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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 the impact 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 of cumulative abnormal returns analysis signify that merger announcements are value-creating activities for the acquirer banks. At the same time, merger announcements erode shareholder wealth for the target banks. The framework of pre-merger and post-merger comparison of the operating performance of the acquirer 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 not provide evidence to support the view that corporate performance improves after mergers.

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

Reference to this paper should be made as follows: Kumar, B.R. and Suhas, K.M. (2010) ‘An analytical study on value creation in Indian bank mergers’, Int. J. Afro-Asian J. Finance and Accounting, Vol. 2, No. 2, pp.107–134.

Biographical notes: B. Rajesh Kumar is an Assistant Professor at Institute of Management Technology, Dubai, UAE. He has published empirical research papers in the area of M&A in refereed journals like IIMA Vikalpa, IIMB Management Review, IIMC Decision and Journal of Applied Business and Economics. He has written two books, including a textbook on mergers and acquisitions 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

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. Cost reductions 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 Union’s acquisition of First Fidelity Bancorp was to market its brokerage and mutual fund services to First Fidelity’s 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 bank’s 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 merger related 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.

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 the difference 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 acquirer’s 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


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 share price reaction pursuant to the announcement of a merger programme that involved the entire banking sector in Malaysia over the period 1999–2004

The study found an over all positive market reaction to the announcement of the bank mergers, notwithstanding that the bank mergers were imposed by the Central Bank. Typically substantial returns were mostly recorded on the day before the announcement followed by a slight market correction thereafter.

Karceski et al. (2005)

The study estimate the impact of bank merger announcements on borrower’s stock prices for publicly traded Norwegian banks

Borrowers of target banks lose about 0.8% in equity value, while borrowers of acquiring banks earn positive abnormal returns, suggesting that borrower welfare is influenced by a strategic focus favouring acquiring borrowers. Larger merger induced increases in relationship termination rates are associated with less negative abnormal returns, suggesting that banks with low switching costs switch banks.

Tetsuya (2005) Using event study methodology, this study investigated the impact of Japanese bank mergers announcement on the market value of financially distressed borrowers

The news of bank mergers brought about a positive wealth effect on financially distressed borrowers.

Olson et al. (2005)

This study examines the mergers of the US publicly traded bank holding companies during 1987–2000 and analyses the determinants of long term operating and stock performance using cross sectional studies

The most economically significant determinants of the merged bank’s abnormal stock return performance are the acquiring bank’s estimated sustainable growth rate prior to the acquisitions as well as post acquisition changes in this growth rate and the bank’s dividend payout ratio.

Ismail and Davidson (2005)

This study analyses merger and shareholder effects in European banking

The study finds that abnormal returns are higher in bank to bank rather than cross product deals, suggesting that there is scope for exploiting economies of scale and market power within the banking sector.

Cornett et al. (2006)

This paper examines the operating performance around commercial bank mergers

The study finds that industry adjusted operating performance of merged banks increases significantly after the merger. Large bank mergers produce greater performance gains than small bank gains.


Table 1 Other performance related studies (continued)


Mayer-Sommer et al. (2006)

Analyses the impact of acquisition of First Savings Bank of Virginia by Southern Financial Bank on shareholder returns

The study finds that shareholders gained excess returns.

Altunba et al. (2008)

The study examine the impact of European Union banks’ strategic similarities on post-merger performance

The study finds that on average, bank mergers have resulted in improved performance. The study also finds that for domestic deals, it can be quite costly to integrate institutions which are dissimilar in 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 profit efficiency

The study identifies successful mergers as those that fulfil simultaneously two criteria. First merged banks must exhibit efficiency levels above the average of non-merging banks. Second banks must exhibit efficiency changes between merger and evaluation. The study further finds that every second merger is a success in terms of either cost efficiency or profit efficiency.

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 acquirer’s 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


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 whether financial deregulation and technological progress has played an important role in the process of mergers and acquisitions (M&As) in the banking sector during the period 1995–2001. Multinomial logit analysis was used to analyse the characteristics of continental European financial institutions.

Size is an important factor in mergers and acquisitions.

Sharkas et al. (2008)

This study investigates the cost and profit efficiency effects of bank mergers on the US banking industry. Non-parametric technique of data envelopment analysis was used to evaluate the production structure of merged and non-merged banks.

The empirical results indicate that mergers have improved the cost and profit efficiencies of banks. Further evidence shows that merged banks have lower costs than non-merged bank because they are using the most efficient technology available (technical efficiency) as well as a cost minimising input mix (allocative efficiency). The results also suggest that there is an economical rational for future mergers in the banking industry.

Hagendroff et al. (2007)

This article aims to advocate an extension of empirical work to focus more clearly on the relationship between banks’ governance attributes and the success of bank mergers.

The results suggest that sound governance mechanisms such as managerial pay incentives and board composition may help prevent bank executives from pursuing value destroying acquisitions.

Rezitis (2008) The study investigates the effect of acquisition activity on the efficiency and total factor productivity of Greek banks using a stochastic output distance function.

The results of the study indicate that the effects of mergers and acquisitions on technical efficiency and total factor productivity growth of Greek banks are rather negative. In particular, the technical efficiency of merger banks decreased in the period after 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).


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 1989–1990, Bank of Karad with Bank of India in 1993–1994 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 bank’s 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 almost seven 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


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 the second 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 India’s 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, consumer banking, 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 (3–4 large banks with a global presence, 8–10 national banks and finally local and rural banks. Presently the acquiring entity need only seek the RBI’s 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 1989–1990 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 capital adequacy 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.


