50

CHAPTER 4

ANALYSIS AND INTERPRETATION

Very few studies appear to have used both stock returns and bank
efficiencies to examine the merger effects in India. In this study the results of
event study analysis and DEA have been analysed to provide an overview
about bank merger implications in India. A detailed analysis that examines the
rationale behind each merger, impact on stock returns and efficiencies has
been done to gain an insight about each merger deal and also to infer the
overall impact in a more meaningful way. The results of event study and DEA
analysis have been compared as well to identify how well stockholder’s
understood a merger deal and whether their expectation was reflected in the
financial performance of merged banks.

4.1 Event Study Analysis

In the Indian context researchers like Jayadev & Sensarma (2007),

Anand & Singh (2008) and Kumar & Suhas (2010), have applied the event
study technique to study the impact of a few bank mergers on stockholders’
return. Others like Mann & Kohli (2009) and Selvam et al (2006) have each
analysed one case of bank merger using event study method. It appears that
not many authors have analysed all the bank-to-bank mergers in India.
This provides a wide scope to probe the effect of merger announcements on
stock returns of both acquiring and acquired banks in India. Consequently, the
standard event study model has been used in this study to analyse the market
reaction to bank merger announcements.
 51

4.1.1 Estimation of Cumulative Average Abnormal Returns

For each acquiring bank and acquired bank, the daily abnormal
returns are computed by subtracting expected returns from the actual returns,
in a 30-day window. Expected returns are computed from stock prices
regressed using 120 days clean period data before the 30-day time window.
Actual returns are computed from the daily closing stock price values on
Bombay Stock Exchange. Then the daily average abnormal returns are
computed for the acquiring bank group and acquired bank group by taking
arithmetic average of abnormal returns of respective banks in that group.
Subsequently, the cumulative average abnormal returns (CAAR) could be
obtained by adding the average abnormal returns in the respective window
and then dividing it by the number of banks.

Sample calculation for Bank of Madura

Stock price on ‘day zero’ = Rs. 142.10

Stock price on the next day = Rs. 153.45
Stock returns = (153.45 – 142.10) / 142.10
Actual returns = 0.079873
Index value on ‘day zero’ = 1427.95
Index value on the next day = 1428.02
Index returns = (1428.02 – 1427.95) / 1427.95
Market returns = 0.0000049
Intercept (regressed value) = -0.001875
Slope (regressed value) = 0.031186
Expected returns = -0.001875 + 0.031186 x 0.079873
= 0.000613
Abnormal returns on ‘day zero’ = 0.079873 – 0.000613
= 0.079174
 52

The daily abnormal returns computed as indicated above are used

for further computation of bank-wise average abnormal returns (AAR).
The cumulative average abnormal returns (CAAR) values are computed as an
average of AAR values.

4.1.2 Stock Returns of Acquiring Banks

Stock returns of acquiring banks have been analysed from three

perspectives i.e. analysis of daily abnormal returns, analysis of abnormal
returns in various event windows and analysis of CAAR.

4.1.2.1 Daily Abnormal Returns of Acquiring Banks

On the day of merger announcement average abnormal returns

declined to 0.39% from 0.5% the day before merger announcement (Table 4.1).
This further declined to 0.28% one day after the merger announcement.
Negative returns of -0.11% were observed two days before ‘day zero’.
Interestingly, the returns were 0.66% the previous day. This probably
indicates that there was some information leakage two days ahead of the
merger announcement and that could have resulted in adverse stock market
reaction.
 55

On the event day maximum gain of 3.62% was made by HDFC

Bank during its acquisition of Times Bank and maximum loss of -3.15% was
incurred by Centurion Bank during its acquisition of Bank of Punjab.
Maximum CAAR of 0.85% was observed 26 days before event day and the
maximum loss of -0.61% was observed 19 days after event day. In general,
acquiring bank stocks appear to have lost value in the few days around merger
announcement.

4.1.2.2 Abnormal Returns of Acquiring Banks in various Event Windows

Abnormal returns of acquiring banks in various event windows are

presented in Table 4.2. Maximum returns of 6.16% were experienced by
Centurion Bank of Punjab during its acquisition of Lord Krishna Bank in the
(0, +2) event window. Maximum loss of 5.61% was experienced by Centurion
Bank during its acquisition of Bank of Punjab in the (0, +2) event window.
Overall, minimum average returns of 0.05% were observed in the (-15, 0) event
window. Maximum average returns of 0.45% were observed in the (-1, 0) event
window. Returns in the other event windows after the event show a declining
trend indicating that the market reaction was generally adverse for merger
announcements.
 57

Overall, the trend observed in daily returns and returns in various

event windows appear to indicate that acquiring bank stock have lost during
merger announcements. However, each merger is unique and a detailed inquiry
of merger motives is necessary to understand the rationale behind stock market
reaction. This analysis is done along with a scrutiny of stock returns in a few
other event windows (Table 4.3).
 59

The merger between HDFC Bank and Times Bank marked the
beginning of market-driven mergers in India. Both were new generation private
sector banks and merged on the basis of commercial considerations. HDFC
Bank paid about Rs. 22 billion for this merger deal where the total deposits
were Rs. 69 billion and combined assets were more than Rs. 90 billion.

HDFC Bank had about 68 branches and it was expected that its
network would increase to 107 branches. The other expectation was that the
additional retail customer accounts would increase the number of deposit and
loan products. The merger was also estimated to improve the infrastructure and
central processing facilities. Moreover, the lower cost alternative channels of
Times Bank, like phone banking and internet bank, were anticipated to reduce
the operating expenses. Overall, the focus was to benefit from economies of
large scale.

On the day of merger announcement the market reaction was

positive for HDFC Bank and the returns were 3.62%. Interestingly, stock
returns were negative on the first and second day before announcement.
Negative returns were observed in the (-10, 0) to (-30, 0) time windows too.
However, the returns were positive in the other windows ranging from (-1, +1)
to (-30, +30) and from (0, +1) to (0, +30). It appears that investors had
expected future benefits from this merger and started buying HDFC Bank
stocks resulting in higher stock returns. In general, the overall market reaction
could be categorised as positive.

The merger between ICICI Bank and Bank of Madura resulted in

ICICI Bank becoming one of the largest private sector banks in India with
combined assets of Rs. 173 billion and total deposits of Rs. 134 billion. ICICI
Bank later acquired the ICICI Ltd. and became the first universal bank in India.
While ICICI Bank was a new generation technology-oriented private sector
 60

bank, Bank of Madura was a profitable and well-capitalised older generation

bank with almost 57 years of operation. It had a network of more than
280 branches mostly in southern India. It was expected that the large customer
base, wide geographical reach and better management of infrastructure would
help in accelerating the growth plans of ICICI Bank.

The abnormal returns on ‘day zero’ were -0.79% and on the day
after merger announcement the returns were -1.1%. The returns in time
windows ranging from (0, +1) to (0, +10) were also negative. This clearly
shows that the initial market reaction was negative for ICICI Bank on
apprehensions of a relatively higher Non Performing Assets (NPAs) and large
number of employees of Bank of Madura. While the NPA was about 1.1% for
ICICI Bank, it was about 4.7% for Bank of Madura. The number of employees
was also a cause for concern since ICICI Bank had only 1,500 employees at the
time of merger and Bank of Madura had about 2,500 employees. However,
returns during other time windows were positive indicating that the market
overcame the shock in anticipation of long-term merger benefits.

Unlike the above two voluntary mergers, Bank of Baroda acquired

Benares State Bank based on RBI’s advice. Bank of Baroda was the third
largest public sector bank in India with total assets of about Rs. 2,274 billion
and more than 3,000 branches and offices. Benares State Bank was a small
old-generation private sector bank with assets of Rs. 11.34 billion and 105
branches. Moreover, it was incurring losses at the time merger and hence it was
anticipated that the merger would have an adverse impact on Bank of Baroda’s
asset quality and risk profile. Consequently, it was expected that this merger
would deplete the stock price of Bank of Baroda.

As expected, the stock returns of Bank of Baroda which were

positive three days ahead of this merger announcement turned negative on the
 61

day of announcement. On ‘day zero’ the returns were -1.19%, whereas the
returns were 1.06% the day before merger announcement. The returns were
mostly positive after the fourth day of announcement in all the time windows
from (0, +10) to (0, +30). It could be implied that the initial market reaction
was negative and the returns turned positive after the information shock was
absorbed by the market.

Similar to the above case, Punjab National Bank acquired

Nedungadi Bank, which was under financial distress, on being directed by the
RBI. Punjab National Bank was a large public sector bank with about 4,900
branches, whereas Nedungadi Bank was an old generation private sector bank
with about 174 branches. Though the net NPA of Nedungadi Bank was only
Rs. 2 billion its impact on the net NPA of the combined entity was high and the
net NPA of the merged bank increased to 7% of the asset value.

