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Impact of Merger and Acquisitions on Performance of Banking Sector in India

Introduction
One of the main elements of contemporary corporate restructuring is the boom in mergers and acquisitions (M&As). Mergers and Acquisition research results signify that target shareholders benefit from mergers. Researchers have attributed increases in equity value to some unmeasured source of real economic gains such as synergy.

It can be stated that a given merger is successful if other things equal, it increases the total current wealth of the owners of the acquiring firm. The efficient market hypothesis assumes that investors anticipation of future benefits will be reflected in the merging firms stock prices at the time of acquisition announcement. The post takeover accounting performance measures represent actual economic benefits generated by takeovers, whereas the takeover announcement returns represent the investors expectation of takeover benefits Banks also want to safeguard against risks, as well as exploit available opportunities indicated by existing and expected trends. M&As in the banking sector have been on the rise in the recent past, both globally and in India. In this backdrop of emerging global and Indian trends in the banking sector, this article illuminates the key issues surrounding M&As in this sector with the focus on India. It seeks to explain the motives behind some M&As that have occurred in India post-2000, analyse the benefits and costs to both parties involved and the consequences for the merged entity. A look at the future of the Indian banking sector, and some key recommendations for banks, follow from this analysis.

The present study looks into the mergers and acquisitions in the banking sector and aims to find out whether the banking sector performance has improved after mergers and acquisitions. The present research study has been aimed at reviewing the operating performance of firms going through mergers in Indian industry, in the post-reforms period.

Brief Review Literature


Herman and Lowenstein (1988) examined the post merger performance of a sample of hostile acquisitions between 1975 and 1983. The study by Paul M Healy and Krishna G Palepu (1992) examines the post merger cash flow performance of acquiring and target firms and explores the sources of merger induced changes in cash flow performance based on 50 largest US mergers between 1979 and mid 1984. The study finds that merged firms show significant improvements in asset productivity relative to their industries, leading to higher operating cash flow returns. These improvements were particularly strong for transactions involving firms in overlapping business. The study also found strong positive relation between post merger increases in operating cash flows and abnormal stock returns at merger announcements indicating that expectations of economic improvements explain a significant portion of the equity revaluation of the merging firms.
The study by Healy et al (1997) finds that strategic takeovers which are generally friendly transactions involving stock and firms in overlapping business are more profitable than financial deals which are usually hostile transactions involving cash and firms in unrelated business. The results of this study also showed that the acquiring companies did not generate any additional cash flows beyond those needed to recover the premium paid.

Cornett and Tehranian (1992) examine the post acquisition performance of large bank merger between 1982 and 1987. The results of their study indicate better performance for merged banks due to the improvements in ability to attract loans and deposits, in employee productivity and in profitable asset growth. Further, the study finds a significant correlation between announcements period abnormal return and the various performance measures

indicating that the market participants are able to identify in advance the improved performance associated with bank acquisitions.

Objectives
This paper examines the post merger operating performance of merged banks using a sample of 15 large mergers in the period 2001-2010. The pre and post acquisition operating cash flow performance of merging banks relative to matched banks are compared to determine whether operating performance has improved following mergers. The study examines pre-merger and post-merger financial ratios in order to study the impact of mergers on the operating performance of the acquiring bank. The main objective of the study is to analyse :
1. whether the earnings before tax to net worth (EBT/Net worth) and return on asset

(ROA) for the sample are decreased after M&A event;


2. whether the liquidity ratios do not show any important decrease in value for the post-

M&A period; and 3. the solvency analysis were observed to be decreased slightly in values.

Measures of Performance Identified


The proposed analysis identifies the following measures of post-merger operating performance:
1. Net profitability (NPM) 2. Return on equity (ROE)

3. Return on total asset (ROTA) 4. Return on capital employed (ROCE), and 5. Growth (GR).

Hypothesis
The study proposes to test the following sets of hypothesis which also consists of one null hypothesis: H1: Mergers in Banking Sector in the post-reform period have improved the operating performance of acquiring firms H0: Mergers in Banking Sector in the post-reform period have not improved the operating

performance of acquiring firms

H2: There is a positive relationship between mergers and asset productivity H0: There is no positive relationship between mergers and asset productivity H3: There is a strong positive relationship between post merger and equity revaluation of the merging banks H0: There is no strong positive relationship between post merger and equity revaluation of the merging banks H4: There is a significant correlation between announcements period abnormal return and the
various performance measures

H0: There is no significant correlation between announcements period abnormal return and the
various performance measures

H0: There is no relative change of the financial ratio from the M&A event. Tentative Variables Identified Operating Profit RONW Liquidity ratios Solvency ratios Return on investment (ROI) ROE ROCE EPS

Time Line
1. Methodology and Research Design 2. Data Collection 3. Data testing and analysis

1 Week 4 days 1 Week

8th August to 13th August 2011 16th August to 19th August 2011 21st august to 27th August 2011

(data validation, analysis and

Interpretations)
4. Conclusions

3 days

29th August to 31st August 2011