Submitted In Partial Fulfillment Of The Requirement For The Award Of
Degree Of

ROLL NO.: 2016063106
SESSION: 2016-18
Mergers and acquisitions have become an important mechanism of corporate restructuring. In the past two decades, there has been an increase in the volume of mergers and acquisitions in India in different sectors like finance, pharmaceuticals, Fast Moving Consumer Goods (FMCG) and banking sector. The research project is an attempt to analyze the effect of mergers and acquisitions on the pre- and post- merger performance of the Indian banks with the help of financial parameters like Gross Profit Margin, Net Profit Margin, Operating Profit Margin, Return on Capital Employed (ROCE), Return on Equity (ROE) and Debt-Equity Ratio. Through literature review it comes to know that most of the work done high-lightened the effect of mergers and acquisitions on different aspects of the companies. The data of mergers and acquisitions since economic liberalization are collected for a set of various economic parameters. This study additionally examines the changes occurring in the acquiring firms on the basis of financial ground and also the overall impact of mergers and acquisitions on acquiring banks.
Keywords: Mergers and Acquisitions, Gross Profit Margin, Net Profit Margin, Return on Equity
This project is concerned about the mergers and acquisitions in Indian banking industry. A merger occurs when two companies combine to form a single company. A merger is almost like a buying deal or takeover, except that in the case of a merger existing shareholders of both companies are involved and retain a shared interest in the new corporation. Conversely, acquisition involves buying most shares, if not all, of the target company and creating a unbalance in the ownership in the new company.

Basically, a merger is similar to a union of two or more companies. It is generally accepted that mergers promote synergies. This project is all about the mergers and acquisitions in banking sector on the basis of different profitability ratios, leverage ratios, etc.

Recent years have also brought about a major change in the nature and quality of employment in this sector. Different public and private sector banks are expanding their business by opting the strategy of mergers and acquisitions. The government of India is also supporting this strategy in banking sector because banking sector plays a vital role in the Indian economy. According to the Pradhan Mantri Jan Dhan Yojna in year 2014 to 2015, about 1.5 crore deprived section of the rural area has got the banking facilities. This move has created a record in Guinness book of world record for connecting about 1.5 crore deprived section of the rural area.

These are some of the recent mergers and acquisitions in the banking sector:
Name of acquiring bank Bank Targeted Year
State Bank of India State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore, State Bank of Hyderabad, State Bank of Patiala 2017
Kotak Mahindra Bank ING Vyas Bank 2014
ICICI Bank Bank of Rajasthan Ltd 2010
HDFC Bank Centurion Bank of Punjab 2008
Indian Overseas Bank Bharat Overseas Bank 2007
Industrial Development Bank of India United Western Bank 2006
Centurion Bank of Punjab Lord Krishna Bank 2006
ICICI Bank Sangli Bank 2006
Centurion Bank Bank of Punjab 2005
Bank of Baroda South Gujarat Local Area Bank 2004
Oriental Bank of Commerce Global Trust Bank 2004
Impact of Mergers on the Cost Efficiency of Indian Commercial Banks
By: Dr. Pradeep Kaur and Dr. Gian Kaur.

The findings of this study suggest that over the entire study period average cost efficiency of public sectors banks found to be 73.4 and for private sector banks is 76.3 percent.

Measuring Post Merger and Acquisition Performance: An Investigation of Select Financial Sector Organizations in India
By: Dr. Neena Sinha, Dr. K P Kaushik and Ms. Timcy Chaudhary
The result of the study indicates that M&A cases in India show a significant correlation between financial performance and the M&A deal, in the long run, and the acquiring firms were able to generate value.

Merger and Acquisitions (M&As) in the Indian Banking Sector in Post Liberalization Regime
By: Azeem Ahmad Khan
The result of the study indicates that the banks have been positively affected by the event of Merger and acquisitions (M & As). These results suggest that merged banks can obtain efficiency and gains through Merger and Acquisitions (M & As) and passes the benefits to the equity share holders’ in the form of dividend.

