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MERGERS AND ACQUISITIONS IN INDIAN BANKING SECTOR

Submitted in partial fulfillment of the requirements of the degree of B.A. (H)Business Economics

By: ChiragAggarwal (10071208005) Rachit Sachdeva (10071208019) Harjeet Singh (2045) Neeraj Garg (2048)

Supervisor: Mr. Abhishek Kumar

Electronic copy available at: http://ssrn.com/abstract=2178051

ACKNOWLEDGEMENT

A successful and satisfactory completion of any project is the outcome of invaluable and aggregate contribution of personal skill in the radical direction and the guidance of the concerned Authorities. Even the best efforts are wasted without a proper guidance and advice. The success of any project is the result of hard work, dedication and the support of the well wishers. It is our proud privilege to express our sincere gratitude to all those who helped us directly or indirectly in completion of this project report. We are greatly indebted to Assistant Professor Abhishek kumar for his support, guidance and valuable suggestions by which this work has been completed effectively and efficiently. These all contributions are of immense value.

Last but not least, we are indebted to those people who indirectly contributed and without them this work would not have been possible. Endeavour has been made to make the project error free yet, we apologize for the mistakes.

Chirag Aggarwal (2024) Rachit Sachdeva (2042) Harjeet Singh (2045) Neeraj Garg (2048)

Electronic copy available at: http://ssrn.com/abstract=2178051

INDEX

S.No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

ABSTRACT INTRODUCTION

Particulars 4 5 6 8 9

Page No.

EMPERICAL RESEARCH SCOPE AND OBJECTIVES OF THE STUDY MERGER TYPES OF MERGERS ACQUISITION TYPES OF ACQUITIONS PURPOSE OF MERGERS AND ACQUISITION BENEFITS OF MERGERS AND ACQUISITION ECONOMIC THEORY LIMITATIONS HYPOTHESIS TESTING METHODOLOGY CONCLUSIONS BIBLIOGRAPHY

10 13 14 17 19 23 24 25 27 31 46

ABSTRACT
The project aims to understand the behavior of various Mergers and Acquisitions in Indian Banking Sector. A large number of international and domestic banks all over the world are engaged in merger and acquisition activities. One of the principal objectives behind the mergers and acquisitions in the banking sector is to reap the benefits of economies of scale. In the recent times, there have been numerous reports in the media on the Indian Banking Industry Reports have been on a variety of topics. The topics have been ranging from issues such as user friendliness of Indian banks, preparedness of banks to meet the fast approaching Basel II deadline, increasing foray of Indian banks in the overseas markets targeting inorganic growth.

Mergers and Acquisitions is the only way for gaining competitive advantage domestically and internationally and as such the whole range of industries are looking to strategic acquisitions within India and abroad. In order to attain the economies of scale and also to combat the unhealthy competition within the sector besides emerging as a competitive force to reckon with in the International economy. Consolidation of Indian banking sector through mergers and acquisitions on commercial considerations and business strategies is the essential pre-requisite. Today, the banking industry is counted among the rapidly growing industries in India. It has transformed itself from a sluggish business entity to a dynamic industry. The growth rate in this sector is remarkable and therefore, it has become the most preferred banking destinations for international investors. In the last two decade, there have been paradigm shift in Indian banking industries. The Indian banking sector is growing at an astonishing pace. A relatively new dimension in the Indian banking industry is accelerated through mergers and acquisitions. It will enable banks to achieve world class status and throw greater value to the stakeholders.

INTRODUCTION

The process of mergers and acquisitions has gained substantial importance in today's corporate world. This process is extensively used for restructuring the business organizations. In India, the concept of mergers and acquisitions was initiated by the government bodies. Some well known financial organizations also took the necessary initiatives to restructure the corporate sector of India by adopting the mergers and acquisitions policies. The Indian economic reform since 1991 has opened up a whole lot of challenges both in the domestic and international spheres. The increased competition in the global market has prompted the Indian companies to go for mergers and acquisitions as an important strategic choice. The trends of mergers and acquisitions in India have changed over the years. The immediate effects of the mergers and acquisitions have also been diverse across the various sectors of the Indian economy. India has emerged as one of the top countries with respect to merger and acquisition deals. In 2007, the first two months alone accounted for merger and acquisition deals worth $40 billion in India.

EMPERICAL RESEARCH

Under this study various researchers reviewed research papers for the purpose of providing an insight into the work related to Merger and Acquisitions (M&As). After going through the available relevant literature on M&As and it comes to know that most of the work done high lightened the impact of M&As on different aspects of the companies. A firm can achieve growth both internally and externally. Internal growth may be achieved by expanding its operation or by establishing new units, and external growth may be in the form of Merger and Acquisitions (M&As), Takeover, Joint venture, Amalgamation etc. Many studies have investigated the various reasons for Merger and Acquisitions (M&As) to take place, Just to look the effects of Merger and Acquisitions on Indian financial services sector. The work of Rao and Rao (1987) is one of the earlier attempts to analyse mergers in India from a sample of 94 mergers orders passed during 1970-86 by the MRTP Act 1969. In the post 1991 period, several researchers have attempted to study M&As in India. Some of these prominent studies are; Beena (1998), Roy (1999), Das (2000), Saple (2000), Basant (2000), Kumar (2000), Pawaskar (2001) and Mantravedi and Reddy (2008). Sinha Pankaj & Gupta Sushant (2011) studied a pre and post analysis of firms and concluded that it had positive effect as their profitability, in most of the cases deteriorated liquidity. After the period of few years of Merger and Acquisitions (M&As) it came to the point that companies may have been able to leverage the synergies arising out of the merger and Acquisition that have not been able to manage their liquidity. Study showed the comparison of pre and post analysis of the firms. It also indicated the positive effects on the basis of some financial parameter like Earnings before Interest and Tax (EBIT), Return on share holder funds, Profit margin, Interest Coverage, Current Ratio and Cost Efficiency etc. Kuriakose Sony & Gireesh Kumar G. S (2010) in their paper, they assessed the strategic and financial similarities of merged Banks, and relevant financial variables of respective Banks were considered to assess their relatedness. The result of the study found that only private sector banks are in favor of the voluntary merger wave in the Indian Banking Sector and public sector Bank are reluctant toward their type of restructuring. Target Banks are more leverage (dissimilarity)