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

Year Acquirer Target 1969 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 1984–1985 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 Trader’s Bank 1989–1990 Allahabad Bank United Industrial Bank 1989–1990 Indian Overseas Bank Bank of Tamil Nadu 1989–1990 Indian Bank Bank of Thanjavur 1989–1990 Bank of India Parur Central Bank 1990–1991 Central Bank of India Purbanchal Bank 1993–1994 Punjab National Bank New Bank of India 1993–1994 Bank of India Bank of Karad 1995–1996 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 Grindlay’s 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 Bank 2006 United Western Bank IDBI Bank 2006 Centurion Bank Lord Krishna Bank 2006 The Federal Bank Ganesh Bank of Kurundwad


3.1 Objective of the study

This study examines the banking mergers in terms of wealth creation by studying both the 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 bank’s 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 bank’s 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.


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 merger’s 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 (α and β) The market model is given by Rt = α + βRmt + ∈t where Rmt is the return on Sensex for day t, β measures the sensitivity of the bank to market – this is a measure of risk and εt is a statistical error term where Σεt = 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 market’s 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 stockholder’s 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


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 the securities. 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 operating performance, bank mergers in which the acquiring bank’s 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 bidding bank 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


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

Variables Sample 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 independent sample t test ROA return on assets (profit after tax /total assets) ROE return on equity (profit after tax/equity capital) CAPTA capital to assets LOEQ 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 ratio LIQ liquidity ratio – Cash&Govt securities to total assets AGR asset growth rate PATA profit after tax divided by total assets PBTA profit before depreciation, interest and tax divided by total assets PANW profit after tax divided by net worth AVRA average return on advances – profit after tax divided by advances FBIP fund based income divided by profit before depreciation, interest and taxes FEIN fee based income divided by profit before depreciation, interest and taxes NIIP non-interest income divided by profit before interest, depreciation and taxes. OITA operating income divided by total assets.


Table 5 Post-merger comparison

Post-merger period bank mean values for three year period

Variables Sample 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 independent sample 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 abnormal trend 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


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 in mergers.

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 online version for colours)

-0.06-0.04-0.02

00.020.040.06

0.080.1

-60

-51

-42

-33

-24

-15 -6 3 12 21 30 39 48 57

Day

Cum

ulat

ive

valu

e

C

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


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

Acquirer Target Event

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 –42.236

1 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 0.8584

12 0.061 0.9194

Notes: AAR average abnormal return CAR cumulative abnormal return


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

Acquirer Target Event

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 return

It 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


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- and

post-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

Operating profits

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


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 time window –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 α βMACRpre + ε= +

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 β captures any correlation in cash flow returns between the pre-merger and post-merger years so that βMACRprei measures the effect of the pre-merger performance on post-merger returns. The intercept α 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.


Table 9 Model – cash flow return on market value of assets

Merged banks Matched Banks Difference Merg Mtch (Mergi – Mtchi)

Years around mergers

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 Annual performance 28.38% 54.71% –26.33% For years +1 to +3

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

i i

i i2

MACRpost α βMACRpre + εMACRpost 0.043 0.128 MACRpre

R 0.176F statistic 0.428 N 5( 0.161)(0.654)

= += − +

== =

−

The difference between the mean of merging and matching bank cash flow returns are statistically 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 the book 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


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 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

Merged banks Matched Banks Difference Merg Mtch (Mergi – Mtchi)

Years around mergers

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 Annual performance 10.01% 8.08% 1.93% For years –3 to –1 Annual performance 4.16% 6.93% –2.77% For years +1 to +3


i i2

MACRpost 0.007 0.554 MACRpre

R 0.23 F statistic 3.99N 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


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) suggest that 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 cash flow return in the post- and pre-merger periods for the bank i. Table 11 Model – cash flow to Income model

Merged banks Matched Banks Difference

Merg Mtch (Mergi – Mtchi) Years around mergers

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

Annual performance 77.79% 75.47% 2.32%

For years

–3 to –1

Annual performance 54.51% 74.84% –20.33%**

For years

+1 to +3


i i2

MACRpost 0.210 0.132 MACRpre

R 0.018F statistic 0.61 N 10( 1.47)(0.401)

= − +

==

=−


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. The accounting studies examine the operating performance (based on reported financial statements) of acquirers before and after mergers to see how financial performance changes. This study based on Indian banking mergers examine the impact of mergers on both the stock market wealth creation and operating performance.

The study also analysed the performance of the merged banks in relation to a control group based on financial ratios. 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 (profit before depreciation, interest and taxes) for the sample banks decreased from 1.27 to 0.877 in the post-merger period. The asset growth of the control banks were greater than 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 erode shareholder wealth for the target 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). The CAR value for the acquirer was positive and statistically 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 abnormal returns 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 cash flow was deflated by market value of assets, book value of assets and income. The result does 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


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. If consolidation 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 included in the target group for media announcement when the bank got merged into ICICI Bank. The number of sample firms in the target group was low due to non-availability of data.


Appendix

Section A

Table A1 Comparative study of banks involved in mergers

Year of merger 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 IDBI

8 2003 Vijaya Bank Vibank Housing and Finance

State Bank of Travancore

9 2003 Indusind Bank Ashok Leyland finance J&K Bank 10 2003 Centurion Bank Bank of Muscat Bank of America

National 11 2004 Oriental Bank of

Commerce 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 Lloyd’s 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


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 Control

1999 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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