Merger and Acquisition The Play of Gain and Loss?

Dr. Nikunj Patel

Assistant Professor,
Institute of Management, Nirma University,
Ahmedabad
Email: profnikunj@gmail.com

Prof. Mitesh Patel

Assistant Professor,
S.V. Institute of Management, Kadi Sarva Vishwavidyalaya,
Gandhinagar
Email: patel4mitesh@gmail.com

Abstract
Banking Industry plays an important role in the economic development of India. For
strengthening structure of banks, concept of merger and acquisition is adopted. This study is
undertaken with an objective to check improvement in financial performance and stock return
performance of banks after merger. This study is undertaken on 4 banks. This Study is
undertaken by applying event study methodology. For IDBI Bank merger has improved
financial performance where as for other banks merger remain somewhat beneficial. After
merger, stock return performance has improved only for ICICI Bank. Reset of the banks have
found loss in stock return after merger. Overall impact of merger and acquisition is mix, i.e.
both positive and negative on Indian banking sector. It can be concluded that merger between
the two banks is beneficial for Indian banks but it requires proper analysis before doing
merger deal.

Keywords: Merger, Financial Performance, Public sector banks, Private sector Banks,
Profitability

1. Introduction
Indian Banking industry is very important for development of economy. For strengthening
structure of banks, merger is adopted. Corporate mergers and acquisitions have become
popular across the globe due to globalization, liberalization, technological development and
intensely competitive business environment. The synergistic gains from mergers and
acquisitions may result from more efficient management, more profitable use of assets,
exploitation of market power and use of complementary resources (Ahmed, M., & Ahmed,
Z., 2014). This study is undertaken with an objective to check improvement in financial
performance of banks before & after merger. Many authors has carried work on merger with
respect to financial performance. This paper is contributing towards the comparison of
financial performance of Banks. This paper is give an outcome that can merger be beneficial
or lossful for bank.

2. Literature Review
Muhammad Shakoor et al (2014) have analysed the post-merger financial performance of
banking sector in Pakistan by taking data from year 2002 to 2011. Researchers have adopted
mean score as analytical tools to compare pre & post-merger performance. From study, it was
founds that after the merger there is a decrease in the financial performance of selected firm.
Jahanzaib Sultan et al (2013) has analysed the efficiency of Pakistani banks in pre & post-
merger situation by studying data from year 2001 to 2007. Researcher has used correlation,
regression and DEA Model to study data & from that, they found that efficiency &
effectiveness of banks has improved but improvement in effectiveness is lesser as compare
to efficiency. Few Financial Ratios has shown improvement after merger.

N. M. Leepsa et al. (2012) has studied Post merger financial performance of selected Indian
manufacturing firms by taking data from year 2003 to 2007. Researcher has applied Paired t-
test to study post-merger performance & founds that there is not much significant
improvement in financial ratios after merger, which put a question mark on the motive behind
mergers & merger does not result in fulfilling objectives. Devarajappa et al (2012) has
examined case of mergers between HDFC Bank and Centurion Bank of Punjab by taking data
from year 2005 to 2011.Researcher has applied Mean score, Standard deviation and Paired t-
test as analytical tools to examine financial performance after merger & found that after the
merger the financial performance of the banks have improved.

Azeem Ahmad Khan et al (2011) have analysed Merger and Acquisitions in the Indian
Banking Sector in Post Liberalization Regime by taking data from year 2000 to 2010.
Researchers have adopted Mean score, Standard deviation, Pairt-test for study purpose &
found that Banks able to generate higher net profits after the merger in order to justify the
decision of merger undertaken by the management to the shareholders. Dr. K.A. Goyal et al
(2012) has undertaken a Case Study of merger of ICICI Bank with other financial institutions.
Researcher has found that from merger of various financial institutions in itself, ICICI Bank
Ltd.; emerge as market leader in private sector banking. James F. Waegelein et al (2003) has
applied regression model to check the financial performance of merger firm in post-merger
era & found that that there is improvement in post-merger operating financial performance
measured by industry return on assets for the full sample.

3. Research Methodology
3.1 Research Objectives
This study is carried out to fulfil various objectives such as to evaluate the banks performance
before and after merger, to analyse the financial strength of the selected Indian Banks on the
basis of key financial ratios & to analyse the performance of stock return.

3.2 Research Design

The research design in this study is descriptive research design as this study assist the decision
maker in determining, evaluating, and selecting the best course of action to take decision in a
given situation.

3.3 Sample & Data Selection

For the present study, two public sector banks & two private sector banks have been selected.
They are IDBI Bank, Indian Overseas Bank, ICICI Bank & HDFC Bank. The basic data for
this current study has been collected from the Internet, Books, Journals and Electronic
database Ace Equity portal. Mean score, Paired sample T-test are used to study financial
performance.

