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Volume 1, Issue 9 (November, 2013)

INTERCONTINENTAL JOURNAL OF FINANCE RESOURCE RESEARCH REVIEW

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CORPORATE RESTRUCTURING: MERGERS AND ACQUISITIONS IN INDIAN

BANKING SECTOR

NIDHI TANWAR

Assistant Professor, Shri Ram College of Commerce, Delhi

ABSTRACT

The Indian economy has been growing with a rapid pace and has been emerging at the top, be it

information technology, reconstruction & development, pharmaceutical, infrastructure, energy, consumer

retail, telecom, financial services, media, and hospitality etc. Investors, big companies, industrial houses

view Indian market in a growing and proliferating phase, whereby returns on capital and the shareholder

returns are high. Corporate restructuring in the form Ms and As has become a natural and perhaps a

desirable phenomenon in the current economic environment. A large number of international & domestic

banks all over the world are engaged in M&A activities. Through M&A in the banking sector, the banks

look for strategic benefits in the banking sector & it can be reckoned that size does not matter and growth

in size can be achieved through M&A quite easily. In this research paper, an attempt has been made to

evaluate the effectiveness of mergers and acquisitions of the CBOP and the HDFC bank Ltd. on 23 May,

2008on the basis of selected variables (like Gross-Profit Margin, Net- Profit Margin, Operating Profit

Margin, Return on Capital Employed, Return on Equity and Debt- Equity Ratio) prior & after mergers

and acquisitions. The t-test is used for testing the statistical significance and this test is applied to test the

effect of Merger and Acquisitions on the performance of banks. The result of the study indicates that the

banks have been positively affected by the event of Merger and acquisitions and can also obtain

efficiency and gains through Merger and Acquisitions

Keywords: Banking Sector; Corporate Restructuring; Mergers and Acquisitions; Strategic Benefits

INTRODUCTION

Acquisition of one company by another was viewed as a sign of failure of the former and violent

aggression of the latter. The laws and regulations previously allowed the takeover of only sick, dying,

unviable and almost hopeless units. The acquirer was driven mostly by the tax benefits of the loss carry

forward. There are now more economic reasons and wider choices for takeover. The trend towards

globalization of all national and regional economies has increased the intensity of mergers, in a bid to

create more focused, competitive, viable, larger players, in each industry. The recent liberalistion has

made mergers more necessary and acceptable. The globalization may entail redundancies & closures of

inefficient units as a consequence of technological upgradtion and modernisation. The competitive forces

are working with vigour and vitality due to liberalization and consequent globalistion.if an industrial unit

wants to survive ,it has to excel and compete successfully both with domestic and multinational

competitors in internal, as well as, in international markets .Takeovers ,mergers, joint ventures, and

strategic alliances have become imminent in today’s business. Mergers and acquisitions of companies are

implicit in free enterprise system because of their obvious advantages- infusion of better management,

consolidating capacities to economic level by forward and backward linkages and healthy growth of

capital market. The concept of mergers and acquisitions has assumed greater significance in the context of

the ongoing programme of liberalistion and globalization. Merger is a combination of two or more

companies into a single company where one survives and the others lose their corporate existence. The

ISSN:2321-0354-Online ISSN:2347-1654-Print

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survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the

surviving company is the buyer, which retains its identity, and the extinguished company is the seller.

Acquisition in general sense is acquiring the ownership in the property. In the context of business

combinations, an acquisition is the purchase by one company of a controlling interest in the share capital

of another existing company.

Table 1: List of Merger and Acquisitions (M&As) in Indian Banking Industry since post

Liberalization regime.

S.

