HDFC

SAJMMR
Volume 2, Issue 1 (January, 2012)
ISSN 2249-877X
Pu b l i s h ed b y : S o u th As i a n Aca d e m i c Re s ea r ch J o u rn a l s
SAJMMR:
South Asian Journal of Marketing & Management Research ARE MERGERS AND ACQUISITIONS BENEFICIAL FOR BANKS: THE INDIAN EXPERIENCE
DR.SURESH CHANDRA BIHARI* *Professor (Banking & Finance) IBS, Hyderabad, India. INTRODUCTION The main motive of bank mergers is to enhance the efficiency of banks, but the increase in operating profits (if any) is partly offset by revaluation effects in the course of the restructuring process. Also, history has failed to find convincing evidence of the advantages of mergers and acquisitions on banks and thus it questions the usefulness of M&As. Thus, further research is necessary to disentangle the specific conditions under which merged banks thrive or fail. This study is geared towards analyzing the increasing Mergers & Acquisitions (M&A) activity in the banking sector seeking to assess if the efforts undertaken in that direction are commensurate with the rewards promised. Here, the intention is to deal with the benefits and losses that are likely to arise to a bank in case of a merger. Analysis is conducted in order to answer the preliminary question - are bank mergers desirable? Thereafter, the synergy effect of merger and acquisition of firms is analyzed. Many studies conducted on similar lines show that M&As generally fail in creating estimated synergy and thus, do not add the value in business as expected. This research deals with the merger and acquisition done by Indian Banks domestically as well as cross border and the synergy effects of same. The post merger performance of the organization with its competitor will be useful to justify the effectiveness of the merger or acquisition e.g. if the return on amount invested in acquisition is more than the cost of capital then the acquisition of target is able to bring synergy to the combined firm. The research paper is meant to analyze the post merger performance of the combined firm and to examine whether synergies of firms would be able to create values or not. This involves examining a sufficient sample size and to test for the synergy effects. Change in stock returns could be one of the ways to see the effect of M&A but it represents a weak test of synergy hypothesis as it increases around the announcement of M&A which is shown by many studies, while a stronger test of synergy is to evaluate whether merged firms improve their performance South Asian Academic Research Journals http://www.saarj.com
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(profitability and growth) relative to their competitors, after M&A. Thus, here we examine weak test of synergy hypothesis to see the synergy effect. For this purpose, mergers in the banking sector for the period 1999 to 2008 have been covered and the motives behind each merger has been discussed before going into the quantitative analysis. OBJECTIVE OF THE STUDY There is a no lack of research when we talk about mergers and acquisitions in general. But when we intend to concentrate our focus on the merger and acquisition activity in the banking sector, and that to with respect to the Indian scenario, finding suitable literature becomes a challenge. Hence with the intention to understand the same and in an attempt to answer the question Is merger and acquisition beneficial for the banking sector. The research objective of the project is to undertake a comparative study to understand if there are any differences in the performance of the entities prior and post merger and if at all there are any differences, whether the results of the consolidation are positive or negative. METHODOLOGY DATA COLLECTION The various sources of data collection are as follows: 1. SECONDARY DATA COLLECTION LITERATURE REVIEWS: Various journals, research articles, research papers, review papers are used as a secondary source of data and have been analyzed. Fact sheets, share prices of the banks, annual financial statements of the companies taken into sample have been used for calculation and analysis purpose. 2. PRIMARY DATA COLLECTION this research is solely based on secondary data. A mixture of qualitative & quantitative method has been used to collect as well as analyze the data along with inductive and deductive approach. SAMPLE SIZE Sample for the study is taken from the Indian bank industry. From 1999 to 2009, there have been twelve merger and acquisitions of banks in Indian banking sector. Out of these eight banks (four pair) have been selected for the analysis so as to include only listed banks in the analysis. Banks such as Benaras SBI, Nedungadi Bank, etc. are not listed and hence have not been included in the study. ICICI banks second merger with ICICI Ltd. is not included in the sample as this was just after its merger with Bank of Madura. On the other hand, HDFC Bank has been included twice as there is a large gap between the merger period with Times Bank and Centurion Bank of Punjab respectively. South Asian Academic Research Journals http://www.saarj.com
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LITERATURE REVIEW Over the last two decades, mergers and acquisitions (M&A) in the banking sector have seen a sharp increase. The growing M&A activity has largely been a response to the deregulation of the industry as exemplified by the abolition of geographic restrictions on banks and the demolition of demarcation lines between different types of financial services. Jens Hagendorff, Michael Collins and Kevin Keasey (2007)1 in their paper outline the bank deregulation and acquisition activity, focusing on the USA, Italy and Germany wherein they have identified as to how changes in the regulatory regime of the USA, Italy and Germany have spurred bank merger activities. The same holds true in the case of India as well. The underlying question here is that if there are benefits associated with a more integrated banking sector it is an important issue to examine how more M&A and, ultimately, more financial integration can be achieved. But before a merger is actually undertaken, specifically in the banking sector, it is important to determine firm characteristics that explain mergers in the banking industry and to predict the likelihood of a merger. Scott I. Meisel (2007)2 has developed a logit model to estimate coefficients and test the effect of the Financial Services Modernization Act on market structure. He has identified profitability (PROF), size (SIZE), asset management (ASSETMGT) and solvency (SOLV) as the factors which justify mergers in a full sample model. According to the results of his research, acquiring banks seek to provide better management, technology, and access to better markets than the smaller merged banks. Besides there have been a lot of studies in the past that have attempted to identify the measure of merger premiums. Having taken into consideration the characteristics that justify a merger in the banking industry it also becomes imperative to understand as to when the so called mergers and merger waves could occur. Gary Gorton, Matthias Kahl and Richard Rosen (2005)3 have presented a model of defensive mergers and merger waves. They suggest that mergers and merger waves can occur when managers prefer that their firms remain independent rather than be acquired assuming that managers can reduce their chance of being acquired by acquiring another firm and hence increasing the size of their own firm. According to them, the timing of mergers, the identity of acquirers and targets, and the profitability of acquisitions depend on the size of the private benefits of control, managerial equity ownership, the likelihood of a regime shift that makes some mergers profitable, and the distribution of firm sizes within an industry. A discussion on the motives behind the mergers and acquisitions in the banking sector with reference to India is also important. Jay Mehta & Ram Kumar Kakani (2006)4 in their research have probed into the same. In the process they have adopted a holistic approach to compare the rationale behind the international mergers & acquisitions scenario with the Indian scene thereby
1
Jens Hagendorff, Michael Collins and Kevin Keasey ,Bank deregulation and acquisition activity: the cases of the US, Italy and Germany retrieved from www.emeraldinsight.com/1358-1988.htm 2 Scott I. Meisel, Characteristics of acquired firms: the case of the banking industry retrieved from http://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=80FFFBBE47F7296810E50526098E60BF?c ontentType=Article&contentId=1637547 3 Gary Gorton, Matthias Kahl, Richard Rosen, Eat or Be Eaten: A Theory of Mergers and Merger Waves 4 Jay Mehta & Ram Kumar Kakani (2006), Motives for Mergers and Acquisitions in the Indian Banking Sector A Note on Opportunities & Imperatives
