A

Dissertation Report

On

"A STUDY ON MERGER AND ACQUISITION IN INDIA

AND THEIR IMPACT ON BUSINESS OPERATION & SHAREHOLDER WEALTH"

Submitted in partial fulfilment of the requirements of

Bachelor of Business Administration (BBA)
Amity University, Gurgaon (Manesar)

Under the Guidance of: Submitted By:

Mr. KAPIL MADAN KANIKA LOHAN
Assistant Professor- Finance BBA (B&F)
A50057915006

Amity Business School

Gurgoan

SESSION 2015 – 2017

 CERTIFICATE

This is to certify that Project Report entitled A Study On Merger And Acquisition In
India And Their Impact On Business Operation & Shareholder Wealth which is
submitted by Kanika Lohan in partial fulfilment of the requirement for the award of degree
BBA in Department of School of Amity Business School from Amity University, is a record
of the candidate own work carried out by her under my supervision. The matter embodied
in this report is original and has not been submitted for the award of any other degree.

FACULTY GUIDE:

Mr. KAPIL MADAN

Amity University
 ACKNOWLEDGEMENT

This research is the final dissertation for BBA at the Amity University, during the term of
2018.
Firstly, I would like to thank Mr. Kapil Madan for his invaluable support, guidance and
availability throughout the course of this project.
Finally, I would like to express my love and appreciation to my parents. I also do not like
to miss the opportunity to acknowledge the contribution of all faculty members of the
department for their kind assistance and cooperation during the development of my
project.
Last but not the least, I acknowledge our friends for their contribution in the completion of
the project.

KANIKA
LOHAN
BBA: 6th Semester
A50057915006
 DECLARATION

I, KANIKA LOHAN Enrol No. A50057915006 BBA (6th Semester) of Amity Business
School, Amity University Gurgaon hereby declare that the Project Report entitled “A Study
On Merger And Acquisition In India And Their Impact On Business Operation &
Shareholder Wealth” is my original work and the same has not been submitted to any
other institute for the award of any other degree.

The feasible suggestion has been duly incorporated in consultation with supervisor.

Countersigned

Signature of the Supervisor Signature of Candidate

Forwarded by:

Director of the Institute

 CONTENTS

CERTIFICATE ……………………………………………………………………………….. PAGE - 2

ACKNOWLEDGEMENT ……………………………………………………………………. PAGE - 3
DECLARATION ……………………………………………………………………………… PAGE - 4
CONTENT ……………………………………………………………………………………. PAGE - 5
EXECUTIVE SUMMARY …………………………………………………………………… PAGE - 6
CHAPTER 1 (Introduction) ………………………………………………………………. PAGE - 7-14
CHAPTER 2 (Objective & research methodology) ………………………………… PAGE - 15-18
CHAPTER 3 (Literature Review) ………………………………………………………. PAGE - 19-32
CHAPTER 4 (Data Analysis) …………………………………………………………… PAGE - 33-45
CHAPTER 5 (Conclusion) ………………………………………………………………. PAGE - 46-
48
BIPLOGRAPHY ………………………………………………………………………….. PAGE - 49-50
 EXECUTIVE SUMMARY

This dissertation is a study on the objectives of mergers and acquisitions, as to why

organisations undertake the inorganic mode of expansion. However the main focus is
on studying the operating performance and shareholder value of acquiring companies
and comparing their performance before and after the merger. To conduct a uniform
research and arrive at an accurate conclusion, we restrict our research to only Indian
companies. To get a broader perspective on India, we study two sectors namely aviation
& banking.

We test a hypothesis that mergers improve operating performance of acquiring

companies. However on studying the cases on the 4 sectors, we conclude that as in
various previous studies, mergers do not improve financial performance at least in the
immediate short term.
CHAPTER-1
1.1 Introduction

In today’s market the main objective of the firm is to make profits and create
shareholder wealth. Growth can be achieved by introducing new products and
services or by expanding with its present operations on its existing products. Internal
growth can be achieved by introducing new products however external growth can be
achieved by entering into mergers and acquisitions. Mergers and acquisitions as an
external growth strategy has gained spurt because of increased deregulation,
privatisation, globalisation and liberalisation adopted by several countries the
world over. Mergers and acquisitions have become an important medium to expand
product portfolios, enter new markets, and acquire technology, gain access to research
and development and gain access to resources which would enable the company to
compete on a global scale. However there have been instances where mergers and
acquisitions are been entered into for non value maximising reasons i.e. to just build
the company’s profile and prestige .

Consolidation in the form of mergers and acquisitions has been witnessed around the
world in almost all the industries ranging from automobile, banking, aviation, oil and gas
to telecom. Some of the biggest mergers in automobile like Daimler-Benz and Chrysler,
airlines Air France and KLM and telecom SBC and AT&T are the ones which the
world can never forget. Lot of research and investigation has gone both in the field of
economics and strategic management on the kind of benefits which are derived out of
mergers to both the acquiring and target company, the customers and the society at
large. However one of the most widely used investigations has been into the shareholder
wealth maximisation out of mergers and acquisitions. The news of mergers is so
sensitive that it can immediately impact the price of the share months before the actual
merger takes place for both the involved companies. The information and news
which can flow can bring in positive or negative sentiments which would lead to a rise
or fall in share price and ultimately shareholders wealth.
1.2 Top Merger & Acquisition Deals In India

Tata Steel-Corus: Tata Steel is one of the biggest ever Indian’s steel company and the
Corus is Europe’s second largest steel company. In 2007, Tata Steel’s takeover
European steel major Corus for the price of $12.02 billion, making the Indian company,
the world’s fifth-largest steel producer. Tata Sponge iron, which was a low-cost steel
producer in the fast developing region of the world and Corus, which was a high-value
product manufacturer in the region of the world demanding value products. The
acquisition was intended to give Tata steel access to the European markets and to
achieve potential synergies in the areas of manufacturing, procurement, R&D, logistics,
and back office operations.

Vodafone-Hutchison Essar: Vodafone India Ltd. is the second largest mobile network
operator in India by subscriber base, after Airtel. Hutchison Essar Ltd (HEL) was one of
the leading mobile operators in India. In the year 2007, the world’s largest telecom
company in terms of revenue, Vodafone made a major foray into the Indian telecom
market by acquiring a 52 percent stake in Hutchison Essat Ltd, a deal with the Hong Kong
based Hutchison Telecommunication International Ltd. Vodafone main motive in going in
for the deal was its strategy of expanding into emerging and high growth markets like
India. Vodafone’s purchase of 52% stake in Hutch Essar for about $10 billion. Essar
group still holds 32% in the Joint venture.