than bidder Banks, so the merger lead to attain optimum capital Structure for the bidders and asset quality of target firms is very poor. Anand Manoj & Singh Jagandeep (2008) studied the impact of merger announcements of five banks in the Indian Banking Sector on the share holder bank. These mergers were the Times Bank merged with the HDFC Bank, the Bank of Madurai with the ICICI Bank, the ICICI Ltd with the ICICI Bank, the Global Trust Bank merged with the Oriental Bank of commerce and the Bank of Punjab merged with the centurion Bank. The announcement of merger of Bank had positive and significant impact on share holders wealth. Mantravadi Pramod & Reddy A. Vidyadhar (2007) evaluated that the impact of merger on the operating performance of acquiring firms in different industries by using pre and post financial ratio to examine the effect of merger on firms. They selected all mergers involved in public limited and traded companies in India between 1991 and 2003, result suggested that there were little variation in terms of impact as operating performance after merger.

SCOPE AND OBJECTIVES OF THE STUDY

To find out the impact of merger on companys stock. To examine the effects of merger on equity share holders. To examine the main factor affecting performance of company, before merger, and after merger. To study the relation between market (CNX BANK NIFTY) and company. To study other variables affecting companys operations and net returns to stock.

MERGER
Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller. Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of: Equity shares in the transferee company, Debentures in the transferee company, Cash, or

A mix of the above modes.

Merger is a financial tool that is used for enhancing long-term profitability by expanding their operations. Mergers occur when the merging companies have their mutual consent as different from acquisitions, which can take the form of a hostile takeover. Managers are concerned with improving operations of the company, managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. If we trace back to history, it is observed that very few mergers have actually added to the share value of the acquiring company and corporate mergers may promote monopolistic practices by reducing costs, taxes etc.

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TYPES OF MERGERS
Merger or acquisition depends upon the purpose of the offeror company it wants to achieve. Based on the offerors objectives profile, combinations could be vertical, horizontal, circular and conglomeratic as precisely described below with reference to the purpose in view of the offeror company.

(A) Horizontal combination: It is a merger of two competing firms which are at the same stage of industrial process. The acquiring firm belongs to the same industry as the target company. The main purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and the operations and broadening the product line, reduction in investment in working capital, elimination in competition concentration in product, reduction in advertising costs, increase in market segments and exercise better control on market.

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(B) Vertical combination A company would like to take over another company or seek its merger with that company to expand espousing backward integration to assimilate the resources of supply and forward integration towards market outlets. The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods, implements its production plans as per the objectives and economizes on working capital investments. In other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production. The following main benefits accrue from the vertical combination to the acquirer company: 1. It gains a strong position because of imperfect market of the intermediary products, scarcity of resources and purchased products; 2. Has control over products specifications.

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(C) Circular combination: Companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and diversification.

(D) Conglomerate combination: It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries. The basic purpose of such amalgamations remains utilization of financial resources and enlarges debt capacity through re-organizing their financial structure so as to service the shareholders by increased leveraging and EPS, lowering average cost of capital and thereby raising present worth of the outstanding shares. Merger enhances the overall stability of the acquirer company and creates balance in the companys total portfolio of diverse products and production processes.

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ACQUISITION
An Acquisition usually refers to a purchase of a smaller firm by a larger one. Acquisition, also known as a takeover or a buyout, is the buying of one company by another. Acquisitions or takeovers occur between the bidding and the target company. There may be either hostile or friendly takeovers. Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company.

Methods of Acquisition An acquisition may be affected by: (a) An agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power; (b) purchase of shares in open market; (c) making takeover offer to the general body of shareholders; (d) purchase of new shares by private treaty;

(e) acquisition of share capital through the following forms of considerations viz. means of
cash, issuance of loan capital, or insurance of share capital.

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TYPES OF ACQUISITION
There are different types of Acquisitions/takeover:-

1. Friendly takeovers 2. Hostile takeovers 3. Reverse takeovers

1. Friendly takeovers Before a bidder makes an offer for another company, it usually first informs that company's board of directors. If the board feels that accepting the offer serves shareholders better than rejecting it, it recommends the offer be accepted by the shareholders.

In a private company, because the shareholders and the board are usually the same people or closely connected with one another, private acquisitions are usually friendly. If the shareholders agree to sell the company, then the board is usually of the same mind or sufficiently under the orders of the shareholders to cooperate with the bidder.

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2. Hostile takeovers A hostile takeover allows a suitor to bypass a target company's management unwilling to agree to a merger or takeover. A takeover is considered "hostile" if the target company's board rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer without informing the target company's board beforehand. A hostile takeover can be conducted in several ways. A tender offer can be made where the acquiring company makes a public offer at a fixed price above the current market price. Tender offers in the USA are regulated with the Williams Act.