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gazing at them both as an opportunity and as imperative perspectives. In order to tackle the demands of the new operating environment that the Indian banking industry is faced with different strategies have been adopted. And one such strategy is consolidation via mergers and acquisitions. They have tried to bring to light the fact that Mergers and Acquisitions (M&A) is highly environment dependant and hence there is a constant focus on this aspect while pertaining to practices. We go on repeatedly saying that the banking industry is consolidating at an accelerating pace. But there are no conclusive results to justify the benefits that might have emerged out of mergers and acquisitions. Dario Focarelli, Fabio Panetta and Carmelo Salleo (1998)5 analyzed the Italian market, which is similar to other main European countries by considering both acquisitions and mergers. They tried to identify the motives and results of each type of deal and found that mergers are more likely between a more and a less services-oriented bank; they seek to improve income from services, but the resulting increase is offset by higher staff costs; return on equity improves because of changes in the capital structure. On the other hand acquisitions are more targeted towards banks with a poor credit management record; they aim to restructure the loan portfolio of the acquired bank; improved lending policies result in higher profits. An analysis of the returns to shareholders as a result of merger announcements seems important at this stage after all that has been already discussed about the reasons and drivers of mergers in the banking sector. Manoj Anand and Jagandeep Singh (2008)6 have analyzed five mergers in the Indian banking sector to understand the shareholder wealth effects of bank mergers. These are mergers of the Times Bank with the HDFC Bank, the Bank of Madura with the ICICI Bank, the ICICI Ltd. with the ICICI Bank, the Global Trust Bank with the Oriental Bank of Commerce, and the Bank of Punjab with the Centurion Bank. Using the single-factor model, their study finds that the average cumulative abnormal return (CAR) of the bidder banks is positive and substantial, thus signifying that the bidder banks got significant positive abnormal returns. The two-factor model results revealed that the merger announcement in the Indian private sector banks generated positive and statistically significant returns to the shareholders of the bidder banks Anup Agrawal and Jeffrey F. Jaffe7 (2002) state that long-run performance is negative following mergers, though performance is non-negative and perhaps even positive following tender offers. They intended to answer two questions: firstly, if post-acquisition performance is, indeed, negative and secondly, what are possible explanations for the literatures findings on long-run performance? According to them there may be several explanations for such under performance following a merger like - speed of price adjustment, short-term focus on EPS, method of payment and estimating performance.
5 6
Dario Focarelli, Fabio Panetta and Carmelo Salleo (1998), WHY DO BANKS MERGE? Manoj Anand and Jagandeep Singh, Impact of Merger Announcements on Shareholders. Wealth: Evidence from Indian Private Sector Banks 7 Anup Agrawal & Jeffrey F. Jaffe, The Post-merger Performance Puzzle retrieved from http://www.bama.ua.edu/~aagrawal/post.pdf
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Sara B. Moeller, Frederik P. Schlingemann, Ren M. Stulzc8 (2003) have examined the gains to shareholders of firms that announce acquisitions of public firms, private firms, or subsidiaries of other firms undertaking a sample of 12,023 acquisitions by public firms from 1980 to 2001. It was found that the equally weighted abnormal announcement return is 1.1%, representing a gain of $5.61 per $100 spent on acquisitions, but acquiring-firm shareholders lose $25.2 million on average upon announcement. This disparity suggests the existence of a size effect in acquisition announcement returns i.e. to say that the announcement return for acquiring-firm shareholders is roughly two percentage points higher for small acquirers irrespective of the form of financing and whether the acquired firm is public or private. This is due to the fact that losses incurred by large firms are much larger than the gains realized by small firms. Their research brings to light a fact that small firms are good acquirers and large firms are not and thus it becomes imperative to take into account the size of the entire deal before arriving at a conclusion as to whether a particular consolidation is meant to improve the efficiency or not. Furthermore, while analyzing the stock performance of the merged entities it is important to take into account a lot of other factors because of the simple fact that different aspects of the entire deal are expected to generate a different reaction. Kathleen P. Fuller, Jeffry M. Netter and Mike Stegemoller (2002)9 show that acquisitions of private firms paid for with equity do not have lower announcement returns than private acquisitions paid for with cash. According to them, since the same bidder chooses different types of targets and methods of payment, any variation in returns must be due to the characteristics of the target and the bid. Their results indicate bidder shareholders gain when buying a private firm or subsidiary but lose when purchasing a public firm. Further, the return is greater the larger the target and if the bidder offers stock. This recent increase in the pace of large corporate mergers does not only have financial implications as has been discussed so far. Civic leaders have been expressing concerns about the negative effects of mergers on communities losing corporate headquarters, including a loss of civic leadership, philanthropy, jobs, and investment. Richard M. Brunell (2006)10 in a challenge to current antitrust discourse maintains in his research that the loss of local control should be restored as a factor in merger policy. Furthermore, empirical studies indicate that communities often (but not invariably) face significant social costs from mergers when a major corporate headquarters is lost and control of a firm is transferred from locally based managers to distant or absentee managers, a process referred to as delocalization. Moreover, the loss of corporate headquarters may impair overall social welfare and efficiency, thus suggesting that restoring local control as a consideration in merger analysis is consistent with modern welfare economics. The research develops a doctrinal argument for considering the loss of local control as a noncompetitive factor that would militate against mergers with uncertain competitive effects, outlines various alternatives for incorporating this factor into antitrust merger review, and also
Sara B. Moeller, Frederik P. Schlingemann, Ren M. Stulzc, Firm size and the gains from acquisitions retrieved from http://jfe.rochester.edu/03289.pdf 9 Kathleen P. Fuller, Jeffry M. Netter and Mike Stegemoller, What Do Returns to Acquiring Firms Tell Us? Evidence from Firms that Make Many Acquisitions retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=313620 10 Richard M. Brunell, The Social Costs of Mergers: Restoring Local Control As A Factor In Merger Policy retrieved from http://ssrn.com/abstract=992272
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offers a proposal for considering the loss of local control as an adverse factor in the analysis of bank mergers under federal banking law. MERGERS IN THE INDIAN BANKING SECTOR The table below shows all the mergers that have taken place in the Indian Banking Sector from the year 1999 to 2008. Bidder Banks HDFC Bank Bank of Baroda Punjab National Bank ICICI Bank ICICI Bank Standard Chartered Bank Oriental Bank of Commerce Centurion Bank Centurion Bank of Punjab Federal Bank IDBI Bank Ltd. HDFC Bank Target Banks Times Bank Benaras State Bank Ltd. Nedungadi Bank Bank of Madura ICICI Ltd. Grindlays Bank Global Trust Bank Bank of Punjab Lord Krishna Bank Ganesh Bank United Western Bank Centurion Bank of Punjab Announcement Date of Merger 26-11-1999 24-10-2001 20-05-2002 09-12-2000 24-10-2001 2001-2002 14-06-2004 20-06-2005 07-11-2005 10-01-2006 04-09-2006 23-05-2008 Comment Included in Sample Share price data is not available Share price data is not available Included in Sample Subsequent merger within one year Announcement date is not available Included in Sample Share price data is not available Share price data is not available Share price data is not available Share price data is not available Included in Sample