Bhatnagar, R. G. (2001) study explored a heavy toll on the public-sector banks plagued by NPA tainted balance sheets and burdened with the flab of endless bureaucratic interventions of the past. In the increasingly competitive industry, well managed, highly popular and innovative sectors banks are giving the PSBs a run for their money. The author offers a solution through merger and streamlined operations.
Pawaskar (2001) analyzed the pre-merger and post-merger operating performance of 36 acquiring firms during 1992-1995, using rations of profitability, growth, leverage and liquidity, and found that the acquiring firms performed better than industry average in terms of profitability. Regression analysis however, showed that there was no increase in the post-merger profits compared to main competitors of the acquiring firms.

Prasad P S R and Sreenivas V. (2001) in their study highlighted the need for mergers in banking industry and discussed various aspects involved in mergers of Indian banks. The authors observed that merger of banks is still viewed as the only alternative left to avoid other hard choices and suggested the role of planners and supervisors of the merger process to have a smooth transition.

Sangita Mehta (2001) major financial institutions of India like IDBI, IFCI and ICICI etc., are in a restructuring phase. These institutions are shunned by the bourse because all face the problems of rising non-performing assets and high fund cost. The author points out that government interference and disparity in pay scales are the hindering factors towards restructuring.

Surjit Kaur (2002) compared the pre- and post-takeover performance of a sample of 20 merging firms, using a set of eight financial ratios, for a period of three years each, immediately preceding and succeeding the merger. The study found that Gross Profit Margin (EBITDA/Sales), Return on Capital Employed (ROCE) and Asset Turnover Ratio Declined Significantly in the Post-takeover period, suggesting that both profitability and efficiency of merging companies declined in the post- takeover period. However, the change in post-takeover performance was statistically not significant when ‘t-test’ was used.

Adrian Gourlay, Geetha Ravishankar, Tom Weyman-Jones (2006) study on efficiency gains from bank mergers in India found that bank mergers in the post reform period possessed considerable potential efficiency gains stemming from harmony gains. In this study, post-merger efficiency analysis of the merged bank with a control group of non-merging banks reveals an initial merger related efficiency advantage for the former that, while persistent, did not show a sustained increase thus failing to provide the merging banks with a competitive advantage vis-à-vis their non- merging counterparts.
Ram Kumar Kakani and Jay Mehta, (2006) examined the motives for mergers and acquisitions in the Indian banking industry through the international mergers ; acquisitions scenario comparing it with the Indian scene. Give the increasing role of the economic power in the turf war of nations, the paper looks at the significant role of the state and the central bank in protecting customer’s interests vis- à-vis creating players of international size. While, gazing at the mergers & acquisitions in the Indian banking sector both form an opportunity and as imperative perspectives, the paper also glances at the large implicative, the paper also glances at the large implications for the nation.

Brinda Jagirdar and Amlendu K Dubey (2007) study examined the performance of public sector banks found that paper private banks and foreign banks were not superior to the PSBs in any of the performance indicator namely ROA, OPR, NIM and OER, given the present regulatory environment. This is surprising to note given the priori expectation that foreign or private banks (especially new private sector banks) are more profitable or efficient than PSBS. The findings also contradicted hypothesis that government enterprises per se are inefficient. There are, however, certain limitations of observed in that study such as data used were only of two years 2004-2005 and 2005-2006. The study also reported that the introduction of banking and financial sector reforms in the country, there has been a significant improvement in the financial health of commercial banks, particularly PSBs, in terms of capital adequacy, profitability and asset quality as well as greater attention to risk management. The study also observed that PSBs as a whole have improved their performance in recent years.

Amitabh Gupta (2008) study on the market response to merger announcements studied the stock price performance of target companies in case of merger announcements in India during the period January 31, 2003 to January 31, 2007. The study found significant positive returns on the date of the announcement. A run up in prices to the date of announcement was also seen, which indicated that the market had prior knowledge of the impending merger. During the 30 days before the merger date, returns were found to be positive for 20 days compared to negative returns on only 10 days. However, after the announcements of merger, there was a reversal in the pattern of returns, as positive returns were seen for a smaller number of 13 days compared to negative returns on 17 days. The study also observed that the returns gained prior to the merger were lost immediately after the announcement.