An acquiring company can also engage in a proxy fight, whereby it tries to persuade enough shareholders, usually a simple majority, to replace the management with a new one which will approve the takeover. Another method involves quietly purchasing enough stock on the open market, known as a creeping tender offer, to effect a change in management. In all of these ways, management resists the acquisition but it is carried out anyway. 3. Reverse takeovers A reverse takeover is a type of takeover where a private company acquires a public company. This is usually done at the instigation of the larger, private company, the purpose being for the

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private company to effectively float itself while avoiding some of the expense and time involved in a conventional IPO. However, under AIM rules, a reverse take-over is an acquisition or acquisitions in a twelve month period which for an AIM company would:

exceed 100% in any of the class tests; or result in a fundamental change in its business, board or voting control; or

in the case of an investing company, depart substantially from the investing strategy stated in its admission document or, where no admission document was produced on admission, depart substantially from the investing strategy stated in its pre-admission announcement or, depart substantially from the investing strategy

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PURPOSE OF MERGERS AND ACQUISITIONS

The purpose for an offeror company for acquiring another company shall be reflected in the corporate objectives. It has to decide the specific objectives to be achieved through acquisition. The basic purpose of merger or business combination is to achieve faster growth of the corporate business. Faster growth may be had through product improvement and competitive position. Other possible purposes for acquisition are short listed below: (1) Procurement of supplies: 1. To safeguard the source of supplies of raw materials or intermediary product; 2. To obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.; 3. To share the benefits of suppliers economies by standardizing the materials. (2) Revamping production facilities: 1. To achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources; 2. To standardize product specifications, improvement of quality of product, expanding 3. Market and aiming at consumers satisfaction through strengthening after sale Services; 4. To obtain improved production technology and know-how from the offered company 5. To reduce cost, improve quality and produce competitive products to retain and Improve market share. (3) Market expansion and strategy: 1. To eliminate competition and protect existing market; 2. To obtain a new market outlets in possession of the offeree; 3. To obtain new product for diversification or substitution of existing products and to enhance the product range; 4. Strengthening retain outlets and sale the goods to rationalize distribution; 5. To reduce advertising cost and improve public image of the offeree company; 6. Strategic control of patents and copyrights. (4) Financial strength: 1. To improve liquidity and have direct access to cash resource; 2. To dispose of surplus and outdated assets for cash out of combined enterprise; 3. To enhance gearing capacity, borrow on better strength and the greater assets backing;

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4. To avail tax benefits; 5. To improve EPS (Earning per Share). (5) General gains: 1. To improve its own image and attract superior managerial talents to manage its affairs; 2. To offer better satisfaction to consumers or users of the product. (6) Own developmental plans: The purpose of acquisition is backed by the offeror companys own developmental plans. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem of taxation, accounting, valuation, etc. But might feel resource constraint with limitations of funds and lack of skill managerial personnel. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities; secure additional financial facilities eliminate competition and strengthen its market position. (7) Strategic purpose: The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal, vertical, product expansion, market extensional or other specified unrelated objectives depending upon the corporate strategies. Thus, various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination. (8) Corporate friendliness: Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. The corporate aims at circular combinations by pursuing this objective.

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BENEFITS OF MERGERS AND ACQUISITIONS

1. GROWTH or DIVERSIFICATION: - Companies that desire rapid growth in size or market share or diversification in the range of their products may find that a merger can be used to fulfill the objective instead of going through the tome consuming process of internal growth or diversification. The firm may achieve the same objective in a short period of time by merging with an existing firm. In addition such a strategy is often less costly than the alternative of developing the necessary production capability and capacity. If a firm that wants to expand operations in existing or new product area can find a suitable going concern. It may avoid many of risks associated with a design; manufacture the sale of addition or new products. Moreover when a firm expands or extends its product line by acquiring another firm, it also removes a potential competitor.

2. SYNERGISM: - The nature of synergism is very simple. Synergism exists whenever the value of the combination is greater than the sum of the values of its parts. In other words, synergism is 2+2=5. But identifying synergy on evaluating it may be difficult, infact sometimes its implementations may be very subtle. As broadly defined to include any incremental value resulting from business combination, synergism is the basic economic justification of merger. The incremental value may derive from increase in either operational or financial efficiency. Operating Synergism: - Operating synergism may result from economies of scale, some degree of monopoly power or increased managerial efficiency. The value may be achieved by increasing the sales volume in relation to assts employed increasing profit margins or decreasing operating risks. Although operating synergy usually is the result of either vertical/horizontal integration some synergistic also may result from conglomerate growth. In addition, sometimes a firm may acquire another to obtain patents, copyrights, technical proficiency, marketing skills, specific fixes assets, customer relationship or managerial personnel. Operating synergism occurs when these assets, which are intangible, may be combined with the existing assets and organization of the acquiring firm to produce an incremental value. Although that value may be difficult to appraise it may be the primary motive behind the acquisition.

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Financial synergism-Among these are incremental values resulting from complementary internal funds flows more efficient use of financial leverage, increase external financial capability and income tax advantages.

a) Complementary internal funds flows Seasonal or cyclical fluctuations in funds flows sometimes may be reduced or eliminated by merger. If so, financial synergism results in reduction of working capital requirements of the combination compared to those of the firms standing alone.

b) More efficient use of Financial Leverage Financial synergy may result from more efficient use of financial leverage. The acquisition firm may have little debt and wish to use the high debt of the acquired firm to lever earning of the combination or the acquiring firm may borrow to finance and acquisition for cash of a low debt firm thus providing additional leverage to the combination. The financial leverage advantage must be weighed against the increased financial risk.

c) Increased External Financial Capabilities Many mergers, particular those of relatively small firms into large ones, occur when the acquired firm simply cannot finance its operation. Typical of this is the situations are the small growing firm with expending financial requirements. The firm has exhausted its bank credit and has virtually no access to long term debt or equity markets. Sometimes the small firm has encountered operating difficulty, and the bank has served notice that its loan will not be renewed? In this type of situation a large firms with sufficient cash and credit to finance the requirements of smaller one probably can obtain a good buy bee. Making a merger proposal to the small firm. The only alternative the small firm may have is to try to interest 2 or more large firms in proposing merger to introduce, competition into those bidding for acquisition. The smaller firms situations might not be so bleak. It may not be threatened by non renewable of maturing loan. But its management may recognize that continued growth to capitalize on its market will require financing be on its means. Although its bargaining position will be better, the financial synergy of acquiring firms strong financial capability may provide the impetus for the merger. Sometimes the acquired firm possesses the financing capability. The acquisition of a cash rich firm whose operations have matured may provide additional financing to facilitate growth of the acquiring firm. In some cases, the acquiring may be able to recover all or parts of

