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The main objective of this paper is to analyze the level, structure and effects of FDI in the form of M&A into the banking sector in Bosnia and Herzegovina. The goal was to show positive effects of growing levels of M&A in banking, but at the same time gaps and problems that B&H still faces. We also compare B&H with other countries in the region to determine whether there are significant differences, lessons or consequences of the large share of foreign owned banks for B&H.

The results indicate that effects of increasing M&A (FDI) in the banking sector in B&H and the region have been positive. But, the price paid for this has been increased concentration, leading to a region's dependence on a decreasing number of foreign banks, with a possible increase in systemic risk and monopolistic behavior. Still, the lessons are clear: reforms and opening up of domestic markets have spurred growth and development of the banking sector. However, there is a need for countries to insist on good corporate behavior, as well as careful monitoring of potential anti-competitive behavior.

M& A, as the one of two basic forms of FDI, can be implemented in the form of an in-market or a crossmarket transaction. In-market transactions have been most intense in the commercial banking sector, notably retail banking. Extensive banking overcapacity in some countries has led to substantial consolidation that has often involved M&A activity. Many of banking M&A are cross-border activities. During 1985-2002, most of M&A transactions in financial services sector were in-market (that is, within banking, insurance, securities, and so forth), with firms acquiring or merging with similar firms, rather than cross-market (between generic activities).

Mergers and acquisitions in banking sector have become familiar in the majority of all the countries in the world. A large number of international and domestic banks all over the world are engaged in merger and acquisition activities. One of the principal objectives behind the mergers and acquisitions in the banking sector is to reap the benefits of economies of scale. With the help of mergers and acquisitions in the banking sector, the banks can achieve significant growth in their operations and minimize their expenses to a considerable extent.

Another important advantage behind this kind of merger is that in this process, competition is reduced because merger eliminates competitors from the banking industry.

METHODOLOGY The performance effects of mergers can be estimated in several ways, but two of these have received prominence with dozens of applications having been published over the last two decades: studies which try to assess merger performance indirectly by analysing the reactions of the stock market to merger announcements, so-called event studies or ex-ante studies, and studies that pursue a direct assessment by analysing the effects of mergers on real firm performance in as far as this can be gauged from internally generated accounting data, so-called ex-post studies. In most of the studies the underlying assumption is that improved stock performance (ex-ante studies) or improved profitability (ex-post studies) are best indicators of true performance increases, i.e. increases in productive (or internal) efficiency (say, productivity) and/or increases in dynamic efficiency (i.e. process and product innovation), in short, increases in the creation of economic wealth. Although this latter criterion is the only one that makes sense when assessing mergers from a social point of view, it is evident that mergers and acquisitions (M&As) may well be beneficial to certain stakeholders (shareholders, managers, employees) and thus welcomed by them even if no economic wealth has been (or will be) created.

RESEARCH OBJECTIVES To study the trends in the inflow of foreign direct investment To study the share of top investing countries of FDI during the period 2003-2006. The sector attracting highest FDI equity inflow To study risk involved in mergers & aquisition Country wise technology transfer Country wise technology transfer approvals Sector wise technology transfer approvals To study the causes and reasons for low FDI inflow in the country To study the determinants for attracting the FDI To study and understand mechanism of approvals of FDI by RBI and FIPB To study the FDI policy in brief. To study benefits of mergers & aquisition

Research problem To analyze the effect of going global through merger and acquisition on investors and traders long term and short term earnings respectively. Impact on companies financials after acquisition or after being acquired. To find out enterprise value of the company by comparing it with the peer group and analyzing the value of the firm. To analyze the difference between prospected and actual returns in terms of % daily cumulative abnormal return of pre acquisition and post acquisition.

When we use the term "merger", we are referring to the merging of two companies where one new company will continue to exist.The term "acquisition" refers to the acquisition of assets by one company from another company. In an acquisition, both companies may continue to exist. However, throughout this course we will loosely refer to mergers and acquisitions ( M & A ) as a business transaction where one company acquires another company. The acquiring company will remain in business and the acquired company (which we will sometimes call the Target Company) will be integrated into the acquiring company and thus, the acquired company ceases to exist after the merger. Mergers and acquisitions are strategic methods to grow business, migrate into other channels of business, and are frequently intended to protect profitability while reducing operating costs. Quite often the approach assumes that revenue will be sustained or enhanced while operational support is simultaneously consolidated and reduced to minimize costs. The intent to protect and boost profit by maintaining revenue and slashing consolidated operational costs is a great theory, but what does it really take to put this into practice. Mergers and acquisitions are often planned as strategic market expansion during periods of stable economic conditions, and frequently the result of rushed response to slash operational and support costs during the challenging economic periods. Regardless of the catalysts, there are some basic principles to govern the relative success of such a venture. On a large scale, mergers and acquisitions occur when whole organizations combine, collide, or are absorbed. On a smaller scale, departments and groups of individuals within

organizations are also being merged, acquired, and absorbed. Big or small, the basic rules for transition remain the same. As M&A research has developed largely along disciplinary lines, finance scholars have primarily focused on the issue of whether acquisitions are wealth creating or wealth reducing events for shareholders. The weight of evidence shows that while takeovers unambiguously bring positive short-term returns for shareholders of target firms, the long-run benefit to investors in acquiring firms is more questionable. DATA COLLECTION

The analysis is putely based on secondary sources: Business Magazines Financial Books

LITERATURE REVIEW Merger is a combination of two or more companies into one company. In India, mergers are called as amalgamations, in legal parlance. The acquiring company, (also referred to as the amalgamated company or the merged company) acquires the assets and liabilities of the target company (or amalgamating company). Typically, shareholders of the amalgamating company get shares of the amalgamated company in exchange for their existing shares in the target company. Merger may involve absorption or consolidation

Acquisition may be defined as an act of acquiring effective control by one corporate over the assets or management of the other corporate without any combination of both of them. For example recently oracle major software firm has agreed to acquire a majority stake in Indian banking software company I-flex Solutions. It can be characterized in terms of the following: a) The corporate remain independent. b) They have a separate legal entity. Motives for M&A The value of taking over an existing entity for the acquirer could be expressed as the present value of the target's earnings and the discounted growth opportunities the target offers. (Walter, 2004; 62-79) As long as the expected rate of return on those growth opportuniopportunities is greater than the cost of capital, the merged entity creates value and the merger should be considered. From the perspective of the shareholders, M&A transaction

must contribute to maximizing the franchise value of the combined firm. This means maximizing the risk-adjusted present value of expected net future returns. Consequently, the main motives for M&A are (Walter, 2004; 62-79): Market extension A firm wants to expand geo graphically into markets in which it has traditionally been absent or weak, or it wants to broaden its product range because it sees attractive opportunities that may complement its existing activities. Done successfully, such growth through acquisition should be reflected in both the top and bottom lines and reflected in both market share and profitability. (Walter, 2004; 62). Economies of scale Whether economies of scale exist in financial services has been at the heart of strategic and regulatory discussions about optimum firm size in the financial services industry. (Walter,2004; 64) If economies of scale prevail, increased size will help create shareholder value and systemic financial efficiency. If diseconomies prevail, both will be destroyed.