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However, a look at the table clearly reveals that the share price data for the banks in majority of the mergers is not available. Hence, for the purpose of the analysis, only the four mergers have been taken into consideration whose data was readily available.
BIDDER BANK
TARGET BANK
DATE OF ANNOUNCEMENT 26-NOV-1999 8-DEC-2000 23-JULY-2004
HDFC BANK ICICI BANK OBC
TIMES BANK BANK OF MADURA GTB CENTURION BANK OF PUNJAB
HDFC BANK(2008)
23-MAY-2008
ANALYSIS OF HDFC BANK AND TIMES BANK MERGER The merger with Times Bank had catapulted HDFC Bank into a different league, giving it greater muscle in terms of retail client base as well as mid-market corporate clientele. In corporate lending, it has focused on top-end corporate clientele while retaining a part of midmarket clientele that came as part of the Times Bank baggage. This move has ensured that the focus on asset quality, which stood the bank in good stead during the two years of recession, is not diluted. The bank had added Rs. 47.71 crores of gross nonperforming accounts on its own account and another Rs. 61.67 crores of gross NPAs on account of the amalgamation in 1999-2000. Apart from this, HDFC Bank has also entered into a number of alliances with software and dotcom companies. HDFC bank has also made selective strategic investments in technology-related companies/important service-providers which provide strong synergy with its existing business plan. BANK OF MADURA AND ICICI BANK MERGER The Bank of Madura is strong in south India states while ICICI is very strong in Central and North Indian states, which has given a complacent advantage to both the banks. The merger has certainly enhanced the reach of ICICI in great measure. ICICI bank was looking at a branch network of 350-400 which would have taken at least five years to achieve. This merger has provided this network immediately and has enabled them spread their network to 16 States. Moreover, the merger has enabled ICICI to have an aggregate of 2.7 million customer base and a combined asset base of Rs.16,000 crore, cross selling opportunities for assets and South Asian Academic Research Journals http://www.saarj.com
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other products, and good cash management services. It has also led the bank to focus on microfinance activities through self-help groups, in its priority sector initiatives through its acquired 87 rural and 88 semi-urban branches. Also, it has helped in adding to the shareholder value, besides providing technology-based, modern banking services to customers. ORIENTAL BANK OF COMMERCE AND GLOBAL TRUST BANK MERGER After the decision of the government to impose a moratorium on Global Trust bank integration was a crucial issue and was not able to be made very easily as OBC and GTB were so different and it was a big challenge to channelize cultural synergies. Nonetheless, the two banks merged. As per the terms of the merger, OBC took over all the assets and liabilities of GTB on its books. It acquired all the 104 branches of GTB, 275 ATMs, a workforce of 1400 employees and one million customers at an estimated merger cost of Rs. 8 bn. OBC's total business volume was expected to reach Rs 65 bn and the total branch network to cross 1,100. All corporate accounts including salary accounts were transferred to OBC. The entire amount of paid-up equity capital of GTB was adjusted towards its liabilities. There was no share swap between GTB and OBC, which meant that GTB shareholders were the ultimate losers, as they did not get any shares of OBC. Moreover, OBC enjoyed a huge tax break by acquiring GTB's NPAs worth Rs 1.2 bn and impaired assets of Rs. 3 bn. HDFC BANK AND CENTURION BANK OF PUNJAB MERGER Both of these banks (HDFC and Centurion bank of Punjab) were involved in a merger earlier HDFC Bank took over the ailing Times Bank and CBoP had started life as Centurion Bank and had merged with the north India-based Bank of Punjab in June 2005 and also the Kochi south India-based Lord Krishna Bank in August 2007. As these mergers were orchestrated by the RBI, it brought in a nice cultural mix in them and made the integration much easier than thought. The biggest advantage of the merger was the number of branches it helped HDFC Bank to add. Since their management styles were similar, they both understood consumer and retail banking. Both the banks have been on a technology platform from day one, so there were no data-related legacy issues. Also, clear-cut synergies existed, which helped in comprehensively addressing the change-management issues. Furthermore, the presence of Centurion Bank of Punjab abroad has made the road very easy for HDFC bank also to go out of India. RESEARCH DESIGN ANALYTICAL TOOL USED The basis for event study analysis is the semi-strong version of the efficient market hypothesis (EMH). It assumes that security prices adjust rapidly to all publicly available information. The event study methodology has been extensively used to assess the impact of an announcement of a particular strategy on the firms stock prices. This methodology assesses whether specific events create abnormal stock returns or not. Abnormal stock returns are the differences between the observed returns and the estimated returns derived from either market model or mean adjusted return method or market adjusted return method. South Asian Academic Research Journals http://www.saarj.com
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For the purpose of this study, the first date of media announcement of the merger has been taken as the event date (day zero). The first possible date when the news of the merger was made public has been used for our study. The event window has been taken from -40 days to the date of announcement to 40 days (except in the case of GTB and Centurion bank of Punjab, where the share price data subsequent to the date of the merger announcement is not available). The share price data and market index data, namely, S&P CNX 500 have been taken from the official website of the National Stock Exchange of India Limited.
ESTIMATING CAR USING SINGLE-FACTOR (MARKET) MODEL Fama, et. al., (1969) market model assumes that all interrelationships among the returns on individual assets arise from a common market factor that affects the return on all assets. The expected returns on individual assets are generated by the following model: The daily residual returns (rjt) are estimated for each bidder and target bank in a 40-day window under the single-factor market model as follows: rjt = R jt . ( + * R mt) where, rjt = Abnormal return for bank stock j at time t, Rjt = Actual return for bank stock j at time t = Ordinary least squares (OLS) estimate of the intercept of the market model regression, = Ordinary least squares (OLS) estimate of the coefficient in the market model regression, Rmt = Return to the market (S&PCNX 500) at time t. The daily average abnormal returns (ARt) of merger announcement in a 40-day (40, +40) window are estimated for bidder bank groups and target bank groups by taking arithmetic average of the residual returns (rjt) of the respective banks in that group. ARt = rjt / N where ARt = Average abnormal returns of merger announcement N = Number of firms in the bidder / target bank blocks (i.e., 4 each)
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The cumulative average abnormal returns (CAR) of merger announcement in a 40-day (-40, +40) window are estimated for bidder bank groups and target bank groups by summation of the average abnormal returns (ARt) in the respective window. t=40 CAR = ARt t=-40 where CAR = Cumulative average abnormal returns of merger announcement t-statistic of residual return : rjt/S(rj) Where, S(rj) - standard deviation of residual of bank j for the window event t-statistic of average abnormal return: ARt/S (AR) Where, S (AR) is the standard deviation of average abnormal returns of bidder banks/ target banks during the window event t-statistic of CAR= CAR/(S (AR)*SQRT (t)) Where, t = Respective window period LIMITATIONS OF THE STUDY This research would suffer from the following limitations: 1. The sample size selected for the research is considered as true representative of the population, which might be biased to specific organizations or so, hence there might be difficulty in framing the true picture. 2. Secondary data analysis is undertaken along with the assumptions of the research undertaken by the researcher which might suffer from certain limitations. FINDINGS OF THE STUDY Bidder Bank Coefficient Std Error T Sig.
HDFC BANK
0.006060661 0.730669967
0.002665078 0.132727976
2.274102735 5.505018521
0.024048746 0.000000
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ICICI BANK