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the cost of acquiring the cash rich firm when the merger is consummated and the cash then belongs to it.

d) The Income Tax Advantages In some cases, income tax consideration may provide the financial synergy motivating a merger, e.g. assume that a firm A has earnings before taxes of about rupees ten crores per year and firm B now break even, has a loss carry forward of rupees twenty crores accumulated from profitable operations of previous years. The merger of A and B will allow the surviving corporation to utility the loss carries forward, thereby eliminating income taxes in future periods. Counter Synergism-Certain factors may oppose the synergistic effect contemplating from a merger. Often another layer of overhead cost and bureaucracy is added. Do the advantages outweigh disadvantages? Sometimes the acquiring firm agrees to long term employments contracts with managers of the acquiring firm. Such often are beneficial but they may be the opposite. Personality or policy conflicts may develop that either hamstring operations or acquire buying out such contracts to remove personal position of authority. Particularly in conglomerate merger, management of acquiring firm simply may not have sufficient knowledge of the business to control the acquired firm adequately. Attempts to maintain control may induce resentment by personnel of acquired firm. The resulting reduction of the efficiency may eliminate expected operating synergy or even reduce the post merger profitability of the acquired firm. The list of possible counter synergism factors could goon endlessly; the point is that the mergers do not always produce that expected results. Negative factors and the risks related to them also must be considered in appraising a prospective merger

Other motives For Merger

Merger may be motivated by two other factors that should not be classified under synergism. These are the opportunities for acquiring firm to obtain assets at bargain price and the desire of shareholders of the acquired firm to increase the liquidity of their holdings.

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Mergers may be explained as an opportunity to acquire assets, particularly land mineral rights, plant and equipment, at lower cost than would be incurred if they were purchased or constructed at the current market prices. If the market price of many socks have been considerably below the replacement cost of the assets they represent, expanding firm considering construction plants, developing mines or buying equipments often have found that the desired assets could be obtained where by cheaper by acquiring a firm that already owned and operated that asset. Risk could be reduced because the assets were already in place and an organization of people knew how to operate them and market their products. Many of the mergers can be financed by cash tender offers to the acquired firms shareholders at price substantially above the current market. Even so, the assets can be acquired for less than their current casts of construction. The basic factor underlying this apparently is that inflation in construction costs not fully rejected in stock prices because of high interest rates and limited optimism by stock investors regarding future economic conditions. 2. Increased Managerial Skills or Technology Occasionally a firm with good potential finds it unable to develop fully because of deficiencies in certain areas of management or an absence of needed product or production technology. If the firm cannot hire the management or the technology it needs, it might combine with a compatible firm that has needed managerial, personnel or technical expertise. Of course, any merger, regardless of specific motive for it, should contribute to the maximization of owners wealth. 3. Acquiring new technology To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.

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ECONOMIC THEORY
The Fama and French Three-Factor Model Fama and French (1993) identify a model with three common risk factors in the stock returns an overall market factor, factors related to firm size (SMB) and those related to book-to-market equity (HML). They use a time-series regression approach of Black, Jensen, and Scholes (1972), whose result says that size and book-to-market factors are proxies for explaining the differences in average returns across stocks. Used alone, these factors do not explain the large difference between the average returns on stocks and risk-free rates. This makes it imperative for the market factor to be included in the regression to explain the above, which then makes the Fama and Frenchs three-factor model: E(Ri)= Rf + [E(Rm)-Rf]bi + siE(SMB) + hiE(HML) where E(Rm)-Rf, E(SMB) and E(HML) are the factor risk premiums and bi, si and hi are the factor sensitivities. Fama and French (1996) define anomalies as the patterns in average returns that are not explained by the CAPM. These are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Fama and French (1998) find international evidence stating that for the period 1975-1995, the value premium which is the difference between the high BE/ME and low BE/ME stocks is 7.68% per year and the value stocks outperform growth (glamour) stocks in twelve of the thirteen major (developed) markets. They also allow for another out-of-sample test of value premium on sixteen emerging markets and find the same result. With respect to size effect, they find that like US stocks returns, small stocks in emerging markets have higher average return than big stocks.

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LIMITATIONS
1) Number of merger cases analyzed by various studies is much less and have taken only mergers and acquisitions. 2) It is noticed that none of the studies dealt comprehensively on trend of M&As for the post 1991 period. 3) From the survey of Indian M&As literature, it is mainly found that apart from growth and expansion, efficiency gains and market power are the two important motives for M&As. Apart from measuring post merger profitability of the merged entity, there have been no reported works on these issues in the Indian context.

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HYPOTHESIS TESTING

The problem of statistical hypothesis may be stated as simply as: Is a given observation or finding compatible with some stated hypothesis or not? The word compatible, as used here, means sufficiently close to hypothesized value so that we do not reject the stated hypothesis. For example, if some theory leads us to believe that the true slope coefficient among some variables is unity, is the observed 2=.684 obtained from its

sample, consistent with stated hypothesis? If it is, we do not reject the hypothesis; otherwise, we may reject it. Null and Alternative Hypotheses In any experiment, there are two hypotheses that attempt to explain the results. They are the alternative hypothesis and the null hypothesis. Alternative Hypothesis ( H1 or Ha ). In experiments that entail manipulation of an independent variable, the alternative hypothesis states that the results of the experiment are due to the effect of the independent variable. In the coin tossing example above, 1 H would state that the biased coin had been selected, and that p(Head) = 0.15. Null Hypothesis ( Ho ). The null hypothesis is the complement of the alternative hypothesis. In other words, if 1 H is not true, then 0 H must be true, and vice versa. In the foregoing coin tossing situation, H0 asserts that the fair coin was selected, and that p(Head) = 0.50. Thus, the decision rule to minimize the overall p(error) can be restated as follows: if p(X | 0 H ) > p(X | 1 H ) then do not reject H0 if p(X | 0 H ) < p(X | 1 H ) then reject H0 THE CONFIDENCE-INTERVAL APPROACH Two tail or two sided Suppose, for a function, H0: 2 = 0.3 H1: 2 0.3 that is, the true 2 is 0.3 under the null hypothesis but it is less than or greater than 0.3 under the alternative hypothesis. The null hypothesis is a simple hypothesis, whereas the alternative hypothesis is composite; actually it is what is known as a two-sided hypothesis.