Hindalco - Novelis: The Hindalco Novelis merger marks one of the biggest mergers in
the aluminum industry. Hindalco industries Ltd. is an aluminum manufacturing company
and is a subsidiary of the Aditya Birla Group and Novelis is the world leader in aluminum
rolling, producing an estimated 19percent of the world’s flat-rolled aluminum products.
The Hindalco Company entered into an agreement to acquire the Canadian company
Novelis for $6 billion, making the combined entity the world’s largest rolled-aluminum
Novelis operates as a subsidiary of Hindalco.
Ranbaxy - Daiichi Sankyo: Ranbaxy Laboratories Limited is an Indian multinational
pharmaceutical company that was incorporated in India in 1961 and Daiichi Sankyo is a
global pharmaceutical company, the second largest pharmaceutical company in Japan.
In 2008, Daiichi Sankyo Co. Ltd., signed an agreement to acquire the entire shareholders
of the promoters of Ranbaxy Laboratories Ltd, the largest pharmaceutical company in
India. Ranbaxy’s sale to Japan’s Daiichi at the price of $4.5 billion.

ONGC-Imperial Energy: Oil and Natural Gas Corporation Limited (ONGC), national oil
company of India. Imperial Energy Group is part of the India National Gas Company,
ONGC Videsh Ltd (OVL). Imperial Energy includes 5 independent enterprises operating
in the territory of Tomsk region, including 2 oil and gas producing enterprises. Oil and
Natural Gas Corp. Ltd (ONGC) took control of Imperial Energy UK Based firm operating
in Russia for the price of $1.9 billion in early 2009. This acquisition was the second largest
investment made by ONGC in Russia.

Mahindra & Mahindra- Schoneweiss: Mahindra & Mahindra Limited is an Indian

multinational automobile manufacturing corporation headquarters in Mumbai, India. It is
one of the largest vehicles manufacturer by production in India. Mahindra & Mahindra
acquired 90 percent of Schoneweiss, a leading company in the forging sector in Germany.
The deal took place in 2007, and consolidated Mahindra’s position in the global market.

Sterlite- Asarco: Sterlite is India’s largest non-ferrous metals and mining company with
interests and operations in aluminum, copper and zinc and lead. Sterlite has a world class
copper smelter and refinery operations in India. Asarco, formerly known as American
Smelting and Refining Company, is currently the third largest copper producer in the
United States of America. In the year 2009, Sterlite Industries, a part of the Vedanta
Group signed an agreement regarding the acquisition of copper mining company Asarco
for the price of $ 2.6 billion. The deal surpassed Tata’s $2.3 billion deal of acquiring Land
Rover and Jaguar. After the finalization of the deal Sterlite would become third largest
copper mining company in the world.

Tata Motors - Jaguar Land Rover: Tata Motors Limited (TELCO), is an Indian
multinational automotive manufacturing company headquartered in Mumbai, India and a
subsidiary of the Tata Group and the Jaguar Land Rover Automotive PLC is a British
multinational automotive company headquarters in Whitley, Coventry, United Kingdom,
and now a subsidiary of Indian automaker Tata Motors. Tata Motors acquisition of luxury
car maker Jaguar Land Rover was for the price of $2.3 billion. This could probably the
most ambitious deal after the Ranbaxy won. It certainly landed Tata Motors in a lot of
troubles.

Suzlon-Repower: Suzlon Energy Limited is a wind turbine supplier based in Pune, India
and RePower systems SE (now Senvion SE) is a German wind turbine company founded
in 2001, owned by Centerbridge Partners. Wind Energy premier Suzlon
Energy’s acquisition of RePower for $1.7 billion.

Ril-Rpl Merger: Reliance Industries Limited (RIL) is an Indian Conglomerate holding

company headquartered in Mumbai, India. Reliance is the most profitable company in
India, the second-largest publicly traded company in India by market capitalization.
Reliance Petroleum Limited was set up by Reliance Industries Limited (RIL), one of
India’s largest private sector companies based in Ahmedabad. Currently, Reliance
Industries taking over Reliance Petroleum Limited (RPL) for the price of 8500 crores
or $1.6 billion.

Ranbaxy- Sun Pharmaceuticals Sun Pharmaceutical Industries Limited, a multinational

pharmaceutical company headquartered in Mumbai, Maharashtra which manufactures
and sells pharmaceutical formulations and active pharmaceutical ingredients (APIs)
primarily in India and the United States bought the Ranbaxy Laboratories. The deal is
expected to be completed in December, 2014.Ranbaxy shareholders will get 4 shares of
Sun Pharma for every 5 Ranbaxy shares held by them. The deal, worth $4 billion, will
lead to a 16.4 dilution in the equity capital of Sun Pharma.

TCS- CM Tata Consultancy Services (TCS), the $13 billion flagship software unit of the
Tata Group, has announced a merger with the listed CMC with itself as part of the
group’s renewed efforts to consolidate its IT businesses under a single entity.At present,
CMC employs over 6,000 people and has annual revenues worth Rs 2,000 crores. The
deal was inked a few days back. TCS already held a 51% stake in CMC.

Yahoo- Bookpad The search engine giant, Yahoo, acquired the one year old
Bangalore based startup Bookpad for a little under $15 million, though the exact amount
has not been disclosed by either of the two parties concerned. While the deal value is
relatively small, this was the first acquisition made by Yahoo, and was much talked
about and hence finds a mention in our list. Bookpad was founded by three IIT
Guwahati pass outs and allows users to view, edit and annotate documents within a
website or an app.

Kotak Mahindra- ING Vysya In November 2014, Kotak Mahindra had announced it
was acquiring Bengaluru-headquartered ING Vysya in an all-stock deal. The deal
implies a price of Rs 790 for each ING Vysya share, based on the average closing price
of Kotak shares during the month to November 19, valuing the deal at about Rs 15,000
crore. That was a 16 per cent premium to a like measure of ING Vysya market price,
Kotak Bank had stated.

Centurion Bank of Punjab- HDFC During the year ended March 31, 2009, the
Reserve Bank of India accorded its consent to the Scheme of Amalgamation of
Centurion Bank of Punjab Limited (“CBoP”) with HDFC Bank Limited. Pursuant to the
order of amalgamation, the operations of both banks were merged with effect from May
23, 2008. On June 24, 2008 our Share Allotment Committee approved the allocation of
69,883,956 equity shares of Rs. 10/- each to the shareholders of CBoP pursuant to the
share swap ratio of one equity share of Rs. 10/- each of HDFC Bank Limited for every
twenty nine equity shares of Re. 1/- each held in CBoP by them as on the record date
viz. June 16, 2008. The amalgamation was accounted for as a business combination
under the purchase method of accounting.

