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Effect of Merger and Acquisition Of Company’s

performance and Shareholder’s wealth

Case: Bank of Rajasthan to Merge with ICICI


A wave of mergers and acquisitions is taking over the entire world.

Companies have always used this strategy to grow and consolidate, and to
eliminate competitors.

In Indian industry, the pace for mergers and acquisitions activity picked up
in response to various economic reforms introduced by the Government of
India since 1991, in its move towards liberalization and globalization. The
Indian economy has undergone a major transformation and structural change
following the economic reforms, and “size and competence" have become
the focus of business enterprises in India. Indian companies realized the
need to grow and expand in businesses that they understood well, to face
growing competition.

Several leading corporate have undertaken restructuring exercises to sell off

non-core businesses, and to create stronger presence in their core areas of
business interest. Mergers and acquisitions emerged as one of the most
effective methods of
such corporate restructuring, and became an integral part of the long-term
business strategy of corporate in India.
Bank of Rajasthan to merge with ICICI Bank
ICICI bank sets swap ratio 25:118

Shareholders of the troubled Bank of Rajasthan Ltd (BoR) are set to get 25
shares of ICICI Bank Ltd for 118 shares of BoR in the ratio of 4.72:1

This is based on an internal analysis of the strategic value of the proposed

amalgamation, average market capitalization per branch of old private sector
banks and relevant precedent transactions,” an ICICI Bank release said

BoR promoter Pravin Kumar Tayal termed the proposed merger as a “win-
win” situation for all—the banks, their employees and investors.

BoR stock rose 19.95% on the Bombay Stock Exchange to close at

Rs99.50, its year high. ICICI Bank stock was down 1.45% to Rs889.35.
Biggest Mergers and Acquisitions deals in India
Tata Steel acquired 100% stake in Corus Group on January 30, 2007. It
was an all cash deal which cumulatively amounted to $12.2 billion.

Vodafone purchased administering interest of 67% owned by Hutch-Essar

for a total worth of $11.1 billion on February 11, 2007.

India Aluminium and copper giant Hindalco Industries purchased Canada-

based firm Novelis Inc in February 2007. The total worth of the deal was

Indian pharma industry registered its first biggest in 2008 M&A deal
through the acquisition of Japanese pharmaceutical company Daiichi
Sankyo by Indian major Ranbaxy for $4.5 billion.

The Oil and Natural Gas Corp purchased Imperial Energy Plc in January
2009. The deal amounted to $2.8 billion and was considered as one of the
biggest takeovers after 96.8% of London based companies' shareholders
acknowledged the buyout proposal.

In November 2008 NTT DoCoMo, the Japan based telecom firm acquired
26% stake in Tata Teleservices for USD 2.7 billion.

India's financial industry saw the merging of two prominent banks - HDFC
Bank and Centurion Bank of Punjab. The deal took place in February
2008 for $2.4 billion.

Tata Motors acquired Jaguar and Land Rover brands from Ford Motor
in March 2008. The deal amounted to $2.3 billion.

2009 saw the acquisition Asarco LLC by Sterlite Industries Ltd's for $1.8
billion making it ninth biggest-ever M&A agreement involving an Indian
In May 2007, Suzlon Energy obtained the Germany-based wind turbine
producer Repower. The 10th largest in India, the M&A deal amounted to
$1.7 billion.
Motives behind M & A

1. Economies of Scale: This generally refers to a method in which the

average cost per unit is decreased through increased production, since
fixed costs are shared over an increased number of goods. In a
layman’s language, more the products, more is the bargaining power.
This is possible only when the companies merge/ combine/ acquired,
as the same can often obliterate duplicate departments or operation,
thereby lowering the cost of the company relative to theoretically the
same revenue stream, thus increasing profit. It also provides varied
pool of resources of both the combining companies along with a
larger share in the market, wherein the resources can be exercised.

2. Increased revenue /Increased Market Share: This motive assumes

that the company will be absorbing the major competitor and thus
increase its power (by capturing increased market share) to set prices.

3. Cross selling: For example, a bank buying a stock broker could then
sell its banking products to the stock brokers customers, while the
broker can sign up the bank’ customers for brokerage account. Or, a
manufacturer can acquire and sell complimentary products.

4. Corporate Synergy: Better use of complimentary resources. It may

take the form of revenue enhancement (to generate more revenue than
its two predecessor standalone companies would be able to generate)
and cost savings (to reduce or eliminate expenses associated with
running a business).

5. Taxes : A profitable can buy a loss maker to use the target’s tax right
off i.e. wherein a sick company is bought by giants.

6. Geographical or other diversification: this is designed to smooth the

earning results of a company, which over the long term smoothens the
stock price of the company giving conservative investors more
confidence in investing in the company. However, this does not
always deliver value to shareholders.

7. Resource transfer: Resources are unevenly distributed across firms

and interaction of target and acquiring firm resources can create value
through either overcoming information asymmetry or by combining
scarce resources. Eg: Laying of employees, reducing taxes etc.

