Afro Asian Journal of Finance and Accounting

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Afro-Asian J. Finance and Accounting, Vol. 2, No. 2, 2010 107

Copyright 2010 Inderscience Enterprises Ltd.

An analytical study on value creation in Indian bank

mergers

B. Rajesh Kumar* and K.M. Suhas

Institute of Management Technology,

Dubai International Academic City,

P.O. Box 345006, Dubai, UAE

E-mail: [email protected]

E-mail: [email protected]

*Corresponding author

Abstract: This study, based on Indian banking mergers, examines theimpact of mergers on both the stock market wealth creation and operating

performance. The study also analyses the performance of the merged banks in relation to a control group based on financial ratios. The results ofcumulative abnormal returns analysis signify that merger announcements arevalue-creating activities for the acquirer banks. At the same time, mergerannouncements erode shareholder wealth for the target banks. The frameworkof pre-merger and post-merger comparison of the operating performance of theacquirer banks was based on three models whereby the cash flow was deflated

by market value of assets, book value of assets, and income. The result does notprovide evidence to support the view that corporate performance improves aftermergers.

Keywords: mergers; cumulative abnormal return; CAR; acquirer; target; cashflow model.

Reference to this paper should be made as follows: Kumar, B.R. andSuhas, K.M. (2010) An analytical study on value creation in Indian bankmergers, Int. J. Afro-Asian J. Finance and Accounting, Vol. 2, No. 2,

pp.107134.

Biographical notes: B. Rajesh Kumar is an Assistant Professor at Institute ofManagement Technology, Dubai, UAE. He has published empirical research

papers in the area of M&A in refereed journals like IIMA Vikalpa, IIMBManagement Review, IIMC Decision and Journal of Applied Business and

Economics. He has written two books, including a textbook on mergers andacquisitions published by McGraw Hill.

K.M. Suhas is an Analyst at Deutsche Bank, Bangalore, India.

1 Introduction

Consolidation in the banking industry worldwide can be attributed to the process of

deregulation and technological changes that facilitated many banks to provide a wider

range of banking services across a larger geographical area. Basically consolidation in the


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108 B.R. Kumar and K.M. Suhas

banking industry is aimed at accruing gains through expense reduction, increased market

power, reduced earnings volatility, scale and scope economies.

Bank mergers can increase value by reducing costs and/or increasing revenues. Costreductions can be achieved by eliminating redundant managerial positions, closing

overlapping bank branches and consolidating back office functions. Cost cutting potential

may be greater when merging banks have geographical overlap. Revenue enhancement

can also be attributed from sources like cross selling of bank services. The main reason

for First Unions acquisition of First Fidelity Bancorp was to market its brokerage and

mutual fund services to First Fidelitys customers. The ability to raise fees and lower

interest rates on deposit accounts to raise net interest revenue can also be cited as a

motivation for acquisitions (Houston et al., 2001).

Two main research approaches explain mergers and acquisition profitability. The

event studies examine the abnormal returns to the shareholders in the period surrounding

the announcement of a merger or acquisition. The accounting studies examine the

reported financial results of acquirers before and after the acquisitions to see how the

financial performance changes. The key question in the context of corporate restructuring

issues is that whether mergers and acquisitions are value creating activities. This research

paper examines both the stock market performance as well as the operating performance.

It can be interpreted that a given merger is successful if other things equal; it increases

the total current wealth of the owners of the acquiring bank. The efficient market

hypothesis assumes that investors anticipation of future benefits will be reflected in the

merging banks stock prices at the time of acquisition announcement.

Studies on mergers and acquisitions are few in the Indian context. This study aims to

fill the gap in merger studies in banking sector by analysing both the stock market

performance and operating performance of banks involved in mergers.

2 Review of literature

Most academic studies follow one of the two distinct approaches to evaluate mergerrelated gains. The first approach compares the performance of banking institutions based

on accounting data, before and after a merger to determine whether consolidation results

in gains. By comparing pre-merger and post-merger data, performance changes

attributable to a deal can be directly estimated. The second approach examines the stock

price performance of the bidder and target bank around the announcement of a merger.

These stock market studies are based solely on market expectation and do not address the

issue of actual gains resulting from consolidation.

Cornett and Tehranian (1992) and Spindt and Tarhan (1993) find increases in post-

merger operating performance while studies by Piloff (1996), Berger and Humphrey

(1992) and Berger (1997) do not find any evidence of post-merger improvement in

performance.

The stock market studies include studies by Houston and Ryangaert (1994) and

DeLong (1998).

Cornett and Tehranian (1992) compare the pre-merger and post-merger performance

of 30 large holding company mergers occurring between 1982 and 1987. They find that

cash flow returns relative to a national group of publicly traded banks that did not merge

over the period improve following the mergers. The study further finds that merger

announcements are associated with significantly positive consolidated abnormal returns.


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An analytical study on value creation in Indian bank mergers 109

Cornett also finds a high correlation between positive market reaction and improvement

in post-merger return on assets (ROA). Linder and Crane (1992) find that interstate

mergers do not result in improved operating income relative to comparably located banks. Spindt and Tarhan (1993) find that mergers lead to operating gains but their

results may be primarily due to economics of scale. Studies of Piloff (1994), Berger et al.

(1999) finds little or no improvement in the post acquisition operating performance of

merged banks relative to industrial peers.

Houston and Ryngaert (1994) find little evidence of wealth creation for the acquired

bank at the expense of the shareholders of the acquirer banks. Houston and Ryngaert

(1997) find that the returns to bidders are significantly greater in bank mergers financed

with cash than mergers financed with stock.

Studies by Hannan and Wolken (1989) and Piloff (1996) examines both the average

and cross sectional properties of merger related performance changes and abnormal

returns of forty eight mergers involving publicly traded banking institutions occurring

from 1982 to 1991. The result suggests that performance gains are related primarily to

high total target and acquirer expenses and abnormal returns are associated with thedifference between the two total cost measures. The correlations of abnormal returns with

performance measures are consistently insignificant, providing direct evidence that

market expectations are unrelated to subsequent merger related gains.

DeLong (1998) finds that focusing mergers (those that increase either geographic or

product focus) increase value, whereas diversifying mergers destroy value.

Houston et al. (2001) based on the analysis of a sample of the largest bank mergers

between 1985 and 1996 finds that merger appear to result in positive revaluations of the

combined value of the bidder and target stocks. The bulk of revaluations is estimated to

cost savings rather than projected revenue enhancements.

The paper by Amihud (2002) examines the effect of cross border bank mergers on

the risk and abnormal returns of the acquiring banks. Their results suggest that on

average neither their total risk nor their systematic risk falls relative to banks in

their home banking market. The abnormal returns to acquirers are negative and

significant, but somewhat higher when risk increases relative to banks in the acquirers

home country.