The information on bank merger is very sensitive for investors. To evaluate stock performance,
Event study methodology is carried out covering a period of 30 days before merger and 30 days
after merger. Under event study methodology, Daily returns of stock, Average abnormal
returns, Cumulative Abnormal Returns are calculated using following formulas.

1) Daily returns are calculated of each selected bank for both pre and post-merger periods by
using the following equation:
Rit [( Pt Pt 1) / Pt 1]*100 . (1)
Where, Rit = the daily returns of a stock i at timet
Pt = the closing price of a stock at timet
Pt 1 = the previous day closing price of a stock at timet-1

2) Abnormal returns were computed for each stock as follows:

ARit [ Rit Rmt ] (2)
Where,
ARit = excess returns for stock i at timet
Rit = simple returns of a stock i at timet
Rmt = returns for the Market Index at timet

3) Average abnormal returns are computed by below given equation

AARt ARit (1/ n) (3)
Where, AARt = average abnormal returns at timet
ARit = abnormal returns for stock i at timet
n = sample size

4) To check cumulative effect of events, the Cumulative Abnormal Returns on stocks is used.
It is calculated using below given formula
CARt ARt . (4)
Where,
CARt = Cumulative abnormal returns at timet
ARt =abnormal returns at timet

4. Data Analysis & Interpretation

4.1 Profitability Ratios
IDBI Bank:
Table 1 Profitability Ratios of IDBI Bank Before & After Merger
Profitability Ratio Pre-Merger Post-Merger
Net Profit Margin 7.21 7.54
Return on Long Term Fund 88.14 126.72
Return on Net Worth 7.15 10.78
Return on Assets 105.78 118.92

Net profit Margin of IDBI bank before merger is 7.21 which is increased after merger up to
7.54. Return on Long Term Fund of IDBI bank before merger is 88.14% which is increased
after merger up to 126.72%. Return on Net Worth of IDBI bank before merger is 7.15 which
is increased after merger up to 10.78. Return on Assets of IDBI bank before merger is
105.78% which is increased after merger up to 118.92%. So, merger has positive effect on
the profitability of IDBI bank.
Indian Overseas Bank
Table 2 Profitability Ratios of Indian Overseas Bank Before & After Merger
Profitability Ratio Pre-Merger Post-Merger
Net Profit Margin 11.77 11.23
Return on Long Term Fund 156.84 130.99
Return on Net Worth 28.61 20.21
Return on Assets 40.41 116.5

Net profit Margin of Indian Overseas bank before merger is 11.77 which is decreased after
merger up to 11.23. Return on Long Term Fund of Indian Overseas bank before merger is
156.84% which is decreased after merger up to 130.99%. Return on Net Worth of Indian
Overseas bank before merger is 28.61 which is decreased after merger up to 20.21. Return on
Assets including Revaluations of Indian Overseas bank before merger is 40.41% which is
increased after merger up to 116.5%. Only, Return on Assets has positive effect on the
profitability of Indian Overseas bank. All other ratios reflate negative effect of merger.

ICICI Bank
Table 3 Profitability Ratios of ICICI Bank Before & After Merger
Profitability Ratio Pre-Merger Post-Merger
Net Profit Margin 12.69 11.80
Return on Long Term Fund 76.87 57.86
Return on Net Worth 15.65 9.37
Return on Assets 185.88 414.85

Net profit Margin of ICICI bank before merger is 12.69 which is decreased after merger at
11.80. Return on Long Term Fund of ICICI bank before merger is 76.87% which is decreased
after merger up to 57.86%. Return on Net Worth of ICICI bank before merger is 15.65 which
is decreased after merger up to 9.37. Return on Assets of ICICI bank before merger is
185.88% which is increased after merger up to 414.85%. So, Return on Assets makes the
positive effect on the profitability of ICICI bank. All other ratios stimulate negative effect of
merger.

HDFC Bank:
Table 4 Profitability Ratios of HDFC Bank Before & After Merger
Profitability Ratio Pre-Merger Post-Merger
Net Profit Margin 15.85 14.2
Return on Long Term Fund 67.2 67.37
Return on Net Worth 23.04 15.12
Return on Assets 138.13 362.4

Net profit Margin of HDFC bank before merger is 15.85 which is decreased after merger up
to 14.2. Return on Long Term Fund of HDFC bank before merger is 67.2% which is increased
after merger up to 67.37%. Return on Net Worth of HDFC bank before merger is 23.04 which
is decreased after merger up to 15.12. Return on Assets before merger is 138.13% which is
increased after merger up to 362.4%. So, Return on Assets and Return on long term Fund
shows positive effect on the profitability whereas Net Profit Margin and Return on Net Worth
demonstrate negative effect of merger.
4.2 Event Study
IDBI Bank
Table 5 Event Study of IDBI Bank
Time Period Days Mean Return Stock AAR CAR
-30 0.0099 0.0071 0.21
-15 0.164 0.134 0.201
Pre-Merger
-7 0.0166 0.0126 0.088
-3 0.0397 0.0361 0.108
3 0.0036 -0.0008 -0.0025
7 -0.0019 -0.0081 -0.0565
Post-Merger
15 0.0031 -0.0007 -0.01
30 -0.0017 -0.0049 -0.14