Cost economies of scope M&A activity may also be aimed at exploiting the potential for economies of scope in the financial services sector - competitive benefits to be gained by selling a broader rather than narrower range of products - which may result either in cost reduction or in revenue increase. (Walter, 2004; 66) Most empirical studies have failed to find cost economies of scope in banking, insurance, or securities industries. The majority of such studies have concluded that some diseconomies of scope are encountered when firms in the financial services sector add new product ranges to their portfolios. Operating efficiencies Financial firms of roughly the same size and providing roughly the same range of services can have very different cost levels per unit of output. Empirically, a number of authors have found very large disparities in cost structures among banks of similar size, suggesting that the way banks are run is more important than their size or the selection of businesses that they pursue. (Walter, 2004; 67).

Revenue Economies of Scope On the revenue side, economies of scope attributable to cross-selling arise when the overall cost to the buyer of multiple financial services from a single supplier is less than the cost of purchasing them from separate suppliers. Demand-side economies of scope include the ability of clients to take care of a broad range of financial needs through one institution a convenience that may mean they are willing to pay a premium. (Walter, 2004; 69). In addition to the strategic search for operating economies and revenue synergies, financial services firms will also seek to dominate markets in order to extract economic returns. By focusing on a particular market, merging financial firms could increase their market power and thereby take advantage of monopolistic or oligopolistic returns. Market power allows firms to charge more or pay less for the same service. (Walter 2004; 76).

Those motives lead to the growing trend of the M&A, as form of FDI, together with the growing trend of the FDI. Both of them demonstrate positive and negative effects on the economy and banking sector in host countries.

Types of Mergers

A merger refers to the process whereby at least two companies combine to form one single company. Business firms make use of mergers and acquisitions for consolidation of markets as well as for gaining a competitive edge in the industry. Merger types can be broadly classified into the following five subheads as described below.

They are Horizontal Merger, Conglomeration, Vertical Merger, Product-Extension Merger and Market-Extension Merger. Horizontal Merger refers to the merger of two companies who are direct competitors of one another. They serve the same market and sell the same product. This kind of merger exists between two companies who compete in the same industry segment. The two companies combine their operations and gains strength in terms of improved performance, increased capital, and enhanced profits. This kind substantially reduces the number of competitors in the segment and gives a higher edge over competition. Conglomeration refers to the merger of companies, which do not either sell any related products or cater to any related markets. Here, the two companies entering the merger process do not possess any common business ties. Conglomerate merger is a kind of venture in which two or more companies belonging to different industrial sectors combine their operations. All the merged companies are no way related to their kind of business and product line rather their operations overlap that of each other. This is just a unification of businesses from different verticals under one flagship enterprise or firm. Vertical Merger is effected either between a company and a customer or between a company and a supplier. Vertical merger is a kind in which two or more companies in the same industry but in different fields combine together in business. In this form, the companies in merger decide to combine all the operations and productions under one shelter. It is like encompassing all the requirements and products of a single industry segment. Co-Generic Merger Co-generic merger is a kind in which two or more companies in association are some way or the other related to the production processes, business markets, or basic required technologies. It includes the extension of the product line or acquiring components that are all the way required in the daily operations. This kind offers great opportunities to businesses as it opens a hue gateway to diversify around a common set of resources and strategic requirements.

Corporate mergers and acquisitions


Corporate merger and acquisition is defined as the process of buying, selling, and integrating different corporations with the desire of expansion and accelerated growth opportunities. This kind of association in any form plays an integral role when it comes to business and economy as it results in significant restructuring of a business.

The key objective of corporate mergers and acquisitions is to increase market competition. This can be done in various ways using different methods of merger like horizontal merger, conglomeration merger, market extension merger, and product extension merger. All the types work towards a common goal but behold different characteristics suited to get the best outcome in terms of growth, expansion, and financial performance.

In many significant ways, this kind of restructuring a business proves to be beneficial to the corporate world. It greatly helps to share all resources, skills, talents, and knowledge that eventually increases the wisdom bar within the company. This can further help to combat the competitive challenges existing in the market.

Further to that, elimination of duplicate departments, possibility of cross selling, reduction of tax liability, and exchange of resources are other big time benefits of corporate merger and acquisition. This not only helps to cut the extra cost involved in the operation and gain financial gains but also help to expand across boundaries and enhance credibility. This in the long run help increase revenue and market share, fulfillment of the only desire that drives the growth of M&A.

Merger and Acquisition Valuation The number as well as the average size of merger and acquisition deals is increasing in India. During post liberalization, increase in domestic competition and competition against cheaper imports have made organizations merge themselves to reap the benefits of a large-sized company. The merger and acquisition valuation is the building block of a proposed deal. It is a technical concept that needs to be estimated carefully.

M&A valuation involves determining the maximum price that a buyer is willing to pay to buy

the target company. From the seller's point of view, it means estimating the minimum price he wants to take against his business. If there are many buyers, then each one bids a purchase price based on his valuation. Finally, the seller will give the business to the highest bidder.

The use of different valuation techniques and principles has made valuation a subjective process. A conflict in the choice of technique is the main reason for the failure of many mergers. For instance, the asset value can be determined both at the market price and the cost price. Therefore, it is important that the merging parties should first discuss and agree upon the methods of valuation.

Calculating the swap ratio is at the core of the valuation process. It is the ratio at which the shares of the acquiring company will be exchanged with the shares of the acquired company. For instance, a swap ratio of 1:2 means that the acquiring company will provide its one share for every two shares of the other company.

Strategies of Merger and Acquisition

Strategies play an integral role when it comes to merger and acquisition. A sound strategic decision and procedure is very important to ensure success and fulfilling of expected desires. Every company has different cultures and follows different strategies to define their merger. Some take experience from the past associations, some take lessons from the associations of their known businesses, and some hear their own voice and move ahead without wise evaluation and examination.

Following are some of the most essential strategies of merger and acquisition that can work wonders in the process: The first and foremost thing is to determine business plan drivers. It is very important to convert business strategies to set of drivers or a source of motivation to help the merger succeed in all possible ways.


There should be a strong understanding of the intended business market, market share, and the technological requirements and geographic location of the business. The company should also understand and evaluate all the risks involved and the relative impact on the business. Then there is an important need to assess the market by deciding the growth factors through future market opportunities, recent trends, and customer's feedback. The integration process should be taken in line with consent of the management from both the companies venturing into the merger. Restructuring plans and future parameters should be decided with exchange of information and knowledge from both ends. This involves considering the work culture, employee selection, and the working environment as well. At the end, ensure that all those involved in the merger including management of the merger companies, stakeholders, board members, and investors agree on the defined strategies. Once approved, the merger can be taken forward to finalizing a deal.