DeLong (2003), based on a sample of 54 bank mergers announced between 1991 and

1995, tests several facets of focus and diversification. The study finds that upon

announcement, the market rewards the merger of partners that focus their geography and

activities and earning stream. Only one of these facets, focusing earning streams

enhances long-term performance.

Beitel et al. (2004) study 98 large M&As of European bidding banks from 1985 to

2000 in order to investigate drivers of excess returns to the shareholders of the targets, the

bidders and to the combined entity of the bidder and target. The findings show that many

of the drivers identified mostly from prior, US focused research have significant

explanatory power, indicating that the stock market reaction to M&A announcements of

European bidding banks can be at least partly forecast. The results confirm the preference

of stock markets for focused transactions and against diversification.Three papers by Tourani and Van Beek (1999), Cybo Ottone and Murgia (2000) and

Beitel et al. (2001) apply event study methodology in order to analyse announcement

effects of European bank mergers and acquisitions. The studies by Beitel et al. (2001) and

Cybo-Ottone and Murgia (2000) find that both target and bidder shareholders earn


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significantly positive cumulative abnormal returns (CARs) in the event window

scrutinised.

Table 1 Other performance related studies

Study Details of study Results

Isa et al. (2004) This study investigates shareprice reaction pursuant to theannouncement of a merger

programme that involved theentire banking sector inMalaysia over the period19992004

The study found an over all positivemarket reaction to the announcement ofthe bank mergers, notwithstanding that the

bank mergers were imposed by the CentralBank. Typically substantial returns weremostly recorded on the day before theannouncement followed by a slight marketcorrection thereafter.

Karceski et al.(2005)

The study estimate the impactof bank merger

announcements on borrowersstock prices for publiclytraded Norwegian banks

Borrowers of target banks lose about 0.8%in equity value, while borrowers of

acquiring banks earn positive abnormalreturns, suggesting that borrower welfareis influenced by a strategic focus favouringacquiring borrowers. Larger mergerinduced increases in relationshiptermination rates are associated with lessnegative abnormal returns, suggesting that

banks with low switching costs switchbanks.

Tetsuya (2005) Using event studymethodology, this studyinvestigated the impact ofJapanese bank mergersannouncement on the marketvalue of financially distressed

borrowers

The news of bank mergers brought about apositive wealth effect on financiallydistressed borrowers.

Olson et al.(2005)

This study examines themergers of the US publiclytraded bank holdingcompanies during19872000 and analyses thedeterminants of long termoperating and stock

performance using crosssectional studies

The most economically significantdeterminants of the merged banksabnormal stock return performance are theacquiring banks estimated sustainablegrowth rate prior to the acquisitions aswell as post acquisition changes in thisgrowth rate and the banks dividend

payout ratio.

Ismail andDavidson (2005)

This study analyses mergerand shareholder effects inEuropean banking

The study finds that abnormal returns arehigher in bank to bank rather than cross

product deals, suggesting that there isscope for exploiting economies of scaleand market power within the bankingsector.

Cornett et al.(2006)

This paper examines theoperating performance aroundcommercial bank mergers

The study finds that industry adjustedoperating performance of merged banksincreases significantly after the merger.Large bank mergers produce greater

performance gains than small bank gains.


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Table 1 Other performance related studies (continued)


Mayer-Sommeret al. (2006)

Analyses the impact ofacquisition of First SavingsBank of Virginia by SouthernFinancial Bank on shareholderreturns

The study finds that shareholders gainedexcess returns.

Altunba et al.(2008)

The study examine the impactof European Union banksstrategic similarities on post-merger performance

The study finds that on average, bankmergers have resulted in improved

performance. The study also finds that fordomestic deals, it can be quite costly tointegrate institutions which are dissimilarin terms of their loans, earnings, cost,deposit and size strategies.

Koetter (2008) This paper aims to suggest a

taxonomy to evaluate post-merger performance on the

basis of cost and profitefficiency

The study identifies successful mergers as

those that fulfil simultaneously twocriteria. First merged banks must exhibitefficiency levels above the average ofnon-merging banks. Second banks mustexhibit efficiency changes between mergerand evaluation. The study further findsthat every second merger is a success interms of either cost efficiency or profitefficiency.

2.1 Other studies related to M&A in banking

Zollo and Leshchinkskii (2000) analyse 579 US bank mergers and acquisition from 1977

to 1998 and find that the size of acquirer has significantly negative impact on the

acquirers M&A success. Seidel and Kritische (1995) analyse 123 US bidding banks

between 1989 and 1991 and show that banks which obtain an optimal size after the

transaction (in terms of assets) are more successful. They conclude that banks are most

successful, if they attain assets between US$ 2 billion and US$ 30 billion after a

transaction. Banerjee and Cooperman (2000) look at the profitability differences between

target and bidder for 30 bidding banks and 62 target banks in the USA between 1990 and

1995 and find that bidding banks are more successful when they are more profitable than

their targets. Hawawini and Swary (1990) find that bidders that are relatively more

profitable than their targets do significantly create more value in bank M&As.

Berger and Humphrey (1992) determine that mergers of large banking organisations

lead to no significant gains in X efficiency, ROA or total costs to assets. Further it reports

the amount of market overlap and the difference between acquirer and target X

efficiency. Srinivasan (1992) and Srinivasan and Wall (1992) report that mergers do

not reduce the non-interest expenses. Rhoades (1993) analyses mergers of large

institutions and conclude that cost reductions and efficiency gains are not significantly

related to mergers. Ryan (1999) opines that most bank acquisitions are not in the

interest of shareholders. Gorton and Rosen (1995) suggest that the primary motive


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for bank mergers is empire building by managers who are insulated from the market

for corporate control.

Table 2 Summary of some selected studies


Sergio and Olalla(2008)

The study examines whetherfinancial deregulation andtechnological progress has playedan important role in the process ofmergers and acquisitions (M&As)in the banking sector during the

period 19952001. Multinomiallogit analysis was used to analysethe characteristics of continentalEuropean financial institutions.

Size is an important factor in mergersand acquisitions.

Sharkas et al.(2008)

This study investigates the costand profit efficiency effects of

bank mergers on the US bankingindustry. Non-parametrictechnique of data envelopmentanalysis was used to evaluate the

production structure of mergedand non-merged banks.

The empirical results indicate thatmergers have improved the cost and

profit efficiencies of banks. Furtherevidence shows that merged bankshave lower costs than non-merged

bank because they are using the mostefficient technology available(technical efficiency) as well as a costminimising input mix (allocativeefficiency). The results also suggestthat there is an economical rationalfor future mergers in the bankingindustry.

Hagendroff et al.(2007)

This article aims to advocate anextension of empirical work tofocus more clearly on therelationship between banksgovernance attributes and thesuccess of bank mergers.

The results suggest that soundgovernance mechanisms such asmanagerial pay incentives and boardcomposition may help prevent bankexecutives from pursuing valuedestroying acquisitions.

Rezitis (2008) The study investigates the effectof acquisition activity on theefficiency and total factor

productivity of Greek banks usinga stochastic output distancefunction.