1.3 Merger and Acquisition Strategy

1.3.1 Firm Diversification

Generally firms enter into mergers and acquisition with firms which normally are in the
same connected line of business than to diversify it and enter into businesses in which
the firm lacks experience . Companies which enter into mergers with diversified firms
can explore various advantages which are not available with undiversified firms.
Diversification is a process of operating into different industries and to diversify in such
a way which helps to influence the value of the firm and enhance shareholders value.
The reason for firms to opt for diversification as a strategy is so that the risk can be
spread across industries in which it operates. Secondly the capital markets would
welcome the multilevel activities which the firm carried on through the diversification
route which would result in growth and profitability of the firm. However danger lies in
mergers and acquisitions as it has to conduct its own test on strength and weaknesses
before exploring its wings in other industries and markets.

1.3.2 Cross-Border Merger and Acquisitions

Internationalisation is also one of the important strategies which firms are adopting in
today’s market to spread its operations in foreign countries. Cross border acquisitions
refer to acquisitions done by parent company with headquarters in one country and
merger in different countries. Domestic mergers are easier to execute because of the
familiarisation of both the involved companies, the laws, procedures and other such
factors however in case of international mergers there are various complexities
involved. The reason for firms opting for cross border mergers and acquisitions is
because it is a time consuming option to enter and set up operations in a foreign country.
A lot of time and cost is saved in building up its own infrastructure and supply chain.
Various studies have shown that cross border acquisitions have resulted into positive
gains for the shareholders. Eun et al (1996) conducted a study in US which shows
that cross border acquisitions have created immense wealth for acquiring shareholders.

1.4 Structure of the Dissertation

The structure of dissertation would be spread into various chapter :-

 Introduction

Objective & Research

Methodology

Literature Review

Data Analysis

Conclusion
CHAPTER-2
2.1 Aims and Objectives of the Research

2.1.1 Aim of the Research

 ‘The main aim of the research is to analyse the impact of mergers and acquisitions
on the operating performance of the firm’.

2.1.2 Objectives of the Research

 To critically analyse the impact of mergers and acquisitions on the operating

performance of the firm in India.

 To strategically evaluate the impact on shareholders wealth post merger and

acquisition.

2.2 Motivation of the Research

The researcher in her entire career has focused towards learning something about
finance. In this entire journey in studying about finance and the Banking, as a student I
have learnt about many companies merging and get acquired in India through the
medium of news channels and newspapers. In India, the media gives due attention to
mergers and acquisitions which increases the curiosity to know more about such
happenings. Over the years I have seen many mergers happening in India across
varied industries. Because of this reason mergers and acquisitions as a subject has
been very close to my heart. At this point in my career I am motivated to study about
mergers and an acquisition happening in India and the impact it has on the operating
performance and shareholders of the acquiring firm. I have noticed that not all
mergers have been successful and the shareholders wealth in most of the mergers
have also not been maximised. My main motivational factor for doing this research
comes here where I want to understand what impact does post merger and
acquisitions hold on the shareholders and operating performance of the firm.

2.3 DATA COLLECTION OF THE STUDY:

The present study mainly depends on the secondary data. The secondary data were
collected for four years during pre and post the merger. The required data were obtained
from several source -:

 Annual Reports

 Newspapers

 Magazines

 Journals

 Websites of company

 reports published in various newspapers at different times.

2.4 SAMPLE SIZE

The researcher would be drawing out sample size from 2 sectors in India. The t wo
sectors which would be involved in this research would be Aviation and Banking. Two
mergers per sector would be studied for ascertaining the impact on the operating
performance of the acquiring firm. The total sample companies which would be
involved for this research would be 8 i.e. 4 companies which would be acquiring
companies and another 4 companies which would be target companies. The sample
size is chosen simple based on the convenience and not my any means of statistical
analysis.

Within Aviation industry the researcher would be studying two known mergers in the
aviation industry in India i.e. the merger between Kingfisher Airlines and Air Deccan and
secondly the merger between Jet Airways and Air Sahara. In the banking industry the
researcher would study the merger between HDFC Bank (Housing Development and
Finance Corporation) and CBOP (Centurion Bank of Punjab) and the second merger
would be that of OBC (Oriental Bank of Commerce) and Global Trust Bank (GTB).

2.4 Tools used for Analysis

This study has analysed the growth of Operating Profits Margin, Gross Operating Profits
Margin, Net Profits Margin, Return On Capital Employed, P/E ratio, EPS basis of pre
and post merger. These above particulars are compared on yearly basis.
 CHAPTER-3

LITERATURE REVIEWS
3.1Definition:-

There are various strategic and financial objectives that influence mergers and
acquisitions. Two organisations with often different corporate personalities, cultures and
value systems are bought together . The terms ‘mergers’ and ‘acquisitions’ are often
used interchangeably. In lay parlance, both are viewed as the same. However,
academics have pointed out a few differences that help determine whether a particular
activity is a merger or an acquisition.

A particular activity is called a merger when corporations come together to combine

and share their resources to achieve common objectives. In a merger, both firms
combine to form a third entity and the owners of both the combining firms remain as
joint owners of the new entity .

An acquisition could be explained as event where a company takes a controlling

ownership interest in another firm, a legal subsidiary of another firm, or selected
assets of another firm. This may involve the purchase of another firm’s assets or stock .
Acquiring all the assets of the selling firm will avoid the potential problem of having
minority shareholders as opposed to acquisition of stock. However the costs involved
in transferring the assets are generally very high.

3.2 Types of Mergers & Acquisitions:-

Mergers are generally classified as either horizontal, vertical or conglomerate

mergers. These types differ in their characteristics and their effects on the corporate
performances.

3.2.1 Horizontal Mergers- Mergers of corporations in similar or related product lines

are termed as horizontal mergers. These mergers lead to elimination of a competitor,
leading to an increase in the market share of the acquirer and degree of concentration
of the industry . However there are strict laws and rules being enforced to ensure
that there is fair competition in the market and to limit concentration and misuse of
power by monopolies and oligopolies.

In addition to increasing the market power, horizontal mergers often tend to be used to
protect the dominance of an existing firm. Horizontal mergers also improve the
efficiency and economies of scale of the acquiring firm.

Recent examples of horizontal mergers in the international market are those of the
European airlines. The Lufthansa-Swiss International link up and the Air France-KLM
merger are cases of horizontal mergers.

3.2.2 Vertical Mergers- A vertical merger is the coming together of companies at

different stages or levels of the same product or service. Generally the main objective of
such mergers is to ensure the sources of supply .

In vertical mergers, the manufacturer and distributor form a partnership. This makes it
difficult for competing companies to survive due to the advantages of the merger. The
distributor need not pay additional costs to the supplier as they both are now part of
the same entity. Such increased synergies make the business extremely profitable
and drive out competition.