No Name of the Transferor Bank

Name of the Transferee

Bank

Date of

Merger/Amalgamat

ion

1 Bank of Bihar Ltd. State Bank of India November 8, 1969

2 National Bank of Lahore Ltd. State Bank of India February 20, 1970

3 Miraj State Bank Ltd. Union Bank of India July 29, 1985

4 Lakshmi Commercial Bank Ltd. Canara Bank August 24, 1985

5 Bank of Cochin Ltd. State Bank of India August 26, 1985

6 Hindustan Commercial Bank Ltd. Punjab National Bank December 19, 1986

7 Traders Bank Ltd. Bank of Baroda May 13, 1988

8 United Industrial Bank Ltd. Allahabad Bank October 31, 1989

9 Bank of Tamilnadu Ltd. Indian Overseas Bank February 20, 1990

10 Bank of Thanjavur Ltd. Indian Bank February 20, 1990

11 Parur Central Bank Ltd. Bank of India February 20, 1990

12 Purbanchal Bank Ltd. Central Bank of India August 29, 1990

13 New Bank of India Punjab National Bank September 4, 1993

14 Bank of karad Ltd Bank of India 1993-1994

15 Kashi Nath Seth Bank Ltd. State Bank of India January 1, 1996

16 Bari Doab Bank Ltd Oriental Bank of Commerce April 8, 1997

17 Punjab Co-operative Bank Ltd. Oriental Bank of Commerce April 8, 1997

18 Bareilly Corporation Bank Ltd Bank of Baroda June 3, 1999

19 Sikkim Bank Ltd Union Bank of India December 22, 1999

20 Times Bank Ltd. HDFC Bank Ltd February 26, 2000

21 Bank of Madura Ltd. ICICI Bank Ltd. March 10, 2001

22 ICICI Ltd ICICI Bank Ltd May 3, 2002

23 Benares State Bank Ltd Bank of Baroda June 20, 2002

24 Nedungadi Bank Ltd. Punjab National Bank February 1, 2003

25 South Gujarat Local Area Bank Ltd. Bank of Baroda June 25, 2004

26 Global Trust Bank Ltd. Oriental Bank of Commerce August 14, 2004

27 IDBI Bank Ltd. IDBI Ltd April 2, 2005

28 Bank of Punjab Ltd. Centurion Bank Ltd October 1, 2005

29 Ganesh Bank of Kurundwad Ltd Federal Bank Ltd September 2, 2006

30 United Western Bank Ltd. IDBI Ltd. October 3, 2006

31 Bharat Overseas Bank Ltd. Indian Overseas Bank March 31, 2007


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32 Sangli Bank Ltd. ICICI Bank Ltd. April 19, 2007

33 Lord Krishna Bank Ltd. Centurion Bank of Punjab Ltd. August 29, 2007

34 Centurion Bank of Punjab Ltd. HDFC Bank Ltd. May 23, 2008

35 The Bank of Rajasthan ICICI Bank Ltd August 13, 2010

Source: Report on Trend and Progress, RBI, Various Issues, VIII competition and consolidation, 04 Sep

2008

MERGERS & ACQUISITIONS AS A GROWTH STRATEGY

As a business gets bigger, the growth will be organic or inorganic. Organic growth, also called internal

growth, occurs when the company grows from its own business activity using funds from one year to

expand the company the following year. While ploughing back profits into a business is a cheap source of

finance, it is also a slow way to expand and many firms want to grow faster. A company can do so by

inorganic growth. Inorganic growth, or external growth, occurs when the company grows by merger or

acquisition of another business. Getting involved with another company in this way makes good business

sense as it can give a new source of fresh ideas and access to new markets.

Table 2 : Brief illustration of growth strategies


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WHY TO REGULATE MERGERS & ACQUISITIONS

When two companies are merged or combined, they must have some objectives behind this merger. One

motive is of merger may be to realize economies of scale, improving operative performance or expanding

the business in order to gain more assets. However, on the other the motive may be to create anti-

competitive effects like to reduce the numbers of competitors or to create dominance in the market. This

can be explained by Porter‘s five sector model, as below:

Table 3: Porter‘s five sector model

LITERATURE REVIEW

Porter (1987) in his study outlined three necessary tests a firm had to pass to make it an interesting take-

over prospect. He called these “the attractiveness test” (that is, the industry structure must be, or have the

potential to be, profitable), the “cost-of-entry test” (that is, that the cost of entry does not erode all future

profits) and the “better off” test (this states that the new unit must gain a competitive advantage as a result

of the acquisition, or the corporation does). These are relatively intuitive, but it is the third ‘test” that is

important. Some kind of advantage must be gained as a result of the acquisition. M. M. Cornett and H.