The results of the study indicate thatthe effects of mergers andacquisitions on technical efficiencyand total factor productivity growthof Greek banks are rather negative. In

particular, the technical efficiency ofmerger banks decreased in the periodafter merging, while that of non-merger banks increased over the same

period.

2.2 The world scene

The commercial banking industry accounted for more volumes of M&As than any other

industry worldwide during the period 1998. More than a fourth of total merger and

acquisition deals were involving banks totalling $102 billion (The Economist, 1999).


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The trend started in the USA in the 1980s. The US banking industry saw more than

7000 mergers between 1980 and 1998.The nineties saw some of the largest mergers in

banking history in the US. The number of banks in the US declined by more than a third

over 1980 to 1997. Moreover between 1994 and 2002, more than 1300 new banks were

opened in US in direct response to perceived decline in service resulting from a bank

merger. Simultaneously, the proportion of banking assets accounted for by the 100 largest

banking organisations went from over 50% in 1980 to nearly 75% in 1997. The reasons

for the mergers were a new statutory environment that allowed interstate ownership and

branching; banks seeking scale economies; geographical diversification; and, increased

competitive pressures (Meyer, 1998).3

M&A within the European financial sector has changed the European banking

landscape in the past decade. The number of European banks decreased from 12,670 in

1985 to 8295 in 1999 (European Central Bank Report, 2000). This development is mostly

driven by M&As among European banks. The European (EU-15) market concentration

measured by the market share of the top five banks in terms of total assets grew by 12%

over the last ten years to 57.1% in 1999. The number of banks per 1000 inhabitants in

Europe is almost twice as large (0.49) as in the US (0.27) indicating many more

concentration potential through M&A transaction in the near term future (European

Central Bank Report, 2000; Berger et al., 1999).

3 The Indian scene

In 1969, there were 73 scheduled commercial banks (SCBs). There are about 90 SCBs,

four non-SCBs and 196 regional rural banks (RRBs). The State Bank and its seven

associates have about 14,000 branches; 19 nationalised banks have 34,000 branches; the

RRBs 14,700 branches; and foreign banks around 225 branches. However, only State

Bank of India is among the top 200 banks in the world. Consolidation of the industry will better help banks raise capital for growth from the financial market without further

liquidating the public sector character in ownership and management.

Over the past few decades, 36 banks and non-banking finance companies have

been merged. Most of these mergers were bail out operations forced by RBI to protect

depositors money. For example, New Bank of India with Punjab National Bank in

19891990, Bank of Karad with Bank of India in 19931994 or Global Trust Bank

with Oriental Bank of Commerce in 1994, Nedungadi Bank with Punjab National

Bank or United Western Bank takeover by IDBI. The notable exceptions were

HDFC banks takeover of Times Bank, the unification of IDBI Bank with IDBI,

the merger of SCICI, Anagram Finance, ITC Classic, Bank of Madura, ICICI with

ICICI Bank. Within a span of 18 months, ICICI announced three mergers that

with SCICI, ITC Classic and Anagram Finance. On acquiring ITC Classic, ICICI own

network improved by ten branches, 12 franchises and a depositor base of almostseven lakh. Through the merger with Anagram, ICICI gained 50 branches and depositor

base of 2,50,000 in Western India. ICICI was attracted by the retail portfolio of

Anagram, which was active in lease and hire purchase, car finance, truck finance and

consumer finance. With the merger of Bank of Madura, ICICI Bank became richer by


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almost 260 branches, 2,500 personnel, deposit base of around 37 billion and a

strong presence in the Southern States. The reverse merger of ICICI with its offspring

ICICI bank was aimed at becoming a Universal Bank which catapulted it into thesecond largest bank in India. The merger saw ICICI bank gaining critical mass and

major thrust on retail front. The merger between Standard Chartered and Grindlay

created Indias largest foreign bank. The Times Bank merger helped HDFC Bank to

increase the customer base by 2,00,000 and branches from 68 to 107 and saved the

costs associated with technology up-gradation. ING integrated its banking operation in

India with Vysya Bank and formed a common umbrella brand ING-Vysya for its

banking, asset management and insurance business of the group in India. ABN Amro

Bank NV acquired the retail banking operations of Bank of America and enhanced its

presence.

The general pattern for public sector banks has been to cater to sectors ranging from

agriculture to international banking. Private sector banks work more in terms of niches in

the area of business type. Most public sector banks except few top banks like State Bank

of India and ICICI Bank have a low presence in newer areas like derivatives, consumerbanking, and foreign institutional investor business. Fund transfer pricing plays a crucial

role in banking policy, particularly if they are to be cost effective and able to absorb

smaller banks.

The first Narasimham Committee report recommended mergers and acquisitions

to create a four tier banking structure (34 large banks with a global presence, 810

national banks and finally local and rural banks. Presently the acquiring entity need only

seek the RBIs acknowledgement. Any merger between two public sector banking

entities can take place under the norms laid down by the Banking Companies Acquisition

and Transfer of Undertakings Act 1970 and 1980 or the Bank Nationalisation Act.

According to this Act two banks can initiate merger talks but the scheme of the merger

must be finalised by the government in consultation with the Reserve Bank of India and

finally it must be placed in parliament, which has the right to modify or reject the

scheme. In case of a merger between a public sector bank and a private bank, both the

Nationalisation Act and the Company Law come into play. Finally Parliamentary

approval is necessary. The merger of two public sector banks was brought about in

19891990 when New Bank of India was merged with Punjab National Bank. However,

in 2004, the merger scheme for Bank of India and Union Bank of India did not even

reach the floor of parliament.

The international banks keen to grow inorganically through local takeovers have been

lobbying for a change in the norms governing local acquisitions. The 10% voting rights

restriction would be a major impediment to grow inorganically. Foreign banks have

focused more on corporate banking and foreign exchange business and ignored retail

finance.

The next phase of banking revolution will involve a wave of global

consolidation, mergers and acquisitions. The competitive environment has been

forcing banks across the globe to grow through mergers and acquisitions as bigger

banks can afford to provide a broad range of products apart from attaining capitaladequacy norms. Geography will play a key role in M&As in this sector. The fifth

largest bank in China is probably bigger than the top five Indian banks put together

in terms of assets. Consolidation in banking industry could lead to substantial cut in

cost per unit of production.