Mergers and acquisitions in banking sector are forms of horizontal merger because the merging entities are involved in the same kind of business or commercial activities. Sometimes, non-banking financial institutions are also merged with other banks if they provide similar type of services. Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in the banking sector. They also try to enhance their customer base. In the context of mergers and acquisitions in the banking sector, it can be reckoned that size does matter and growth in size can be achieved through mergers and acquisitions quite easily. Growth achieved by taking assistance of the mergers and acquisitions in the banking sector may be described as inorganic growth. Both government banks and private sector banks are adopting policies for mergers and acquisitions. In many countries, global or multinational banks are extending their operations through mergers and acquisitions with the regional banks in those countries. These mergers and acquisitions are named as cross-border mergers and acquisitions in the banking sector or

international mergers and acquisitions in the banking sector. By doing this, global banking corporations are able to place themselves into a dominant position in the banking sector, achieve economies of scale, as well as garner market share. Mergers and acquisitions in the banking sector have the capacity to ensure efficiency, profitability and synergy. They also help to form and grow shareholder value. In some cases, financially distressed banks are also subject to takeovers or mergers in the banking sector and this kind of merger may result in monopoly and job cuts. Deregulation in the financial market, market liberalization, economic reforms, and a number of other factors have played an important function behind the growth of mergers and acquisitions in the banking sector. Nevertheless, there are many challenges that are still to be overcome through appropriate measures. Mergers and acquisitions in banking sector are controlled or regulated by the apex financial authority of a particular country. For example, the mergers and acquisitions in the banking sector of India are overseen by the Reserve Bank of India (RBI). A merger has two effects on the industry: First, it the market share of the merged firms is increased and as the market share increases so does the power; second, it leads to gains in these efficiency which in turn results in reduction in the costs of the merged firms and increase in the revenue. The first effect leads increase in prices. As you are the market leader so it creates a monopoly for you in the market and you can charge high spread for the products from the customer for the services which you provide. Like if a bank is offering 10 products, after merging with a bank which complements its product range it can offer many more products to the customer. And for these services it can charge high value to the customer. In some cases it can even become the monopoly player and this leads to increase in revenue and becomes one of the important catalysts in the for the merger .But banks do not merge only with the increase in revenue in mind as the law of the land protects the monopoly state to occur and thus restricts the high growth in revenue.

Mergers & Acquisitions have become a common strategy to consolidate business. The basic aim is to reduce cost, reap the benefits of economies of scale and at the same time expand


market share. For many people, mergers simply mean sharing resources and costs to increase bottomlines. However, it is not as simple as it sounds. According to statistical reports, more than 64% of the times the mergers fail to accomplish the promised results. They suffer from a decline in the shareholders' wealth and conflicts in management. Therefore, a success of any merger initiative primarily depends upon the objective behind the need for a merger.

Following globalization, many small organizations hastily got into mergers to stand against highly-competitive, large scale multinational corporations. They took mergers as a protective strategy to save their business from being perished in the newly created dynamic environment. Unfortunately, in many cases, it did not work due to lack of proper planning and implementation of the planned merger. Moreover, the high costs of business consolidation (professional fees of bankers, lawyers, advisors, paperwork, etc.) could not be covered by the combined revenue of the merged organization leading to its failure.

Another reason for an unsuccessful merger is the lack of efficient management to unite different organizational cultures. The most challenging task is to bring together people and make them work as a team. Establishing a new organizational structure that fits all the employees is also difficult. Hence, many fearing retrenchment resign leading to a complete break-down at the operational level.

Amalgamation is defined as a simple arrangement or reconstruction of business. It is a process that involves combining of two or more companies as either absorption or as blend. Two or more companies can either be absorbed by an entirely new firm or a subsidiary powered by one of the basic firm. In such cases all the shareholders of the absorbed company automatically become the shareholders of the ruling company as the amalgamating company loses its existence. All the assets and liabilities are also transferred to the new entity.

Amalgamation has given different forms to different actions in due course of the merger taking place. It can either be classified in the nature of merger or in the nature of purchase. If the process takes place in the nature of merger then the all assets, liabilities, and shareholders holding not less than 90% of equity shares are automatically transferred to the new company or the holding company by virtue of the amalgamation.


When amalgamation takes place in nature of purchase then the assets and liabilities of the company are taken over by the ruling company. All the properties and characteristics of amalgamating company should vest with the other company. Even the shareholders holding shares not less than 75% should transfer their shares to the transferee company. In such a case any company does not purchase the business resulting in a takeover, the transferor company does not completely lose its existence.

Mergers and acquisitions are strategic business deals that are executed only after comparing its cost with the potential benefits to know the viability of the proposition. In an acquisition deal, the acquiring company estimates the cost of acquiring the other company to gauge how profitable will be the takeover in the long-run.

Many methods are available to calculate the cost of mergers and acquisitions. However, the common ones are the Replacement Cost Method and the Discounted Cash Flow Method. Replacement Cost Method is ideally used for manufacturing firms that have a number of byproducts. These by-products like machinery, furnaces, tools, etc. can be re-used by the acquiring company in the course of business. Therefore, the total cost of the by-products is compared with the cost of replacing them with the new ones at market price to determine the profitability of the deal. However, this method is unsuitable for human resource-intensive firms.

Discounted Cash Flow Method involves discounting future cash flow projections, from the newly formed company, to its present value. If the present value is higher than the actual cost of merger, then the merger is viable. The present value is calculated using the weighted average cost of capital.

All these methods are different approaches to determine the value of the target company. Both the buyers and the sellers bid their own valuation. The buyers tend to bid a lower price whereas the sellers give a higher valuation. After negotiations, a final price is decided and finalized.

Merging and acquiring business is a cumbersome task. Any loophole or negligence can lead to huge financial losses and in extreme cases even the closure of business is possible.

Therefore, many professional firms, known as merger and acquisition (M&A) advisories, provide consulting services only in the area of business consolidation. The advisory team mainly communicates with the top management of its client organization.

They are hired by organizations to study the market and give strategic and financial inputs for growing their business. M&A advisory analyze the need of M&A for the organization, the cost involved, the possible benefits, change in the capital structure, and many other effects of the possible consolidation. They also plan, execute, and implement all the phases of a mergers and acquisition process starting from the pre-merger phase to the post-merger integration. Depending upon the nature of business and the industry underlying the business, the advisories temporarily hire an industry specialist, who has a deep and expert knowledge about the particular industry, to assist in the entire M&A process.

Giving business expansion advice also falls within the domain of such advisories. They suggest the potential new markets, the need for relocating business, new business tactics, etc. on regular basis to their clients.

The advisories have an assorted client-base that includes both small and large enterprises and domestic and international companies. Big and successful advisories extend their service gamut by advising on other business strategies like joint venture, greenfield investments, and divestment in various industries and even countries.

ADVANTAGES OF MERGERS: A merger does not require cash. A merger may be accomplished tax-free for both parties. A merger lets the target (in effect, the seller) realize the appreciation potential of the merged entity, instead of being limited to sales proceeds. A merger allows the shareholders of smaller entities to own a smaller piece of a larger pie, increasing their overall net worth.


A merger of a privately held company into a publicly held company allows the target company shareholders to receive a public company's stock, despite the liquidity restrictions of SEC Rule 144a. A merger allows the acquirer to avoid many of the costly and time-consuming aspects of asset purchases, such as the assignment of leases and bulk-sales notifications. Of considerable importance when there are minority stockholders is the fact that upon obtaining the required number of votes in support of the merger, the transaction becomes effective and dissenting shareholders are obliged to go along.