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Confidence interval is given by: t= i.e.

Here, se

is the estimated standard error. Using t value at required significance level from t we develop a confidence interval for 2.

table and then using value of

The confidence interval provides a set of plausible null hypotheses. Therefore, if 2 under H0 falls within the 100(1 ) % confidence interval, we do not reject the null hypothesis; if it lies outside the interval, we may reject it. In statistics, when we reject the null hypothesis, we say that our finding is statistically significant. On the other hand, when we do not reject the null hypothesis, we say that our finding is not statistically significant.

In our analysis we have taken the following hypothesis: 1. Testing the significance difference between Pre and Post merger Actual Return on Equity H0 (Null Hypothesis) There is no significance difference between the pre and post merger Mean Return on Equity.(taking 100 days before merger, 100 days after merger) H1 (Alternative Hypothesis) There is significance difference between the pre and post merger mean Return on Equity. (taking 100 days before merger, 100 days after merger) This hypothesis is done to check whether there is any merger impact or not. If null hypothesis is accepted, that means there is no change in return to stock even after merger. 2. Testing the significance difference between Post mergers Actual and Predictive return H0 (Null hypothesis) There is no significance difference between the Actual and predictive return in 2nd period. (1 year before merger, 1 year after merger) H1 (Alternative hypothesis) There is significance difference between the Actual and predictive return in 2nd period. (1 year before merger, 1 year after merger) i.e. The Actual return is greater than and predictive return for 2nd period. This hypothesis will show whether the impact of merger (if any), positive or negative. If null hypothesis is rejected, that means there is positive impact of merger on bank.

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METHODOLOGY
a) Data Collection For the purpose of evaluation, investigation data is collected from Merger and Acquisitions (M&As) of the Indian banking industry. The financial and accounting data of banks is collected from companies Annual Report to examine the impact of M&As on the performance of sample banks. Financial data has been collected from Bombay Stock Exchange (BSE), National Stock Exchange (NSE), Securities and Exchange Board of India (SEBI), Money control for the study and other websites. Variables chosen to represent merger impact of a company are: (a) Daily Adjusted close price of company (1 year before merger, and 1 year after merger), (b) Daily Adjusted close Indices of Market (1 year before merger, and 1 year after merger) corresponding to stock, (c) Book value (per share holder) of the company, (d) Deposits, (e) Total Deposits and (f) EPS. Generally, indices are used to calculate how much is market explaining the movement in stock and how much riskier is the stock and thus are considered as a strong financial factor to explain a firms performance in accordance to economy.

b) Building and Classification of database To test the research prediction, methodology of comparing the pre and post performances of banks after Merger and Acquisitions (M&As) has been adopted. We have taken 5 cases of Merger and Acquisitions (M&As) as sample, in order to evaluate the impact of M&As. The pre merger (1year prior) and post merger (after 1 year) of the financial ratios are being compared. The observation of each case in the sample is considered as an independent variable. Before merger two different banks carried out operating business activities in the market and after the merger the bidder bank carrying business of both the banks. By using financial and accounting data, we have investigated the impact of M&As on the performance of the sampled companies. For carrying out this analysis, secondary data on financial variables and statements of selected Indian companies have been collected from capital market online data bank. Some companies experienced more than one M&A in the reference period and many M&As took place in the adjacent periods. So, in many cases pre M&A year of latter event coincided

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with post M&A year of former even. So, such cases were included in the study as by employing regression analysis, impact of merger would not be visible clearly as pre M&A observation of second event would neutralize the impact of change in performance measures (post M&A observation) of the first event.

Selection of Sample and Period: The banks selected for studying the impact of M&As on various financial variables represents the Indian economy. Only limited banks were selected for in depth financial analysis taking into account the constraints of uniformity of data for the said time period. This study concentrated only on few banks as relevant data is not available for targeted banks. For this investigation, we have selected 5 listed banks on NSE. Further, utmost care has been given to select companies which fairly represent broad industrial groupings as has been followed in this study.

Analysis: Two techniques were used to study the data. 1. Microsoft Excel: The tool was used to collect, store and sort out the data of the banks to be used for further research process. Its tools of Conditional formatting and Format cells helped most in sorting out data. 2. SPSS: Tool for regression and compare means has been applied to investigate the trend and impact of M&As. Classical Linear Regression Model and other statistical tools were also used for analysis as part of our study.

In our Research we have used the famous concept of Event Study to find out the actual effect of merger and Acquisition. Event study methodology is based on Efficient Market Hypothesis. According to this, a market is efficient if prices fully reflect all available information. One important assumption is that capital markets are sufficiently efficient to react on events (new information) regarding expected future profits of affected corporations. Efficiency is classified as weak form when information set includes past prices, semi strong form when information set includes all publicly available information and strong form when information set includes all publicly and privately available information. Event studies are mostly rested upon the analysis of the so-called normal and abnormal returns which are estimated on the basis of asset pricing model.

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PROCESS:

Step 1: Data of 5 banks, collected and sorted in above steps, was then opened in SPSS for further interpretations. Variables were created in SPSS file, and also there type, width, decimals etc. were defined before pasting data in Data set.

Step 2: Variables were then transformed into their respective LAGs and LOGs of LAGs. For this, compute variable option was used. Also then Return on stock and indices was calculated by subtracting Log and lag of the respective variables. Step 3: Two dummy variables were then created by recoding into different variable to separate data for two periods. It has value equal to 1, when data point is taken for pre M&A period and 0, when data point is taken for post M&A period. And also another dummy is implied which has value equal to 0, when data point is taken for pre M&A period and 1, when data point is taken for post M&A period.