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Table 3 Mergers and acquisition in banking/NBFC Sector in India

Year Acquirer Target1969 State Bank of India Bank of Behar

1970 State Bank of India National Bank of Lahore

1971 Chartered Bank Eastern Bank

1974 State Bank of India Krishnaram Baldeo Bank Ltd

1976 Union Bank Belgaum Bank Ltd

19841985 Canara Bank Lakshmi Commercial Bank

1984-1985 State Bank of India Bank of Cochin

1985 Union Bank Miraj State Bank

1986 Punjab National Bank Hindustan Commercial Bank

1988 Bank of Baroda Traders Bank

19891990 Allahabad Bank United Industrial Bank

19891990 Indian Overseas Bank Bank of Tamil Nadu

19891990 Indian Bank Bank of Thanjavur

19891990 Bank of India Parur Central Bank

19901991 Central Bank of India Purbanchal Bank

19931994 Punjab National Bank New Bank of India

19931994 Bank of India Bank of Karad

19951996 State Bank of India Kasinath Seth Bank

1996 ICICI SCICI

1997 ICICI ITC Classic

1997 Oriental Bank of Commerce Bari Doab Bank

1997 Oriental Bank of Commerce Punjab Cooperative Bank

1998 ICICI Anagram Finance

1999 Bank of Baroda Bareilly Corporation Bank

1999 Centurion Bank 20th Century Finance Corporation

1999 HSBC British Bank of Middle East

1999 Union Bank Sikkim Bank

2000 HDFC Bank Times Bank

2000 Standard Chartered Grindlays Bank

2001 ICICI Bank Bank of Madura

2002 ICICI Bank ICICI

2002 Bank of Baroda Benares State Bank

2002 ING Vysya Bank

2003 Punjab National Bank Nedungadi Bank

2004 Bank of Baroda South Gujarat Local Bank

2004 Oriental Bank of Commerce Global Trust Bank

2004 IDBI IDBI Bank2006 United Western Bank IDBI Bank

2006 Centurion Bank Lord Krishna Bank

2006 The Federal Bank Ganesh Bank of Kurundwad


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3.1 Objective of the study

This study examines the banking mergers in terms of wealth creation by studying boththe stock price and operating performance. M&As related gains are measured using both

the accounting based and stock price performance approach. The study examines the

effect of mergers on the wealth of shareholders of both acquire and target banks involved

in banking mergers. The study also examines whether the operating performance of the

merged entity have improved after the merger.

The stock market reaction to the merger announcement is examined in the paper. In

an efficient capital market, if there is certainty about the scope, timing and success of a

banks merger program, then the entire net present value of a merger program should be

capitalised when the program is first announced. If there is certainty about the program,

the market reaction should be ongoing as new information is released (Paul, 1983).

3.2 Hypothesis

The hypotheses tested in this paper are:

1 The study tests the hypothesis whether banking mergers are positive net present

value activity for the bidding and target banks. The merger announcement is

expected to exhibit positive abnormal returns for the acquirer and target bank.

2 The study also examines the hypothesis whether corporate performance improves

after mergers.

3.3 Methodology

Firstly the performance of the merged banks in relation to a control group was analysed

on the basis of financial ratios. Eleven merged banks performance was compared to a

control group based on the size of the banks. Banks with assets closest to those of the

combined assets of the acquirer and target banks in the year before merger was selected

as the matching banks. Economic theory states that performance is related to banks size

because of factors such as increasing returns to scale. On account of matching criteria,

exact matching bank in the sector for some mergers could not be found. Hence the

matching bank had to be taken from the industry.

The list of acquirer, target and respective control banks are given in Appendix. The

pre-merger performance of the merger banks (acquirer and target banks) were compared

with the pre-merger performance of the control banks. The pre-merger performance ratios

were the average value for three years (3, 2, 1) before the merger. Similarly the post-

merger performance ratio of the combined bank was compared with the control group

based on three-year average (+1, +2, +3 years) after merger. For the pre-merger years, the

financial ratios were calculated on the basis of the combined value of the acquirer and

target bank. For example to calculate the ROA, the combined net profit was divided by

the combined assets of both the acquirer and target in the respective years. For the post-

merger years, the merged bank value was compared with the control bank value.

Secondly the stock market performance of the acquirer and target banks during the

period surrounding the announcement of the merger was examined.


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The sample banks involved in mergers were selected based on availability of

media announcement of M&A. The media announcement of mergers was obtained from

the CMIE prowess database, financial newspapers and other websites. Those banks

involved in M&A were only considered which were traded for at least four days in a

week. The analyses were based on 16 merger events for acquirer banks and six target

banks.1

Choosing the appropriate event date is important in event studies and based generally

on the motivation of the research. The event date considered in this study is the media

announcement of M&A. A stronger test of market efficiency would use the first public

announcement date.

Methodology for stock market event study: market model methodology was used to

estimate the abnormal stock returns. Residual analysis basically tests whether the returns

to the common stock of individual bank or groups of banks is greater or less than that

predicted by general market relationships between return and risk. One problem involved

is the choice of reference period for obtaining the parameters to be used in calculating

excess returns caused by the events such as mergers. If the reference period chosen is too

long or far removed from the event, then the risk characteristics of the sample bank may

have changed in the interval. If the reference period is too short, it may not represent a

valid benchmark.

The choice of the benchmark is probably the most important factor in making

accurate measurement of a mergers impact.

The expected rate of return on the security is found out using the market model.

The model parameters were estimated by regressing daily stock return on the

market index over the estimation period. To use the market model a clean period was

chosen 100 to 250 days (0 day being the merger announcement day) to estimate

the model parameters ( and ) The market model is given by Rt = + Rmt + t

where Rmt is the return on Sensex for day t, measures the sensitivity of the bank to

market this is a measure of risk and t is a statistical error term where t = 0. Thus the

predicted return for the bank in the event period is the return given by the market model

on that day using these estimates. Market model method is the most widely used method

since it takes explicit account of both the risk associated with the market and mean

returns.

The markets reaction to a merger bid is measured using daily stock return data to

compute excess stockholder returns. These excess returns are a measure of the

stockholders return from the new information, which becomes available to market. The

daily excess return for the security is estimated by

( )t t tXR R E R =

where

t day relative to an event

XRt excess return on the security for day t

Rt actual return on the security for day t


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E (Rt) predicted or expected rate of return on the security for day t.

Firstly the average excess returns (AAR) for each relative day t are calculated across thesecurities. Daily average cumulative excess returns (CAR) are sums of the average excess

returns over event time. In other words CAR is defined as the sum of previous daily

average residuals for each trading day. The t statistics are then calculated.

In the event time, the day on which a merger announcement appears in the press is

designated as 0. Trading days prior to the merger announcement are numbered event days

1, 2 and so on. The event days following the merger are numbered +1, +2 and so on.

The maximum time window involved in the study is 60 days to +60 days for the

acquirer banks and 10 to +10 for target banks. The other shorter time windows were also

applied for the acquirer and target banks. For merger announcements which occur before

the stock market closes, the proper event date is t = 1. For events which are announced

after the market closes the proper event day is t = 0.

Thirdly the operating performance of the acquirer banks before and after the merger

was examined to see how the financial performance changes. To analyse the operatingperformance, bank mergers in which the acquiring banks financial data were available

for a period of three years before and after the year of merger was selected for the study.

