after merger

ICICI Bank 30.885 36.780

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IDBI Bank 8.080 8.145

Oriental Bank of Commerce

36.460 41.685

Bank of Baroda 32.970 25.960

‘t’ test significance- 0.750Correlation- 0.917

Hence, EPS is not much affected by the mergers for these sample banks as nullhypothesis is accepted for EPS. It is clear from the graph that ICICI and OBC haveexperienced good growth while Bank of Baroda has seen huge fall and IDBI hasnot seen much change in EPS post merger. Here, if we examine closely, the EPS of IDBI Bank and ICICI Bank have increased quite drastically, i.e. IDBI’s EPS by

29% and ICICI’s EPS by 50% after merger while that of Oriental bank of commerce has seen a dip by 14% and Bank of Baroda has seen a dip by 15%. Also,the book value per share has gone down for Bank of Baroda from Rs 52 to Rs 32.So, we can say that qualitatively the changes in EPS after merger have beendifferent and that is why this result of no effect of merger on EPS is seen by ‘t’test.

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Test for Current Ratio

A bank is deemed to be sound if it is in a position to carry on its dailytransactions smoothly and meet all its obligations both long-term as well asshort term without any strain. The current ratio is the most commonly used ratio

for measuring liquidity position of manufacturing sectors. It expresses therelationship between current assets and current liabilities. A higher current ratioshows that the manufacturing company is able to pay its debts maturing within ayear. From the management point of view, a higher current ratio is an indicationof poor planning since an extensive amount of funds would lie idle. On thecontrary, a low ratio would mean inadequacy of working capital, which maylater interfere with the smooth functioning of an enterprise. In a sound

business, a current ratio of 2:1 is considered an ideal one. In this study,current assets include cash and cash equivalent, inter assets, short- terminvestments and deposits. The current liabilities include trade creditors, bills

payable, accrued expenses, short-term loan from RBI etc. The formula for Current ratio is given as:

Current ratio= Current assets/ Current liabilities

Name of Bank Current ratioavg. beforemerger

Current ratioavg. after merger

ICICI Bank 0.615 0.720

IDBI Bank 0.455 0.505


0.390 1.065

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Bank of Baroda

0.550 0.615

‘t’ test significance- 0.235

Correlation- -0.463

Hence, null hypothesis is accepted for current ratio, i.e. current ratio remainsunaffected by bank mergers as far as these sample banks are concerned. But, withclose examination we can find that ICICI’s current ratio has risen by 18%, IDBIhas seen a 22% rise, Oriental Bank of Commerce has experienced a mammoth173% increase, Bank of Baroda has seen 11% increase. So, but for Oriental Bank of Commerce, other 3 have seen 11 to 22 percent increase which is more or lessuniform.

Test for Net Working Capital

The net working capital refers to the difference between current assets and currentliabilities. There is always a time gap between the receipt of cash andrepayment of loan and working capital is required for this intervening period in

order to sustain the activities. In case adequate working capital is not available,the manufacturing company may not be in a position to sustain its activities.The formula of net working capital is given by:

Net Working Capital = Current Assets - Current Liabilities

Name of Bank Avg. Net working capital before merger(Rs. Cr.)

Avg. Net working capitalafter merger(Rs. Cr.)

ICICI Bank -12,130.935 -11,765.620

IDBI Bank -5,167.180 -4,942.585


-1,186.220 160.120

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Bank of Baroda -2,728.420 -2,540.260

‘t’ test significance: 0.148

Correlation: 0.995

Here, again null hypothesis is accepted, that is merger has no impact on the networking capital. Almost all these banks are having negative net working capitalwhich means current liabilities are far more than current assets. As it is seen fromthe table, all of them have experienced increase in their net working capital after merger. The correlation of 0.995 shows the fact that each one has experiencedincrease in their net working capital.