Step 4: Returns on stock, CNX bank nifty and all other variable were then multiplied with both dummies, one by one, to separated variables for both the period.

Step 5: Once data was sorted into two groups with returns, using dummy, regression was run for both periods, one by one and results were saved. Adjusted R2 and Beta coefficients were recorded for hypothesis testing for next step.

Step 6: First, Testing the significance difference between Pre and Post merger Actual Mean Return on Equity to check whether there is a merger impact or not, using Independent Sample T-test in Compare means tool of SPSS. Step 7: Coefficients of 1st period were then used to calculate return on stock for post merger period. This gave us a Predicted Return for 2nd period.

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Step 8: Another hypothesis testing was then done in MS-EXCEL to test the significance difference between Post mergers Actual and Predictive return. This showed us whether change in return (if any) was due to market return or banks performance.

Step 9: All the outcomes were formulated in tables and graphs were drawn for some instances for further references and clarifications.

Step 10: Output was interpreted and conclusions were drawn on the basis of collected results

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CONCLUSION
The purpose of this study was to examine the impact of mergers and acquisition on the performance of Indian Banking sector. The results and their interpretation are as follows: Stock Bank Of Baroda ICICI Bank IDBI Bank Oriental Bank Of Commerce Indian Overseas Bank Variance Unequal Equal Equal Unequal Equal Average return Of Both Periods Equal Equal Equal Equal Equal

From the above we can easily conclude that when we compared the average return on the stock 100 days before merger with the average return on the stock 100 days after the return. In our analysis we hypothesized that means of both the periods are same and Alternate hypothesis is both the means are not same. Shockingly, when we conducted the test we found out that average return of both the periods for all the companies is same and this can be verified from the graphs of all the banks given below:

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At first instance it may be said that merger has no effect on the firm but this may be partially true because there might be chances that the companies may have performed well after merger or acquisition but due to bad market conditions its performance may not have reflected in its Market price as a result of which average return for the short term period would not have changed On the other hand, the situation may be opposite as investor may consider merger good for the company and increased its price by buying the stock excessively, even though impact of merger on the company is bad but still it will get the chance to hide under the shade of increased market return. In order to know whether average return for the firm increased, decreased or remain constant for the firm we designed the model inspired by the Famas Three factor model.

Using the above model we ran the regression on above mentioned stocks with CNX bank Nifty and obtained output. Through this model we tried to explain the effect of merger by taking account of all the factors which could have explained the variation in return and then predicted the return for the second period and subtracted it from its actual return using t test.

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1) Bank Of Baroda merger with South Gujarat Local Area Bank Ltd. According to the RBI, South Gujarat Local Area Bank had suffered net losses in consecutive years and witnessed a significant decline in its capital and reserves. To tackle this, RBI first passed a moratorium under Section 45 of the Banking Regulation Act 1949 and then, after extending the moratorium for the maximum permissible limit of six months, decided that all seven branches of SGLAB function as branches of Bank of Baroda. The final decision about the merger was of the Government of India in consultation with the RBI dated 25th June 2004. Bank of Baroda was against the merger, and protested against the forced deal.

Following Results are obtained from regression when Bank Of Baroda is regressed with Bank nifty, PE Ratio, MPS/EPS and Size taking sample for 1yr:

Variable Constant(B0) PE Ratio MPS/EPS Size Bank Nifty

Before Merger Beta Coeff. Significance .007 Insignificant .000 Insignificant .004 Insignificant -.201 Insignificant 1.449 Significant

After Merger Beta Coeff. Significance -.003 Insignificant .000 Insignificant .005 Insignificant .005 Insignificant 1.480 Significant

When we regressed Bank Of Baroda with the Bank Nifty, PE ratio, MPS/EPS and Size, we obtained the above mention results from which we can draw conclusion that as the merger came into effect Beta coefficient of Constant reduced but the coefficients of all other variables i.e. PE ratio, MPS/EPS, Size and Bank Nifty increased over the same period.

Also looking at the above table we can say that Constant, PE ratio, MPS/EPS and Size are insignificant but Coefficient of Bank Nifty is significant. Even though some variables are insignificant but this does not affect the viability of the model as overall model is significant.

34

With reference to the above figure we can easily say that R2 of the company reduced after the merger, this implies the factors we took in our model now explain less variation in the stock. It is to be noted that reduced R2 will not make the model meaningless. NOTE: All the above mentioned assumptions of CRLM are validate with this model and thus it is good model for conducting research. After conducting the above regression we calculated the Predicted Return for second period and compared it with Actual Return of the second period. In this comparison we hypothesized that Actual and Predicted return are same and Alternate hypothesis is Actual return is greater than Predicted return using One-tail test. We did this process for both 100 days and 1yr sample to check whether the trend continues in the long run or it just have a short term effect.

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Above Graph was obtained when found the values of Predicted and actual returns taking sample of 100 days. From the above graph it can be easily concluded that both predicted return and actual return are moving together but actual return seems to have an upper hand.

Above Graph was obtained when found the values of Predicted and actual returns taking sample of 1yr. From the above graph it can be easily concluded that both predicted return and actual return are moving together but actual return was better than predicted return and this is verified as when we found the compare means of both the returns and hypothesized that both means are same, but our hypothesis got rejected as the p-value of the test is very low so we can easily say that merger had a positive impact on Bank Of Baroda.