Banks were matched on pre-acquisition size of the merging banks. For every merger, a

matched control bank was selected based on asset size one-year prior to merger (1). In

other words banks with asset size closest to those of the combined acquirer and target

bank in the year 1 was selected as the matching control bank.

The pre- and post-acquisition operating performance of merging banks relative to

matched banks are compared based on three models. In the first model, cash flow was

deflated by market value of assets. In the second and third model, cash flow was deflated

by book value of assets and sales. The financial data for the year in which merger

occurred is omitted in order to control for accounting differences and any one time

merger cost incurred during the merger which would otherwise make it difficult to

compare them with results for other years. The performance data of target and biddingbank are aggregated before the merger to obtain the pro forma pre-merger performance of

the combined banks. Comparing the post-merger performance with the pre-merger

benchmark provides a measure of the change in performance.

The results of the three dimensions of the study are given in the Sections A, B and C.

Section A

This section gives the results of univariate analyses with respect to the performance of the

merged banks in relation to a control group based on financial ratios.

The ratio of capital to assets which is higher for the sample banks compared to

control banks was found to be statistically significant at 5% level of significance. All

other variables were statistically insignificant.

Compared to the pre-merger period the ROA decreased for the sample banks in the post-merger period. The ratios of loan to equity and deposit to equity increased from

37.91 and 66.59 for the sample banks in the pre-merger period to 59.04 and 92.23 in the

post-merger period. The ratio of fund-based income to cash flow (pbdit) for the sample

banks decreased from 1.27 to 0.877 in the post-merger period. The asset growth of the


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control banks were greater than that of the sample banks and was statistically significant

at 1%. All other variables showed statistical insignificance.

Table 4 Pre-merger comparison

Pre-merger period bank mean values for three year period

VariablesSample bank

(acquirer + target)Control bank

Difference(sample control)

ROA 0.009 0.009 0.000

ROE 0.746 44.15 43.4

CAPTA 0.032 0.008 0.024*

LOEQ 37.91 1325 1287

DEPEQ 66.59 1043 976.1

LIQ 0.28 0.343 0.065

AGR 0.107 0.205 0.098

PATA 0.0095 0.009 0.0007

PBTA 0.096 0.083 0.0137

PANW 0.802 0.155 0.956

AVRA 0.0139 0.022 0.008

FBIP 1.27 1.24 0.0249

FEIN 0.063 0.077 0.014

NIIP 0.626 0.564 0.0618

OITA 0.096 0.083 0.013

Note: *statistically significant at 5% level of significance for a two tailed independentsample t testROA return on assets (profit after tax /total assets)ROE return on equity (profit after tax/equity capital)CAPTA capital to assetsLOEQ loan to equity (advances/equity capital)DEPEQ deposits to equity (deposits /equity capital)ASEMP assets to employees ratio (total assets to employees)INEMP income to employees ratioLIQ liquidity ratio Cash&Govt securities to total assetsAGR asset growth ratePATA profit after tax divided by total assetsPBTA profit before depreciation, interest and tax divided by total assetsPANW profit after tax divided by net worthAVRA average return on advances profit after tax divided by advancesFBIP fund based income divided by profit before depreciation, interest and

taxesFEIN fee based income divided by profit before depreciation, interest and taxes

NIIP non-interest income divided by profit before interest, depreciation andtaxes.

OITA operating income divided by total assets.


14/28


Table 5 Post-merger comparison

Post-merger period bank mean values for three year period

VariablesSample bank

(acquirer + target)Control bank

Difference(sample control)

ROA 0.021 0.0105 0.031

ROE 0.777 11.27 10.49

CAPTA 0.034 0.0099 0.024

LOEQ 59.04 432.61 373.5

DEPEQ 92.23 453.41 361.17

LIQ 0.287 0.343 0.05

AGR 0.262 0.14 0.40***

PATA 0.021 0.0105 0.031

PBTA 0.041 0.068 0.026

PANW 0.466 0.174 0.64

AVRA 0.021 0.023 0.001

FBIP 0.877 1.23 0.357

FEIN 0.036 0.0173 0.034

NIIP 0.317 0.6229 0.31

OITA 0.0419 0.068 0.026

Note: ***statistically significant at 1% level of significance for a two tailed independentsample t test

Section B

This section discusses the results of the analyses the stock market performance of

the acquirer and target banks during the period surrounding the announcement of the

merger.

Analysis results

The CAR for the acquirer banks show irregular trend during the pre-merger

announcement time period. CAR shows steep positive upward trend during the period

surrounding the announcement day, then again shows irregular pattern. Some steep

upward trend is observed surrounding +25 days after the merger announcement. Over all

the CAR analysis during the time period 60 to +60 reveals that the negative abnormaltrend in the pre-merger period is accompanied by positive upward movement of abnormal

returns in the post-merger announcement period.

The CAR analysis of the target banks shows steep downward movement of abnormal

returns in the post-merger period. There has been negative CAR throughout the


15/28


time window of 10 to +10 days. The CAR graph shows some upward movement

during the announcement day and then the gain slips down drastically down. This

observation is contrary to the general belief of the wealth gain by target banks involved inmergers.

The average alpha and beta values for the acquirer banks were 0.0013 and 0.96

respectively.

Figure 1 CARs for the acquirer banks (CAR in % for time window 60 to +60) (see onlineversion for colours)

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

-60

-51

-42

-33

-24

-15

-6 3

12

21

30

39

48

57

Day

Cumulativev

alue

C

Figure 2 CAR for target banks involved in merger (CAR for 10 to +10 days) (see online versionfor colours)

-35.0000%

-30.0000%-25.0000%

-20.0000%

-15.0000%

-10.0000%

-5.0000%

0.0000%

5.0000%

-10

-8

-6

-4

-2 0 2 4 6 8

10

Day


16/28


Table 6 Summary of average daily abnormal returns and CARs: acquirer banks

Acquirer TargetEvent

AAR% CAR% AAR% CAR%

20 0.002 0.0016

19 0.006 0.0077

18 0.01 0.007

17 0.01 0.021

16 0.01 0.036

15 0.006 0.03

14 0 0.03

13 0 0.031

12 0.019 0.011

11 0.012 0.001 10 0.022 0.0227 1.46616 1.46616

9 0.028 0.051 0.34934 1.8155

8 0.028 0.0785 1.6527 0.16283

7 0.023 0.1012 3.077 2.9142

6 0.008 0.1091 3.951 6.8652

5 0.01 0.1195 5.9535 12.819

4 0.004 0.1233 6.7398 19.558

3 0.008 0.1313 7.6644 27.223

2 0.016 0.1475 5.2992 32.522

1 0.024 0.1717 4.1384 36.66

0 0.062 0.234 5.5751 42.2361 0.067 0.3008 6.9872 49.223

2 0.066 0.3669 11.846 61.069

3 0.053 0.4203 20.424 81.493

4 0.065 0.485 20.969 102.46

5 0.049 0.5339 22.041 124.5

6 0.055 0.5887 22.426 146.93

7 0.049 0.6381 23.8 170.73

8 0.054 0.6925 26.552 197.28

9 0.061 0.7532 27.867 225.15

10 0.055 0.8077 28.627 253.77

11 0.051 0.858412 0.061 0.9194

Notes: AAR average abnormal returnCAR cumulative abnormal return


17/28


Table 6 Summary of average daily abnormal returns and CARs: acquirer banks (continued)