Test for Capital Adequacy Ratio

Capital adequacy ratio is the ratio that shows the amount of capital a bank has tocover all its risk that is risky assets. According to RBI, Indian banks are required tokeep 9% capital adequacy whereas, the banks actually are having a much better

state as most Indian banks are conservative in their approach and thus far complexinstruments like options, swaps etc are not fully traded in India. Again this capitalconsists of tier-1 and tier-2 capital. Tier-1 capital consists of equity capital, cashreserves, retained earnings etc while tier-2 capital consists of subordinate debt,revaluation reserves, general provisions etc. The ratio is given by:

Capital adequacy ratio= Capital/Risk adjusted assets

Name of Bank Avg. Capital adequacyratio before merger

Avg. Capital adequacyratio after merger

ICICI Bank 12.520 13.970

IDBI Bank 15.155 12.840


14.470 10.125

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‘t’ test significance: 0.309Correlation: -0.529

Again, null hypothesis is accepted, that is merger does not impact capital adequacyratio. From the graph, it is evident that the capital adequacy ratio of Bank of Baroda has seen small amount of decline in capital adequacy ratio. OBC has seenhuge fall while IDBI has seen fall as well post merger. ICICI Bank is the only oneto see good growth in its capital adequacy ratio after merger. IDBI has incurredmore debt after this merger whereas the debt position of others has actuallystrengthened after merger. If we examine, we can find that equity capital of IDBIhas not changed by much whereas it has increased its unsecured loans from Rs 260

billion to Rs 433 billion after merger which has triggered this increase.

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Test for Net Interest Margin

The net interest margin is a performance metric that examines how successful afirm's investment decisions are compared to its debt situations. A negative valuedenotes that the firm did not make an optimal decision, because interest expenseswere greater than the amount of returns generated by investments. Here averagetotal assets is taken as this keeps varying and hence an average of the values givesa fair view.The formula for interest coverage ratio is given by:

Net Interest Margin= Interest Income- Interest Expenses/ Average Total Assets

Name of Bank Avg. Net interest margin before merger (%)

Avg. Net interest marginafter merger (%)

ICICI Bank 1.90 1.96

IDBI Bank 0.33 0.63


3.56 2.77


‘t’ test significance: 0.748Correlation: 0.961

Here, we can say the null hypothesis is accepted as ‘t’ test significance is at 0.748whereas we can reject it if it is below 0.05. Here the effect is different for different

banks as we can see. BOB, ICICI and IDBI have experienced growth in their NIMwhereas, OBC has seen decline. So, we can say that bank mergers don’t haveimpact on the net interest margin.

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Test for Net Profit Margin

The primary objective of any business entity is to earn profits. A bank

needs profits not only for its existence but also for expansion anddiversification. Investors want adequate returns on their investments while theworkers want higher wages and the creditors want higher security for their interest and loan. A bank can discharge its obligations to the various segmentsof the society only through earnings of profits. The profit is, thus, a usefulmeasure to examine the overall efficiency of a bank. The profit to themanagement is the test of efficiency and a measurement of control to owners,the measure of worth of their investment to the creditors, the margin of safety to employees as a source of benefits, to Government a measure of

taxpaying capacity and the basis of legislative action to demand better quality and price cuts and to an enterprise less cumbersome source of finance. Profits are an index of economic progress. Hence the profitabilityratios are calculated to measure the overall efficiency of the banking sector.

Net profit ratio establishes a relationship between net profit (after tax) andincome. It indicates overall efficiency of the banking sector. If the profit isnot sufficient, the firm will not be able to achieve satisfactory returns oninvestment. This ratio also indicates the firms’ capacity to face adverse

economic conditions such as competition, low demand etc. Obviously, higher the ratio, better the profitability. While interpreting the ratio, it should bekept in mind that the performance of profits must also be seen in relation toinvestments or capital of the firm.

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Name of Bank Avg. Net profit beforemerger

Avg. Net profit after merger

ICICI Bank 12.465 10.510

IDBI Bank 8.930 8.290


17.03 15.990


‘t’ test significance: 0.023

Correlation: 0.981

Here, null hypothesis is rejected as ‘t’ test significance is 0.023, that is below 0.05.Correlation of 0.981 means there is strong association between bank merger anddecrease in net profit. All the four banks have seen decrease in their net profit after merger.