0.001921083 1.265838058 0.004056147 0.223724222 0.001993408 0.10470946 0.001899522 0.087407126 0.473622713 5.65802865 0.628978175 17.48622509 0.256677786 13.85998306
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0.636491245 0.000000 0.530346215 0.000000 0.797804341 0.000000
OBC
-0.00125381 1.83097318
HDFC BANK(2008)
0.000487565 1.211461279
HDFC BANK R square Adj. R square Std Error 0.134507437 0.130069014 0.037349132
ICICI BANK 0.182919186 0.177205334 0.048710832
OBC 0.676825322 0.674611797 0.024249899
HDFC BANK(2008) 0.578439125 0.575427976 0.022605673
Regression has been run for share prices return of each bank with index return taking the estimation period more than window period. The result of Bidder bank has been shown in above table 3 and result of the targets banks have been shown as below in table 4. Significance level has been taken 5% for each regression. From above we can see that if significance level has been taken 10%, all coefficient would be statistically significant. and are the coefficients of single factor model. Data for GTB and Centurion Bank of Punjab are not available for the period of post merger and that is why the sample has been taken of the period before merger. Target Bank Coefficient Std Error T Sig.
TIMES BANK
0.008073914 0.758148651 0.009102127
0.004390569 0.231948145 0.002862117
1.838921888 3.268612698 3.180207909
0.06857582 0.001435673 0.001840236
BANK OF MADURA
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GLOBAL TRUST BANK CENTURION BANK OF PUNJAB

