01-10-2014, 12:28 PM
Merger and Acquisitions (M&As) in the
Indian Banking Sector in Post
Liberalization Regime
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ABSTRACT
The purpose of this paper is to explore various motivations of Merger and
Acquisitions in the Indian banking sector. This includes the various aspects of
banking Industry’s Merger and Acquisitions. It also compares pre and post
merger financial performance of merged banks with the help of financial
parameters like Gross-Profit Margin, Net- Profit Margin, Operating Profit
Margin, Return on Capital Employed (ROCE), Return on Equity (ROE) and
Debt-Equity Ratio. Through literature review it comes to know that most of the
work done high lightened the impact of Merger and Acquisitions on different
aspects of the companies. The data of Merger and Acquisitions since economic
liberalization are collected for a set of various financial parameters. This study
also examines the changes occurring in the acquiring firms on the basis of
financial ground and also the overall impact of Merger and acquisitions (M&As)
on acquiring banks. The Researcher used independent t-test for testing the
statistical significance and this test is applied not only for the ratio analysis but
also to test the effect of Merger and Acquisitions on the performance of banks.
This performance is being tested on the basis of two grounds i.e. Pre merger and
Post merger. The result of the study indicates that the banks have been positively
affected by the event of Merger and acquisitions (M&As). These results suggest
that merged banks can obtain efficiency and gains through Merger and
Acquisitions (M&As) and passes the benefits to the equity share holders’ in the
form of dividend
INTRODUCTION
In the globalized economy, Merger and Acquisitions (M&As) acts as an important tool for the
growth and expansion of the economy. The main motive behind the Merger and acquisitions
(M&As) is to create synergy, that is one plus one is more than two and this rationale beguiles the
companies for merger at the tough times. Merger and Acquisitions (M&As) help the companies
in getting the benefits of greater market share and cost efficiency. Companies are confronted with
the facts that the only big players can survive as there is a cut throat competition in the market
and the success of the merger depends on how well the two companies integrate themselves in
carrying out day to day operations.
One size does not fit for all, therefore many companies finds the best way to go ahead like to
expand ownership precincts through Merger and acquisitions (M&As). Merger creates synergy
and economies of scale. For expanding the operations and cutting costs, Business entrepreneur
and Banking Sector are using Merger and Acquisitions world wide as a strategy for achieving
larger size, increased market share, faster growth, and synergy for becoming more competitive
through economies of scale. A merger is a combination of two or more companies into one
company or it may be in the form of one or more companies being merged into existing
companies or a new company may be formed to merge two or more existing companies. On the
other hand, when one company takes over another company and clearly well-known itself as the
new owner, this is called Acquisition. The companies must follow legal procedure of Merger and
Acquisitions (M&As) which has given by RBI, SEBI, Companies’ Act 1956 and Banking
Regulation Act 1949.
Growth is always the priority of all companies and confers serious concern to expand the business
activities. Companies go for Merger and Acquisitions (M&As) for achieving higher profit and
expanding market share. Merger and Acquisitions (M&As) is the need of business enterprises for
achieving the economies of scale, growth, diversification, synergy, financial planning,
Globalization of economy, and monopolistic approach also creates interest amongst companies
for Merger and Acquisitions (M&As) in order to increase the market power. Merger and
Acquisitions is not a single day process, it takes time and decisions are to be taken after
examining all the aspects. Indian companies were having stringent control before economic
liberalization; therefore they led to the messy growth of the Indian corporate sector during that
period. The government initiated the reform after 1991 and which resulted in the adaptation of
different growth and expansion strategies by the companies.
The Banking system of India was started in 1770 and the first Bank was the Indian Bank known
as the Bank of Hindustan. Later on some more banks like the Bank of Bombay-1840, the Bank of
Madras-1843 and the Bank of Calcutta-1840 were established under the charter of British East
India Company. These Banks were merged in 1921 and took the form of a new bank known as
the Imperial Bank of India. For the development of banking facilities in the rural areas the
Imperial Bank of India partially nationalized on 1 July 1955, and named as the State Bank of
India along with its 8 associate banks (at present 7). Later on, the State Bank of Bikaner and the
State Bank of Jaipur merged and formed the State Bank of Bikaner and Jaipur.
The Indian banking sector can be divided into two eras, the pre liberalization era and the post
liberalization era. In pre liberalization era government of India nationalized 14 Banks on 19 July
1969 and later on 6 more commercial Banks were nationalized on 15 April 1980. In the year 1993
government merged The New Bank of India and The Punjab National Bank and this was the only
merger between nationalized Banks, after that the numbers of nationalized Banks reduced from
20 to 19. In post liberalization regime, government had initiated the policy of liberalization and
licenses were issued to the private banks which lead to the growth of Indian Banking sector.
The Indian Banking Industry shows a sign of improvement in performance and efficiency after
the global crisis in 2008-09. The Indian Banking Industry is having far better position than it was
at the time of crisis. Government has taken various initiatives to strengthen the financial system.
The economic recovery gained strength on the back of a variety of monetary policy initiatives
taken by the Reserve Bank of India.
LITERATURE REVIEW AND GAP
Under this study the researcher 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.
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.
RESEARCH GAP
It is seen that, most of the works have been done on trends, policies & their framework, human
aspect which is needed to be investigated, whereas profitability and financial analysis of the
mergers have not give due importance. The present study would go to investigate the detail of
Merger and Acquisitions (M&As) with greater focus on the Indian banking sector in post
liberalization regime. The study will also discuss the pre and the post merger performance of
banks. An attempt is made to predict the future of the ongoing Merger and Acquisitions (M&As)
on the basis of financial performance and focusing mainly of Indian banking sector.
-CONCLUSION AND FUTURE DIMENSIONS
Merger and Acquisition is the useful tool for growth and expansion in the Indian banking sector.
It is helpful for survival of weak banks by merging into larger bank. This study shows the impact
of M&As in the Indian banking sector and researcher took two cases for the study as sample and
examine that merger led to a profitable situation or not. For this a comparison between pre and
post merger performance in terms of gross profit margin, net profit margin, operating profit
margin, return on capital employed, return on equity, and debt equity ratio. The combined
performance of both bank (three years before) merger and the performance of acquiring bank
(after three years) merger have compared. In case I the merger of Nedungadi bank and PNB net profitability, return on capital employed, return on equity and debt equity ratio and case II the
return on equity, debt equity ratio and gross profit margin has shows the improvement after the
merger, and for the purpose and objective of the study investigator apply independent t-test for
analyzing the pre and post merger performance of the banks. And results suggest that after the
merger the efficiency and performance of banks have increased. The most important is that to
generate higher net profits after the merger in order to justify the decision of merger undertaken
by the management to the shareholders.
Researcher suggests, for future research in this area could be the study of impact of merger only
on acquiring banks by comparing pre and post merger performance and take more banks to a
larger sample concerning a longer time period for the study which would have given better result.