As observed in other forced mergers the stock market reaction was

negative for Punjab National Bank in the entire 30-day time window after
merger announcement. However, it is to be noted that the returns were negative
even before merger announcement and became more negative after the
announcement was made. The returns were -0.04% four days before merger
announcement and it declined to -0.23% on the announcement day. Though
there was some loss reduction on the first day after announcement, the returns
declined to -0.31% on the second and third day after merger announcement.
Overall, it could be implied that that market reaction was negative for Punjab
National Bank.

In yet another forced merger, Bank of Baroda, a profitable public

sector bank, was compelled to acquire South Gujarat Local Area Bank, a new
generation private sector bank. The latter was under financial distress at the
time of acquisition and had incurred losses of about Rs. 37 million. It had also
 62

failed to maintain the minimum cash reserve ratio and statutory liquidity ratio.
So, the RBI directed Bank of Baroda to acquire South Gujarat Local Area Bank
to protect the interest of depositors.

Stock returns of Bank of Baroda turned negative one day after the
merger announcement. On the day of announcement the returns were 1.25%
and it declined to -3.05% on the next day. This delay in translation of the
information to the share price could be inferred as inefficiency of the stock
market. Though the returns in (-4, 0) to (0, 0) windows were positive they were
negative in the all the run up windows from (0, +1) to (0, +30). Similarly the
returns were negative in all the time windows from (-1, +1) to (-3, +30).
This clearly highlights the negative reaction of stock market to the merger
announcement.

In another forced merger involving a financially distressed bank and

a public sector bank, Oriental Bank of Commerce acquired Global Trust Bank,
to protect the interest of depositors. Global Trust Bank was a new generation
private sector bank with a net loss of about Rs. 2.7 billion and net NPA of
6.5%, and Oriental Bank of Commerce was a public sector bank with a net
profit of about Rs. 4.6 billion and net NPA of 2.3%, at the time of merger.
Global Trust Bank had about 87 branches and Oriental Bank of Commerce had
about 989 branches. The merger would increase the reach and presence of
Oriental Bank of Commerce in South India and also result in an additional
retail customer base of about 1 million.

The stockholders appear to have rightly gauged the gains that would
be made by Oriental Bank of Commerce and hence the stock returns on ‘day
zero’ were 2.36%. This is significant since the returns were -1.88% on the day
before merger announcement was made. The returns were positive till the
eighth day after merger announcement and were volatile in the remaining time
 63

period. In the run up windows the returns were mostly positive except during
the (-10, 0) and (-2, 0) windows. This leads to the conclusion that the market
reaction was generally positive for Oriental Bank of Commerce.

Unlike the four previous cases merger between Centurion Bank and
Bank of Punjab was voluntary, based on the notion that the business portfolio
of the two banks would result in harmony gains. Bank of Punjab was a new
generation private sector bank with about 136 branches and a significant player
in small and medium enterprises loans and agricultural sector loans. Centurion
Bank was also a new generation private sector bank with about 99 branches
and significant presence in the retail segment with a wide range of products.
Centurion Bank’s net worth was about Rs. 5.1 billion and the net worth of
Bank of Punjab was about Rs. 1.8 billion. However, the net NPA of Bank of
Punjab was about Rs. 1.1 billion and that was to be carried to the books of
Centurion Bank.

The immediate market reaction to merger announcement was

negative for Centurion Bank. This could be attributed to the high level of NPA
of Bank of Punjab. Probably, the stockholders were apprehensive of the NPAs.
The returns which were 7.59% before ‘day zero’ declined to -3.15% on the day
of announcement. The returns were negative till 14 days after announcement,
except for an aberration on the eighth day. The returns were predominantly
negative in all the time windows from (0, 0) to (0, +30) and also from (-1, +1)
to (-20, +20) time windows. The returns were however positive in all the run up
windows from (-1, 0) to (-30, 0) and in (-25, +25) and (-30, +30) time
windows. Therefore, it may be concluded that the overall stock market reaction
for Centurion Bank was negative.

Federal Bank acquired Ganesh Bank of Kurundwad based on the

advice of RBI since the latter was under financial distress. Both the banks were
 64

old generation private sector banks and Ganesh Bank of Kurundwad had a
network of 32 branches in Maharashtra. At that time Federal Bank had
20 branches in Maharashtra. Federal Bank was asked by RBI to takeover
Ganesh Bank of Kurundwad since the net NPA was about 18%. On the positive
side, it was expected that the merger would help Federal Bank to improve its
exposure to agriculture sector and retail banking.

Though the immediate stock market reaction was negative, returns

appear to be volatile in the 30-day time window. The negative returns increased
from -0.25% one-day before merger announcement to -1.37% on ‘day zero’.
Returns were negative in the run up windows from (-4, 0) to (0, 0), and from
(0, +1) to (0, +30). Positive returns were observed for four days, from fourth
day to seventh day, after the event day. Returns were positive during the time
windows from (-5, +5) to (-30, +30). It could be implied that though the initial
stock market reaction was negative the returns turned positive in anticipation of
benefits.

Similar to the earlier case this merger was also carried out on RBI’s
directive. United Western Bank had incurred a net loss of about Rs. 1 billion
before the merger year and hence IDBI Bank was advised to acquire the loss
making entity to protect the interest of various stakeholders. IDBI was a public
sector bank with about 180 branches and United Western Bank was an old
generation private sector bank with about 230 branches. IDBI Bank’s net NPA
was about 1% and the poor asset quality of United Western Bank was likely to
affect the performance IDBI though the asset base would increase to
Rs. 71.6 billion. Yet, IDBI Bank gained ready access to physical infrastructure
in semi-urban and rural areas and that could aid in extending loans.

Though the returns for IDBI Bank were positive on ‘day zero’ and a
few days before and after it, the returns showed a declining trend during the
 65

first 3 days after merger announcement and turned negative from fourth day to
seventh day. This clearly shows that though the immediate market reaction was
positive, it turned negative after some time. On ‘day zero’ the returns were
1.14% and it reduced to 0.84% on the second day and declined till the seventh
day. Analysis of returns in the run up windows from (-30, 0) to (-3, 0) shows
that the overall returns were negative and it turned positive in (-2, 0) window
and remained positive till (0, +15) window, except in (0, +5) window.
The returns were positive in (-1, +1) and (-2, +2) windows and thereafter the
returns were negative till the (-30, +30) window. The trend indicates that the
stock market reacted negatively to the merger announcement and recovered
quickly and turned positive.

Merger between Indian Overseas Bank and Bharat Overseas Bank was
also carried out under directions from the RBI. Indian Overseas Bank was a public
sector bank with about 1,496 branches and an asset base of about Rs. 508 billion.
Bharat Overseas Bank was a private sector bank with about 91 branches and an
asset base of Rs. 32 billion. The net worth of Bharat Overseas Bank was about
Rs. 1.9 billion, whereas the net worth of Indian Overseas Bank was Rs. 25.8 billion.
This was the first merger involving a public sector bank and a profitable private
sector bank. In most other cases the public sector banks were forced by the RBI to
acquire loss-making private sector banks to protect the interest of various
stakeholders. The returns were -2.19% one day before merger announcement and
on ‘day zero’ the returns were -0.39%. This is significant since the returns three
days before the event day were 2.51% and two days before the event day the
returns were 0.01%. On the first day after merger announcement the returns
showed a slight improvement and were 0.09%. In the (-1, +1) to (-30, +30)
windows the returns were negative. In the (-30, 0) to (0, +30) run up windows the
returns were mostly negative except in the (-5, 0) and (-4, 0) windows. Hence, it
could be stated that the merger announcement had a negative impact on the
stockholders, though the reasons for such adverse reaction are not clear.
 66

Merger between Centurion Bank of Punjab and Lord Krishna Bank

was voluntary in nature which was carried out with an expansion motive.
Both were private sector banks. Centurion Bank of Punjab had about 403
branches and Lord Krishna Bank had about 59 branches with about 80% credit-
deposit ratio and the industry average at that time was 66%. It was expected
that the combined entity would have a strong presence in the state of Kerala.

The returns for Centurion Bank of Punjab were 2.75% on ‘day zero’
and it increased to 9.17% on the second day after merger announcement.
Though such high returns were not observed on later days the returns were
positive in the run up windows from (-25, 0) to (0, +30). Only in the (-30, 0)
window the returns were negative. The returns in run up windows from (-1, +1)
to (-30, 30) were also positive. Overall, the merger announcement appears to
have positively impacted the stockholders of Centurion Bank of Punjab.