Acquirer TargetEvent AAR% CAR% AAR% CAR%

13 0.055 0.9743

14 0.048 1.0222

15 0.047 1.0693

16 0.052 1.1212

17 0.061 1.1817

18 0.059 1.2405

19 0.059 1.2993

20 0.064 1.3635

Notes: AAR average abnormal return

CAR cumulative abnormal returnIt is observed that from 12 days till +20 days after announcement of mergers, the

average abnormal return (AAR) has been positive for the acquirer banks. The study

documents an AAR of 0.062% and 0.067% on 1 and 0 day of announcement for the

acquirer banks. The maximum AAR for the acquirer banks during the period 20 to +20

was observed for +1 day after merger announcement (0.067%). But the abnormal return

analysis for the target banks for the period 10 to +10 reveal that except for the 10 and

9 day, the AARs were negative during the rest of the time window period. The AAR

was 5.57% on the day before announcement and 6.98% on the day of announcement

for the target banks. On the +10 day after announcement, the AAR was 28.62% for the

target bank. Hence it can be stated that stock market reacts negatively to merger

announcement with respect to target banks. The results may indicate that the terms of the

merger are unduly favourable to the acquirer at the expense of the target. Investors may

not perceive positive futuristic benefits from mergers for the target banks. This is evident

from the massive wealth erosion due to stock market performance of target banks.

Table 7 Summary statistics of daily returns of banks involved in mergers

Acquirer banks Target Banks

Through CAR value t-statistic Through CAR value t-statistic

Cumulative market model adjusted returns in %

60 +60 0.053 9.39***

40 +40 1.022 1.37

20 +20 1.36 6.08***

10 +10 0.54 4.77*** 10 +10 253.77 4.32***

5 +5 0.33 3.06** 5 +5 18.09 3.19**

1 +1 0.104 1.98 1 +1 1.69 0.32

Number of banks in the sample 16* Number of banks in the sample 6

Note: *two mergers each of ICICI Ltd were taken for the study


18/28


The CAR analysis reveals that merger announcement is a value-creating activity for

acquirer banks. The CAR for the acquirer bank was 0.053% with a t statistic value of

9.39 at 1% level of significance for the 121-day surrounding the merger announcement(60 to +60). Similarly the CAR value during the time window 20 through +20 was

1.36% with statistical significance at all levels. The positive CAR value for the acquirer

banks in the time windows 10 to +10, 5 to +5 were also statistically significant.

The CAR for the target banks show steep decline during the merger announcement

period.

During the time window 10 to +10 days, the CAR declined by 253%. In other

period of analysis also the CAR showed negative returns for the target banks.

The study reports negative announcement returns for the target banks. The pattern of

market based returns for the acquirer bank was positive in all the time window period. It

can be stated that merger announcement are value-creating activities for the acquirer

banks. At the same time merger announcement erode shareholder wealth for the target

banks.

Section C

This section deals with the accounting based financial results to examine whether the

long term operating performance improves after merger.

Table 8 Summary statistics of financial variables of acquirer banks in the pre- andpost-merger period: Rs in Crores

Year 3 2 1 0 1 2 3

MEAN 205.2047 241.0076 267.9347 383.6163 473.1235 527.6882 500.9415

MEDIAN 91.13 70.73 130.9 235.61 411.31 454.84 262.06

Net profit

SD 215.8227 261.0498 311.3849 402.7969 516.4446 513.8885 592.6905

MEAN 18,760.83 22,168.35 25,643.1 32,528.02 41,586 47,039.68 45,987.6

MEDIAN 7,996.89 8,668.65 12,072.62 19,404.44 24,128.65 29,340.46 23,819.11

Total

assets

SD 20,997.59 23,670.53 27,191.64 31,980.81 40,676.41 45,231.15 47,487.38

MEAN 1,488.835 1,784.609 1,996.042 2,457.804 2,672.124 3,343.727 3,044.219

MEDIAN 555.9 646.43 825.1 1,191.45 1,681.54 1,551.89 1,558.43

PBDIT

SD 1,497.419 1,760.192 1,985.903 2,371.11 2,683.392 3,293.546 3,302.48

MEAN 1,394.817 1,683.934 1,886.775 2,304.733 2,432.366 2,910.596 2,674.059

MEDIAN 515.92 594.45 812.1 1,102.2 1,532.27 1,323.81 1,305.38

Operatingprofits

SD 1,441.693 1,706.927 1,898.404 2,231.13 2,485.701 2,809.419 2,985.652

MEAN 2,001.506 2,368.231 2,741.501 3,344.203 3,650.225 4,477.004 4,151.485

MEDIAN 763.95 816.89 1,048.09 1,702.89 2,382.44 2,341.65 2,035.41

Sales

SD 2,120.888 2,454.412 2,819.068 3,256.37 3,561.986 4,225.988 4,228.091

The mean and median characteristics of all the financial variables are showing an

increasing trend in the post-merger period compared to the pre-merger period. The mean


19/28


and median net profit of the acquirer banks have increased by 144% and 187.5% in the

post-merger period of +3 year after merger compared to the pre-merger period of 3 year

before merger. The mean of the total assets have increased by 79% during the timewindow 1 to +3 year of merger. The mean of cash flow, operating profits and sales have

increased by 52%, 41.7% and 24.13% respectively during the same window period of 1

to +3 year after merger. The median of total sales increased by 166% during the time

window 3 to +3 year of merger. The median of operating profits increased by 1.57 times

during the time window 1 to +3 year. The median of total cash flow increased by 1.8

times during the time period 1 to +3 year. The median assets and net profit increased by

97% and 100% respectively during the above period.

The mean size of the target banks were about 54% of that of acquirer banks. The

median size of target banks were found to be about 16% of the size of acquirer banks.

Model 1 Cash flow to market value of assets

This model analyses the cash flow return on market value of assets relative to matched

banks. Operating cash flow ROA is profit before depreciation, interest and taxes as a

percentage of market value of assets at the beginning of each year. The market value of

assets is the sum of the market value of outstanding equity and book value of debt. Pre-

merger returns for the combined sample banks are weighted averages of target and

acquirer returns with the weights being the relative asset values of the two banks. Post-

merger returns uses data for the merged banks. Banks are matched on the basis of

combined assets of the acquiring and target banks one year prior to acquisition. Each

merger is denoted by i. The matched bank adjusted excess cash flow return is computed

for each bank and year as the difference between the sample bank value in that year and

control bank. MACRposti and MACRprei are matched bank adjusted excess cash flow

return in the post- and pre-merger periods for the bank i.