Purchase of automobile dealers by manufacturers like Ford and Vauxhall are

examples of vertical mergers. Ford’s acquisition of Hertz is an example of a vertical
merger. The acquisition of Flag Telecom by Indian telecom company Reliance
Communications Ltd was a very significant vertical merger.

3.2.3 Conglomerate Mergers- Conglomerate mergers occur between firms that are
unrelated by value chain or peer competition. Conglomerates are formed with the belief
that one central office would have the know-how or knowledge and expertise to
allocate capital and run the businesses better than how they would be run
independently .
The main motive behind the formation of a conglomerate is risk diversification as the
successful performers balance the badly performing subsidiaries of the group.

3.3 Merger and Acquisition Process

Merger and Acquisition Process is a great concern for all the companies who intend to go
for a merger or an acquisition. This is so because, the process of merger and acquisition
can heavily affect the benefits derived out of the merger or acquisition. So, the Merger
and Acquisition Process should be such that it would maximise the benefits of a merger
or acquisition deal.

The Merger and Acquisition Process can be divided in to some steps. The stepwise
implementation of any merger process ensures its profitability.

Step: 1 Preliminary assessment or business valuations In this first step of Merger and
Acquisition Process, the market value of the target company is assessed. In this process
of assessment not only the current financial performance of the company is examined but
also the estimated future market value is considered. The company which intends to
acquire the target firm, engages itself in an thorough analysis of the target firm’s business
history. The products of the firm, its’ capital requirement, organisational structure, brand
value everything are reviewed strictly.

Step: 2 Phase of proposal after complete analysis and review of the target firm’s market
performance, in the second step, the proposal for merger or acquisition is given.
Generally, this proposal is given through issuing an non-binding offer document.

Step: 3 Exit plan When a company decides to buy out the target firm and the target firm
agrees , then the latter involves in Exit Planning. The target firm plans the right time for
exit. It consider all the alternatives like Full Sale, Partial Sale and others. The firm also
does the tax planning and evaluates the options of reinvestment.
Step: 4 Structured Marketing After finalising the Exit Plan, the target firm involves in the
marketing process and tries to achieve highest selling price. In this step, the target firm
concentrates on structuring the business deal.

Step: 5 Origination of Purchase Agreement or Merger Agreement In this step, the

purchase agreement is made in case of an acquisition deal. In case of Merger also, the
final agreement papers are generated in this stage.

Step:6 Stage of Integration In this final stage, the two firms are integrated through
Merger or Acquisition. In this stage, it is ensured that the new joint company carries same
rules and regulations throughout the organisation.

3.4 Valuation Related To Mergers And Acquisitions

Valuation related to mergers and acquisitions employ several procedures, namely, the
income based procedure, the asset based procedure and the market based
procedure.There are many factors that determine whether a particular company ought to
be bought or not, such as the financial soundness of the subject company. Along with
that, the financial trends over the past couple of years and the trends manifested in the
macroeconomic indicators also need to be judged. Valuation related to mergers and
acquisitions usually follow these three methods: market based method, asset based
method and income based method. It may be felt that the market based method is the
most relevant, but all three methods are significant depending upon the situation
prevailing during the course of the mergers as well as acquisitions.

1.Market Based Method:

Valuation related to mergers and acquisitions estimated by the market based method,
compares various aspects of the target company with the same aspects of the other
companies in the market. These companies (not the target company) usually possess a
market value, which has been established previously. Other aspects that need to be
compared include book value and earnings, or total revenue. Once all the data is
collected, an extensive comparison is made to find the value of the target/subject
company.

2.Asset Based Method:

Valuation related to mergers and acquisitions employ this method when the subject or the
target company is a loss making company. Under such circumstances, the assets of the
loss making company are calculated. Along with this method, the market based method
and the income based method may also be employed. Valuations obtained from this
method may generate very small value; however it is more likely to generate the actual
picture of the assets of the target company.

3.Income Based Method:

Valuation related to mergers and acquisitions employing the income based method take
the net present value into consideration. The net present value of income, which is likely
to be in the future, is taken into account by the application of a mathematical formula.

3.5 Costs of Mergers and Acquisitions

Abstract: Costs of Mergers and Acquisitions are calculated in order to check to the
viability and profitability of any Merger or Acquisition deal. The different method adopted
for this cost calculation are the Replacement Cost Method, Discounted Cash Flow Method
and Comparative Ratio calculation method.

Costs of Mergers and Acquisitions are very much important as it determines the
viability of any Merger or Acquisition. Any company finalises a merger deal only after
calculating the cost of merger. In case of acquisition, when a company buys out another
firm, it calculates the costs in order to determine how beneficial will be the takeover.
1) Comparative Ratios:The following are two examples of the many comparative
metrics on which Acquirers may base their offers:

 P/E (Price-to-Earnings) Ratio: With the use of this ratio, an acquirer makes an
offer as a multiple of the Earnings the target company is producing. Looking at the
P/E for all the stocks within the same industry group will give the acquirer good
guidance for what the target’s P/E multiple should be.

2) E/V Sales (Enterprise – value – to – Sales Ratio or Price – to – Sales) Ratio:

With this ratio, the acquiring company makes an offer as a multiple of the
Revenues again. While being aware of the P/S ratio of other companies in the
industry.

3) Replacement Cost: Replacement Costs actually refers to the cost of replacing

the target firm. Generally, Target Company’s value is calculated by adding the
value of all the equipments, machinery and the costs of salary payments to the
employees. So, the company which wishes to acquire the target firm, offers price
accounting to this value. But, if the target firm does not agree on the price offered,
then the other firm can create a competitor firm with same costing. So, this idea of
cost calculation is referred as the calculation of Replacement Cost. But, it should
be mentioned here that, in case of the firms, where the main assets are not
equipments and machinery, but people and their skills, this type of cost calculation
is not possible.

4) A key valuation tool in M & A discounted Cash flow analysis determines a

company’s current values according to its estimated future cash flows. Forecasted
free cash flows (operating profit + Depreciation + amortisation of goodwill – capital
expenditures – cash taxes - Change in working capital) are discounted to a present
value using the Company’s weighted average costs of capital (WACC).
Synergy: The Premium for Potential Success For the most part, acquiring nearly
always pay a substantial premium on the stock market value of the companies they buy.
The justification for doing so nearly always boils to the 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 acquire 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 merger
synergy they expect can be achieved. The following equation offers a good way to think
about synergy and how to determine if a deal makes sense. The equation solves for the
minimum required synergy.
Pre-Merger Value of Both Firms + synergy = Pre Merger Stock Price — Post Merger
Number of Shares

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 merger often prevent the
expected benefits from being fully achieved

What to Look For

It’s hard for investors to know when a deal is worthwhile. The burden of a proof should
fall on the acquiring company. To find mergers that have a chance of success, investors
should start by looking for same of these criteria:

 A Reasonable Purchase Price: A premium of say, 10% above the market price
seems within the bounds of level headedness. A premium of 50 %, on the other hand,
requires synergy of stellar proportions for the deal to make sense. The investors
should stay away from companies that participate in such contents.
 Cash transaction: Companies that pay in cash tend to be more careful when
calculating bids, and valuations come closer to target. When stock is used as the
currency for acquisition, discipline can go by the way side.
 Sensible Appetite: An acquiring company should be targeting a company that is
smaller or in business that the acquiring company knows intimately. Synergy is hard
to create from companies in disparate business areas.
Mergers are awfully hard to get right, so investors should look for acquiring companies
with a healthy grasp of reality. 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 merger soften prevent the expected benefits from being fully achieved.