ICICI Bank acquired Sangli Bank in a voluntary merger to expand

its own operations. Both were private sector banks. Sangli Bank was under
financial distress at the time of merger and it had incurred a loss of about
Rs. 310 million. Whereas, ICICI Bank had a network of 632 branches and
strong financials with a deposit base of Rs. 1,900 billion, which was about
95 times that of Sangli Bank. It was expected that ICICI Bank would gain by
having access to Sangli Bank’s network of over 190 branches and 100,000
customers. It was also anticipated that ICICI Bank would benefit by expanding
its rural operations and small enterprise banking operations.

It appears that there was some information leakage and negative

returns were observed two days before the date of merger announcement.
The returns increased from -0.58% on ‘day zero’ to 0.54% on the succeeding day.
The returns in the run up windows from (-30, 0) to (0, +1) were negative and it
turned positive during the run up windows from (0, +2) to (0, +10). Yet, the
 67

returns in the run up windows from (-1, +1) to (-30, +30) were negative. Overall,
the immediate reaction was negative for ICICI Bank and later the losses appeared
to decrease. It could be inferred that since Sangli Bank was under financial distress
at the time of merger the stockholders were initially wary of the merger. However,
expectation of long-term benefits from extended operations in the rural sector
could have reduced the negative sentiments over time.

HDFC Bank acquired Centurion Bank of Punjab on voluntary basis

in order to access the wide branch network of the latter bank, to offer more
products, to develop complimentary income streams and to gain from synergy
benefits. While HDFC Bank had assets of about Rs. 913 billion and a network
of 638 branches, Centurion Bank of Punjab had assets of about Rs. 209 billion
and 394 branches. Both the banks were private sector banks and were profitable
at the time of merger. However, experts had opined that the acquisition was
expensive, quality of assets was poor, loan profile was risky and return on
equity would reduce (Mann & Kohli 2009).

The returns were -0.02% on the event day for HDFC Bank. However,
it appears that there was some information leakage prior to the announcement and
the returns were negative three days prior to the announcement. While the stock
returns were 0.17% on the fourth day before merger announcement, the returns
were -0.36% on the third day before the announcement. The returns were negative
till the third day after merger announcement and on the third day 0.14% returns
were observed. The returns in all the run up windows were negative. The negative
returns increased from -0.02% in the (-30, 0) window to -0.17% in (0, +30)
window. Overall, this indicates the negative reaction of stock market to the merger
announcement on the HDFC Bank’s stocks. It appears that the stockholders were
apprehensive about valuation of the deal, poor asset quality and risky profile of the
loan quality of the acquired bank.
 68

State Bank of Saurashtra’s merger with State Bank of India (SBI) is

rather different from the other mergers discussed so far. SBI’s merger model is
operational in nature (Jayadev & Sensarma 2007) and the subsidiary banks of
SBI are being operationally integrated to consolidate the position of SBI in
India. State Bank of Saurashtra was an unlisted subsidiary bank of SBI and had
about 432 branches across India. Hence, from a conceptual viewpoint this
merger should not cause any impact on the stock returns.

Contrary to the expectation, stock markets appear to have adversely

reacted to the merger announcement. The returns were 1.12% two days before
the event and it declined to -1.62% one day before the announcement.
This indicates the possibility of information leakage. On ‘day zero’ the returns
were -2.68% and it was negative in all the six days after merger announcement
except for an aberration on the first day after event day. The returns were
negative in all the time windows except (-10, 0) window. These observations
indicate that the market reaction was negative for State Bank of India.

Continuing on its committed path to acquire the associate banks,

State Bank of India acquired State Bank of Indore too. State Bank of Indore
was an unlisted subsidiary of SBI and had about 470 branches across India.
This consolidation could also be categorised as operational consolidation and
conceptually this merger was unlikely to affect the stock returns of SBI.

The returns were 2.29% on ‘day zero’ and it was negative two days
before and after the announcement. On the first day after merger announcement
the returns were -0.01% and on the second day after announcement the returns
were -2.27%. The returns were mostly negative in the run up windows from
(-30, 0) to (0, +30) and from (-1, +1) to (-20, +20). However, the returns were
positive on the ‘day zero’. Overall, it appears that the markets had reacted
negatively to the merger announcement.
 69

ICICI Bank, a private sector bank, acquired Bank of Rajasthan

which was also a private sector bank on voluntary basis. Though Bank of
Rajasthan was a loss making entity, ICICI Bank expected to increase its
presence in North India by having access to the 463 branches of Bank of
Rajasthan. ICICI Bank expected to gain a customer base of about 2 million
from Bank of Rajasthan. While the latter had total assets of Rs. 173 billion, it
had incurred a loss of Rs. 1 billion. ICICI Bank had more than 2,000 branches,
total assets of Rs. 3,634 billion and had earned a net profit of Rs. 40 billion.

The returns were 3.26% for ICICI Bank on ‘day zero’ and reduced
to -0.41% on the first day after merger announcement. The returns were -0.04%
on the second day after the event day and negative returns were observed from
the fifth day to eighth day after merger announcement. It is to be noted the
trend was fairly positive in the 30-day time period before merger announcement.
Likewise, the stock returns reduced from 0.28% in (-30, 0) window to 0.07% in
the (0, +30) window. It could be implied that the market reaction was negative
for the stocks of ICICI Bank. This could be attributed to the reservation of
stockholders regarding acquisition of a loss making entity.

In general, adverse stock market reaction was observed for most of

acquiring banks in the first few days around the merger announcement. In most
merger announcements a declining trend was observed in various event
windows after the merger announcement.

4.1.2.4 Impact Analysis of CAAR

The CAAR values of acquiring banks are provided in Table 4.4 and
the same has been plotted in Figure No. 4.1. CAAR of acquiring banks had
declined from 3.9% on the day of merger announcement to 2.8% one day after
the announcement. It was also observed that the CAAR was 5% one day before
the announcement. The gains were zero, four days before the announcement
 70

and it increased to 6.6% on the third day. This could be attributed to

information leakage ahead of the merger announcement. Investors could have
anticipated merger benefits and indulged in a buying spree resulting in some
price gains to acquiring banks’ shareholders.

Table 4.4 CAAR of Acquiring Banks

Event Day CAAR t

-30 0.0001 0.0030
-29 -0.0030 -0.2102
-28 0.0048 0.4256
-27 0.0008 0.0405
-26 0.0085 0.3008
-25 0.0030 0.1048
-24 0.0024 0.0494
-23 -0.0002 -0.0023
-22 -0.0036 -0.0567
-21 -0.0009 -0.0182
-20 -0.0026 -0.2385
-19 -0.0035 -0.1577
-18 0.0081 0.2415
-17 0.0045 0.2631
-16 0.0030 0.1877
-15 -0.0039 -0.0927
-14 -0.0004 -0.0227
-13 0.0007 0.0591
-12 0.0013 0.0661
-11 0.0005 0.0264
-10 0.0029 0.1430
-9 -0.0004 -0.0278
-8 -0.0027 -0.1561
-7 -0.0035 -0.2054
-6 -0.0019 -0.1696
-5 0.0020 0.1664
-4 0.0000 -0.0038
 71

Table 4.4 (Continued)

Event Day CAAR t

-3 0.0066 0.4777
-2 -0.0011 -0.0927
-1 0.0050 0.1881
0 0.0039 0.1901
1 0.0028 0.0815
2 0.0037 0.1037
3 0.0024 0.1921
4 0.0050 0.2644
5 0.0027 0.1267
6 0.0039 0.2425
7 0.0025 0.1178
8 -0.0032 -0.3200
9 0.0050 0.3454
10 -0.0059 -0.4556
11 -0.0020 -0.1286
12 0.0032 0.1404
13 0.0058 0.2984
14 0.0063 0.2022
15 0.0025 0.1639
16 -0.0052 -0.3399
17 0.0034 0.2394
18 0.0019 0.1639
19 -0.0061 -0.5356
20 -0.0040 -0.1861
21 -0.0019 -0.0988
22 0.0004 0.0368
23 -0.0017 -0.1524
24 -0.0003 -0.0192
25 0.0075 0.4127
26 -0.0013 -0.1619
27 -0.0017 -0.1688
28 -0.0004 -0.0399
29 0.0049 0.2617
30 -0.0013 -0.1293
 73

Negative returns of -0.32%, -0.59% and -0.2% were observed on the

eight day, tenth day and eleventh day after merger announcement. This was
followed by high volatility in stock returns as observed in Figure 4.1. Returns
in the time windows from (0, +1) to (0, +30) also appear to have declined from
3.3% to 1.1%. Overall, the market reaction to merger announcements appears
to be negative for acquiring banks.

This contradicts the findings of Anand & Singh (2008) who had
reported that the shareholder wealth effects were positive and significant for
both acquiring and acquired banks in India. They had analysed five market-
driven bank mergers in a 40-day time window using the merger announcement
date as event date. Jayadev & Sensarma (2007) also noted that stockholders of
acquiring banks gained in the three voluntary bank mergers analysed by them
in the Indian context. However, their findings about the negative effect of
forced bank mergers on acquiring banks’ stock returns are similar to the
findings of this study. They had analysed three voluntary bank mergers and six
forced bank mergers in a 4-day time window using merger announcement date
as the event date.