Manoj Anand and Jagandeep Sing (2008) studied the impact of mergers announcements on shareholders wealth among Indian private sector banks by capturing the returns to shareholders as a result of the merger announcements using the event study methodology. The study observed that merger announcements in the Indian banking industry had positive and significant shareholder wealth effect both for bidder and target banks. The market value weighted CAR of the combined bank portfolio as a result of merger announcement was 4.29 % in a three-day period (-1,1) window and 9.71% in a 11-day period (-5,5) event window.

Literature about mergers among Indian banks is limited largely been due to the paucity of published case material and the confidentiality associated with this activity. From the existing literature, it was observed that major studies focused on performance and the resultant implications of M&A. Most importantly, in an industry where “size” determines sustenance ability, the merger should place the banks on a better footing. Today, more than ever, merger in the Indian banking sector have gained considerable momentum for achieving consolidation. In limited, there exists limited research examining the financial ratio such as liquidity ratio, probability ratio and turnover ratio for appreciating and understanding the real performances of the merged banks.

To find out reason for merger and acquisition in bank.

To study the performance of bank before and after the merger on the basis of Gross Profit Margin, Net Profit Margin, Operating Profit Margin, Return on Capital Employed, Return on Equity, Debt and Equity Ratio.

DATA COLLECTION: Secondary data
Gross Profit Margin:- Gross profit margin is a profitability ratio which calculates percentage of sales that exceed the cost of goods sold. In other words, it measures how efficiently a company uses its materials and labor to produce and sell products profitably.

Gross Profit Margin = (Total Sales – Cost of Goods Sold)/ Total Sales * 100
Net Profit Margin:- Net profit margin is the percentage of revenue left after all expenses have been deducted from sales. The measurement reveals the amount of profit that a business can extract from its total sales.

Net Profit Margin = Net Profit/Net Sales * 100
Operating Profit Margin:- The operating profit margin ratio indicates how much profit a company makes after paying for variable costs of production such as wages, raw materials, etc.
Operating Profit Margin = Earning before Interests and Taxes (EBIT)/Net Sales * 100
Return on Capital Employed (ROCE):- It is a profitability ratio which measures how efficiently a company can generate profits from its capital employed by comparing net operating profit to capital employed.

ROCE = Net Operating Profit/ (Total Assets – Current Liabilities) * 100
Return on Equity (ROE):- It is a profitability ratio which measures the ability of a firm to generate profits from its shareholders’ investments in the company.

ROE = Net Income/ Shareholders’ Equity * 100
Debt-Equity Ratio:- It is calculated by dividing a company’s total liabilities by its stockholders’ equity. It is a leverage ratio used to measure a company’s financial leverage. It shows the percentage of firm’s financing that comes from creditors and investors.

Debt/Equity Ratio = Total Liabilities/ Shareholders’ Equity
The data for this study are secondary data generated from annual reports and accounts of banks quoted on the National Stock Exchange of India. This was for a three year period before as well as after merger.

Data collected is analyzed using t-test in Microsoft Excel 2013.

The prosperity of a company depends upon its profitability and financial health. The financial statements published by a company periodically helps us to access the profitability and financial health of the company. The two basic financial statement provided by the company are the balance sheet and the profit loss account .The first gives of a picture of asset and liabilities while the other gives us the picture of its earnings. In this paper these financial statement is used to know the effect of merger and acquisition ICICI bank and Bank of Rajasthan.