3.6 Impact of Mergers And Acquisition

Just as mergers and acquisitions may be fruitful in some cases, the impact of mergers
and acquisitions on various sects of the company may differ. In the article below, details
of how the shareholders, employees and the management people are affected has been
briefed. Mergers and acquisitions are aimed at improving profits and productivity of a
company. Simultaneously, the objective is also to reduce expenses of the firm. However,
mergers and acquisitions are not always successful. At times, the main goal for which the
process has taken place loses focus. The success of mergers, acquisitions or takeovers
is determined by a number of factors. Those mergers and acquisitions, which are resisted
not only affects the entire work force in that organization but also harm the credibility of
the company. In the process, in addition to deviating from the actual aim, psychological
impacts are also many. Studies have suggested that mergers and acquisitions affect the
senior executives, labour force and the shareholders.

Employees:
Impact Of Mergers And Acquisitions on workers or employees:
Aftermath of mergers and acquisitions impact the employees or the workers the most. It
is a well known fact that whenever there is a merger or an acquisition, there are bound to
be layoffs. In the event when a new resulting company is efficient business wise, it would
require less number of people to perform the same task. Under such circumstances, the
company would attempt to downsize the labour force. If the employees who have been
laid off possess sufficient skills, they may in fact benefit from the lay off and move on for
greener pastures. But it is usually seen that the employees those who are laid off would
not have played a significant role under the new organisational set up. This accounts for
their removal from the new organization set up. These workers in turn would look for re
employment and may have to be satisfied with a much lesser pay package than the
previous one. Even though this may not lead to drastic unemployment levels,
nevertheless, the workers will have to compromise for the same. If not drastically, the mild
undulations created in the local economy cannot be ignored fully.

Management at the top:

Impact of mergers and acquisitions on top level management:

Impact of mergers and acquisitions on top level management may actually involve a
“clash of the egos”. There might be variations in the cultures of the two organizations.
Under the new set up the manager may be asked to implement such policies or strategies,
which may not be quite approved by him. When such a situation arises, the main focus
of the organization gets diverted and executives become busy either settling matters
among themselves or moving on. If however, the manager is well equipped with a degree
or has sufficient qualification, the migration to another company may not be troublesome
at all.

Shareholders:
Shareholders of the acquired firm:

The shareholders of the acquired company benefit the most. The reason being, it is seen
in majority of the cases that the acquiring company usually pays a little excess than it
what should. Unless a man lives in a house he has recently bought, he will not be able to
know its drawbacks. So that the shareholders forgo their shares, the company has to offer
an amount more than the actual price, which is prevailing in the market. Buying a
company at a higher price can actually prove to be beneficial for the local economy.

Shareholders of the acquiring firm:

They are most affected. If we measure the benefits enjoyed by the shareholders of the
acquired company in degrees, the degree to which they were benefited, by the same
degree, these shareholders are harmed. This can be attributed to debt load, which
accompanies an acquisition.

3.7 Pros and Cons of merger & acquisitions

A look at the pros and cons of mergers. Are mergers in the public interest or are mergers
just beneficial for top executives and shareholders? When looking at mergers it is
important to look at the subject on a case by case basis as each merger has a different
possible benefits and costs. These are the most likely advantages and disadvantages of
a merger.

Pros:

1. Network Economies. In some industries, firms need to provide a national network.

This means there are very significant economies of scale. A national network may imply
the most efficient number of firms in the industry is one. For example, when T-Mobile
merged with Orange in the UK, they justified the merger on the grounds that:

“The ambition is to combine both the Orange and T-Mobile networks, cut out duplication,
and create a single super-network. For customers it will mean bigger network and better
coverage, while reducing the number of stations and sites – which is good for cost
reduction as well as being good for the environment.”

2. Research and development. In some industries, it is important to invest in research

and development to discover new products / technology. A merger enables the firm to be
more profitable and have greater funds for research and development. This is important
in industries such as drug research.

3. Other Economies of Scale. The main advantage of mergers is all the potential
economies of scale that can arise. In a horizontal merger, this could be quite extensive,
especially if there are high fixed costs in the industry. Note: if the merger was a merger
or conglomerate merger, the scope for economies of scale would be lower.

4. Avoid Duplication. In some industries it makes sense to have a merger to avoid

duplication. For example two bus companies may be competing over the same stretch of
roads. Consumers could benefit from a single firm with lower costs. Avoiding duplication
would have environmental benefits and help reduce congestion.

5. Regulation of Monopoly. Even if a firm gains monopoly power from a merger, it

doesn’t have to lead to higher prices if it is sufficiently regulated by the government. For
example, in some industries the government have price controls to limit price increases.
That enables firms to benefit from economies of scale, but consumers don’t face
monopoly prices.

4. Greater Efficiency. Redundancies can be merited if they can be employed more

efficiently.
5. Protect an industry from closing. Mergers may be beneficial in a declining industry
where firms are struggling to stay afloat. For example, the UK government allowed a
merger between Lloyds TSB and HBOS when the banking industry was in crisis.

6. Diversification. In a conglomerate merger two firms in different industries merge. Here

the benefit could be sharing knowledge which might be applicable to the different industry.
For example, AOL and Time-Warner merger hoped to gain benefit from both new internet
industry and old media firm.

7. International Competition. Mergers can help firms deal with the threat of
multinationals and compete on an international scale.

8. Mergers may allow greater investment in R&D This is because the new firm will
have more profit which can be used to finance risky investment. This can lead to a better
quality of goods for consumers. This is important for industries such as pharmaceuticals
which require a lot of investment.

Cons:

1. Higher Prices. A merger can reduce competition and give the new firm monopoly
power. With less competition and greater market share, the new firm can usually increase
prices for consumers. For example, there is opposition to the merger between British
Airways (parent group IAG) and BMI. This merger would give British Airways an even
higher percentage of flights leaving Heathrow and therefore much scope for setting higher
prices. Richard Branson (of Virgin) states:

“This takeover would take British flying back to the dark ages. BA has a track record of
dominating routes, forcing less flying and higher prices. This move is clearly about
knocking out the competition. The regulators cannot allow British Airways to sew up UK
flying and squeeze the life out of the travelling public. It is vital that regulatory authorities,
in the UK as well as in Europe, give this merger the fullest possible scrutiny and ensure
it is stopped.
2. Less Choice. A merger can lead to less choice for consumers.