Though results of event study model are sensitive to the choice of

event window and event date, the decline in stock returns of acquiring banks in
this study is not without reason. Here, nine out of the sixteen bank mergers
were voluntary mergers and seven mergers took place under regulatory
compulsions (Table 4.5). The latter mergers could be classified as forced
mergers and in many such mergers financially strong public sector banks
acquired banks that were structurally weak.
 74

Table 4.5 Nature of Bank Mergers

S. Nature of
Acquiring Bank Acquired Bank
No. merger
1 HDFC Bank Times Bank Voluntary
2 ICICI Bank Bank of Madura Voluntary
3 Bank of Baroda Benares State Bank Forced
4 Punjab National Bank Nedungadi Bank Forced
5 Bank of Baroda South Gujarat Local Forced
Area Bank
6 Oriental Bank of Global Trust Bank Forced
Commerce
7 Centurion Bank Bank of Punjab Voluntary
8 Federal Bank Ganesh Bank of Forced
Kurundwad
9 IDBI Bank United Western Bank Forced
10 Indian Overseas Bank Bharat Overseas Bank Forced
11 Centurion Bank of Lord Krishna Bank Voluntary
Punjab
12 ICICI Bank Sangli Bank Voluntary
13 HDFC Bank Centurion Bank of Voluntary
Punjab
14 State Bank of India State Bank of Saurashtra Voluntary
15 State Bank of India State Bank of Indore Voluntary
16 ICICI Bank The Bank of Rajasthan Voluntary

Stockholders of acquiring banks were wary of the consequences of

acquiring a distressed bank and hence the stock market reaction was generally
negative in forced mergers. These kind of forced mergers are facilitated by the
RBI and government with a view to protect the interest of depositors and
other stakeholders. These forced mergers have resulted in losses to stockholders
of acquiring banks in India and Malaysia (Jayadev & Sensarma 2007 and
Sufian 2007).
 75

In case of voluntary mergers too gains were not made by all the
acquiring banks since some of the acquired banks were financially weak.
For example, Centurion Bank which voluntarily acquired Bank of Punjab had
to absorb its net NPA of Rs. 1.1 billion also and hence the immediate market
reaction was negative. Similarly, in another voluntary merger, stock returns of
ICICI Bank declined after it announced about the acquisition of Sangli Bank
which had accumulated losses of about Rs. 310 million.

In other cases such as the merger between HDFC Bank and

Centurion Bank of Punjab it was felt that the acquisition was expensive
(Mann & Kohli 2009) and hence the stock returns declined. Though
Selvam et al (2006) have reported that there was no difference in the stock
price behaviour of ICICI Bank (acquisition of Bank of Madura) the initial
market reaction appears to be negative. However, some banks like HDFC Bank
(acquisition of Times Bank) had experienced gains.

Overall, it appears that mergers have depleted the stock returns of

acquiring banks, irrespective of whether the merger was carried out under
regulatory compulsion or on a voluntary basis. In most of the above mergers
the financials of acquired banks were weak and that could be cited as a major
reason for the adverse reaction of stock markets. Probably, the stockholders of
acquiring banks were not in favour of their bank acquiring a structurally weak
bank.

4.1.3 Stock returns of Acquired Banks

Daily abnormal stock returns of acquiring banks and the average

returns in various event windows have been analysed in this section along with
an analysis of CAAR.
 76

4.1.3.1 Daily Abnormal Returns of Acquired Banks

Daily abnormal returns of the ten acquired banks which were listed
are provided in Table 4.6. The other six banks were not listed firms. Average
abnormal returns declined to 0.61% on the event day from 3.87% the previous
day. The returns were lower till the third day and on the fourth day the returns
increased to 4.62%. As observed in case of acquiring banks, lower returns of
0.91% were observed two days before merger announcement.

Table 4.6 Daily Abnormal Returns of Acquired Banks

DAY Times BOM NED GTB BOP UWB BHOB CBOP BOR CAAR SD t
-30 0.0501 0.0370 -0.0083 -0.0102 0.0472 -0.0418 0.0204 -0.0127 -0.0105 0.0079 0.0319 0.2479
-29 -0.0165 -0.0334 -0.0472 -0.0250 -0.0083 0.0219 0.0016 0.0052 -0.0043 -0.0118 0.0212 -0.5568
-28 -0.0079 -0.0037 0.0251 -0.0255 0.0217 0.0354 0.0124 0.0429 0.0028 0.0115 0.0221 0.5195
-27 -0.0465 -0.0335 -0.0290 0.0263 -0.0597 -0.0249 0.0391 -0.0350 -0.0154 -0.0198 0.0325 -0.6104
-26 0.0229 0.0753 0.0546 0.0076 0.0676 -0.0201 0.0106 -0.0062 0.0050 0.0242 0.0338 0.7144
-25 0.0223 -0.0009 -0.0256 0.0642 -0.0651 0.0077 -0.0041 -0.0273 -0.0049 -0.0037 0.0358 -0.1041
-24 -0.0198 0.0388 0.0270 0.0354 0.0034 0.0180 -0.0074 -0.0140 0.0069 0.0098 0.0214 0.4603
-23 -0.0050 0.0216 0.0077 0.0069 0.0148 0.0037 -0.0238 0.0538 0.0030 0.0092 0.0210 0.4366
-22 -0.0292 0.0264 -0.0147 -0.0915 0.1179 0.0198 -0.0015 0.0187 -0.0013 0.0050 0.0554 0.0894
-21 0.0136 0.0157 0.0051 0.0133 0.0024 0.0057 -0.0282 0.0238 -0.0168 0.0038 0.0165 0.2321
-20 -0.0173 0.0391 -0.0214 0.0015 0.0376 -0.0003 -0.0055 -0.0275 0.0009 0.0008 0.0237 0.0334
-19 -0.0207 0.0527 -0.0110 -0.1379 0.1906 0.0017 -0.0171 0.0038 -0.0070 0.0061 0.0857 0.0715
-18 -0.0338 -0.0692 -0.0220 -0.1550 0.0859 0.0560 -0.0044 0.0196 -0.0086 -0.0146 0.0703 -0.2080
-17 -0.0415 0.0509 0.0123 0.1481 -0.0972 0.0114 0.0041 0.0151 -0.0067 0.0107 0.0664 0.1616
-16 0.0255 -0.0331 0.0203 0.0619 -0.0950 -0.0018 0.0021 0.0020 0.0001 -0.0020 0.0433 -0.0465
-15 0.0548 0.0140 -0.0445 -0.0141 0.0280 0.0379 -0.0012 -0.0186 -0.0006 0.0062 0.0308 0.2009
-14 0.0389 -0.0448 -0.0114 -0.0078 -0.0370 0.0567 -0.0030 0.0021 -0.0074 -0.0015 0.0323 -0.0467
-13 -0.0231 0.0634 0.0012 -0.0078 0.0713 0.0331 0.0407 -0.0053 -0.0020 0.0191 0.0339 0.5615
-12 0.0073 -0.0088 -0.0454 -0.0014 -0.0074 -0.0158 0.0353 0.0143 -0.0163 -0.0042 0.0225 -0.1882
-11 0.0041 0.0246 0.0073 -0.0079 0.0324 0.0091 -0.0073 0.0039 -0.0034 0.0070 0.0137 0.5082
-10 -0.0232 0.0019 0.0335 -0.0697 0.0715 -0.0096 -0.0286 -0.0121 -0.0166 -0.0059 0.0398 -0.1477
-9 0.0042 0.0252 -0.0101 -0.0496 0.0748 0.0420 -0.0367 -0.0174 0.0112 0.0049 0.0390 0.1246
-8 -0.0113 0.0201 0.0127 0.0309 -0.0108 -0.0307 -0.0217 0.0103 0.0197 0.0021 0.0213 0.1002
-7 -0.0113 0.0394 -0.0044 0.0021 0.0372 -0.0099 0.0047 0.0112 -0.0056 0.0070 0.0191 0.3689
-6 -0.0177 -0.0008 -0.0030 -0.0223 0.0215 0.0198 -0.0046 -0.0220 -0.0052 -0.0038 0.0161 -0.2368
-5 -0.0020 0.0791 -0.0256 -0.0014 0.0805 0.0196 0.0009 -0.0095 -0.0071 0.0149 0.0386 0.3872
-4 0.0044 0.0789 -0.0161 0.0305 0.0484 -0.0114 0.0144 0.0104 0.0097 0.0188 0.0299 0.6302
-3 0.0171 0.0793 -0.0309 -0.0152 0.0945 0.0092 -0.0002 -0.0193 0.0003 0.0150 0.0435 0.3442
-2 -0.0238 0.0791 -0.0016 0.0091 0.0700 -0.0134 0.0080 -0.0384 -0.0076 0.0091 0.0401 0.2259
-1 0.2309 0.0790 -0.0092 -0.0014 0.0804 0.0110 -0.0143 -0.0084 -0.0196 0.0387 0.0817 0.4739
0 -0.0199 0.0792 0.0821 0.0229 0.0563 -0.2204 -0.0136 0.0154 0.0527 0.0061 0.0926 0.0655
1 -0.0280 0.0793 -0.0845 -0.0863 0.1655 0.0723 -0.0017 -0.0083 -0.0070 0.0112 0.0816 0.1377
2 0.0837 0.0792 -0.0077 -0.0598 0.1390 0.0011 -0.0210 -0.0059 -0.0120 0.0219 0.0638 0.3426
3 -0.0045 0.0791 0.0477 -0.1278 0.2069 0.0835 -0.0151 0.0031 -0.0049 0.0298 0.0915 0.3256
 77