If a merger leads to a significant increase in market share, either in local or national markets, the new firm could exercise monopoly power. The legal definition of a monopoly is a firm with more than 25% of the market. If the firm has monopoly power there could be the following disadvantages: Higher prices leading to allocative inefficiency) Lower Quantity and reduction in consumer surplus Monopolies are more likely to be productively inefficient and not produce on the lowest point on the average cost curve Easier to collude If there is less competition complacency amongst firms can lead to lower quality of products and less investment in new products Fewer firms therefore less choice for consumers With increased supernormal profits the firm can engage in cross subsidisation or predatory pricing increasing Barriers to Entry. The new firm can pay lower prices to suppliers Mergers can lead to job losses. If the firm becomes too big it may suffer from diseconomies of scale The motives for mergers is often poor. E.g. managers may prefer to work for a big company where they get higher salaries and more prestige.


ADVANTAGES OF ACQUISITIONS: High speed access to resources Avoide barrier to entry Less reaction from competitor It can block competitor Realitive price earning ratio r effected Asset valuation Quick access to resources & skills the business needs Overcomes barriers to entry Helps spread risk (wider range of products and greater geographical spread) Revenue growth opportunities (synergy) Cost saving opportunities (synergy) Reduces competition May enable economies of scale

DISADVANTAGES OF ACQUISITIONS: High cost involved Problems of valuation Clash of cultures Upset customers Problems of integration (change management) Resistance from employees Non-existent synergy Incompatibility of management styles, structures and culture Questionable motives High failure rate Diseconomies of scale

The Impact of Changes in Competition Policy


Our point of departure is a fundamental policy shift observed in many industrial countries over the last decades, i.e., the introduction or strengthening of general competition policy. Such a shift is by definition mostly exogenous to changes or policies in any individual sector, and hence particularly attractive for analyzing the specialness of banks. Moreover, the literature as cited above has brought up a number of reasons why competition may play a different role in banking than in other sectors. We focus in particular on concentrations. Continuing substantial financial consolidation renders them particularly important and the competition reviews of M&As are complemented in banking by supervisory reviews (see section IV). The ultimate objective of the present section is therefore to find out whether banks are affected differently or in the same fashion as other firms by general changes in competition control of M&As.

A. Competition Control of Mergers and Acquisitions

In most countries formal competition policies conducted by specific authorities are a relatively recent phenomenon. In stark contrast to the United States, where competition policy started with the 1890 Sherman and 1914 Clayton Acts, and Germany, where it was formalized with the Gesetz gegen Wettebewerbeschaenkungen in 1958, most countries did not introduce systematic competition policy until the early 1990s. In all cases, the introduction of competition policy constituted a significant change for the countries involved. The main objective of controlling M&As from a competition perspective is to prevent excessive market concentration. The concern is that concentration could lead to a substantial lessening of competition or the creation (or strengthening) of a dominant position, which would increase prices and reduce consumer welfare through market power. To avoid this from happening competition authorities tend to apply a number of criteria to review merger proposals. The most frequently used competition criteria include the degree of concentration of the relevant markets (measured through either parties combined market share or the Herfindahl-Hirschman index), the possibility of entry and the presence of potential entrants, and the evolution of the market and of the parties market shares in the years before the proposed transaction. In some countries it is also evaluated whether efficiency gains, e.g. through scale, would offset any price

impacts of an increase in concentration (the so-called efficiency defense). An important factor is also whether other than competition criteria can or have to be taken into account. In particular, the competition laws of countries often contain a provision that allow the competent authorities to weigh competition considerations against other presumed social or political benefits, such as the preservation of employment, technical achievements or certain services in a specific region. A related issue is the so-called failing firm defense, which is sometimes based on competition grounds and sometimes on social benefits. In the financial sector, e.g., some competitive disadvantages are sometimes accepted in order to prevent a costly bank failure through a merger.

In countries with developed competition regimes, policies tend to be conducted by a separate competition authority. The strength of the competition authority in taking merger decisions varies across countries. In some countries the antitrust authority or the courts can take the decisions alone. In other countries the decision-making power is shared with other authorities, such as multiple antitrust authorities or the ministry of finance. Again in other countries ministries or special sector regulators, such as sometimes the case in banking, are in charge. The strength of the responsible authority is also influenced by the fact whether another authority can intervene, take over the review process or overturn decisions.

A last component of the competition policy regime is the process of merger reviews. In most countries they follow similar steps in that a merger is notified to the competent authority (if large enough),6 then it is decided whether the case has the potential to raise competition concerns and if this is the case the specific transaction is reviewed. Basically in all countries this process tends to be highly transparent in that the decisions reached are made public. In many countries competition policy was rather dramatically strengthened during the last three decades in its objective, criteria, authority and/or process design. We study now these particular moments of change.

B. Data, Institutional Variables and Events


We use the event study approach to analyze the effects of the introduction and strengthening of competition policy, henceforth, changes (in competition policy), in industrial countries. In order to identify the events, we collect detailed information on the legislative changes affecting the setup for competition reviews of M&As in the European Union (EU) and 18 individual countries: the United States and Canada, 14 EU countries, including Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, Sweden, and the United Kingdom, and two non-EU countries, Switzerland and Norway.

C. Dating The precise dating of the changes in competition laws regulating the control of mergers and acquisitions across the sample countries, combined with information on stock prices, are the main ingredients of our empirical investigation. Figure 1 displays the main steps in most legislative procedures and the corresponding dates we use in our study.9 We divide the legislative process in three phases: approval, publication and implementation. Approval refers to the date of approval by either the Parliament or the Head of State. When available, we collect from our sources and contacts the earliest date in the official approval process. For example, in a bi-cameral parliamentary system we use the first date when one of the chambers approves the law. Publication refers to the date when the legislation is published in the countrys official journal; and Implementation is the official date when the legislation enters into force. The process leading up to implementation varies substantially across countries and type of legislation. In general, a law comes into force either after a certain (fixed) time period starting from the day when it is published or following a decree implementing it. In the latter case, the process may contain more uncertainty, as some aspects of the policy regime may be specified in the implementing decree only.

SPECIAL EFFECTS ON BANKS: A. The Supervisory Control of Mergers and Acquisitions in the Banking Sector A crucial difference between the banking sector and most other sectors is that banks are, for the reasons listed in the introduction, subject to special regulations and supervision. This

includes special supervisory reviews of bank mergers to ensure the soundness and stability of the new entities. So, we start to look for explanations for the banks unusual response to legislative changes strengthening competition policy with the institutional features related to this fact. Moreover, in most countries competition control of mergers was introduced in an environment where financial regulation and supervision already existed. So, competition reviews had to be conform with supervisory reviews. This could possibly introduce important dialectics between the agencies enforcing the two (see also Carlton and Picker (2006)). The balancing of objectives is reflected in the resolution of conflicts, the procedure each country follows when the two reviews lead to different outcomes. In general, the resolution procedure may require that bank mergers can be implemented only if they pass both reviews, or the procedure may stipulate that in case of conflict a third agency (typically a ministry) takes the final decision weighing the arguments put forth in both reviews. Carletti and Hartmann (2003) discuss these procedures in detail for major industrial countries. Last, competition policy in the banking sector may equal to other sectors or differ from them. To conclude, all the considerations above suggest that the stock prices of banks should increase at the announcement of changes in the competition policy when the supervisory controls are important in the merger decisions. The more independent and focused on stability supervisory reviews are, the less transparent and the stronger vis--vis competition reviews, the less competition and efficiency may play a role. Whilst this could make the banking sector more stable, it could also have unintended side effects on the efficiency of the consolidation process, thereby reducing from an ex ante perspective the valuation of banks in the stock market. The strengthening of competition policy in banking, whose primary focus is on competition and efficiency, could then counteract these adverse effects. Provided that the associated efficiency gains are stronger than the profits lost through greater competition, bank valuations in the stock market would increase. In other words, the strengthening of competition control may extend a positive externality on the financial sector and this externality may be the stronger the greater is the conflict between competition policy and supervisory policy.