From the above table it is seen that in Pre-merger period return of stock of IDBI Bank was
remain positive which was remain both positive and negative during post-merger period.
Highest return was 1.64% & 0.36% in pre-merger & post-merger period, respectively. AAR
and CAR Both remain positive in Pre-merger period and were remain negative in post-merger
period. Overall, after merger performance of stock has decreased.

Indian Overseas Bank

Table 6 Event Study of Indian Overseas Bank
Time Period Days Mean Return Stock AAR CAR
-30 -0.0012 0.0009 0.0267
-15 0.0053 0.0051 0.0766
Pre-Merger
-7 0.0056 0.0014 0.0098
-3 0.0027 0.0039 0.0118
3 0.0033 -0.0111 -0.0333
7 -0.0011 -0.0095 0.0666
Post-Merger
15 0.0097 0.0016 0.0247
30 0.0055 0.0013 0.0384

From this table it can be seen that mean return of stock (R) was remain positive till 15 days
windows and then it turns to negative return where as in post-merger period, mean return was
positive except 7 day window. Highest return of stock was 0.56% & 0.97% in pre and post-
merger period, respectively. AAR was positive in pre-merger period where as in post-merger
it was remain positive for only 15 & 30 days. Highest AAR was 0.51% in pre-merger period
and 0.16% in post-merger period. In relation to that, CAR was positive in pre-merger period
where CAR in post-merger period was remain positive except 3 days window. Highest CAR
was 7.66% in pre-merger period and 6.66% in post-merger period. Overall, after merger
performance of stock has decreased.

ICICI Bank
Table 8 Event Study of ICICI Bank
Time Period Days Mean Return Stock AAR CAR
-30 0.0047 0.0036 0.1078
Pre-Merger
-15 0.0041 0.0042 0.0632
 -7 0.0004 0.0007 0.0049
-3 -0.0056 -0.0017 -0.005
3 0.0191 0.0117 0.0351
7 0.0042 0.0032 0.0221
Post-Merger
15 0.0056 0.0037 0.055
30 0.0051 0.0015 0.0444

Above table shows that during pre-merger mean return of stock (R) was Positive except day
3 where as it remain positive for all days in post-merger period. Highest positive return was
0.47% & 1.91% in pre and post-merger period, respectively. AAR & CAR, both during pre-
merger period remain positive except day 3 window. In Post-merger period both AAR &
CAR remain positive. AAR has highest return on 0.42% & 1.17% in post-merger period. In
same line, CAR has highest return on 1.07% & 5.55% in post-merger period. Overall, after
merger performance of stock has improved.

HDFC Bank
Table 7 Event Study of HDFC Bank
Time Period Days Mean Return Stock AAR CAR
-30 0.025 -0.0008 -0.02
-15 -0.0074 -0.0057 -0.085
Pre-Merger
-7 -0.0088 -0.0093 -0.065
-3 -0.028 -0.0178 -0.0533
3 -0.0056 -0.005 -0.015
7 -0.014 -0.0069 -0.048
Post-Merger
15 -0.01 -0.0061 -0.09
30 -0.092 -0.0032 -0.096

Table shows that during pre-merger period, return of stock was remain negative for 3, 7 & 15
days windows and be positive in 30 days window. In contrast to that, during post-merger the
return was remain negative for all days. AAR & CAR remain negative for both pre & post-
merger time period. Overall, after merger performance of stock has decreased.

5. Conclusion
Merger and Acquisition is 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 the impact
of M & A in the Indian banking sector and researcher took four banks for the study as sample
to examine that merger led to a profitable situation or not. For this a comparison between pre
and post-merger performance in terms of net profit margin, return on net worth, return on
long term fund and return on assets is undertaken. For IDBI Bank merger has improved
financial performance where as for other banks merger remain somewhat beneficial as par as
financial performance is concern. From stock return analysis it can be concluded that, for
IDBI Bank, Indian Overseas Bank and HDFC Bank merger remain negative as stock
performance has reduce after merger whereas for ICICI bank merger remain beneficial.
Overall impact of merger and acquisition is mix, i.e. positive as well as negative on the Indian
banking sector. So, it can be concluded that merger between the two banks can be beneficial
for Indian banks but detail analysis and forecasting is required before making merger deal.
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