Table 4.6 (Continued)

DAY Times BOM NED GTB BOP UWB BHOB CBOP BOR CAAR SD t
4 0.1456 0.0793 0.0146 -0.1509 0.2302 0.0849 -0.0014 -0.0118 0.0256 0.0462 0.1074 0.4306
5 0.0044 0.0791 -0.0450 0.0035 0.0756 0.0455 -0.0112 0.0251 -0.0022 0.0194 0.0410 0.4733
6 0.0719 0.3825 -0.0122 0.0131 0.3693 -0.0160 -0.0129 -0.0177 -0.0060 0.0858 0.1669 0.5142
7 -0.0176 -0.0755 0.0121 -0.0493 -0.0262 0.0447 0.0365 -0.0133 -0.0072 -0.0106 0.0384 -0.2770
8 -0.0657 -0.0617 -0.0031 -0.0662 0.0044 0.0446 -0.0061 -0.0252 -0.0072 -0.0224 0.0400 -0.5593
9 0.0343 -0.0753 0.0059 -0.0172 -0.0581 0.0445 -0.0142 0.0101 -0.0072 -0.0086 0.0391 -0.2194
10 -0.0041 -0.0283 0.0194 0.0839 -0.1121 0.0298 -0.0100 0.0035 -0.0072 -0.0028 0.0522 -0.0533
11 -0.0308 0.0358 0.0717 0.0335 0.0023 0.0057 0.0161 -0.0180 -0.0072 0.0121 0.0313 0.3872
12 -0.0339 0.0048 -0.0194 0.1052 -0.1004 -0.0006 -0.0051 -0.0356 -0.0072 -0.0102 0.0537 -0.1904
13 0.0706 -0.0128 -0.0461 0.0164 -0.0292 0.0088 0.0025 0.0330 -0.0072 0.0040 0.0344 0.1162
14 0.0715 0.0108 0.0639 -0.0234 0.0342 0.0229 -0.0016 -0.0229 -0.0072 0.0165 0.0348 0.4734
15 0.0718 -0.0051 -0.0180 -0.0068 0.0017 0.0042 -0.0145 -0.0314 -0.0072 -0.0006 0.0292 -0.0201
16 0.0120 0.0189 0.0429 -0.1596 0.1784 0.0072 -0.0063 0.0127 -0.0072 0.0110 0.0858 0.1283
17 -0.0435 0.0423 0.0210 0.0419 0.0004 0.0072 0.0139 0.0307 -0.0072 0.0119 0.0271 0.4390
18 -0.0237 -0.0306 -0.0107 -0.0393 0.0087 0.0042 0.0047 -0.0217 -0.0072 -0.0128 0.0170 -0.7563
19 -0.0483 -0.0074 0.0549 -0.0415 0.0340 0.0042 -0.0009 -0.0220 -0.0072 -0.0038 0.0330 -0.1151
20 -0.0624 0.0163 -0.0501 -0.0046 0.0209 0.0042 -0.0044 0.0105 -0.0072 -0.0085 0.0289 -0.2957
21 -0.0249 -0.0154 -0.0160 -0.0025 -0.0130 0.0042 0.0099 0.0218 -0.0072 -0.0048 0.0147 -0.3264
22 0.0450 -0.0113 0.0117 -0.0142 0.0028 0.0042 0.0041 -0.0187 -0.0072 0.0018 0.0190 0.0952
23 0.0244 -0.0083 -0.0055 -0.0327 0.0243 0.0042 0.0008 0.0042 -0.0072 0.0005 0.0175 0.0265
24 0.0197 0.0614 0.0181 -0.0080 0.0695 0.0042 -0.0175 -0.0225 -0.0072 0.0131 0.0330 0.3960
25 0.0714 0.0150 -0.0145 0.0320 -0.0169 0.0042 -0.0068 -0.0030 -0.0072 0.0082 0.0282 0.2923
26 0.0320 0.0125 -0.0264 0.1524 -0.1399 0.0042 0.0008 0.0082 -0.0072 0.0041 0.0747 0.0544
27 -0.0729 0.0199 0.0038 0.0400 -0.0201 0.0042 0.0259 -0.0011 -0.0072 -0.0008 0.0325 -0.0261
28 0.0354 0.0322 0.0117 -0.0330 0.0652 0.0042 -0.0091 0.0138 -0.0072 0.0126 0.0289 0.4344
29 -0.0451 0.0792 -0.0016 0.0378 0.0415 0.0042 -0.0110 -0.0003 -0.0072 0.0108 0.0364 0.2970
30 0.0432 -0.0091 0.0050 -0.0079 -0.0012 0.0042 -0.0119 -0.0117 -0.0072 0.0004 0.0173 0.0219

On ‘day zero’ maximum gains were made by Nedungadi Bank when

it was acquired by Punjab National Bank. Maximum losses of -22.04% were
experienced by United Western Bank it acquisition by IDBI Bank, on the event
day. Maximum CAAR of 8.58% was observed six days after merger
announcement and it turned negative on the seventh day. Maximum loss of
-2.24% was observed on the eight day indicating the volatility of returns in
acquired banks. Overall, acquired bank stocks appear to have lost value though
some gains were observed in the first few days around merger announcement.

4.1.3.2 Abnormal Returns of Acquired Banks in various Event Windows

Abnormal returns of acquired banks in various event windows are

presented in Table 4.7. Maximum gains of 2.30% were observed in the (0, +4) event
window. Minimum gain of 0.55% was observed in the (-30, 0) time window.
 79

Maximum gains of 15.96% in the (0, +4) event window were

experienced by Bank of Punjab when it was acquired by Centurion Bank.
Maximum loss of -10.47% in the (-1, 0) event window was experienced by
United Western Bank when it was acquired by IDBI Bank. In general, returns
in the time windows ranging from (0, +5) to (0, +30) show a declining trend
indicating the overall market reaction was negative for acquired banks.
However, as each merger is unique detailed analysis of reasons behind mergers
along with analysis of returns in some more event windows is provided below
(Table 4.8).
 81

Times Bank, a profitable new generation private sector bank merged

with HDFC Bank driven by commercial considerations. However, the stock
returns for Times Bank declined from a significantly high value of 23.1% one
day before merger announcement to -1.99% on the day of announcement.
This probably indicates that the investors had prior information about the
merger deal. The returns further declined to -2.8% on the second day after
merger announcement. While the returns were negative in the (0, +1) window,
it is positive in all the other time windows. Overall, it may be concluded that
the market reaction was positive for Times Bank in anticipation of potential
gains.

Bank of Madura also merged with ICICI Bank for commercial

reasons. The stock returns for Bank of Madura are relatively higher than the
returns of acquired banks involved in other mergers. On the day of
announcement the stock returns were 7.92% and it increased to 38.25% on the
sixth day. However, the returns turned negative on the seventh day and the
trend continued up to the twelfth day. The overall returns in all the other time
windows were positive. Overall, it could be implied that the market reaction
was positive for Bank of Madura stocks.

Nedungadi Bank was under financial distress when it was acquired

by Punjab National Bank under RBI directive. Understandably, the market
reaction was positive for Nedungadi Bank and the stock returns were 8.21% on
the day of announcement. The increase is significant compared to the -0.92%
return one-day before ‘day zero’. However, the returns turned negative on the
first day after merger announcement and remained volatile in the following
days. Yet, the returns were 0.94% in the (0, +3) time window and increased to
1.04% in the (0, +4) time window. Though the returns tended to decline the
overall impact of the merger announcement was positive on Nedungadi Bank’s
stocks.
 82

Similar to the above case, Global Trust Bank was financially

distressed and was acquired by Oriental Bank of Commerce under RBI
directive. However, the stockholders of Global Trust Bank did not receive any
stocks of Oriental Bank of Commerce since the paid-up capital and reserves
were treated as provision for bad and doubtful loans and depreciation in assets.
It appeared that the stockholders of acquired bank would lose. Notwithstanding, the
stock returns for Global Trust Bank were 2.29% on ‘day zero’ and in
comparison to the previous day’s return of -0.14% this was a significant gain.
However, the returns turned negative on the first day after merger announcement
and subsequently the returns were volatile. Initially, the stockholders might
have failed to understand the facts surrounding the merger and probably
reacted positively expecting a swap deal. As the details of merger emerged on
the next day the sentiments turned negative leading to losses. The returns in all
the run up windows from (0, +1) to (0, +30) were also negative indicating that
the market reaction was negative for the Global Trust Bank.