A cross-sectional regression approach is used to compare performance before and

after merger. The measure of abnormal matched bank adjusted cash flow return measure

incorporates the relation between pre- and post-merger-matched bank adjusted returns.

The excess control bank adjusted cash flow returns are estimated using the following

cross sectional regression.

i iMACRpost MACRpre + = +

where MACRposti is the mean annual matched bank adjusted cash flow return for

company i from the post-merger years and MACRprei is the pre-merger mean for the

same company. The slope coefficient captures any correlation in cash flow returns

between the pre-merger and post-merger years so that MACRprei measures the effect of

the pre-merger performance on post-merger returns. The intercept is therefore

independent of pre-merger returns.

The number of observations has been truncated due to non-availability of data. The

matched banks showed superior cash flow returns on market value of assets compared to

the sample of merging banks. The cash flow return on market value of assets is showing a

decreasing trend during the period 3 to +3 year for both the merging and control banks.

It has been observed that the market value of equity and book value of debt have

increased substantially in the post-merger period.


20/28


Table 9 Model cash flow return on market value of assets

Merged banks Matched Banks Difference

Merg Mtch (Mergi Mtchi)Years aroundmergers

Mean Mean Mean

Panel A: cash flow return on market value of assets

3 72.48% 182.05% 109.57%

2 69.5 123.49 53.99

1 41.91 112.27 70.36*

1 27.27 62.99 35.72*

2 31.84 48.33 16.49

3 26.03 52.81 26.78

Annual performance 61.31% 139.27% 77.96%

For years

3 to 1


For years

+1 to +3

Panel B: abnormal matched bank adjusted operating cash flow returns (t values in parenthesis)

i i

i i

2

MACRpost MACRpre +

MACRpost 0.043 0.128 MACRpre

R 0.176

F statistic 0.428 N 5

( 0.161)(0.654)

= +

= +

=

= =

The difference between the mean of merging and matching bank cash flow returns arestatistically insignificant during the pre-merger period of 3, 2 years. The mean

differences were also statistically insignificant during the period +2 and +3 years. But the

mean returns are negative and statistically significant in the year 1 at 10% level of

significance (t value = 2.282). The difference between mean returns in the year +1 was

negative and statistically significant at 10% level (t = 2.123). The regression analysis

examines the impact of pre-merger matched bank cash flow returns on post-merger

matched bank cash flow returns. The intercept with a value of 0.043 is statistically

insignificant. The slope coefficient with a value of 0.128 is also statistically insignificant.

There is no evidence to suggest that post-merger performance improves based on the

market value of assets model.

Model 2 Cash flow to assets model

Operating cash flow ROA is profit before depreciation, interest and taxes divided by thebook value of assets at the beginning of the year. Pre-merger returns for the combined

bank are weighted averages of target and acquirer returns, with the weights being the

relative asset values of the two banks. Post-merger returns use data for the merged banks.

Banks are matched on the basis of acquiring and target banks combined size (measured


21/28


by total assets) one year prior to the acquisition. The pre- and post-merger cash flow

returns on book value of assets are calculated for the control banks. Each merger is

denoted by i. The matched bank adjusted excess cash flow return is computed for eachbank and year as the difference between the sample bank value in that year and control

banks. MACRposti and MACRprei are the matched bank adjusted excess cash flow return

in the post- and pre-merger periods for the bank i. This model is not sensitive to market

revaluations of equity after merger.

Table 10 Model cash flow to assets model



Mean Mean Mean

Panel A: cash flow return on book value of assets

3 10.28% 8.19% 2.09%*

2 9.71 7.89 1.82 1 10.06 8.18 1.88

1 1.95 7.24 5.29

2 5.04 6.98 1.94

3 5.51 6.88 1.37


For years

3 to 1


For years

+1 to +3


i i

2


R 0.23

F statistic 3.99

N 10

( 0.324)( 1.9)*

=

=

=

=

Col 2 and Col 3 in panel A indicate the mean cash flow returns of the merger and

matched banks in the pre- and post-merger period. Column 4 shows the mean matched

bank adjusted cash low returns for the merger in the pre- and post-merger period. The

merger banks have greater cash flow returns in the pre-merger period compared to the

control banks. But in the entire post-merger time window, the matched control bank has

higher cash flow returns compared to the merged banks. The mean cash flow return for

the merged bank decline from 10.28% in the period 3 year to 5.51% in +3 year of

merger. In the year +1, the cash flow ROA was 1.95%.The difference of mean of

matched bank adjusted cash flow return was positive and statistically significant at 3

year. The cash flow returns for the merger banks get drastically reduced in the post-

merger years. The increase in asset size after merger with no proportionate increase in the

cash flow could be attributed to the reduction in cash flow returns. The average cash flow


22/28


returns in the pre-merger period (3 to 1) was 10.01% for merger banks and 8.08% for

the control group. The corresponding values in the post-merger period was 4.16% and

6.93% respectively. The results in the panel A and panel B (regression results) suggestthat corporate performance of banks does not improve after mergers.

Model 3 Cash flow to income model

Operating cash flow return on income is profit before depreciation, interest and taxes

divided by the total income at the beginning of the year. Pre-merger returns for the

combined bank are weighted averages of target and acquirer returns, with the weights

being the relative asset values of the two banks. Post-merger returns use data for the

merged banks. Banks are matched on the basis of acquiring and target banks combined

size (measured by total assets) one year prior to the acquisition. The pre- and post-merger

cash flow returns on book value of assets are calculated for the control banks. Each

merger is denoted by i. The matched bank adjusted excess cash flow return is computed

for each bank and year as the difference between the sample bank value in that year and

control banks. MACRposti and MACRprei are the matched bank adjusted excess cashflow return in the post- and pre-merger periods for the bank i.

Table 11 Model cash flow to Income model



Mean Mean Mean

Panel A: cash flow return on market value of assets

3 78.52% 74.37% 4.15%

2 78.86 73.75 5.11

1 75.99 78.28 2.29

1 63.69 76.41 12.72

2 47.08 73.54 26.46

3 58.67 73.35 14.68


For years

3 to 1

Annual performance 54.51% 74.84% 20.33%**

For years

+1 to +3


i i

2


R 0.018

F statistic 0.61

N 10

( 1.47)(0.401)

= +

=

=

=


23/28


In this model cash flow was deflated by total income. The cash flow returns of merging

banks have decreased from 78.52% in the year 3 to 58.67% in the year +3. But the cash

flow returns of the control banks are showing not much difference during the period 3 to+3. The differences of matched banks adjusted returns were negative and statistically

significant at 5% level of significance during the period +1 to +3. The t value was 2.046.

The cash flow returns for matched banks were higher than the sample banks during the

period +1 to +3. The mean differences of the matched bank adjusted cash flow returns.

Over all results based on pre- and post-merger comparison and regression analysis

suggest no evidence of improvement of corporate performance.