0.838374333 -0.005877519 1.09210653 -0.001052879 1.074341971 0.164170375 0.005092865 0.208615728 0.00326457 0.157808748
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0.000000 0.251995546 0.000000 0.747892096 0.000000
5.106733366 -1.154069385 5.235015298 -0.32251695 6.807873361
TIMES BANK R square Adj. R square Std Dev 0.087084248 0.078933214 0.046639887
BANK OF MADURA 0.167086998 0.160679975 0.032676939
GLOBAL TRUST BANK 0.259999858 0.250512677 0.045509581
CENTURION BANK OF PUNJAB 0.363943311 0.35609076 0.029670995
197 Observations have been taken for HDFC Bank, 114 for Times Bank, 145 for ICICI Bank, 132 for BOM, 148 for OBC, 80 for GTB and 142 for HDFC 2008 and finally 83 for CBoP. BIDDER BANKS Following table is showing the data of CAR of Bidder Banks for the window period of 1 day, 2 day, 5 day, 10 day, 15 day and 40 day. WIND OW PERIO D (IN DAYS) 3 5
HDF C
ICIC I
OBC
HDF C(08)
COMB INED
STD DEV
tSTATS
Sig Level
(-1,1) (-2,2)
-0.046 -0.049
0.063 0.052
-0.0111 0.06163
0.012 -0.034
0.004 -0.023
0.01642 1 0.01736 3
0.15698 6 0.59574
10% 10%
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(-5,5) (10,10) (15,15) (40,40) -0.107 -0.128 -0.206 0.210