Unlike the earlier mergers, Bank of Punjab was acquired by

Centurion Bank on voluntary basis. The stock returns for Bank of Punjab on
‘day zero’ were 5.63% and the returns increased up to 23.02% on the fourth
day. Same trend was observed in the run up windows from (0, +1) to (0, +4),
where the returns increased from 11.09% to 15.96%. Subsequently, the returns
declined and reached 3.92% in the (0, +30) time window. The returns in
(-1, +1) time window were 10.07% and it reached 11.34% in the (-5, +5) time
window. Overall, it appears that the market reaction was positive for Bank of
Punjab.

United Western Bank, a loss making private sector bank was

acquired IDBI Bank on RBI directive. The stock returns on the event day were
-22.04% for United Western Bank. However, it reached 7.23% on the first day
after merger announcement and generally remained positive. Similarly, the
 83

returns increased from 0.43% in (0, +4) window to 1.95% in the (0, +10) time
window. The returns in the time windows ranging from (-5, +5) to (-30, 30)
were also positive indicating that the market reaction was favourable. It appears
that stockholders of acquired bank have gained though there were some losses
in the initial days around merger announcement.

Bharat Overseas Bank, a private sector bank, was also acquired by

Indian Overseas Bank on RBI’s directive. However, the acquired bank was a
profitable bank unlike other typical forced mergers where the acquired banks
were loss making entities. The returns for Bharat Overseas Bank slightly
improved from -1.43% on the day before merger announcement to -1.36% on
the event day. However, the returns were negative and increased from -0.09%
in (-30, 0) window to -0.26% in the (0, +30) window. The returns in the other
time windows were also negative indicating that the merger announcement had
adversely affected the Bharat Overseas Bank stockholders. Probably, the
Bharat Overseas Bank’s stockholders were apprehensive about being acquired
by a public sector bank.

Centurion Bank of Punjab was acquired by HDFC Bank in a

voluntary move to for market expansion. The returns on ‘day zero’ were 1.54%
for Centurion Bank of Punjab compared to 0.35% returns on the day before
merger. The returns were positive in the run up windows from (-1, 0) to (0, +3).
However, the returns in the run up windows from (0, +4) to (0, +30) were
negative and showed an increasing trend except in the (0, +5) time window.
It could be inferred that the stock market had initially reacted positively in
anticipation of potential gains. However, the major cause of fall in returns
could be attributed to the unfavourable swap ratio that was fixed at 1:29 when
the stockholders had expected a swap ratio of 1:26 (Mann and Kohli 2009).
 84

Bank of Rajasthan, a loss making private sector bank, was acquired

by ICICI Bank on voluntary basis for increasing it operations in North India.
The returns for Bank of Rajasthan were 5.27% on the day of announcement and
it reduced to -0.7% on the day after merger announcement. The returns in the
(-30, 0) time window reduced from -0.18% to -0.41% in the (0, +30) time
window. The returns in the run up windows from (-10, +10) to (-30, +30) run
up windows were also negative. It could be inferred that the market reaction for
stocks of Bank of Rajasthan was not favourable. Probably, stockholders could
have expected a higher swap ratio than 1:4.72.

In general, mergers seem to have adversely affected the stock

returns of acquired banks. The stockholders of acquired banks appear to be
apprehensive about their bank being taken over by a bigger bank and also about
unfavourable swap ratio.

4.1.3.3 Impact Analysis of CAAR of Acquired Banks

The CAAR of acquired banks indicate that the returns have declined
on the day of merger announcement (Table 4.9) and the same has been plotted
in Figure 4.2. One day before ‘day zero’ the returns were 3.87% and it declined
to 0.61% on the day of merger announcement. Though the returns were
positive till the sixth day after merger announcement, the overall trend appears
to be negative. The returns were negative from the seventh day to tenth day.
Though significant gains were made on certain days, the overall reaction
appears to be negative.
 85

Table 4.9 CAAR of Acquired Banks

Event Day CAAR t

-30 0.0079 0.2479
-29 -0.0118 -0.5568
-28 0.0115 0.5195
-27 -0.0198 -0.6104
-26 0.0242 0.7144
-25 -0.0037 -0.1041
-24 0.0098 0.4603
-23 0.0092 0.4366
-22 0.0050 0.0894
-21 0.0038 0.2321
-20 0.0008 0.0334
-19 0.0061 0.0715
-18 -0.0146 -0.2080
-17 0.0107 0.1616
-16 -0.0020 -0.0465
-15 0.0062 0.2009
-14 -0.0015 -0.0467
-13 0.0191 0.5615
-12 -0.0042 -0.1882
-11 0.0070 0.5082
-10 -0.0059 -0.1477
-9 0.0049 0.1246
-8 0.0021 0.1002
-7 0.0070 0.3689
-6 -0.0038 -0.2368
-5 0.0149 0.3872
-4 0.0188 0.6302
-3 0.0150 0.3442
-2 0.0091 0.2259
-1 0.0387 0.4739
0 0.0061 0.0655
 86

Table 4.9 (Continued)

Event Day CAAR t

1 0.0112 0.1377
2 0.0219 0.3426
3 0.0298 0.3256
4 0.0462 0.4306
5 0.0194 0.4733
6 0.0858 0.5142
7 -0.0106 -0.2770
8 -0.0207 -0.5479
9 -0.0086 -0.2194
10 -0.0028 -0.0533
11 0.0121 0.3872
12 -0.0102 -0.1904
13 0.0040 0.1162
14 0.0165 0.4734
15 -0.0006 -0.0201
16 0.0110 0.1283
17 0.0119 0.4390
18 -0.0128 -0.7563
19 -0.0038 -0.1151
20 -0.0085 -0.2957
21 -0.0048 -0.3264
22 0.0018 0.0952
23 0.0005 0.0265
24 0.0131 0.3960
25 0.0082 0.2923
26 0.0041 0.0544
27 -0.0008 -0.0261
28 0.0126 0.4344
29 0.0108 0.2970
30 0.0004 0.0219
 88

These findings are different from that of Mann & Kohli (2009),
who analysed the merger announcement involving HDFC Bank and
Centurion Bank of Punjab, and reported that the stock market gave a positive
response to both the stocks. However, these findings are consistent with the
results of Kumar & Suhas (2010). They had noted that while merger
announcements created value for acquirer banks, the announcements eroded
the shareholder wealth of acquired banks.

Most of the acquired banks in this study appear to have been ailing
from some financial problem at the time of acquisition. Ideally, the
stockholders must have been relieved that their bank was being taken over by
a stronger bank. In contrast, overall positive returns were observed only in
case of Times Bank (acquired by HDFC Bank), Bank of Madura (acquired by
ICICI Bank), Nedungadi Bank (acquired by Punjab National Bank), Bank of
Punjab (acquired by Centurion Bank) and United Western Bank (IDBI Bank).

Average stock returns of acquired and acquiring banks are

presented in Table 4.10.

Table 4.10 Average Stock Returns

S. Event day Pre-merger Post-merger t (Pre and

Bank
No. (0, 0) (-30, -1) (+1, +30) Post merger)
1 Acquiring 0.0039 0.0009 0.0010 0.02377
banks
2 Acquired 0.0061 0.0055 0.0078 0.14392
banks

The average returns of acquiring banks after merger announcement

appears to have made statistically insignificant gains. In case of acquired
banks too the gains appear to be statistically insignificant. On a comparative
note the gains made by acquired banks appears to be more before and after
merger announcement and also on the event day. Most of the acquired banks
 89

were structurally weak at the time of merger announcement and the

stockholders were probably relieved that the bank was being taken over by a
stronger bank leading to overall gains.

However, a closer analysis of the stock returns done in the earlier

sections on the basis of daily returns and average returns in various event
windows indicates that the market reaction was generally adverse for
acquiring and acquired banks during merger announcements.