B. Other Issues We include in our cross-sectional analysis several explanatory variables capturing other potential explanations for the positive reactions of banks CARs to the regulatory

amendments. Banks can benefit more from a more competition-oriented control of M&As if they can claim more than non-financial firms that the merger leads to important efficiency gains (through economies of scale, for example) that exceed the welfare losses due to the increase in market power. Efficiency Defense equals one if efficiency gains are being explicitly considered in the merger review as a factor mitigating anticompetitive effects, and equals zero otherwise.21 We include the change in this variable (D) as a result of the strengthening in competition policy. Also, we interact DEfficiency Defense with log(Bank Assets), a measure of bank size, to analyze whether larger banks benefit more from a more efficiency-oriented review. Some observers claim that the introduction or the strengthening of competition policy could sometimes act as a collusion-enhancing device, in particular in an oligopolistic sector. If competition control prevents external growth for the few large banks operating in the market, the changes in competition policy may act as a signal of stability in the competitive structure of the sector, sustain more easily collusive behavior, and hence consistently with investors expectations result in higher future profits.

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, labor force and the shareholders.

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 lay offs.


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 labor 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 organizational 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.

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.

A sound strategic planning can protect any merger from failure. The important issues that should be kept in mind at the time of developing Merger and Acquisition Strategy, are discussed:

Merger and Acquisition Strategies are extremely important in order to derive the maximum benefit out of a merger or acquisition deal. It is quite difficult to decide on the strategies of merger and acquisition , specially for those companies who are going to make a merger or acquisition deal for the first time. In this case, they take lessons from the past mergers and acquisitions that took place in the market between other companies.

Through market survey and market analysis of different mergers and acquisitions, it has been found out that there are some golden rules which can be treated as the Strategies for Successful Merger or Acquisition Deal.

Before entering in to any merger or acquisition deal, the target company's market performance and market position is required to be examined thoroughly so that the optimal target company can be chosen and the deal can be finalized at a right price. Identification of future market opportunities, recent market trends and customer's reaction to the company's products are also very important in order to assess the growth potential of the company. After finalizing the merger or acquisition deal, the integration process of the companies should be started in time. Before the closing of the deal, when the negotiation process is on, from that time, the management of both the companies require to work on a proper integration strategy. This is to ensure that no potential problem crop up after the closing of the deal. If the company which intends to acquire the target firm plans restructuring of the target company, then this plan should be declared and implemented within the the period of acquisition to avoid uncertainties. It is also very important to consider the working environment and culture of the workforce of the target company, at the time of drawing up Merger and Acquisition Strategies, so that the laborers of the target company do not feel left out and become demoralized.

The impact of M&As on shareholders Mergers take up a considerable amount of the executives time, and the paper therefore seeks to assess what they actually deliver to shareholders and the economy. In assessing the impact of mergers on share value, the paper looks at two types of scientific studies, which have been conducted over the decades to assess the performance of mergers. One type of study seeks to assess the reaction of the stock market to merger announcements and the impact of share prices in different timeframes from the merger announcement, while filtering out the impact of general share price movements (so called event or ex-ante studies). Another type of study looks at company accounts after the merger to assess its performance (ex-post studies). Despite the latter sometimes being complicated by companies use of creative accounting methods, both types of study indicate a largely negative outcome of merger decisions, particularly on the acquiring company.

The impact of M&As on employees, staff representatives and their unions M&As provide management with the opportunity to renegotiate terms and conditions, which leads to a destabilisation of the social climate of the company. This is further aggravated by the uncertainty relating to employee information and consultation arrangements in the new merged company. As mergers often lead to organisational changes involving the break-up of established bargaining units, such collective bargaining arrangements often have to be renegotiated.

The impact of M&As on consumers

On the whole, it is argued that it is difficult to assess the impact of mergers and acquisitions on consumers, not only because this aspect is not usually considered in popular or scientific analysis, but also because it is often difficult to disentangle the direct impact of M&As from the impact of other factors such as increasing global competition or technological change. Bearing in mind these considerations, the paper reaches the following conclusions: Looking at the impact of M&As on product provision, choice and the cost of products, it is argued that in general, the number of products on the market has increased significantly in recent years, offering more choice at reduced prices, as most new market entrants are seeking to compete on the basis of price. They are able to do this because new information and communication technology allows them to save costs by operating with fewer branches or without a traditional branch network. New products and providers are also argued to offer many clients more time flexibility, as they no longer have to rely on branch opening hours to conduct their business. Traditional providers have responded to this trend in order to meet consumer need, but also to cut running costs - by closing branches. It is argued that recent trends in the financial services, including mergers and acquisitions, have had a varying impact on different clients. While the majority of larger, wealthy and standard clients (i.e. those without problems of bad credit histories etc.) have benefited from the increase in product choice and the proliferation of information and communication technology based services (such as Internet banking), a significant minority of individuals are detrimentally affected by this trend as they lack access to the required information and communication technology or the knowledge to use it, while at the same time losing access to local branches. It can be argued that this trend has served to increase social exclusion, as the groups

detrimentally affected by these developments tend to already suffer from educational, social and economic disadvantage. Research, for example, shows that branch closures tend to be located in the poorer areas.

Mergers and acquisitions are an important part of the European retail financial services landscape, and will continue to be so for the foreseeable future. They are indicative of a rescaling of financial service activities within Europe as organisations endeavour to expand and diversify their operations across financial services markets, regions and countries. Mergers and acquisitions are a means by which firms are able to increase market share and capitalise upon scale efficiencies within an increasingly competitive market for financial products and services. There is a strong case for arguing that mergers and acquisitions within the European financial services industry are better seen as a consequence of, rather than a direct cause of, competitive change within the European financial services industry. In other words, the growth in merger and take over activity may be interpreted as an outcome of the destabilisation of the competitive environment for financial services over the last 25 to 30 years or so. The market for financial services has become more competitive over this period, for at least two reasons. First, successive rounds of national and European re-regulation have removed the structural regulatory barriers that previously kept firms corralled within narrow parts of the financial system, and which has encouraged firms to expand into new financial markets so raising levels of competition within them. Second, successive rounds of financial innovation have also raised levels of competition, which have changed the bases upon which firms compete with one another for customers and market share. Perhaps the best example of this is the growth of electronic databases as a means of sorting and managing customers. The use of relational databases in combination with automated credit-scoring and forensic marketing systems has reduced the dependence of established financial services firms upon their traditional branch networks, which are an expensive way of distributing products and services to customers. Mergers between financial services firms have not necessarily deepened social and financial exclusion. However, as indicated earlier, a significant minority of people do not have access to basic financial services, and these individuals and households tend to be geographically concentrated. Research undertaken by the author has revealed that bank branch closures tend to be disproportionately concentrated within the poorest parts of towns and cities. Because these individuals and households tend to be the most economically marginal members of society they are the least able to make personal investments in the kinds of basic infrastructure needed to participate in developments such as telephone-based

financial services or Internet-based services. For the latter, customers would need not only to be connected to a telephone service but also be able to afford an expensive personal computer and accompanying software. In some of the poorest parts of European cities significant proportions of the population are unable to afford a telephone.