0.002 0.033 0.082 0.036 0.09461 0.05185 0.10735 0.04588 -0.038 -0.106 -0.161 -0.090 -0.059 -0.063 -0.139 0.0280 0.01291 6 0.01110 6 0.01224 2 0.01368
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-1.3836 1.24342 -2.046 0.22750 6 11 21 31 81 10% 10% 10% 10%
According to above data HDFC Bank has been a loser as its CAR is in negative for all the window period except 40- days. This shows that HDFCs shareholders gained after 40 days of the merger announcement with 21% abnormal return. The merger of the Times Bank with the HDFC Bank has added significant value in terms of increased branch network, expanded geographic reach, and enhanced customer base, and the opportunity to cross-sell and leverage alternative delivery channels. ICICI bank was following the decreasing trend and even giving the negative returns of 8% in 15 days although ICICI Banks shareholders gained abnormal return of 5.2% within two days of the announcement. After its merger with the Bank of Madura in 2001, ICICI Bank became one of the largest private sector banks in India with the combined assets of Rs 173.27 billion and total deposits of Rs 134.60 billion. The ICICI Bank gained substantial but not significant abnormal returns during the Bank of Madura merger announcement. For a 40-day (-40, +40) window, the cumulative abnormal returns came to 3.6%. OBC was again giving the negative abnormal returns as we were moving from window of 1 day to 40 days i.e. from -1.1% to 4.6%. HDFC (2008) was again providing the negative abnormal returns from -3% to -9% as moving from 2-day to 40-day window. It means the only exception here are OBC Bank and HDFC bank (2008) which are providing the negative abnormal returns in all the windows while all others are giving the negative returns till 31 day window period and it becomes positive in 40 day window period. Combined result of Bidder banks group is giving .4% abnormal return within two days while it has been negative for next 31 days and became positive for 40 days window period. This can be justified as two banks from the bidder banks group have shown negative return and make overall abnormal return to the group negative which in turn is the loss to the shareholders of the banks. CAR is significant for 10% significance level for the Bidder Banks group. From the graph we can observe that combined gain to shareholders in first 3 days is .4% while it is negative return for other consecutive periods. CAR again rose to positive after the period of 81 days. So we can say that the short term gain to shareholders of bidder banks is .4% with negative return increasing to 13.9% upto 15 days post merger announcement and becomes positive again after 40 days of merger announcement. South Asian Academic Research Journals http://www.saarj.com
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TARGET BANKS
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Following table is showing the data of CAR of Target Banks for the window period of 1 day, 2 day, 5 day, 10 day, 15 day and 40 day. WINDO W Target Banks TIMES BO M GTB CBO P COMB INED STD DEV tSTAT S PERIOD (IN DAYS) (-1,1) (-2,2) (-5,5) (-10,10) (-15,15) (-40,40) 0.133 0.229 0.345 0.224 0.325 0.202 0.17 4 0.29 4 0.60 7 0.85 1 0.69 6 0.43 8 0.182 0.002 -0.028 -0.027 -0.070 0.032 0.165 0.308 0.335 0.511 0.320 0.058 0.048 0.039 0.036 0.037 0.030 0.315 1.551 2.383 2.015 2.484 1.173 3 5 11 21 31 81
Sig Lev el
10% 10% 5% 5% 5% 10%
Share prices details for GTB and Centurion Bank of Punjab are not available after the merger of the banks with respective Bidder banks. So CAR is calculated for window period of 1day for GTB and for window period 1 day, 2 days, 5 days and 10 days for Centurion Bank of Punjab as per the availability of share prices. In the case of TIMES BANK, its CAR has been increased till window period of 5 days and decrease subsequently.It follows a pattern as first to increase and then decrease. Same pattern can be observed in case of Bank of Madura though shareholders earned positive returns in case of these two banks with 85% abnormal return in window period of 15 days in case of Bank of Madura. While there are negative returns in case of GTB bank and Centurion Bank of Punjab ranging from 2% to 7%.
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Normally all share price gains from M&A activities are captured by target firm shareholders. But out of the 4 target firm, GTB and Centurion Bank of Punjab shows negative shareholders return. The negative return for GTB is attributed to adjusting entire amount of paid-up equity capital of GTB towards its liabilities and no share swap between GTB and OBC. The negative return of Centurion Bank of Punjab is attributed to earlier merger of this bank as bidder bank with Bank of Punjab in 2005 and Lord Krishna Bank in 2007. Combined CAR of the target banks group is showing positive returns to shareholders of the group. CAR for window period 1 day has included CAR for all the four banks while CAR for window period 2 days, 5 days and 10 days has included all the four banks except GTB. CAR of window period 15 days and 40 days included only CAR of Times Bank and Bank of Madura. Significance level is mentioned for each window period.
CAR of Target Banks Group

0.600 0.500 0.400 0.300 0.200 0.100 0.000 (-1,1) (-2,2) (-5,5) (-10,10) (-15,15) (-40,40)
From the above graph we can observe that the shareholders of target banks gained all the time from mergers with the maximum gain of 5%. CAR of target banks group has been increasing till 31 days while it started decreasing then onwards and come to 3% in window period of 41 days. So we can say that the shareholders of target banks gain as compared to shareholders of bidder banks in India. The returns to the shareholders of target banks is a function of share exchange ratio and expected synergy gains from the merger. The decrease of CAR of target bank group to 3% is mainly attributed to sharp decrease in return of BOM from 85% to 43%. The decrease is mainly due to merger of two entities(ICICI-BOM) which have different culture i.e. the two banks grown in different environments. Many problems like different software environment, procedure, lack of awareness of technology utilisation in BOM which hinder for effective merger of these two entities. South Asian Academic Research Journals http://www.saarj.com
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CAR of Bidder and Target Banks Group