4.2 Qualitative Analysis of Individual Mergers

1. ICICI Bank- Sangli Bank

The merger was announced on APRIL 18, 2007 between ICICI Bank and SangliBank. All branches of Sangli Bank function as branches of ICICI Bank from April19,2007 said the Reserve Bank of India. Sangli Bank was an unlisted private bank headquartered at Sangli in Maharashtra. As on March 31, 2006, Sangli Bank haddeposits of Rs. 2,004 crore, advances of Rs. 888 crore, net NPA (non-performing

42



assets) ratio of 2.3 per cent and capital adequacy of 1.6 per cent. Its loss at the endof 2005-06 amounted to Rs. 29 crore. It had 198 branches and extension counters,including 158 branches in Maharashtra and 31 branches in Karnataka. The bank has about 1,850 employees.

On the other hand, ICICI Bank is the second largest bank in India and the biggestin terms of market capitalisation. As on September 30, 2006, ICICI Bank had totalassets of Rs. 282,373 crore. In the six months ended September 30, 2006, it made anet profit of Rs. 1,375 crore. It had 632 branches and extension counters and 2,336ATMs as on that date, and is in the process of setting up additional branches andATMs. It has about 31,500 employees.

ICICI Bank offers a wide range of financial products and services directly andthrough subsidiaries in the areas of life and general insurance, asset management

and investment banking. Its shares are listed on the Bombay Stock ExchangeLimited and the National Stock Exchange of India Limited and its AmericanDepositary Shares are listed on the New York Stock Exchange.

Pre-merger Expectations

The pre-merger expectations were that, this merger would help ICICI Bank inexpanding its business into rural areas and semi-urban areas. ICICI Bank will seek to leverage Sangli Bank's network of over 190 branches and the existing customer and employee base across urban and rural centres in the rollout of its rural andsmall enterprise banking operations, which are key focus areas for the bank. As far as Sangli Bank is concerned, its employees and customers would get a chance toaccess the multi-channel network and multiple types of services. But, itsemployees were opposing the merger as they were apprehensive about foreigninvestors having 74% stake in ICICI Bank and that over 80% employees in ICICIBank are temporary hence job guarantee is not there.

Post-merger Achievements

ICICI Bank’s EPS increased by around 20% over the average of two years’ EPS prior to the merger. Its net profit went down by 17% and operating profit by 10%after merger. Its current assets went up by 32% from Rs 235 billion to Rs 311

billion as compared to current liabilities going up by 12% from Rs 382 billion toRs 429 billion. Hence, average current ratio moved up from 0.61 to 0.72 and

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average net working capital went up from Rs -121 billion to Rs -117 billion. Thisshows a stronger position in liquidity. Merger with Sangli bank has brought better liquidity but less profitability. Its market reach has increased but profitability is yetto show that effect which will take some time. This merger has helped ICICI buildthe scale to some extent, but not the infrastructure that a bank needs to support thescale. It employed thousands of agents to sell mortgages, car and consumer loans,aggressively tapping the rising disposable incomes in the world’s second fastestgrowing major economy, but these cannot garner deposits. Higher non-performingassets, or NPAs, call for higher provisioning, and that is affecting profitability.

2. IDBI Bank- United Western Bank

The RBI held inefficient management to be the principal reason for UWB's poor financial performance. The bank incurred huge losses in the past two years beforemerger, its capital adequacy ratio had turned negative (against a minimumregulatory stipulation of nine per cent) and its net worth had been eroded. For IDBIBank, take-over of a bank with 230 plus branches makes good sense.


The pre-merger expectations were that, this merger would help IDBI Bank inexpanding its business into various areas and the 230 plus branches would enhancethe market reach significantly. This would contribute in extended market reach and

better financial position. For IDBI, UWB's branch network was the primeattraction. With the acquisition it could double its number of branches. Its urgencyto go retail is obvious. Tracing its roots to India's principal development financeinstitution (IDBI), the bank had a huge asset base of Rs. 90,000 crore.