4.2 Data Envelopment Analysis

This non-parametric technique has been widely used in bank

merger studies in various countries. In India, Kaur & Kaur (2010) and
Kumar (2007) have used this methodology to analyse post-merger gains of
banks. The available evidence in US, Europe and Australia in terms of impact
on cost and profit efficiency is mixed (Singh 2009). Literature in the Indian
context is limited and generally these studies indicate that there were no cost
efficiency gains. However, there is some evidence to suggest that there were
post-merger profit efficiency gains. This difference arises since measured cost
efficiency changes do not take into account the effects of changes in output
that occur after the merger, whereas measured profit efficiency changes
include all the cost efficiency changes plus the cost and revenue effects of
changes in output that occur after a merger.

In this study Constant Returns to Scale (CRS) assumption has not

been made since it is applicable only when all the Decision Making Units
operate at an optimal scale. Factors such as competition, legal and regulatory
framework make it impossible to make a CRS assumption and hence the
Variable Returns to Scale (VRS) model has been applied here. Sufian et al
(2007) and Chu & Lim (1998) have analysed bank mergers in Singapore
under VRS assumption. Mean value of the inputs i.e. shareholders capital,
 90

interest expenses and operating expenses, and mean value of the outputs i.e.
annual increase in average assets and total income were used to calculate Cost
Efficiency and Profit Efficiency values to obtain a comprehensive picture
about the merger impact on acquiring banks. For calculation of mean values,
the year of legal merger was considered as ‘Year Zero’ and the preceding
years were denoted as -1, -2 and -3. Similarly, the successive years were
denoted as 1, 2 and 3. The mean value of a given input or output in a
particular year was computed by adding all the sixteen values in that year and
then dividing the total by sixteen. The mean values thus obtained are given in
Table 4.11.

Table 4.11 Mean of Inputs and Outputs

Values in millions of Rupees

Inputs Outputs
Total Profit
Year Annual
Share Interest Operating Income After Tax
Increase
Capital Expenses Expenses (Cost (Profit
in Assets
Efficiency) Efficiency)
-3 101.37 63.46 27.77 148.75 118.54 13.22
-2 119.52 75.47 31.18 197.15 138.95 18.26
-1 144.93 88.67 36.68 151.24 163.46 19.89
0* 172.31 105.09 43.75 257.31 197.13 21.49
1 220.69 130.20 52.75 326.70 242.84 25.24
2 245.28 149.18 60.05 296.17 279.20 27.78
3 196.67 122.98 49.05 -383.91 228.33 25.26
* Year of merger

From the above mean values, efficiencies are calculated as given below:

Cost Efficiency = (v1 × Annual Increase in Assets + v2 × Total

Income) ÷ (u1 × Shareholders capital + u2 ×
Interest Expenses + u3 × Operating Expenses)
 91

Profit Efficiency = (v1 × Annual Increase in Assets + v2 × Profit

After Tax) ÷ (u1 × Shareholders capital + u2 ×
Interest Expenses + u3 × Operating Expenses)

Where, v1, v2, u1, u2 and u3 are weights assigned to the respective
inputs or outputs. These weights are computed by solving the above equation
as a linear programme problem using Solver.

For example, Cost Efficiency for ‘Year Zero’ was computed as follows:
C. E. = (0.00000078 × 257.31 + 0.00001579 × 197.13) ÷
(0.00001747 × 172.31 + 0 x 105.09 + 0.00002253 × 43.75)
= 0.9947

Similarly, Profit Efficiency for ‘Year Zero’ was computed as given below:
P. E. = (0.00001936 × 257.31 + 0.00000027 × 197.13) ÷
(0 × 172.31 + 0 × 105.09 + 0.000022535013 × 43.75)
= 0.9942

Cost Efficiency and Profit Efficiency for the all the years were
calculated using the same approach and these values are shown in Table 4.12.

Table 4.12 Mean Cost Efficiency and Profit Efficiency of Acquiring Banks

Time period Cost Efficiency Profit Efficiency

-3 0.98 0.98
-2 0.99 1.00
-1 0.98 0.98
0 0.99 0.99
1 0.99 1.00
2 1.00 0.98
3 0.95 0.82
 92

Though was no adverse impact on the cost efficiency of acquiring

banks the cost efficiency had not increased after merger. However, profit
efficiency appears to have declined after merger. The decline in profit
efficiency was mainly due to increase in operating expenses (non-interest
expenses) in the form of advertising and rapid expansion. Similar, observation
was made by Singh (2009) who had analysed three commercial bank mergers
in India which had happened over the period 2000 – 05. Consequently, it was
suggested that banks must consider mergers only if they were able to justify it
on the basis of strong economic rationale. Similarly, Gourlay et al (2006)
analysed the potential efficiency gains in Indian bank mergers using a
production model and reported that initial gains were due to harmony effects.
Yet, there was no sustained increase and hence it was argued that the
acquiring banks did not gain a competitive advantage over their non-merging
counterparts.

The decline in profit efficiency and lack of cost efficiency gains

indicate the absence of sound economic rationale behind bank mergers in
India. Bank managers and RBI appear to support bank mergers based on their
own assessment of the situation and that has resulted in lower efficiencies.
However, Kaur & Kaur (2010) reported that mergers led to higher level of
cost efficiencies for acquiring banks due to higher technical efficiency.
On this basis they argued that strong banks must be merged with strong banks
to compete with foreign banks and to enter in the global financial market.
Yet, they noted that merger between distressed and strong banks did not yield
any significant efficiency gains to acquiring banks. In this study most of the
mergers had happened between stronger banks and financially distressed
banks. Hence, these results are similar to some of the observations made by
Kaur & Kaur (2010).
 93

However, RBI (2008) arrived at a different conclusion and

reported that public sector banks were able to garner higher efficiency gains
than private sector banks during post-merger period. Akhavein et al (1997),
Avkiran & Rudi (1996) who had analysed profit efficiency of bank mergers in
US, Australia and Europe, respectively, had also reported that there were
gains due to multiple reasons. Though the results of DEA studies could be
greatly influenced by choice of input and output variables, the above results
are rather exceptions compared to the general results of international and
Indian literature available on bank mergers.

In the Indian context Sanjeev (2009) observed that there was no

clear evidence of improvement in the efficiency levels of public sector banks
due to mergers. DeYoung (1993 & 1997), Berger & Humphrey (1993),
Resti (1997) and Podinovski (1998) too reported that little or no cost
efficiency improvement was observed in US bank mergers of 1980s.
The mean efficiency scores of this analysis also indicate that there were no
gains. Hence, it is imperative to closely scrutinise the reason for absence of
efficiency gains in each merger. The following section provides an insight
into the causes that lead to efficiency gains or losses in each merger.

4.2.1 Rationale for efficiency gain / loss

Cost efficiency and profit efficiency of individual acquiring banks

is provided in Table 4.13 and Table 4.14, respectively. Efficiency of acquired
banks was not computed since they cease to exist after mergers and it would
be inappropriate to compare their pre-merger efficiencies with the
post-merger efficiencies of acquiring banks.
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Table 4.13 Cost Efficiency of Acquiring Banks

S. Acquiring Year
No. Bank -3 -2 -1 0 1 2 3
1 HDFC
(Times)
0.51 0.47 0.62 1.00 0.45 0.54 0.75
2 ICICI
1.00 1.00 0.82 0.99 1.00 0.94 0.97
(BOM)
3 BOB
1.00 0.90 0.99 1.00 0.99 0.89 0.78
(BSB)
4 PNB
0.89 0.85 1.00 1.00 1.00 0.93 0.93
(NB)
5 BOB
0.92 0.93 1.00 1.00 0.95 1.00 0.99
(SGLA)
6 OBC
1.00 0.74 1.00 1.00 0.94 1.00 0.92
(GTB)
7 CB
0.67 0.70 0.76 0.97 1.00 0.90 --*
(BOP)
8 FB
0.79 0.58 0.99 1.00 1.00 0.83 0.85
(GB)
9 IDBI
0.69 0.87 0.90 0.97 1.00 0.97 1.00
(UWB)
10 IOB
0.32 0.48 0.86 1.00 1.00 0.83 0.19
(BHOB)
11 CBOP
0.64 1.00 0.95 1.00 --* --* --*
(LKB)
12 ICICI
0.75 0.83 0.91 1.00 0.99 0.93 0.95
(Sangli)
13 HDFC
0.98 0.99 0.95 1.00 0.95 0.95 0.98
(CBOP)
14 SBI
0.78 0.78 0.93 1.00 0.87 0.88 0.95
(SBSAU)
15 SBI
0.91 0.91 0.90 1.00 0.95 0.91 --**
(SBIND)
16 ICICI
0.94 0.91 0.90 0.96 0.97 1.00 --**
(BOR)
* Centurion Bank which acquired Bank of Punjab to become Centurion Bank
of Punjab was subsequently acquired by HDFC Bank
* * Financial results for the ‘Year 3’ i.e. 2013 – 14, were not declared at the
time of compilation of this report
 95