3. Job Losses. A merger can lead to job losses. This is a particular cause for concern if
it is an aggressive takeover by an ‘asset stripping’ company – A firm which seeks to merge
and get rid of under-performing sectors of the target firm.

4. Diseconomies of Scale. The new firm may experience dis-economies of scale from
the increased size. After a merger, the new bigger firm may lack the same degree of
control and struggle to motivate workers. If workers feel they are just part of a big
multinational they may be less motivated to try hard.

Why M & A s Can Fail

Pitfalls of mergers are the reasons for failures and the pitfalls of mergers are:

1. Poor Strategic Fit.

2. Cultural and Social Differences.
3. Incomplete and Inadequate due diligence.
4. Poorly Managed Integration.
5. Paying too much.
6. Limited focus.
7. Failure to get the figures audited.
8. Failure to make immediate control.
9. Failure to set the place for integration.
10. Incompatibility of partners.
11. Failures to adopt the product to local taste.
12. Irrelevant core competence.
 Chapter- 4

Data Findings and Analysis

4.1 Aviation Industry – Overview

The Indian airline industry underwent liberalisation in the year 1990 when private
sector companies were allowed to start its business. Many companies like Damania,
East-West, Air Sahara and NEPC entered the market but after nearly a decade none of
them survived. However in today’s scenario there have been number of private airline
companies operating in this sector with players like Air Deccan, Kingfisher, Jet Air, Go
Air, Spice Jet and many other players. The Indian aviation has only 2 state
controlled airline companies i.e. Air India and Indian Airlines. Sahara Airlines is one of
the oldest private sector airline companies in India which commenced business in 1991
and then was rebranded as Air Sahara in 2000. Similarly the state owned domestic
airline company Indian Airlines was rebranded as ‘Indian’ under its plan to revamp the
position in the airline industry. Later the government announced the merger of Air
India and Indian which would build an airline giant in India. Jet Airways is one
private player which operated both on domestic and international routes in India and
holds a major share in the aviation industry in India. Spice Jet, Go Air and Air Deccan
are the low cost no frill airline companies in India. Kingfisher Airlines is the closes
competitor to private players and it operates in both domestic and international routes
.

Strategic alliance and mergers have been one of the buzz words in the airline industry.
According to Oum, Park and Zhang (2000) for the airline industry “strategic
alliances refer to a long term commitment and partnership with two or more
companies who attempt to gain competitive advantage collectively by fighting their
competitors by sharing resources, cutting costs and improving profitability”
 5.4 1.5
18.6
12.4 Air India
Jet
Kingfisher
Indigo
13.6 Go Air
Spice jet
27.7 Paramount

20.7

The following is the market share of different airline companies in India in the year
2008.

4.1.1 Kingfisher Airlines and Air Deccan Merger

One of the significant moves in the airline industry was the merger between Air
Deccan the first low cost carrier in India and Kingfisher Airline. Air Deccan has
created waves in the airline industry by offering people the lowest cost flying
experience and shifted rail travellers to airline travellers.

However Air Deccan and Kingfisher Airlines have now merged and known as
Kingfisher Aviation. The merger started when Kingfisher Airlines owner Dr. Vijay Mallya
bought 26% controlling stake in Air Deccan (Indian Express, 2007).

Synergy

The combined entity now has a fleet size of 71 aircrafts covering 70 destinations and
more than 550 flights in a single day. The merger would benefit the entity by offering
operational synergies like inventory management, maintenance, engineering and
overhaul which would reduce the overall cost by 4% to 5% i.e. around Rs 300 million
(Financial Express, 2007). Further the company would be able to rationalise its
routes in a better way by changing its fair structure which will attract more passengers
(Business Standard, 2007). The merged entity would also have clear business model
with reaching wider domestic base with Air Deccan capabilities and Kingfisher
Airlines would reach international destinations.

Financial Analysis

The merger between Kingfisher Airlines and Air Deccan took place in the year 2006.
Hence below analysis has been done two years prior to the merger i.e. during 2004-05
and 2005-06 and two years after the merger i.e. 2007-08 and 2008-09 respectively.

KINGFISHER AIRLINES 2004- 2005- 2006- 2007- 2008-

Operating Profit Margin 05
10.2% 06
-1.3% 07
-21.9% 08
-51.5% 09
-26.5%

Gross Operating Margin -4.0% -24.6% -21.0% -47.8% -33.9%

Net Profit Margin -6.4% -27.5% -23.6% -13.1% -30.5%

Return on Capital 15.4% -9.8% 7.5% -19.6% -24.4%

Employed
Return on Net Worth - - - - -
143.0% 347.5% 287.4% 129.8% 809.0%
Debt-Equity Ratio 20.8 4.6 6.3 6.4 4.7

EPS -63.0 -347.5 -31.0 -13.9 -118.5

PE -1.9 -0.3 -4.6 -9.6 -0.4

The results for Kingfisher Airlines shareholders have been very similar to the results of
Jet Airways. Kingfisher airlines has seen operating margins fall to a negative 26.5%
and gross operating margin fall to a negative 33.9. Similarly the net profit margin and
return on capital employed has also be negative for the firm post merger basis. The EPS
for Kingfisher Airlines has fallen quite sharply since the number of shareholders has
increased but with that the profit after tax has not increased an instead has fallen.
Shareholders wealth of Kingfisher airlines has deteriorated significantly post merger
with Air Deccan. The P/E ratio of the firm also states that the stock has been
undervalued over the years and does not look that an immediate upward movement in
share price or EPS basis which the P/E will go up.

4.1.2 Jet Airways and Air Sahara merger

Jet Airways started its business operations in 1993 and is now the largest company in
the airline industry in terms of market share. The company has a fleet size of 88
aircraft and flies to over 60 destinations worldwide with over 360 flights scheduled for
a single day.

Synergy

Fleet Jet Air Merged

Airway Sahara Entity
s
B737- - 2 2
300
B737- 6 3 9
400
B737- 13 7 20
700
B737- 28 7 35
800
B737- 2 2
900
CRJ-200 7 7

ATR-72 8 - 8

A330- 2 - 2
200
A340- 3 - 3
300
Total 62 26 88

The major efficiency and synergy comes because both the companies use B737 as
their domestic fleet efficiencies. Air Sahara has B737s which are more than 10 years
old and CRJ-200 which were taken on lease for higher rentals. Jet Airways will have to
rationalise the cost aspect of operating and maintaining the fleet size. Since Jet
Airways does not have a proper mix of aircrafts this would lead to higher maintenance
cost for the merged entity (Centre for Asia Pacific Aviation, 2007).