IDBI Bank’s EPS almost remained unchanged over the average of two years’ EPS prior to the merger. Its net profit went down by 7% and operating profit by 24%after merger. Its average current assets went up by 18% from Rs 43 billion to Rs 51

billion as compared to current liabilities going up by 5% from Rs 95 billion to Rs100 billion. Hence, average current ratio moved up from 0.45 to 0.5 and average

44



net working capital went up from Rs -52 billion to Rs -49 billion. This shows astronger position in liquidity. Merger with United Western Bank has brought better liquidity but less profitability. Its market reach has increased but profitability is yetto show that effect which will take some time.

3. Oriental Bank of Commerce- Global Trust Bank

The driving force for this merger was to set up a robust bank with a high capital base. In brief, the underlying driving factors were to cope with pressures in theform of increasing capital adequacy requirements, tightening prudential norms, andthe increasing demands on resources to be committed for technology andinfrastructure. Geographical synergy was of prime importance for Delhi basedOriental Bank Of Commerce, when it took over the Hyderabad based GTB inAugust 2004. OBC's 1000 odd branches were particularly strong in north Indianstates of Punjab, Uttar Pradesh and Haryana while the southern regions remain

largely untapped. GTB had involvement in the Ketan Parekh securities scam of 2001 leading to ouster of promoter Ramesh Gelli. The moratorium of RBI wasaimed at freezing the assets and liabilities of the bank in order to protect the bank'shealth from further deterioration.


The pre-merger expectations were that, this merger would help Oriental Bank of

Commerce which is a Delhi based bank, in diversifying its business. As far asGlobal Trust Bank is concerned, its employees and customers would get a chanceto access the multi-channel network and multiple types of services. Global TrustBank, has a fairly strong clearing bank business which would help Oriental Bank of Commerce. While weakness of GTB has been bad assets, strength of OBC isrecovery. Since the GTB is a south-based bank, it would give OBC the much-

45



needed edge in the southern part of the country. Moreover, both the banks have acommon core banking solution 'Finacle", which would help in the consolidation.


Oriental Bank of Commerce’s EPS increased by around 14% over the average of two years’ EPS prior to the merger. Its net profit went down by 6% and operating

profit by 23% after merger. Its current assets went up by 200% from Rs 8 billion toRs 25 billion as compared to current liabilities going up by 10% from Rs 20 billionto Rs 22 billion. Hence, average current ratio moved drastically up from 0.39 to1.06 and average net working capital went up from Rs -12 billion to Rs 1.6 billion.This shows a stronger position in liquidity. Merger with Global Trust Bank has

brought better liquidity but less profitability. Overall, this merger has contributed

to reduced share price of OBC and in many aspects it has been seen as a failedmerger.

4. Bank of Baroda- South Gujarat Local Area Bank

South Gujarat Local Area Bank was failed and the merger was aimed to aid it inreviving. Its customers and employees were fortunate to have association with astrong player like Bank of Baroda. There were only seven branches of SouthGujarat Local Area Bank. The performance of SGLABL which had its registeredoffice at Navsari, Gujarat, had deteriorated in all major parameters, namelydeposits, investments, advances and profitability.


The pre-merger expectations were that, this merger would help Bank of Baroda ingetting a better position in western India. South Gujarat Local Area Bank wasmainly operating in Gujarat , and thus this was a chance for its employees andcustomers to get alliance with a bank with wider reach. Bank of Baroda expectedits strong recovery system would enable it to deal with NPAs of the SGLABL.

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Bank of Baroda’s EPS decreased by around 21% over the average of two years’EPS prior to the merger. So, clearly, the merger was not helpful in maximizing theshareholder’s value. Its net profit went down by 16% and operating profit by 37%after merger. Its current assets went up by 20% from Rs 34 billion to Rs 41 billionas compared to current liabilities going down by 2% from Rs 61 billion to Rs 60

billion. Hence, average current ratio moved up from 0.55 to 0.61 and average networking capital went up from Rs -27 billion to Rs -25 billion. This shows astronger position in liquidity.

CHAPTER 5

FINDINGS AND

RECOMENDATIONS

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5.1 Findings of the Study

The findings of this study are:

1.Bank mergers impact net profit margin negatively while net interest marginshows growth in 3 of the 4 sample banks after merger.