Again, it is virtually impossible to determine the exact impacts of specific mergers and acquisitions on levels of customer loyalty from the available evidence. This kind of information is highly sensitive, and is not easily released by firms. However, it is generally known that the industry sees declining levels of customer loyalty as a problem, although levels of customer mobility vary markedly between sectors. Levels of mobility are relatively high in price-sensitive sectors such as car and household insurance, whereas it is lower for more complex products such mortgages and lower still for banking services. In all product areas a growing number of consumers are prepared to move their business from one firm to another. Although on the whole financial service customers tend to be highly conservative, it tends to be the more affluent and financially literate customers that are most prepared to shop around for products and to relocate their financial activities if necessary. This is seen less as a boon and more of a burden for the financial services industry. Such developments add to the 0marketing costs of the industry as firms seek to develop attractive brands and retain and attract customers through advertising. In addition, while these are exactly the kinds of customers firms would like to attract from other firms, as they are more likely to buy additional financial products, they are also the customers firms would least like to lose from their own customer rosters. The problem is complicated by the fact that in the case of products such as current accounts, customers rarely engage in activities as clear and precise as closing one account and opening an alternative, substitute account elsewhere. Rather, they tend to open additional accounts to run alongside their existing service and move their business across gradually, while maintaining the original account, to provide maximum flexibility and to leave open the possibility of reversing the account transfer should they need to in the future. This adds costs to the banking sector as a whole, as additional accounts have to be serviced without a net addition of capital to the system. This contradictory development is exacerbated by the development of packages to encourage and facilitate the movement of business from one account to another as firms agree to take responsibility for transferring items such as direct debits and standing orders.

Failure of Mergers & Acquisitions:


Mergers and acquisitions may seem to be beneficial, resulting in the amalgamation of two conglomerates. They have been found to lead to cost cuts and increased revenues. However, merger and acquisition failures are not uncommon. These failures may harm the companies, tarnish their credibility in the market, and ruin the confidence of their shareholders.

Studies reveal that approximately 40% to 80% of mergers and acquisitions prove to be disappointing. The reason is that their value on the stock market deteriorates. The intentions and motivations for effecting mergers and acquisitions must be evaluated for the process to be a success. It is believed that when two companies merge the combined output will increase the productivity of the merged companies. This is referred to as "economies of scale." However, this increase in productivity does not always materialize.

There are several reasons merger or an acquisition failures. Some of the prominent causes are summarized below: If a merger or acquisition is planned depending on the (bullish) conditions prevailing in the stock market, it may be risky. There are times when a merger or an acquisition may be effected for the purpose of "seeking glory," rather than viewing it as a corporate strategy to fulfill the needs of the company. Regardless of the organizational goal, these top level executives are more interested in satisfying their "executive ego." In addition to the above, failure may also occur if a merger takes place as a defensive measure to neutralize the adverse effects of globalization and a dynamic corporate environment. Failures may result if the two unifying companies embrace different "corporate cultures." It would not be correct to say that all mergers and acquisitions fail. There are many examples of mergers that have boosted the performance of a company and addressed the well-being of its shareholders. The primary issue to focus on is how realistic the goals of the prospective merger are.


Mergers and acquisitions often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after mergers or acquisitions would be greater than the sum of the shareholder values of the parent companies. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale. Merger & Acquisition also leads to tax gains and can even lead to a revenue enhancement through market share gain. Companies go for Mergers and Acquisition from the idea that, the joint company will be able to generate more value than the separate firms. When a company buys out another, it expects that the newly generated shareholder value will be higher than the value of the sum of the shares of the two separate companies. Mergers and Acquisitions can prove to be really beneficial to the companies when they are weathering through the tough times. If the company which is suffering from various problems in the market and is not able to overcome the difficulties, it can go for an acquisition deal. If a company, which has a strong market presence, buys out the weak firm, then a more competitive and cost efficient company can be generated. Here, the target company benefits as it gets out of the difficult situation and after being acquired by the large firm, the joint company accumulates larger market share. This is because of these benefits that the small and less powerful firms agree to be acquired by the large firms.

Gaining Cost Efficiency When two companies come together by merger or acquisition, the joint company benefits in terms of cost efficiency. A merger or acquisition is able to create economies of scale which in turn generates cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale and when the output production increases, there are strong chances that the cost of production per unit of output gets reduced.

An increase in cost efficiency is affected through the procedure of mergers and acquisitions. This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of


operations of the new firm increases. As output production rises there are chances that the cost per unit of production will come down.

Mergers & Acquisition Trends Merger and Acquisition Trends give a clear idea about the movements of the market. Not only the product market or labor market, but also the money market gets influenced by these in the years 2006 and 2007, the world experienced numerous mergers and acquisitions.

The reason of this particular Merger and Acquisition Trend, was the emergence and rapid growth of Private Equity Funds. Moreover, the regulatory environment of the publicly owned companies and the urge to attain growth of short term earnings were also behind the specific trend.

Mergers and Acquisitions resulting into privatization of the public undertakings took place not only in Europe, but also in North America, China and even in country like Brazil. In Europe this type of Mergers and Acquisitions took place significantly, as the market for public-to-private investment was quite strong in Europe. According to experts this trend of going private through mergers and acquisitions will continue in the future. As the Private Equity Funds are facing the target of deploying the raised capital, acquisition og large public organizations are definitely in the pipeline.

Costs of Mergers and Acquisitions They are calculated in order to check to the viability and profitability of any Merger or Acquisition deal. The different methods adopted for this cost calculation are the Replacement Cost Method, Discounted Cash Flow Method and Comparative Ratio calculation method. They are very much important as it determines the viability of any Merger or Acquisition. Any company finalizes 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. In order to calculate the cost of Mergers and Acquisitions proper valuation of the target company. It is very natural that the target company tries to project its value to a high level but the firm who wants to take over the target company wants the deal to settled at a low price. So, the ultimate cost of the Acquisition depends on the price of the target company. In the overall cost calculation of Acquisition, the Replacement Costs are something very crucial. 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.

Other than this Replacement Cost calculation method, the other methods that are followed in calculating Costs of Mergers and Acquisitions, are the methods of Discounted Cash Flow Method and Comparative Ratio calculation Method. In Discounted Cash Flow Method, weighted average costs of capital are calculated, while in Comparative Ratio calculation method, Price- Earnings Ratio and Enterprise Value to Sales Ratio are calculated.

The mergers and acquisitions can be thought of in India on merit, due to following factors also: Top 5-6 Indian banks have solid management and they can improve the functioning of some of the smaller banks, through changes in their management. Indian banks are scattered regionally and can consolidate to improve their client and industry positions. There is an opportunity for smaller banks to become large and larger banks to consolidate and become even larger. There are other cost cutting opportunities in IT implementation, branch rationalisation and staff rationalisation.