Financial Analysis

The acquisition between Jet Airways and Air Sahara took place in the year 2006.
Hence below analysis has been done two years prior to the merger i.e. during 2004-05
and 2005-06 and two years after the merger i.e. 2007-08 and 2008-09 respectively.

JET AIRWAYS 2004- 2005- 2006- 2007- 2008-09

Operating Profit Margin 05
33.2% 06
24.8% 07
14.7% 08
8.6% 5.2%

Gross Operating Margin 24.0% 19.8% 6.6% 4.1% -6.4%

Net Profit Margin 9.0% 7.9% 0.4% -2.9% -3.5%

Return on
Capital
31.6% 21.2% 13.8% 6.3% 4.0%
Employed
Return on Net Worth 22.4% 21.1% 1.3% -13.7% -31.1%

Debt-Equity Ratio 1.7 2.3 2.9 6.5 12.6

EPS 45.4 52.4 3.2 -29.3 -46.6

PE 27.6 18.5 195.8 -17.7 -3.3

On carefully looking at the above figures it can be seen that the operating margins of
Jet Airways were very strong in the year 2004-05. Later the operating margins started
slowing down in the coming years. Post merger the operating margins of Jet Airways
had gone down to 5.2% from an earlier five year high of 33.2%. Gross Profit margin was
at a very strong 24% in 2004-05 however post merger it has moved into a negative
territory of (6.4%). Return on capital employed proves the efficiency with which the
business is maintained. Looking at the post merger results the shareholders who act as
owners would surely be disappointed with only 4% return compared to 31.6% in 2004-
05. Similarly the Return on Net worth for the company has also gone negative and post
merger it has not added any significant value for the shareholders. The debt equity ratio
of the firm at current level is around 10 times higher than in the year 2004-05 which
shows the level of leverage which the company wants to drive on. The EPS which is
the crude factor for any shareholder has seen a dip of -46.6%. Looking at the P/E ratio
clearly shows that the stock has been highly undervalued and shareholders wealth has
been deteriorated.

Overall it can be seen that Jet Airways has been able to post positive operating
margins post merger however Kingfisher Airlines have failed to do that. Kingfisher
Airlines also has a negative return on capital employed compared to Jet Airways. But on
the other parameters like Earnings per share, Return on Net Worth and Net Profit Margin
have been negative for both the companies. It can thus be inferred that mergers
and acquisitions have not created enough shareholder wealth post merger.
4.2 Banking Industry - Overview
Since 1991 when Indian banking sector went under liberalisation the industry has been
sound, strong and well regulated. On comparison with any other banking sector in the
world the current position of Indian banking sector is robust. The Indian banking system
consists of 26 public sector banks, 20 private sector banks, 43 foreign banks, 56 regional
rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in
addition to cooperative credit institutions.
As on September 2016, the outstanding credit to NBFCs stood at US$ 55.27 billion,
growing at 25 per cent on year-on-year basis. Bank credit to non-banking finance
companies has touched the highest in three years. The largest bank in India is State Bank
of India (SBI).

4.2.1 HDFC Bank and Centurion Bank of Punjab Merger

HDFC Bank (Housing Development Finance Corporation) was established in the year
1994 immediately when the government of Indian liberalised the sector. At present the
bank has a network of 4,729 branches across 2,669 cities and over 12,259 ATMs in
India (www.hdfcbank.com)

HDFC Bank and Centurion Bank of Punjab underwent a merger in early 2008. The
share swap ratio of the merger was 1:29 i.e. for every 29 share of Centurion Bank of
Punjab shareholders would get 1 share of HDFC Bank (Business Standard, 2008).

According to Deepak Parekh (Chairman of HDFC), “It is a win-win situation for all the
stakeholders, shareholders, employees and customers of the bank” (Financial
Express, 2008).

Synergy

The combined bank would have a branch network of 1,148 branches since HDFC
Bank while entering in the merger has 754 branches and Centurion Bank of Punjab
had 394 branches. ICICI Bank which is the closes competitor to HDFC Bank had a
branch network of 955 branches. This makes HDFC Bank the largest private sector
bank in the country in terms of number of branches.

Secondly the merger would give HDFC Bank have a combined asset size of over
Rs1,10,000 crores. Similarly the deposits of HDFC Bank would go up to Rs.1,20,000
crores and advance would be up to Rs.85,000 crores. This would collectively make
the balance sheet size of HDFC Bank grow to Rs.1,50,000 crores

According to HDFC, both banks complement each other in the best way since both
the banks have tremendous experience in both operating and in merger delivery.
HDFC Bank has previous experience of acquiring Times Bank whereas Centurion Bank
of Punjab had earlier experience of acquiring Lord Krishna Bank and merger of
Centurion Bank with Bank of Punjab. The only challenge f o r t h e b a n k saw in the
merger was handling of stress accounts and non performing assets in Centurion Bank
of Punjab’s portfolio. This would add pressure on HDFC Bank to do excess
provisioning for NPAs which can hit the margins to a certain extent. However the
effect would be mitigated since the merger brings branch network, asset size and
cost savings for HDFC Bank. Overall there is geographical synergy which adds
significant branch network to the bank ad every branch added adds lot of CASA growth
for the bank. (CASA means Current Account and Savings Account which is a low cost
deposit for the bank).

Positives from the merger are that HDFC Bank would have increased footprint and
high metro presence. Secondly HDFC Bank would have a better cost to income ratio
because of better cost efficiencies and cost management and lastly both the banks
have a high profile and experienced top management who have headed foreign banks
like Citigroup before.

Details of HDFC Bank Centurion Bank

Branch of
Network Punjab
Metro 287 127

Non Metro 467 267

 Non Metro Proportion 62% 68%

Metro Proportion 38% 32%

Financial Analysis

The merger between HDFC Bank and Centurion Bank of Punjab took place in the
year 2008. Hence below analysis has been done two years prior to the merger i.e.
during 2005-06 and 2006-07 and one year after the merger i.e. 2008-09.