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Tehranian1992 examined the post-acquisition performance of large bank mergers between 1982 and

1987. On the whole, the merged banks outperform the banking industry. Their better performance appears

to result from improvements in the ability to attract loans and deposits, in employee productivity, and in

profitable asset growth. Further, they found a significant correlation between announcement-period

abnormal stock returns and the various performance measures, showing that market participants were able

to identify in advance the improved performance associated with bank acquisitions. Frei and Harker

(1996) in their study concluded that the cost efficiency effects of merger & acquisition depend upon the

type of merger & acquisition, the motivation behind it and the manner in which the management

implemented its plans. Akhavein, Berger and Humphrey (1997) studied the price & efficiency effect of

mega mergers on US banking industry & found that after merger banks have experienced higher level of

profit efficiency than before merger. Robert DeYoung (1997) estimated pre- and post-merger X-

inefficiency in 348 mergers approved by the OCC in 1987/1988. Efficiency improved in only a small

majority of mergers, and these gains were unrelated to the acquiring bank's efficiency advantage over its

target. Efficiency gains were concentrated in mergers where acquiring banks made frequent acquisitions,

suggesting the presence of experience effects. Lang and Welzel (1999) studied 283 mergers among

Bavarian cooperative banks in the period 1989- 1997. They estimate a frontier cost function with a time-

variable stochastic efficiency term. They compare actual mergers to hypothetical ones and found no

evidence of efficiencyin the post merger period except for “leveling off of differences among the merging

units”.J. K. Kang, A. Shivdasani and T. Yamada 2000 studied 154 domestic mergers in Japan during

1977 to 1993. In contrast to U.S. evidence, mergers are viewed favorably by investors of acquiring firms.

They document a two-day acquirer abnormal return of 1.2 percent and a mean cumulative abnormal

return of 5.4 percent for the duration of the takeover. Announcement returns display a strong positive

association with the strength of acquirer's relationships with banks. The benefits of bank relations appear

to be greater for firms with poor investment opportunities and when the banking sector was healthy. they

concluded that close ties with informed creditors, such as banks, facilitate investment policies that

enhance shareholder wealth. Anand and Singh (2008) studied the five mergers in the Indian banking

sector to capture the returns to shareholders as a result of the merger announcements using the event study

methodology. These are the merger of times bank with the HDFC Bank, Bank of Madura with ICICI

Bank, ICICI Ltd. with the ICICI Bank, Global Trust Bank with the Oriental Bank of Commerce and Bank

of Punjab with the Centurion Bank. The aim was to understand the wealth effects of bank mergers. It was

concluded that the merger announcements in the Indian banking industry have positive and significant

shareholder wealth effect both for acquirer and target banks. K. Ravichandran,Fauzias Mat-Nor,Rasidah

Mohd-Said (2010) analyzed the efficiency and performance using CRAMEL–type variables, before and

after the merger for the selected public and private banks which were initiated by the market forces. The

results suggested that the mergers did not seem to enhance the productive efficiency of the banks as they

do not indicate any significant difference. The financial performance suggests that the banks were

becoming more focused on their retail activities (intermediation) and the main reason for their merger was

to scale up their operations. However it was found that the Total Advances to Deposits and the

profitability were the two main parameters which are to be considered since they are very much affected

by mergers. Also the profitability of the firm is significantly affected giving a negative impact on the

returns. Pardeep KAUR , Gian KAUR, examined the cost efficiency of Indian commercial banks by using

a non-parametric Data Envelopment Analysis Technique. The cost efficiency measures of banks were

examined under both separate and common frontiers. This paper also empirically examined the impact of

mergers on the cost efficiency of banks that have been merged during post liberalization period. The


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present study based on unbalanced panel data over the period 1990-91 to 2007-08. In this paper to test the

efficiency differences between public and private both parametric and non-parametric tests are employed.

The findings of this study suggest that over the entire study period average cost efficiency of public sector

banks found to be 73.4and for private sector banks is 76.3 percent. The findings of this paper suggest that

to some extent merger programme has been successful in Indian banking sector. The Government and

Policy makers should not promote merger between strong and distressed banks as a way to promote the

interest of the depositors of distressed banks, as it will have adverse effect t upon the asset quality of the

stronger banks.