0.6 0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2 BIDDER BANKS TARGET BANKS (-1,1) (-2,2) (-5,5) (-10,10) (-15,15) (-40,40)
Similarly, cumulative CAR of bidder bank group rises 15-days to 40-days window as shown in the above graph which is mainly attributed to increase in return of bidder banks in 40-days as compared to previous days due to several factors like greater client base, increased market share, increased branch network,cross selling opertunities etc. Also it is also interpreted from the above graph that cumulative abnormal return of target banks group is positive and higher than the CAR of bidder banks group. This shows that the gain of target shareholders is higher than the bidder bank or acquiring banks in Indian context. These findings are similar with that of Scholtens and Wit (2004) study of announcement effects of bank mergers in Europe and the US, wherein they found the cumulative abnormal returns of target banks much higher than those of the bidder banks. Volatility of cumulative abnormal returns of target banks is higher as compared to bidder banks. The average of the standard deviations of target banks abnormal returns is 4.13 percent as against 1.40 per cent in the case of bidder banks. These findings are in agreement with that of Scholtens and Wit (2004). CONCLUSION An event study methodology has been used to explore the short-term shareholder wealth effects of the Indian bank mergers. We have studied four mergers from 1999 onwards to see wealth creation to shareholders for short term from merger and acquisition of two banks. We saw that target banks were in advantage but this was not true for the bidder banks group. From the study, it emerges that merger announcement in the Indian banking industry can have both positive and negative effect on shareholders wealth for both i.e. for the bidder and target South Asian Academic Research Journals http://www.saarj.com
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banks while the combined effect is positive for target banks and negative for bidder banks. This means that it is not necessary that every announcement of merger favors the shareholders, it can have negative impact also. The finding of the studies is also in agreement with the US bank mergers and acquisitions where shareholders wealth is destroyed in case of bidder banks group. REFERENCES 1. Angel, Liao., & Jonathan,Williams. Do win win outcomes exist? A study of cross border M&A transactions in emerging markets. University of Wales, Bangor, UK. 2. Damodaran, Aswath. (2009). Investment Valuation. 3. Kumar, M.D. (2008, Jan-June). Post Merger Organizational Change & Occupational Stress: Study with Specific Reference to Type A and Type B (Personality) Bank Managers in Private Sector,Vidwat. The Indian Journal of Management, Volume No. 1. 4. Lausberg, C., & Stahl, T. (2009). Motives and Non-Economic Reasons for Bank Mergers & Acquisitions. The ICFAI University Press. 5. Maggi, B., & Rossi, S.P.S. (2006). Does Banking Consolidation Lead To Efficiency Gains? Evidence from Large Commercial Banks in Europe and US. The Icfai Journal Press. 6. Paul, Temple,& Simon, peck. Merger and Acquisition: Perspective. 7. Trehan, R., & Soni, N. Efficiency and Profitability in Indian Public Sector Banks. ICFAI Press. 8. Weston, J.Fred.,Chung,S., Wang,K., & Hoag,Susan,E. Mergers, Restructuring and Corporate Control. 9. www.banknetindia.com/banking/70837.htm 10. www.nse-india.com ANNEXURES ANNEXURE I REGRESSION OUTPUT SUMMARY OF HDFC BANK Regression Statistics Multiple R 0.366752556
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R Square Adjusted R Square Standard Error Observations

0.134507437 0.130069014 0.037349132 197
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ANOVA Df Regression Residual Total SS MS F Significance F 1.1534E-07
1 0.042274511 0.042274511 30.30522891 195 0.272016742 0.001394958 196 0.314291252
Coefficients Intercept X Variable 1
Standard Error
t Stat
P-value
Lower 95%
0.006060661 0.002665078 2.274102735 0.024048746 0.000804584 0.730669967 0.132727976 5.505018521 1.1534E-07 0.468903321
Upper 95% Intercept X Variable 1
Lower 95.0%
Upper 95.0%
0.011316739 0.000804584 0.011316739 0.992436614 0.468903321 0.992436614
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ANNEXURE II
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REGRESSION OUTPUT SUMMARY OF TIMES BANK Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 0.295100403 0.087084248 0.078933214 0.046639887 114
ANOVA df Regression Residual Total SS MS F Significance F
1 0.023240309 0.023240309 10.68382897 0.001435673 112 0.243631252 0.002175279 113 0.266871561
Standard Error
t Stat
P-value
Lower 95%
0.008073914 0.004390569 1.838921888
0.06857582 0.000625436
0.758148651 0.231948145 3.268612698 0.001435673 0.298573149
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Lower 95.0% Upper 95.0%
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0.016773265 0.000625436 0.016773265 1.217724152 0.298573149 1.217724152
ANNEXURE III REGRESSION OUTPUT SUMMARY OF ICICI BANK Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA df Regression Residual Total SS MS F Significance F 0.427690526 0.182919186 0.177205334 0.048710832 145
1 0.075959375 0.075959375 143 0.339302559 0.002372745 144 0.415261934
32.0132882 8.06941E-08
Standard Error
t Stat
P-value
Lower 95% -0.00609667
0.001921083 0.004056147 0.473622713 0.636491245 1.265838058 0.223724222
5.65802865 8.06941E-08 0.823604141
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Upper 95% Intercept X Variable 1 0.009938837
-0.00609667 0.009938837
1.708071976 0.823604141 1.708071976
ANNEXURE IV REGRESSION OUTPUT SUMMARY OF BANK OF MADURA Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 0.408762765 0.167086998 0.160679975 0.032676939 132
ANOVA df Regression Residual Total 1 130 131 SS MS F Significance F
0.027846403 0.027846403 26.07872567 1.13904E-06 0.138811705 0.001067782 0.166658108
Coefficients Intercept X Variable 1 0.009102127 0.838374333
Standard Error
t Stat
P-value
Lower 95%
0.002862117 3.180207909 0.001840236 0.003439771 0.164170375 5.106733366 1.13904E-06 0.513582884
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Upper 95% Intercept X Variable 1 0.014764484 1.163165783
0.003439771 0.014764484 0.513582884 1.163165783
ANNEXURE V REGRESSION OUTPUT SUMMARY OF OREINTAL BANK OF COMMERCE Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA df Regression Residual Total 1 146 147 SS MS F Significance F 1.234E-37 0.822693942 0.676825322 0.674611797 0.024249899 148
0.179809233 0.179809233 305.7680679 0.085856408 0.000588058 0.265665641
Coefficients Intercept X Variable 1 -0.00125381 1.83097318
Standard Error
t Stat
P-value
Lower 95%
0.001993408 0.628978175 0.530346215 0.005193473 0.10470946 17.48622509 1.234E-37 1.624031098
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Upper 95.0%
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Lower 95.0%
0.005193473 0.002685853 1.624031098 2.037915262
ANNEXURE VI REGRESSION OUTPUT SUMMARY OF GLOBAL TRUST BANK Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 0.509901812 0.259999858 0.250512677 0.045509581 80
0.056759895 0.056759895 27.40538517 1.35755E-06 0.161547512 0.002071122 0.218307406
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Standard Error
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t Stat
P-value
Lower 95%
0.005092865 1.154069385 0.251995546 0.016016634 0.208615728 5.235015298 1.35755E-06 0.676784525
Lower 95.0%
Upper 95.0%
0.016016634 0.004261595 0.676784525 1.507428534
ANNEXURE VII REGRESSION OUTPUT SUMMARY OF HDFC BANK (2008) Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 0.760551855 0.578439125 0.575427976 0.022605673 142
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ANOVA
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df Regression Residual Total
SS
MS
Significance F
1 0.098165817 0.098165817 192.0991303 4.84162E-28 140 0.071542304 0.000511016 141 0.169708122
Standard Error
t Stat
P-value
Lower 95%
0.000487565 0.001899522 0.256677786 0.797804341 0.003267891 1.211461279 0.087407126 13.85998306 4.84162E-28 1.038652699
Lower 95.0%
Upper 95.0%
0.004243021 0.003267891 0.004243021 1.384269859 1.038652699 1.384269859
ANNEXURE VIII REGRESSION OUTPUT SUMMARY OF CENTURION BANK OF PUNJAB Regression Statistics Multiple R R Square Adjusted R Square 0.603277143 0.363943311 0.35609076
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Standard Error Observations