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1) ICICI Bank with Bank of Rajasthan ICICI Bank Ltd, Indias largest Private sector bank, said it agreed to acquire smaller rival Bank of Rajasthan Ltd to strengthen its presence in northern and western India, on 13th Aug 2010. The deal, which will give ICICI a sizeable presence in the northwestern desert of Rajasthan, values the small bank at 2.9 times its book value, compared with an Indian Banking sector average of 1.84. The negatives for ICICI Bank are the potential risks arising from BoRs non-performing loans and that BoR is trading at expensive valuations. Following Results are obtained from regression when Bank Of Baroda is regressed with Bank nifty, PE Ratio, MPS/EPS and Size taking sample for 1yr:

Partially Variable Constant(B0) PE Ratio MPS/EPS Size Bank Nifty

Before Merger Beta Coeff. Significance -.050 .000 .006 1.063 1.196 Insignificant Insignificant Insignificant Insignificant Significant

After Merger Beta Coeff. Significance -.050 1.196 .000 .006 1.063 Insignificant Insignificant Insignificant Insignificant Significant

Similarly, When we regressed ICICI Bank with the Bank Nifty, PE ratio, MPS/EPS and Size to find out the actual effect of merger, we obtained the above mention results from which we can draw a conclusion that as the merger came into effect Beta coefficient of Constant remained the same but the coefficients MPS/EPS, Size and Bank Nifty reduced and Coefficient of PE ratio increased. Also looking at the above table we can say that Constant, PE ratio, MPS/EPS and Size are insignificant but Coefficient of Bank Nifty is significant. Even though some variables are insignificant but this does not affect the viability of the model as overall model is significant.

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With reference to the above figure we can easily say that R2 of the company increased after the merger, this implies the factors we took in our model now explain more variation in the stock. NOTE: All the above mentioned assumptions of CRLM are validate with this model and thus it is good model for conducting research. After completing the regression process we repeated the same process for calculating Predicted Mean as we did earlier and compared it with actual return for both 100 days and 1yr. Taking the same hypothesis and null hypothesis we computed t-value at one tail and obtained results as follows:

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Above Graph was obtained when found the values of Predicted and actual returns taking sample of 100 days. From the above graph it can be easily concluded that both predicted return and actual return are moving together but Predicted return outclassed the actual return.

Above Graph was obtained when found the values of Predicted and actual returns taking sample of 1yr. From the above graph it can be easily concluded that both predicted return and actual return are moving together but Predicted return outclassed the actual return and this is verified as when we found the compare means of both the returns and hypothesized that both means are same, but our hypothesis got rejected as the p-value of the test is very high we can easily say that merger had a negative impact on ICICI Bank. 2) Oriental Bank of Commerce with Global Trust Bank Ltd. For Oriental Bank of Commerce there was an apparent synergy post merger as the weakness of Global Trust Bank had been bad assets and the strength of OBC lay in recovery. In addition, GTB being a south-based bank would give OBC the much-needed edge in the region apart from tax relief because of the merger. GTB had no choice as the merger was forced on it, dated 14th August 2004, by an RBI ruling, following its bankruptcy. OBC gained from the 104 branches and 276 ATMs of GTB, a workforce of 1400 employees and one million customers. Both banks also had a common IT platform.

39 Before Merger Beta Coeff. Significance -.005 Insignificant .000 Insignificant 0.000014 Insignificant .150 Insignificant 1.399 Significant After Merger Beta Coeff. Significance .003 Insignificant -.001 Insignificant .005 Insignificant -.206 Insignificant .914 Significant

Variable Constant(B0) PE Ratio MPS/EPS Size Bank Nifty

Again, When we regressed Oriental Bank Of Commerce as we did in previously with the Bank Nifty, PE ratio, MPS/EPS and Size to find out the actual effect of merger, we obtained the above mention results from which we can draw a conclusion that as the merger came into effect Beta coefficient of MPS/EPS increased but all other coefficients decreased. Also looking at the above table we can say that Constant, PE ratio, MPS/EPS and Size are insignificant but Coefficient of Bank Nifty is significant. Even though some variables are insignificant but this does not affect the viability of the model as overall model is significant.

From the above figure we can easily say that R2 of the company reduced after the merger, this implies the factors we took in our model now explain less variation in the stock. It is to be noted that reduced R2 will not make our model meaningless. NOTE: All the above mentioned assumptions of CRLM are validate with this model and thus it is good model for conducting research. After completing the regression process we repeated the same process for calculating Predicted Mean as we did earlier and compared it with actual return taking both 100 days and 1yr. Taking the same hypothesis and null hypothesis we computed t-value at one tail.

40

Above Graph was obtained when found the values of Predicted and actual returns taking sample of 100 days. From the above graph it can be easily concluded that both predicted return and actual return are moving together but actual return outclassed the predicted return.

Above Graph was obtained when found the values of Predicted and actual returns taking sample of 1yr. From the above graph it can be easily concluded that both predicted return and actual return are moving together but Actual return outclassed the Predicted return and this is verified as when we found the compare means of both the returns. We hypothesized that both means are same, but our hypothesis got rejected as the p-value of the test is very low so we can easily conclude that merger had a positive impact on Oriental Bank of Commerce.

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3) IDBI Bank with United Western Bank Ltd For IDBI, growing at 25 per cent over the past two years, addition of branches would help sustain the momentum. The merger, therefore, gave IDBI access to a ready physical infrastructure, enabling it to mobilize low-cost funds. Second, the merger with UWB, dated 3rd October 2006, expected to help IDBI diversify its credit profile. Dominant in industrial financing, IDBI should get exposure to agriculture credit through UWB
Before Merger Beta Coeff. Significance -.178 Significant .020 Significant -.105 Significant 4.062 Significant 1.436 Significant After Merger Beta Coeff. Significance -.163 Significant .011 Significant .032 Insignificant 3.619 Significant .962 Significant

Variable Constant(B0) PE Ratio MPS/EPS Size Bank Nifty

In this regression, we regressed the 15th Lag of IDBI with the 15th lag of Bank Nifty, PE ratio, MPS/EPS and Size to find out the actual effect of merger. In this regression we used 15th lag in order to improve the model. As a result of which we obtained the above mention results from which we can draw a conclusion that as the merger came into effect, Beta coefficients of MPS/EPS and Constant increased but coefficients of all the other variables decreased namely PE ratio, size and 15th lag of Bank Nifty. Also looking at the above table we can say that Constant, PE ratio and Size are insignificant, Coefficient of Bank Nifty is significant but coefficient of MPS/EPS is insignificant before merger but became significant after merger. Even though some variables are insignificant but this does not affect the viability of the model as overall model is significant.