OBJECTIVES OF THE STUDY

1.To evaluate the banks performance in terms of net profitability.

2.To analyze the performance of banks after merger in terms of return on capital employed.

3.To find out the impact of merger on company’s debt equity ratio.

HYPOTHESES

The present work is essentially based on secondary sources; hence hypothesis is being tested by using

published materials.

H0 (Null Hypothesis): There is no significant difference in mean value of selected variables

before and after merger.

H1 (Alternative Hypothesis : There is significant difference in mean value of selected variables

before and after merger

DATA AND METHODOLOGY

a)Data Collection

The present study is based on secondary data published by the reserve bank of India, annual report of

public sector banks. Data have also been collected from the websites of various government and non-

government agencies. 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.

b) 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. One case of Merger and Acquisitions (M&As) has taken randomly as

sample in order to evaluate the impact of M&As. The pre merger (3years prior) and post merger (after 3

years) of the financial ratios are being compared. 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.

ANALYSIS AND INTERPRETATIONS

In Table 4, selected case for study, the merger of the CBOP and the HDFC bank Ltd. on 23 May, 2008

has been analyzed in order to analyze the financial performance of banks after Merger and Acquisitions


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(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. 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. In this

case all financial and accounting ratios have been computed.

Table 4 - Merger Date

SL. NO Bidder Bank Target Bank

Date of

Announcement

Case 1 HDFC Bank Ltd Centurion Bank of Punjab Ltd. May 23, 2008

Table 5 - Profile of Centurion Bank of Punjab and HDFC Bank for the last three financial

years is ending before the merger announcement. Financial Ratios

(in Percentage)

Centurion Bank of Punjab(Target HDFC Bank

Bank) (Bidder Bank)

As on 31 As on 31 As on 31 As on 31 As on 31 As on 31

Mar’2005 Mar’2006 Mar’2007 Mar’2005 Mar’2006 Mar’2007

Gross Profit

55.8583 53.41508 69.57029 74.17189

71.12331

69.94028

Margin

Net profit

8.7116 15.249 9.56855 21.51485

19.45729

16.56912

Margin

Operating

37.23308 22.43152 37.60888 53.1167

46.00834

47.93091

Profit Margin

Return on

0.65377 1.081 0.65671 1.29413

1.18463

1.2511

Capital

Employed

Return on

29.7572 86.9701 77.46505 214.77991

278.08009

357.38438

Equity

Debt-Equity

35.275661 67.110771 100.80164 134.38834

192.74861

222.65358

Ratio

Source: compiled from financial statement of Banks retrieved from

http://www.moneycontrol.com/stocksmarketsindia/


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Table 6 - Profile of HDFC Bank (Bidder Bank) for the next three financial years was ending

after the merger announcement. Financial Ratios (in Percentage)

HDFC Bank

(Bidder Bank)

As on 31

Mar’2009

As on 31

Mar’2010

As on 31

Mar’2011

Gross Profit Margin 74.76217 74.66454 76.2925

Net profit Margin 13.74548 18.23227 19.70267

Operating Profit Margin 54.61426 51.12141 54.53866

Return on Capital Employed (ROCE) 1.22493 1.3255 1.41566

Return on Equity (ROE) 527.75165 644.18447 843.96749

Debt-Equity Ratio 342.04104 393.9357 479.29082



Table 7 - Combined Profile of Centurion Bank of Punjab and HDFC Bank for the last three

financial years was ending before the merger announcement. Financial Ratios

(in Percentage)

Centurion Bank of Punjab and HDFC Bank

As on 31

Mar’2005

As on 31

Mar’2006

As on 31

Mar’2007

Gross Profit Margin 72.32917 68.42877 69.88274

Net profit Margin 20.22659 18.81694 15.4805

Operating Profit Margin 51.51849 42.42082 46.32579

Return on Capital Employed 1.24143 1.17079 1.15097

Return on Equity 169.19017 218.79419 265.25583

Debt-Equity Ratio 109.9669 153.77339 182.54902



Table 8 - Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined

(CBOP &HDFC Banks) and Acquiring Bank (HDFC Bank)

Mean Std.Deviation t-value Sig.