Table 1. Financial Ratio Analysis of ICICI Bank Before and After Merger
Ratios ICICI Bank
Pre- merger Post- merger
Gross profit margin 2007 2008 2009 2011 2012 2013
92.270 92.744 92.590 89.201 90.249 91.180
Net profit margin 10.810 10.510 9.740
15.790 15.750 17.190
Operating Profit Margin 53.783 57.486 57.871 63.725 66.845 68.690
Return on capital employed 0.902 1.040 0.991 1.268 1.322 1.551
Return on equity 11.950 9.880 7.8 9.65 11.2 13.1
Debt equity ratio 11.425 6.623
5.727 6.084 6.550 6.565
Source: Annual reports of ICICI Bank Ltd.

Table 2. Financial Parameters of ICICI Bank Pre- and Post- Merger
Ratios Group N Mean SD T-value
Gross Profit Margin Pre 3 92.5346 0.2417 0.5129
Post 3 90.21 0.9900 Net Profit Margin Pre 3 10.3533 0.5519 -1.0953
Post 3 16.2433 0.8200 Operating Profit Margin Pre 3 56.38 2.25729 -1.0515
Post 3 66.42 2.5096 Return on Capital Employed Pre 3 0.9776 0.0699 -1.4981
Post 3 1.3803 0.1502 Return on Equity Pre 3 9.8766 2.0750 -0.6115
Post 3 11.3166 1.7279 Debt-Equity Ratio Pre 3 7.925 3.0640 3.4113
Post 3 6.3996 0.2734 INTERPRETATION:
In the present case, the merger of the Bank of Rajasthan and the ICICI Bank, the comparison between pre- and post-performance it can be seen that the Mean value of Gross Profit margin (92.5346% vs. 90.21%) has decreased with t-value 0.5129 after the merger but in Net Profit margin and Operating Profit margin one can see the increment in the Mean of both parameters that indicates that there is a change in the performance of ICICI bank after merger and results shows that there is significant change with Mean (10.3533% vs. 16.2433%) and t-value -1.0953 and (56.38% vs. 66.42%) and t-value -1.0515. The mean of Return on Capital Employed (0.9776% vs. 1.3803%) and t-value -1.4981 which also significant statistically and shows that there is a change in term of investment after the merger. The mean of Return on Equity shows improvement and statistically conformed significant to mean value (9.8766% vs. 11.3166%) and t-value -0.6115, the mean value of equity in post-merger has been increased so it increased the shareholders’ return held, it also shows the improved performance of bank after merger. But, debt equity ratio has declined after the merger, the mean value (7.925% vs. 6.3996%) with t-value 3.4113 shows the change in debt equity ratio after the merger.
From the above analysis, we can conclude that some ratios indicates no effect but most of the ratios shows the positive effect and increased the performance of banks after merger announcement.

The findings of this study are expected to be of great use affect profitability in a significant way. Thus, more emphasis can be laid on those factors, which are positively associated with profitability, and an effort can be made to constrain the factors which affect profitability in a positive or negative way in the financial performance of banks before and after merger. The other aspects like taxation vision, accounting research and valuation of market risks, human resources and legal and strategic aspects etc. relates to mergers and acquisitions are avoided.

Merger is the useful tool for growth and expansion in Indian Banking Sector. It is helpful for survival of weak banks by merging into larger bank. This study shows that impact of merger on financial performance of Indian Banking sector. For this a comparison between pre- and post-merger performance examined in terms of Gross Profit margin, Net Profit margin, Operating Profit margin, Return on Capital employed, Return on Equity and Debt equity ratio. The motive behind such deals was to capitalize the potential synergy in the after such event period. The most important is that to generate net higher profit after the merger in order to justify the decision of merger undertaken by the management to the shareholders.

It is evident from the case of ICICI Bank Ltd. that how an organization can become market leader by adopting some strategic tools like mergers and acquisitions. The post-merger integration process is a difficult and complex task. It comes along with long lists of activities and tasks that have to be fulfilled within a short time and partly with incomplete information (e.g. formation of new teams and departments). There are many opportunities to exploit and many decisions to take. However, we can divide various challenges and issues in three phases i.e. pre-merger phase, acquisition phase and post-merger phase, which has scope for further research.

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