42

From the above figure we can easily say that R2 of the company reduced after the merger, this implies the factors we took in our model now explain less variation in the stock. It is to be noted that reduced R2 will not make our model meaningless. NOTE: All the above mentioned assumptions of CRLM are validate with this model and thus it is good model for conducting research. After completing the regression process we repeated the same process for calculating Predicted Mean as we did earlier and compared it with actual return for both 100 days and 1yr sample. Taking the same hypothesis and null hypothesis we computed p-value at one tail.

43

Above Graph was obtained when found the values of Predicted and actual returns taking sample of 100 days. From the above graph it can be easily concluded that both predicted return and actual return are moving together. It seems that both returns might be equal but we cannot say that before testing the data.

Above Graph was obtained when found the values of Predicted and actual returns taking sample of 1yr. From the above graph it can be easily concluded that both predicted return and actual return are moving together but Predicted return and the actual return are same and this is verified as when we found the compare means of both the returns and hypothesized that both means are same as our hypothesis got accepted as the p-value of the test is lies within acceptance region so we can easily say that merger had a no impact on IDBI Bank. 4) INDIAN OVERSEAS BANK with Indian overseas bank Ltd. Indian Overseas Bank (IOB) was a private bank based in Chennai, India. In 2007 it merged with Indian Overseas Bank, which took over all the bank's employees, assets, and deposits. IOB earlier held 30% of the BOB stocks. The board of state-owned Indian Overseas Bank then approved a proposal to buy out the remaining 70 per cent of unlisted Indian Overseas Bank for Rs 170 crore. The acquisition helped IOB, Indias ninth-largest bank with more than 1,500 branches, to add another 91 branches.

44 Before Merger Beta Coeff. Significance -.032 Insignificant .000 Insignificant .001 Insignificant 1.163 Insignificant .993 Significant After Merger Beta Coeff. Significance .454 Insignificant .002 Insignificant .0000 Insignificant -17.557 Insignificant .916 Significant

Variable Constant(B0) PE Ratio MPS/EPS Size Bank Nifty

When we regressed INDIAN OVERSEAS BANK with the Bank Nifty, PE ratio, MPS/EPS and Size, we obtained the above mention results from which we can draw conclusion that as the merger came into effect Beta coefficient of Constant reduced but the coefficients of all other variables i.e. PE ratio, MPS/EPS, Size and Bank Nifty increased over the same period. Also looking at the above table we can say that Constant, PE ratio, MPS/EPS and Size are insignificant but Coefficient of Bank Nifty is significant. Even though some variables are insignificant but this does not affect the viability of the model as overall model is significant.

From the above figure we can easily say that R2 of the company reduced after the merger, this implies the factors we took in our model now explain less variation in the stock. It is to be noted that reduced R2 will not make our model meaningless. NOTE: All the above mentioned assumptions of CRLM are validate with this model and thus it is good model for conducting research. After completing the regression process we repeated the same process for calculating Predicted Mean as we did earlier and compared it with actual return for both 100 days and 1yr. Taking the same hypothesis and null hypothesis we computed t-value at one tail and obtained results as follows:

45

Above Graph was obtained when found the values of Predicted and actual returns taking sample of 100 days. From the above graph it can be easily concluded that both predicted return and actual return are moving together but Predicted return outclassed the actual return.

Above Graph was obtained when found the values of Predicted and actual returns taking sample of 1yr. From the above graph it can be easily concluded that both predicted return and actual return are moving together but Predicted return outclassed the actual return and this is verified as when we found the compare means of both the returns and hypothesized that both means are same, but our hypothesis got rejected as the p-value of the test is very high we can easily say that merger had a negative impact on Indian Overseas Bank.

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BIBLIOGRAPHY

http://www.mergersandacquisitions.in http://www.mergersindia.com/mergeronline/ http://rspublication.com/ijrm/march%2012/3.pdf http://www.moneycontrol.com http://akpinsight.webs.com/Azeem%20Ahmad%20Khan.pdf www.mergerdigest.com www.nseindia.com www.In.finance.yahoo.com Gujarati,_D._(2004)_Basic_Econometrics www.sify.com www.Bankofbaroda.com www.punjabnationalbank.com www.icici.com www.idbi.com www.iob.com www.obc.com

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B.B.E. (Semester-V) Evaluation of Project Report Paper-502: Computational Techniques EVALUATION SHEET Name of Candidate: __________________________ S. No 1 2 3 Roll No: ___________

Basis of Examining Candidate M. Marks Award Analysis of topic Objectives and Hypothesis 10 Scope, coverage and Review of Literature 10 Quality of Research Methodology Applied 10 Interpretation of Statistical Results-content and 4 10 depth Ability to highlight limitations and suggestions 5 10 for further research Total 50 Note: 40% of these marks shall be assigned to each of the participating student of this Group Project, as per Para 1(b) of Project Report Evaluation, given above. Remarks: _______________________________________________________________ _______________________________________________________________ ______________________________________________________________ ______________________________________________________________

(External Examiner) Code: ________

(Internal Examiner) Code:_______

(Note: This evaluation Performa should be pasted inside each Project Report for use by Internal and external examiner.)

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Evaluation Sheet to be used for Individual student of Group project

University Roll No. Marks from Project40% Questions on any part of Project-30% 1 2 3 Questions on specific Module-30% 4 5 6 Marks Marks:50 Total

Name of Candidate

(External Examiner) Code: ________

(Internal Examiner) Code: _______