HDFC Bank 2004- 2005-06 2006- 2007- 2008-09

Operating Profit 05
41.7% 36.8% 07
40.0% 08
37.6% 24.1%
Margin
Gross Operating 30.8% 26.3% 30.5% 28.6% 18.0%
Margin
Net Profit Margin 27.6% 24.9% 20.1% 15.7% 13.7%

Return on
Capital
2.6% 2.3% 3.1% 2.9% 2.1%
Employed
Return on Net Worth 18.9% 21.1% 21.5% 13.8% 14.9%

Debt-Equity Ratio 9.21 11.39 11.05 9.15 9.67

EPS 27.63 35.65 43.34 44.92 52.82

PE 19.26 21.60 21.92 31.19 20.82

HDFC Bank is one of the strongest banks in the Indian banking sector with a high
capital adequacy ratio and good year on year results. However on testing the pre
merger and post merger numbers it can be clearly seen that compared to pre merger
ratio the post merger ratios have taken a beating on all parameters like operating
margin, gross profit margin, net profit margin, return on capital employed and return on
net worth. The only significant positive factor for the shareholders has been that the
EPS has risen sharply thanks to a robust profit made by the company and a good
integration process. The P/E ratio of the company has been at significant levels which is
very similar to the pre merger levels. Overall HDFC Bank shareholders would not be
happy on other parameters however the firm has been able to generate god earning per
share even post merger and the valuation of the company is also stable at 20 times its
earnings.

4.2.2 Oriental Bank of Commerce and Global Trust Bank Merger

Oriental Bank of Commerce is a public sector bank which was established in the year
1943. Immediately after nationalisation in 1980s the bank started gaining momentum
and it increases its branch network across India. At present it has a branch network of
1,273 branches and 666 ATMs (www.obcindia.co.in)

Synergy

The synergy for Oriental Bank of Commerce comes from the good network of
branches which Global Trust Bank earlier had. Secondly the merger offers operational
convenience to Oriental Bank of Commerce since both the banks use the same
operational software and technology based applications. Thirdly Oriental Bank of
Commerce benefitted from the savings from Corporate Tax during the year 2008 and
2009 since it had taken over huge NPAs from the erstwhile Global Trust Bank.
Oriental Bank of Commerce also expects to recover close to 30% from the existing
NPAs which will add to its books. GTB in the year 2006 made a profit of 150 crores
which was added to the books of Oriental Bank of Commerce. However during 2007
GTB made a loss of 812 crores which got accumulated on to the balance sheet and
accounting statements of Oriental Bank of Commerce (Domain, 2004a; 2004b).

Cost synergies comes from the fact that OBC directly got access to 100 branches and
275 ATMs of GTB which would otherwise have cost Rs 2 billion for Oriental Bank of
Commerce to open in the near future. Oriental Bank of Commerce would also get
access to 1 million customers of Global Trust Bank. Global Trust Bank with its
necessary infrastructure, strong client base and pan Indian network of branches would
offer good benefits to Oriental Bank of Commerce (Domain, 2004a, 2004b).

Financial Analysis

The merger between Oriental Bank of Commerce and Global Trust Bank took place in
the year 2005. Hence below analysis has been done two years prior to the merger i.e.
during 2002-03 and 2003-04 and two years after the merger i.e. 2005-06 and 2006-
07.

2 2 2 2 2
Oriental Bank of Commerce 0 0 0 0 0
Operating Profit Margin 35.2%
0 46.4%
0 66.5%
0 71.0%
0 76.0%
0
2- 3- 4- 5- 6-
Gross Operating Margin 38.4% 50.2% 34.5% 28.9% 25.1%
0 0 0 0 0
3 4 5 6 7
Net Profit Margin 13.9% 20.8% 20.3% 13.5% 11.2%

Return on Capital Employed 3.4% 3.7% 1.9% 1.7% 1.5%

Return on Net Worth 21.7% 25.6% 21.8% 10.8% 10.4%

Debt-Equity Ratio 14.50 13.59 14.60 9.88 11.54

EPS 23.74 35.64 37.72 22.24 23.19

PE 2.78 8.16 8.14 10.57 7.98

Oriental Bank of Commerce is a public sector bank in India and is posting favourable
numbers year on year. Post merger the operating profit margins of the company has
raised sharply from 35% in 2002-03 to 76% in 2006-07. However the gross profit
margin of the company has seen a dip since 2003-04. The return on capital employed
and return on net worth for the shareholders has also dropped sharply, however it is
still in the positive zone. The debt equity ratio of the company has been at an average
of close to 12.5% over the five year period. Similarly the EPS of the firm has been
maintained at Rs 23 pre and post merger. The valuation of the company measured by

its P/E ratio has moved to close to 8 times its earnings. However the stock still
remains undervalued compared to its other peers. Overall the shareholders have not
gained significantly out of the merger and the pre merger and post merger
performance has been maintained at the similar level.
Chapter - 5
Conclusion
Mergers have been the prime reason by which companies around the world have been
growing. The inorganic route has been adopted by companies forced by immense
competition, need to enter new markets, saturation in domestic markets, thrust to
grow big and maximise profits for shareholders. In the changing market scenario it
has become very important for firms to maximise wealth for shareholders. Many
researchers have shown significant findings out of their research. The Hubris
hypothesis in fact states that the announcement of a merger or acquisition does not
lead to return for shareholders since the acquisition would only lead to transfer of the
wealth from the bidding shareholders to the target shareholders.

This research has been carried out in t w o sectors namely aviation & banking.

Within the airline space it was seen that the acquiring firms i.e. Jet Airways and
Kingfisher Airlines were not able to create significant wealth for its shareholders. Jet
Airways Operating Margin started dipping from a high of 33% pre merger in 2004-05 to
5.2% in 2008-09. Similarly gross operating margin, net profit margin, return on net worth,
and EPS started going down significantly. This was also accompanies by a high debt
to equity ratio for Jet Airways. A similar post performance analysis was also seen
for Kingfisher Airlines who deteriorated the shareholders wealth considerably. All
the financial parameters were going down post merger.

The banking sector in India is said to be one of the strongest sector at present in the
global scenario. Both the acquiring firms i.e. HDFC Bank and Oriental Bank of
Commerce saw positive financial ratios post acquisition however when compared to the
pre merger figures it had gone down significantly. Return on net Worth for both the
firms went down post merger. However only the EPS remained positive for both the
companies and quite stagnant compared to pre merger. Overall the post merger
performance was not able to create enough wealth for shareholders because of dip in
net profit margins and net worth.
Mergers and Acquisitions are entered into for creating a win-win situation for all the
concerned stakeholders of the company. The overall research has discussed the way
mergers and acquisitions are created and their analysis of the pre and post financial
performance has been studied. The study has shown that in the Indian context mergers
and acquisitions haven’t been able to create enough shareholder wealth post
acquisition for the combined entity. However the research has also examined factors
beyond financial analysis which shows that there is a lot of synergy in the form of
geographical spread, increased customer space, growth in size and scale, access to
new markets, cutting costs in operational terms and reduction in areas where overlap
was witnessed.

To conclude mergers and acquisitions do not create immediate shareholder wealth and
margins for the acquiring firm in the immediate short term. However from a longer
perspective a consolidated company would be able to better cope up with competition,
increased pressure to cut costs and grow in the changing business environment.
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Financial management - I M PANDEY