M & A provides a fast and easy method for many banks to enter areas where they lack a presence. Structured framework of merger process : The 1st report of the Narasimham Committee (Nov 1991) had recommended a broad pattern of the structure of the banking system with 3 or 4 large banks (to become international in character), 8 to 10 national banks (to have a network throughout the country & engaged in universal banking) besides local banks and rural banks. In its 2nd report, the Committee had recommended that the mergers between banks, DFIs and NBFCs, should be based on synergies and must make sound commercial sense.

Mergers and Acquisitions in India Mergers and acquisitions in India are on the rise. Volume of mergers and acquisitions in India in 2007 are expected to grow two fold from 2006 and four times compared to 2005.

India has emerged as one of the top countries with respect to merger and acquisition deals. In 2007, the first two months alone accounted for merger and acquisition deals worth $40 billion in India. The estimated figures for the entire year projected a total of more than $ 100 billions worth of mergers and acquisitions in India. This is two fold growth from 2006 and a growth of almost four times from 2005. Mergers and Acquisitions in different sectors in India Sector wise, large volumes of mergers and mergers and acquisitions in India have occurred in finance, telecom, FMCG, construction materials, automotives and metals. In 2005 finance topped the list with 20% of total value of mergers and acquisitions in India taking place in sector.

In the banking sector, important mergers and acquisitions in India in recent years include the merger between IDBI (Industrial Development bank of India) and its own subsidiary IDBI Bank. The deal was worth $ 174.6 million (Rs. 7.6 billion in Indian currency). In the telecom sector, an increase of stakes by SingTel from 26.96 % to 32.8 % in Bharti Telecom was worth $252 million (Rs. 10.9 billion in Indian currency). In the Foods and

FMCG sector a controlling stake of Shaw Wallace and Company was acquired by United Breweries Group owned by Vijay Mallya. This deal was worth $371.6 million (Rs. 16.2 billion in Indian currency). Another important one in this sector, worth $48.2 million (Rs 2.1 billion in Indian currency) was the acquisition of 90% stake in Williamson Tea Assam by McLeod Russell India In construction materials 67 % stake in Ambuja Cement India Ltd was acquired by Holcim, a Swiss company for $634.9 million (Rs 27.3 billion in Indian currency).

Mergers and Acquisitions in India in 2007 Some of the important mergers and takeovers in India in 2007 were Mahindra and Mahindra acquired 90% stake in the German company Schoneweiss. Corus was taken over by Tata. RSM Ambit based at Mumbai was acquired by PricewaterhouseCoopers. Vodafone took over Hutchison-Essar in India.

Clearly, mergers in banking and elsewhere take up considerable amounts of managerial time and talent (perhaps as much as fifty per cent at the level of top-executives). Since they usually require enormous funds to get done, or vast offerings of paper, it is therefore of great importance to know what they deliver to the economy. Is all this time and money spent well? In this paper, I will review the evidence for banking mergers. I will do so, however, by referring explicitly to non-financial mergers as well. Although many studies of banking mergers have been undertaken there are still many questions left. Looking into the effects of non-financial mergers may therefore be helpful in establishing an overall view on the issue. Many academic researchers, policy makers and market practitioners regard banks as special firms. The literature justifies this view and the related sector-specific regulations with potential instability, informational asymmetries in the provision of credit and the key role the financial sector plays in the economy. For the same reasons competition is regarded with

greater caution than is the case for other sectors. An emerging new literature, however, throws a more positive light on competition in the banking sector.

The present paper attempts to shed some new light on this debate by looking at the role legal and other institutional arrangements play in governing the review of mergers and acquisitions (M&As). It is asked first whether legal changes strengthening competition policy have the same or differential effects on banks and non-financial firms. Second, differential effects on banks are explained with institutional features of the merger review process specific to the banking sector. In fact, bank mergers are subject to a supervisory review exhibiting institutional features unknown in more regular sectors.

One important contribution of the paper is the presentation of a unique data set of legislative changes affecting the reviews of M&As in 19 industrial countries (United States, Canada and seventeen European countries) between 1987 and 2004. The data set covers the introduction of competition laws and competition authorities (both in banking and other sectors) as well as changes in the relative responsibilities of competition and supervisory authorities in bank merger reviews.

The analysis finds striking differences between the impact of legislative changes on banks and firms. Legislative changes strengthening competition policy decrease the market valuations of firms, but increase the market valuations of banks. The decrease in the valuations of firms is expected: A more proactive competition policy and consequently more intense competition should lead to the erosion of profits, an effect predicted by standard industrial organization theories. In contrast, a merger review policy oriented more towards competition has a nonstandard positive effect on bank stocks and also on the profitability and size of bank merger targets. A key issue is which features specific to banking explain this special reaction by banks. A cross-section analysis of the cumulative abnormal bank stock returns identifies the variables that drive the positive reaction. We pay particular attention to the different regulatory framework faced by banks compared to non-financial firms, namely that bank mergers are not only subject to competition reviews but also to supervisory reviews. One key feature of the institutional setup for supervisory bank merger reviews is whether the results are published or not. (Competition reviews are public in all countries of our sample.) Our estimations suggest that the less transparent the supervisory reviews in a given country are,

i.e., when the supervisory decisions are not published, the higher the valuation gains of banks.

This result is robust to controlling for a host of individual bank and country-specific variables, including the quality of other economic institutions. The results suggest that the effects of the reorientation of the legal and institutional environment towards more competition in banking will be heavily influenced by the supervisory regime. In particular, supervisory reviews of bank mergers are often guided by other objectives and approaches than competition reviews. They typically focus on the soundness and stability of the new entity created. Moreover, supervisory intervention occasionally promotes specific mergers in order to save weak or failing banks. As a result, these interventions are usually not driven by competition and efficiency considerations. And this may be even more so in less transparent supervisory systems. Investors will penalize banks for these sources of inefficiency with a lower valuation. As competition reviews gain importance and as the supervisory setup becomes more transparent, the room for less efficiency-oriented transactions vanishes and bank valuations may increase.

In other words, the strengthening of competition policy seems to generate important positive externalities in the financial system that limit supervisory discretion in determining merger outcomes and thereby offset unintended adverse side effects on efficiency introduced through supervisory policies focusing on prudential considerations and financial stability. More generally, legal arrangements governing competition and supervisory control of bank mergers seem to have important implications for bank and firm performance in the economy.

Future of M&A in Indian Banking

In 2009, further opening up of the Indian banking sector is forecast to occur due to the changing regulatory environment (proposal for upto 74% ownership by Foreign banks in Indian banks). This will be an opportunity for foreign banks to enter the Indian market as with their huge capital reserves, cutting-edge technology, best international practices and skilled personnel they have a clear competitive advantage over Indian banks. Likely targets of takeover bids will be Yes Bank, Bank of Rajasthan, and IndusInd Bank. However, excessive valuations may act as a deterrent especially in the post-sub-prime era.


Persistent growth in Indian corporate sector and other segments provide further motives for M&As. Banks need to keep pace with the growing industrial and agricultural sectors to serve them effectively. A bigger player can afford to invest in required technology. Consolidation with global players can give the benefit of global opportunities in funds' mobilisation, credit disbursal, investments and rendering of financial services. Consolidation can also lower intermediation cost and increase reach to underserved segments. The Narasimhan Committee (II) recommendations are also an important indicator of the future shape of the sector. There would be a movement towards a 3-tier structure in the Indian banking industry: 2-3 large international banks; 8-10 national banks; and a few large local area banks. In addition, M&As in the future are likely to be more market-driven, instead of government-driven.