Advantages of M&A’s:

The general advantage behind mergers and acquisition is that it provides a

productive platform for the companies to grow, though much of it depends
on the way the deal is implemented. It is a way to increase market
penetration in a particular area with the help of an established base.

# Accessing new markets

# maintaining growth momentum
# acquiring visibility and international brands
# buying cutting edge technology rather than importing it
# taking on global competition
# improving operating margins and efficiencies
# developing new product mixes

Objectives of the study

Financial condition of each company

If both companies are in good shape, then joining them together will
likely make each entity stronger; if one company is in trouble, then the
other will be saddled with the problems of the other. It will also have an
impact on assets and liabilities of the 2 companies.

Effect of swap ratio

if one company is eliminated after the alliance takes place, the
shareholders of the eliminated company will not receive shares equal to
what they currently have you might only receive 1 share in the new
company for every 4 shares you had in the old company, and depending
upon the current market price, this could actually decrease the overall
value of your investment, so you might want to sell before the merger
takes place.

How much is the acquiring company paying for the acquired


If the acquirer is paying less than or equal to what the smaller business is
worth, this might not be a good sign, but if they are paying a premium for
the other company, this is a sign that the acquisition is remunerative and
will increase their overall worth.

Change in the stock price before and after the M&A

There is significant change that goes around when the actual

announcement comes and when it happens. This leads to a change in
price of both of acquired and acquirer firm.

Research Objective

1. To evaluate the financial performance of ICICI bank before and after

its merger with Bank Of Rajasthan(BoR).
2. To summarize the findings and find a conclusion.

Literature Review
Researchers have studied the effects of M&A on the value of both the
Acquiring firm and the bidder firm. The evidence on mergers indicates that
the stockholders of target firms have earned significant abnormal/excess
return not only around the announcement period, but also in the weeks after
the announcement. Jensen & Ruback (1983) review 13 studies that
examine returns around takeover announcements and report an average
abnormal return of 30% to target stockholders in successful tender offers and
20% to target stockholders in successful mergers. Jarrell, Brickley, and
Netter (1988) review the results of 663 tender offers made
between 1962 to 1985, and note that premiums averaged 19% in the 1960s,
35% in the 1970s, and 30% between 1980 and 1985. Other studies report
an increase in the stock price of the target firms prior to the M&A
announcement, suggesting either a very perceptive financial market or
leaked information about prospective deals.

Nevertheless, evidence on the effect of M&A announcements on bidder firm

stock prices is not clearcut and, in fact, is contradictory, as empirical studies
have shown mixed results. Desai and Stover (1985), James and Weir
(1987), and Cornett and De (1991), among others, report positive abnormal
returns to bidding firms in banking acquisitions. However, Neely (1987)
and Cornett and Tehranian (1992) report negative returns to the bidder.
Houston and Ryngaert (1994) suggest that samples that emphasize larger
acquisitions are more apt to find negative bidder

Research Methodoly:

Fauzias (1992) in testing the efficiency of the Malaysian stock market’s

reaction to acquisition announcements uses the daily common stock returns
of KualaLumpur Stock Exchange (KLSE) for a period ranging 200 days
before and 200 days after the acquisition announcement date.
Fauzias suggests that the bidder may have overestimated the value of the
shares, which results in paying too much for the assets. The increase in share
prices prior to the announcement may be due to information leakage, which
causes prices to move up before the announcement is made. Fauzias (1993)
examines the effects of acquisition announcement on the price behavior of

Malaysian bidders and target firms by using three alternative models:

(1) a one factor market model;
(2) the Capital Asset Pricing Model (CAPM);
(3) the regression estimation of α = 0 and β = 1 in the model.

The results show that the target’s returns are negative but not statistically
significant and the bidder’s returns are negative and statistically significant
after the announcement date.

Fauzias and Ruzita (2003) show that the market reaction to three
announcements of corporate restructurings by the Malaysian Resources
Corporation were statistically significant in terms of market reaction to each
announcement. Fauzias and Ruzita’s test results indicate that the market
reacted to the initial restructuring announcement, increased in reaction to the
second restructuring announcement, and produced mixed results to the third
restructuring announcement. Houston, James, and Ryngaert (2001) examine
the factors that explain merger gains in 64 large banks and find that the bulk
of the gains are from cost reductions particularly through reduction in
geographical overlap. Rhoades (1998) investigates the efficiency effect of
bank mergers by using case studies of nine mergers in America. He
employs the same basic analytical framework in all of the case studies, such
as financial ratios, econometric cost measures, and the effect of the merger
announcement on the stock of the acquiring and acquired firms. All nine of
the mergers resulted in significant cost cutting in line with pre-mergers
projections. Four of the nine mergers were clearly successful in improving
cost efficiency but five were not. The most frequent and serious synergies
experienced in bank mergers that increase bidder returns relative to non-
financial mergers was unexpected difficulty in integrating data processing
systems and operations.