Gross Profit Margin

Pre 70.2136 1.97113

-4.008 .016

Post

75.2397 0.91303


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Net profit Margin

Pre

18.8413 3.37311

0.610 .575

Post

17.2268 3.10326

Operating Profit Margin

Pre

46.7550 4.56400

-2.319 .081

Post

53.4248 1.99513

Return on Capital Employed

Pre

1.1877 0.04755

-2.182 .095

Post

1.3220 0.09541

Return on Equity

Pre 2.1775 48.04140

-4.711 .009

Post

6.7197 159.92827

Debt-Equity Ratio

Pre 1.4876 36.54953

-5.667 .005

Post

4.0509 69.30134

Source: Compilation based on tables 6&7, 5% level of significance

In this 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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RESULTS

The result suggest that the performance of the HDFC Bank after acquired the Centurion bank of

punjab,the Net Profit Margin does not shows any change after the merger with t-value 0.610 which is

statistically insignificant therefore H0 (Null Hypothesis) is accepted 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 therefore

H0 (Null Hypothesis) is accepted 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 therefore H1

(Alternative Hypothesis) is accepted , 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 therefore H1

(Alternative Hypothesis) is accepted , 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

CONCLUSION

The present study analyzed the growth of sample merged bank during pre-merger and post-merger

periods Merger and Acquisition is the useful tool for growth and expansion in the Indian banking sector.

In this study 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

has been done. The results revealed that the return on equity, debt equity ratio and gross profit margin has

shows the improvement after the merger, and for the purpose and objective of the study independent t-

test for analyzing the pre and post merger performance of the banks have been applied. And results

suggest that after the merger the efficiency and performance of banks have increased.

REFERENCES

1. Anand, Manoj and Singh Jagandeep (2008), “Impact of Merger Announcements on Shareholders

Wealth: Evidence from Indian Private Sector Banks”, Vikalpa The Journal for Decision Makers,

Vol.33, No.1, pp 35-54

2. Akhavein, J.d., Berger, A.N and Humphrey, D.B (1997), “The effects of Bank Mergers on Efficiency

and Prices: Evidence from the profit function”, Review of industrial organization, Vol 12, pp 95-139.

3. Cornettt, M.M &Tehranian, H. (1992), “Changes in Corporate Performance Associated with Ban

Acquisitions”, Journal of Financial Economics, Vol.31, pp211-234.

4. Frei, F and Harker, P. (1996), “Measuring the Efficiency of Service Delivery Processes: With

Applications to Retail Banking”, Working Paper No. 96-31, Wharton Financial Institutions Centre.


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5. J. K. Kang, A. Shivdasani and T. Yamada 2000 The effect of bank relations on investment decisions:

An investigation of Japanese takeover bids, Journal of Finance,Vol: 55,Issue: 5,pp : 2197-2218

6. K. Ravichandran,Fauzias Mat-Nor,Rasidah Mohd-Said 2010 Market Based Mergers in Indian

Banking Institutions, International Research Journal of Finance and Economics, Vol: 37 ,pp30-39

7. Kaur Pardeep and Kaur Gian (2010) , Impact of Mergers on the Cost Efficiency of Indian Commercial

Banks, Eurasian Journal of Business and Economics 2010, 3 (5), 27-50

8. Lang, G., Welzel, P., 1999. Mergers among German cooperative banks: a panel-based stochastic

frontier analysis. Small Business Economics 13, pp. 273-286.

9. Porter, M., “From Competitive Advantage to Corporate Strategy",Harvard Business Review, May-Jun

1987.

10. Robert DeYoung,1997, Bank mergers, x-efficiency, and the market for corporate

control,Managerial Finance, Patrington. Vol. 23, Iss. 1, p. 32-47 (18 pp.)

11. http://www.banknetindia.com/books/merger.htm

12. http://www.researchandmarkets.com/reportinfo.asp?report-id=4020

13. www.hdfcbank.com


http://www.hdfcbank.com/

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