ANALYSIS Various Industrial and financial sectors are seeking to get exemption from CCI to look into their M&As. Section-60 of CCI act overrides all such legislation. Banking regulation (amendment) is one such law. CCI needs to object such laws through MCA. CCI cannot give up its role in M &As as once a dominant position is acquired by any entity, it will be a marathon task with huge legal impediments to restrict that entity in their role in anti competitive area. RBIs role as a regulator is to ensure safety of funds of depositors and monitor the role of banks in economic growth. CCIs role in a way is opposed to this as it looks at checking the profiteering motive of banks in charging unreasonable interest or giving lower returns to depositors etc. Both are distinctive and important. Section 45 of the banking regulation act requires that RBI , restructure or amalgamate any number of weak banks with a stronger bank, if it finds that the failing weaker bank will have some impact on the economic development. But, the same banking regulation Act (should the new proposed amendment be carried out) requires that only the RBI (CCI is excluded) is authorized to look into any merger taking within the banking sector. This is a contradictory situation, as it gives RBI the ultimate power to both initiate a merger and also gives it the authority to look into it, and determine its legality and correctness. RBI has made it mandatory for all banking entities in India to follow the Basel II banking regulation policies. This international policy stipulates proper risk management procedure to be taken by all banking entities which follow it. Risk management, includes under its purview, mitigation of a possible financial/ operational/ market risk that may arise out of M&A of two such banking entities. Whereby, after the M&A the credibility of one bank may go down, and/or its bad debt or risky debt might go up. Such an outcome might not be favourable to the consumers to whom the CCI is directly responsible. Hence, by this policy, under any such M&A, CCI should be consulted by the RBI to determine if the M&A is in the interest of the public.

Investors in a company that are aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth.


Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target company. Here are just a few of them:
1. Comparative Ratios - The following are two examples of the many comparative

metrics on which acquiring companies may base their offers: Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes an offer that is a multiple of the earnings of the target company. Looking at the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the target's P/E multiple should be. Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the price-to-sales ratio of other companies in the industry.

2. Replacement Cost - In a few cases, acquisitions are based on the cost of replacing the

target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets - people and ideas - are hard to value and develop.

3. Discounted Cash Flow (DCF) - A key valuation tool in M&A, discounted cash flow

analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (net income + depreciation/amortization - capital expenditures - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method.


Regarding the first category (liquidity ratios: variables from V01 to V04, namely: current ratio, acid test ratio, cash ratio, working capital), the only variable that is affected by the M&As event is the variable V03 (cash ratio), since it is statistically significant at the 0.05 level (P-Value=0,026**). It is concluded that there is an improvement of the variable V03 (cash ratio) for conglomerate mergers than nonconglomerates based on the 95% Confidence Interval (1,81; 27,54), that are positive numbers. Regarding these liquidity ratios after the merger, it can be concluded that the targets from M&As transactions were mainly firms that have high liquidity levels and with a lot of their funds in cash, or nearly in cash, and for this reason it observed this real improvement in the acquirer firms liquidity even four years after the examined conglomerate merger.

The second category of ratios (activity ratios: variables from V05 to V11, namely: average receivables conversion period, average payables deferral period, average inventory conversion period, working capital turnover ratio, asset turnover ratio, fixed asset turnover ratio, owners equity turnover ratio), present no significant change of any examined variable after the M&As transactions between conglomerate and nonconglomerate mergers.

In order to evaluate this trend, using financial ratios, the post-merger performance of a sample of Greek firms, listed on the Athens Stock Exchange (ASE) that executed at least one merger or acquisition in the period from 1998 to 2002 as acquirers, is investigated. For the purpose of the study, the sample of firms is sub-tracted in two different groups, which are: (i) firms that involved in M&As activities as acquirers with firms from their industry (horizontal or vertical mergers) and (ii) firms that involved in M&As activities as acquirers but with firms from a different industry and were exposed in extended business risk (conglomerate mergers).



PEST analysis is a useful tool for any business. Easy to use and understand, PEST analysis provides a methodology for critically examining the external factors that may affect the business itself, its operations and/or its strategy. The most important aspect to remember is that PEST analysis is nothing more than a framework for determining the external factors that may affect a business. PEST analysis itself is not intended as a rigid structure that requires lists upon lists in tightly defined categories. The greatest strength of PEST analysis is its ability to facilitate brainstorming about factors that are outside the company's control but which affect the business nevertheless. The relative effectiveness of PEST analysis will vary based upon the industry and the good/services produced by a company. PEST analysis is best used in scenarios where a new location, product or service is considered, a potential acquisition or merger is judged, or the current relation of a business, product, service or brand is evaluated in regards to its market.







The main conclusions to this brief overview are as follows: It is difficult to discern specific impacts made on consumers from merger and acquisition activity within the European retail financial services sector. Merger and acquisition activity should be seen as an outcome and a response to the intensification of competition across the retail financial services industry. Increased competition is a product of wider regulatory changes and a reduction in the entry barriers to retail financial services. This has involved a move away from a dependence upon collecting and utilising face-to-face knowledge accumulated within branches towards the use of electronic databases which can be used to discriminate between and communicate with consumers at-adistance. Retail financial services markets are becoming increasingly polarised, as a result of processes of financial inclusion and financial exclusion. This process will intensify with the growth of Internet banking which will increase choice and reduce costs to those consumers who buy their financial services on-line. The problems of finding readily accessible information on consumer responses to changes suggest the need for a more effective system of monitoring the social accountability of the European retail financial services market. Within the United States, for example, it is possible to determine the impact of bank mergers on consumers because of the existence of regulation that requires banks to disclose information on the markets they serve (the Community Reinvestment Act) and the outcomes of decisions on applications for home mortgages (the Home Mortgage Disclosure Act). Legislation such as this has enabled communities and unions to monitor the


impact of mergers and take-overs within the banking sector and to mobilise objections to mergers that might produce socially regressive lending outcomes. There is a clear need for parallel legislation to require disclosure within the member states of the European Union.

Based on the trends in the banking sector and the insights from the cases highlighted in this study, one can list some steps for the future which banks should consider, both in terms of consolidation and general business. Firstly, banks can work towards a synergy-based merger plan that could take shape latest by 2009 end with minimisation of technology-related expenditure as a goal. There is also a need to note that merger or large size is just a facilitator, but no guarantee for improved profitability on a sustained basis. Hence, the thrust should be on improving risk management capabilities, corporate governance and strategic business planning. In the short run, attempt options like outsourcing, strategic alliances, etc. can be considered. Banks need to take advantage of this fast changing environment, where product life cycles are short, time to market is critical and first mover advantage could be a decisive factor in deciding who wins in future. Post-M&A, the resulting larger size should not affect agility. The aim should be to create a nimble giant, rather than a clumsy dinosaur. At the same time, lack of size should not be taken to imply irrelevance as specialised players can still seek to provide niche and boutique services.


Mergers and Acquisition, ICFAI UNIVERSITY Mergers and Acquisitions Broc Romanek and Cynthia M. Krus Journal on Mergers and Acquisition, ICFAI UNIVERSITY Business Standard Business India Agrawal, A. and J. Jaffe (2000). The post merger performance puzzle, Advances in Mergers and Acquisitions