4 Summary

The main research approaches that help us in forming a view of M&A value creation is

based on event studies and accounting studies. Event studies examine the abnormal

returns to shareholders in the period surrounding the merger announcement. Theaccounting studies examine the operating performance (based on reported financialstatements) of acquirers before and after mergers to see how financial performancechanges. This study based on Indian banking mergers examine the impact of mergers onboth the stock market wealth creation and operating performance.

The study also analysed the performance of the merged banks in relation to a controlgroup based on financial ratios. Compared to the pre-merger period the ROA decreasedfor the sample banks in the post-merger period. The ratios of loan to equity and deposit toequity increased from 37.91 and 66.59 for the sample banks in the pre-merger period to59.04 and 92.23 in the post-merger period. The ratio of fund-based income to cash flow

(profit before depreciation, interest and taxes) for the sample banks decreased from 1.27to 0.877 in the post-merger period. The asset growth of the control banks were greaterthan that of the sample banks and was statistically significant at 1%.

The results of CARs analysis signify that merger announcements are value-creating

activities for the acquirer banks. At the same time merger announcement erodeshareholder wealth for the target banks. The CAR for the acquirer bank was 0.053% witha t statistic value of 9.39 at 1% level of significance for the 121-day surrounding themerger announcement (60 to +60). The CAR value for the acquirer was positive andstatistically significant in all the time window period except during the 40 to +40 period.The CAR analysis of the target banks show steep downward movement of abnormalreturns in the post-merger period. There has been negative CAR throughout the time

window of 10 to +10 days.The framework of pre-merger and post-merger comparison of the operating

performance of the acquirer banks was based on three alternate models whereby the cashflow was deflated by market value of assets, book value of assets and income. The resultdoes not provide evidence to suggest the fact that corporate performance improves after

mergers.

5 Conclusion and implication

Deregulation and changing technology have dramatically transformed the banking

industry over the past decades enabling many banks to provide a wider range of banking


24/28


services and to service more customers across a larger geographical area. The fervour of

consolidation is based on a belief that gains can accrue through expense reduction,

increased market power, reduced earnings volatility and scale and scope economies. Ifconsolidation does in fact lead to performance gains, then the shareholder wealth can be

increased.

In Indian context, earlier most of the mergers were bail out operations forced by RBI

to protect depositors money. Winds of change appeared with the onset of financial sector

reforms. Entry barriers were removed paving the way for new entrants. Prudential and

capital adequacy norms were introduced in line with global practices. interest rates were

deregulated giving banks more freedom as well as more competition. The artificial divide

between the development financial institutions and banks have been removed.

Technology came in to impact the banks in a big way.

A merger is assumed to create value if the stock market returns of the bidder and

target increases on the announcement of the merger. The results of this study show that

mergers in the banking sector are positive net present value activities for the bidding

banks. The positive announcement returns to biding banks could be partly attributable to

positive signalling related to the value created by merger. The study documents negative

abnormal returns for the target banks. The results with respect to the acquirer banks

confirm the point that that merger programs are consistent with the value maximising

behaviour by management of the acquirer banks. Post-merger excess return experience of

acquirer banks is consistent with the efficient markets hypothesis. The results with

respect to acquirer banks returns signals the confidence of the investors in the ability of

the acquirer bank to turnaround the inefficiently managed target banks. The study finds

that the operating performance does not improve after mergers. Perhaps the real

economic gains could be analysed over a longer period of time.

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Notes

1 For the stock market study, the acquirer banks like ICICI Ltd. and IndusInd Banks

involvement in two mergers at different period were considered. ICICI ltd was also includedin the target group for media announcement when the bank got merged into ICICI Bank. Thenumber of sample firms in the target group was low due to non-availability of data.


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Appendix

Section A

Table A1 Comparative study of banks involved in mergers

Year ofmerger

Acquirer banks Target banks Control banks

1 1997 ICICI Ltd. ITC Classic Finance Canara Bank

2 1999 Lloyds Finance Sandhead Lakshmi Vilas Bank

3 1999 HDFC TIMES Bank South Indian Bank Ltd.

4 2000 Apple Finance Ltd. Apple Credit Corp. Ltd. ABN AMRO Bank Ltd.

5 2001 ICICI Bank ICICI Ltd. Bank of India

6 2001 Indusind Bank Indusind ent & fin Ltd. J&K Bank

7 2002 Punjab National Bank Nedungadi Bank IDBI8 2003 Vijaya Bank Vibank Housing and

FinanceState Bank ofTravancore

9 2003 Indusind Bank Ashok Leyland finance J&K Bank

10 2003 Centurion Bank Bank of Muscat Bank of AmericaNational

11 2004 Oriental Bank ofCommerce

Global Trust Bank Union Bank of India

Section B

Table A2 List of acquirer and target banks involved in merger with date of announcement

Date Name of acquirer banks

26/11/1997 ICICI Ltd.

21/03/1999 Lloyds Finance

21/12/1999 Federal Bank

06/01/1999 ICICI Ltd.

19/11/1999 HDFC Bank

02/08/2000 Apple Finance Ltd.

20/10/2001 Bank of Baroda

24/10/2001 ICICI Bank

24/02/2001 IndusInd Bank

16/04/2002 Kotak Mahindra

18/09/2002 Bank of India

7/10/2003 Vijaya Bank

02/12/2003 Indus Ind bank

28/10/2003 Centurion Bank

08/05/2004 Oriental Bank of Commerce

14/11/2002 Punjab National Bank


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Table A2 List of acquirer and target banks involved in merger with date of announcement(continued)

Date Name of target banks

26/11/1997 ITC Classic Finance

02/08/2000 Apple Ltd.

24/10/2001 ICICI Ltd.

14/11/2002 Nedugandi Bank

02/12/2003 Ashok Leyland Financial

08/05/2004 Global Trust Bank

Section C

Table A3 List of acquirer, target and control banks used for Model 1

Year of merger Acquirer Target Control1999 HDFC Times Bank South Indian Bank

2001 ICICI Bank ICICI Ltd. Bank of India

2002 Punjab National Bank Nedungadi Bank Canara Bank

2003 Indus Ind. Ashok Leyland Finance J&K Bank

2004 OBC GTB Union Bank of India

Table A4 List of acquirer, target and control banks used for Model 2 and Model 3

Year of merger Acquirer Target Control

1997 ICICI Ltd. ITC Classic Canara Bank

1999 Lloyds Finance Sandhead Lakshmi Vilas Bank

2000 Apple Finance Ltd. Apple Credit Corp ABN Amro Bank Ltd.

2001 ICICI Bank ICICI Ltd. Bank of India

1999 HDFC Times Bank South Indian Bank

2002 Punjab National Bank Nedugandi Bank IDBI

2003 Indus Ind Bank Ashok Leyland J&K Bank

2003 Vijaya Bank Vibank State Bank of Travancore

2004 OBC GTB Union Bank of India

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