2.Bank mergers help attain better current ratio and better net working capital.

3.The impact of bank mergers on capital adequacy ratio of banks would vary but

in this study 3 of the 4 banks show decline in it after merger.

5.2 Suggestions & Scope for Further Research

Bank mergers are occurring quite frequently in India now as the government isencouraging them to do so in order to become globally powerful brands. But, the

expected synergies may not always come as is evident in the case of OrientalBank of Commerce and Global Trust Bank merger. Hence, banks should do a

proper due diligence process before deciding to go for a merger. The synergy theylook for has to comply with their human resource, technical expertise, marketreach as well as financial health.

48



5.3 Limitations

1. The economic slowdown and current financial crisis meant that current datacould not be taken into account for analysis as those are adversely affected by

economy and may not show impact of the merger.

2. This study was done at a time when banks are going through a bad phase andthus meeting with higher authorities could not be arranged which was a setback.

BIBLIOGRAPHY

Database:-

Prowess Corporate database

Books:-

Dr. J.C.Verma, 1997, “Corporate Mergers, Amalgamations & Takeovers”, Bharat

Publishing House

Prof. R.N.Kar, 2008, “Corporate Mergers & Acquisitions”, JBA Publishers

M.Y.Khan, 2005, “Financial Services”, Tata Mc Graw Hills

Magazines:-

Business Week

Outlook Money

Business India

49



Business World

Websites:-

www.valueresearchonline.com

www.ebscohost.com

www.rbi.org

APPENDIX

SPSS Outputs

50



Output For EPS Test

Paired Samples Statistics

Mean N Std. DeviationStd. Error

Mean

Pair 1 Before_Merger

27.09875 4 12.886079 6.443040

After_Merger

28.14250 4 14.862358 7.431179

Paired Samples Correlations

N Correlation Sig.

Pair 1 Before_Mer ger &After_Merger

4 .917 .083

Paired Samples Test

Paired Differences

t df Sig. (2-taileMean Std. DeviationStd. Error

Mean

95% Confidence Intervalof the Difference

Lower Upper

51



air 1 Before_Mer ger -After_Merger

-1.043750 5.967644 2.983822-

10.5396038.452103 -.350 3 .7

Output For Current Ratio Test



Mean


.50250 4 .099708 .049854

After_Merger

.72625 4 .242294 .121147


N Correlation Sig.


4 -.463 .537

Paired Samples Test

Paired Differences


Mean


Lower Upper


-.223750 .301728 .150864 -.703866 .256366 -1.483 3 .2

Output For Net Working Capital



Mean

Pair 1 Before_Me - 4 4837.888074 2418.9440

52



rger 5303.18875

37

After_Merger

-4772.0862

54 5107.063443

2553.531722


N Correlation Sig.


4 .995 .005

Paired Samples Test

Paired Differences


Mean


Lower Upper


-531.10250

0548.833333

274.416667

-1404.4188

07

342.213807

-1.935 3 .1

Output For Capital Adequacy Ratio



Mean


14.01375 4 1.118432 .559216

After_Merger 12.51750 4 1.665245 .832623


N Correlation Sig.

Pair 1 Before_Mer ger &After_Merg

4 -.529 .471

53



er

Paired Samples Test

Paired Differences


Mean


Lower Upper


1.496250 2.448559 1.224279 -2.399953 5.392453 1.222 3 .3

Output For Net Interest Margin



Mean


2.16750 4 1.401746 .700873

After_Merger

2.08250 4 1.062242 .531121


N Correlation Sig.


4 .961 .039

Paired Samples Test

Paired Differences


Mean


Lower Upper


.085000 .481975 .240988 -.681930 .851930 .353 3 .7

54



Output For Net Profit Margin



Mean


12.63875 4 3.333013 1.666506

After_Merger

11.26375 4 3.303850 1.651925


N Correlation Sig.


4 .981 .019

Paired Samples Test

Paired Differences


Mean


Lower Upper

air 1 Before_Mer ger -

After_Merger

1.375000 .640039 .320020 .356555 2.393445 4.297 3 .0

Documents

End Term Project Report_Satya