0.029670995 83
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0.040802535 0.040802535 0.071309802 0.000880368 0.112112338
46.3471397 1.58017E-09
Standard Error 0.00326457
t Stat
P-value
Lower 95% -0.00754835
-0.32251695 0.747892096
0.157808748 6.807873361 1.58017E-09 0.760352069
Lower 95.0%
Upper 95.0%
-0.00754835 0.005442591 0.760352069 1.388331872
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SAJMMR

Volume 2, Issue 1 (January, 2012)

Volume 2, Issue 1 (January, 2012)

Volume 2, Issue 1 (January, 2012)

South Asian Academic Research Journals http://www.saarj.com

Volume 2, Issue 1 (January, 2012)

South Asian Academic Research Journals http://www.saarj.com

Volume 2, Issue 1 (January, 2012)

South Asian Academic Research Journals http://www.saarj.com

Volume 2, Issue 1 (January, 2012)

South Asian Academic Research Journals http://www.saarj.com

Volume 2, Issue 1 (January, 2012)

DATE OF ANNOUNCEMENT 26-NOV-1999 8-DEC-2000 23-JULY-2004

HDFC BANK ICICI BANK OBC

TIMES BANK BANK OF MADURA GTB CENTURION BANK OF PUNJAB

Volume 2, Issue 1 (January, 2012)

Volume 2, Issue 1 (January, 2012)

South Asian Academic Research Journals http://www.saarj.com

Volume 2, Issue 1 (January, 2012)

South Asian Academic Research Journals http://www.saarj.com

Volume 2, Issue 1 (January, 2012)

ICICI BANK 0.182919186 0.177205334 0.048710832

OBC 0.676825322 0.674611797 0.024249899

HDFC BANK(2008) 0.578439125 0.575427976 0.022605673

0.008073914 0.758148651 0.009102127

0.004390569 0.231948145 0.002862117

1.838921888 3.268612698 3.180207909

0.06857582 0.001435673 0.001840236

South Asian Academic Research Journals http://www.saarj.com

Volume 2, Issue 1 (January, 2012)

5.106733366 -1.154069385 5.235015298 -0.32251695 6.807873361

BANK OF MADURA 0.167086998 0.160679975 0.032676939

GLOBAL TRUST BANK 0.259999858 0.250512677 0.045509581

CENTURION BANK OF PUNJAB 0.363943311 0.35609076 0.029670995

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Volume 2, Issue 1 (January, 2012)

Volume 2, Issue 1 (January, 2012)

10% 10% 5% 5% 5% 10%

South Asian Academic Research Journals http://www.saarj.com

Volume 2, Issue 1 (January, 2012)

CAR of Target Banks Group

Volume 2, Issue 1 (January, 2012)

CAR of Bidder and Target Banks Group

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South Asian Academic Research Journals http://www.saarj.com

Volume 2, Issue 1 (January, 2012)

ANOVA Df Regression Residual Total SS MS F Significance F 1.1534E-07

1 0.042274511 0.042274511 30.30522891 195 0.272016742 0.001394958 196 0.314291252

Coefficients Intercept X Variable 1

Upper 95% Intercept X Variable 1

0.011316739 0.000804584 0.011316739 0.992436614 0.468903321 0.992436614

South Asian Academic Research Journals http://www.saarj.com

Volume 2, Issue 1 (January, 2012)

ANOVA df Regression Residual Total SS MS F Significance F

1 0.023240309 0.023240309 10.68382897 0.001435673 112 0.243631252 0.002175279 113 0.266871561

Coefficients Intercept X Variable 1

0.008073914 0.004390569 1.838921888

0.758148651 0.231948145 3.268612698 0.001435673 0.298573149

South Asian Academic Research Journals http://www.saarj.com

Volume 2, Issue 1 (January, 2012)

Upper 95% Intercept X Variable 1

0.016773265 0.000625436 0.016773265 1.217724152 0.298573149 1.217724152