Table 4.14 Profit Efficiency of Acquiring Banks

S. Acquiring Year
No. Bank -3 -2 -1 0 1 2 3
1 HDFC
(Times)
0.98 0.99 1.00 1.00 0.71 0.78 0.85
2 ICICI
1.00 1.00 0.59 0.87 1.00 0.74 0.96
(BOM)
3 BOB
0.97 0.57 1.00 0.99 1.00 0.84 0.88
(BSB)
4 PNB
0.91 1.00 0.99 0.97 1.00 0.90 0.82
(NB)
5 BOB
0.67 0.79 1.00 0.86 1.00 1.00 0.90
(SGLA)
6 OBC
0.68 0.57 1.00 1.00 0.92 1.00 0.74
(GTB)
7 CB
0.03 0.21 0.32 1.00 0.88 0.74 --*
(BOP)
8 FB
0.69 0.46 1.00 1.00 1.00 0.80 0.80
(GB)
9 IDBI
1.00 0.59 0.92 0.84 0.90 0.94 1.00
(UWB)
10 IOB
0.33 0.51 0.91 1.00 0.89 0.74 0.18
(BHOB)
11 CBOP
0.66 1.00 0.98 0.69 --* --* --*
(LKB)
12 ICICI
1.00 0.99 0.95 0.91 0.90 0.92 0.96
(Sangli)
13 HDFC
0.98 1.00 0.81 1.00 0.81 0.89 0.93
(CBOP)
14 SBI
0.64 0.66 0.92 1.00 0.77 0.62 0.77
(SBSAU)
15 SBI
0.75 1.00 0.62 0.89 0.61 0.83 --**
(SBIND)
16 ICICI
0.94 0.84 0.77 1.00 1.00 1.00 --**
(BOR)
* Centurion Bank which acquired Bank of Punjab to become Centurion Bank
of Punjab was subsequently acquired by HDFC Bank
* * Financial results for the ‘Year 3’ i.e. 2013 – 14, were not declared at the
time of compilation of this report
 96

In case of HDFC Bank (acquisition of Times Bank), cost efficiency

was maximum during the year of merger (Table 4.13). This was mainly due to
lower operating expenses during that year. However, cost efficiency in the
subsequent three years was 0.45, 0.54 and 0.75 since the growth in loan
disbursements was not proportionate to the increase in operating expenses and
interest expenses. The loan disbursements were Rs. 14 billion during the year
of merger and Rs. 34 billion, Rs. 46 billion and Rs. 68 billion in the
subsequent years. While, operating expenses during the year of merger was
Rs. 1.7 billion, expenses increased to Rs. 3.1 billion, 4.2 billion and 5.9
billion the following years. Similarly, the interest expenses increased from
Rs. 3.7 billion during the year of merger to Rs. 7.5 billion, Rs. 10.7 billion
and Rs. 11.9 billion in the later years. Hence, the cost efficiency declined after
merger. The decline in profit efficiency of HDFC Bank was not sharp as
observed in the case of cost efficiency. Yet the profit efficiency before merger
was close to unity in all the three years and it had declined immediately after
merger. This could be mainly attributed to the increase in interest expenses.
Overall, the merger has resulted in considerable decline of cost efficiency and
profit efficiency of HDFC Bank.

Cost efficiency of ICICI Bank (acquisition of Bank of Madura)

appeared to improve during the year of merger and next year. However, it
declined in the subsequent years due to higher interest expenses and operating
expenses. During the year of merger the interest expenses were Rs. 8.4 billion
and it increased to Rs. 15.6 billion, Rs. 79.4 billion and Rs. 70.2 billion in the
subsequent years. The operating expenses were Rs. 3.3 billion during the year
of merger and in the subsequent years it increased to Rs. 6.2 billion,
Rs. 20.1 billion and Rs. 25.7 billion, respectively. Yet, the loan disbursements
were high and hence the decline in efficiency was not steep. Profit efficiency
too increased during the year of merger and next year. However, the
efficiency was higher during third and second year before merger. Though the
 97

profit after tax increased from Rs. 1.6 billion during the year of merger to
Rs. 2.6 billion, Rs. 12.1 billion and Rs. 16.4 billion during the subsequent
years, the increase was not proportionate to the increase in share capital and
other expenses. Due to inefficient use of share capital and higher expenses the
post-merger profit efficiency was generally lower.

Unlike the above two cases, cost efficiency of Bank of Baroda

(acquisition of Benares State Bank) was maximum during the year of merger
and all the three years before merger. The post-merger efficiency showed a
declining trend mainly due to lower growth in loan disbursements. The loan
disbursement was Rs. 353.5 billion during the year of merger and in the
subsequent three years it was Rs. 356 billion, Rs. 434 billion and Rs. 599 billion,
respectively. Though there was no decline in profit efficiency during the first
year after merger, it appeared to decline in the subsequent years. In spite of
incurring lower interest expenses the profit efficiency too declined due to
lower growth in loan disbursements. The interest expenses were Rs. 4 billion
during the year of merger and in the later years it was Rs. 3.6 billion, Rs. 3.5
billion and Rs. 3.9 billion in the subsequent years.

Cost efficiency of Punjab National Bank (acquisition of Nedungadi

Bank) was maximum during the year of merger and one year before and after
the merger. It had declined in the second and third year after merger
indicating the detrimental effect of merger. This could be attributed to higher
level of net NPA. Though the net NPA of Nedungadi Bank was only
Rs. 2 billion its impact on the net NPA of the combined entity was high and it
increased to 7% of the asset value. Profit efficiency was the highest two years
before merger and one year after merger. It had declined in the second and
third year after merger. This decline was mainly due to increase in operating
expenses. The operating expenses were Rs. 20.6 billion during the year of
mergers and it increased to Rs. 23.7 billion, Rs. 29.8 billion and
 98

Rs. 30.2 billion in the subsequent three years. The increase in loan
disbursement was offset by the higher operating expenses.

Cost efficiency of Bank of Baroda (South Gujarat Local Area

Bank) declined marginally one year after the merger and in the subsequent
years it was rather unaffected. One reason that could be attributed to this
phenomenon is the small size of acquired bank. The decline in the first year
after merger was mainly due to higher operating expenses. Operating expenses
were Rs. 19.8 billion during the year of merger and in the subsequent years it
was Rs. 23.8 billion, Rs. 25.4 billion and Rs. 29.3 billion, respectively. Profit
efficiency of the bank declined during the year of merger and in the next two
years it was the maximum before declining in the third year. These changes
could be attributed to the increase in operating expenses and interest
expenses. Interest income during the year of merger was Rs. 34.5 billion and it
increased to Rs. 38.8 billion, Rs. 54.3 billion and Rs. 79 billion in the
subsequent years. Consequently, the profits declined and hence the profit
efficiency declined. In addition, the bank had increased its share capital too
and the increase in profit after tax was not proportionate to the increase in
share capital. Overall, profit efficiency appears to have declined after merger
and cost efficiency appears to be relatively unaffected by the merger.

The cost efficiency of Oriental Bank of Commerce (acquisition of

Global Trust Bank) appeared to decline during the first and third year after
merger and it was the maximum during the year of merger and second year
after merger. Yet, the decline was relatively lower than the decrease in profit
efficiency. During the third of merger there was a steep decline in profit
efficiency. Overall, both the efficiencies had declined after merger except
during the second year after merger. Though the loan disbursements had
increased during the three year period, the interest expenses and operating
expenses had also considerably increased leading to decreased profitability.
 99

Interest expenses were Rs. 20.5 billion during the year of merger and it had
increased to Rs. 25.1 billion, Rs.34.7 billion and Rs. 51.6 billion in the
subsequent years. Operating expenses were Rs. 0.79 billion during the year of
merger and had increased to Rs. 0.97 billion, Rs. 1 billion and Rs. 1.1 billion
in the later years. High NPA level and interest expenses appear to have
resulted in lower efficiencies.

Centurion Bank’s cost efficiency appeared to improve after its

acquisition of Bank of Punjab during the year of merger and in the second
year after merger. However, it had declined during the third year. Profit
efficiency was maximum during the year of merger and it had also declined in
the second and third year. The bank had incurred losses in the second and first
year after merger and hence the profit efficiency appeared to improve during
the year of merger. However, the improvement was not sustained due to
increase in interest expenses and operating expenses. During the year of merger
interest expenses were Rs. 0.4 billion and it had increased to Rs. 0.7 billion and Rs.
1.5 billion in the subsequent years. The operating expenses were Rs. 0.5
billion in the year of merger and in the subsequent years it was Rs. 0.7 billion
and Rs. 1 billion. Overall, cost efficiency appears to be unaffected and profit
efficiency appears to have declined after merger. The combined entity was
acquired by HDFC Bank in the third year after merger and ceased to exist.
Hence, efficiencies were not computed for the third year.

The cost efficiency of Federal Bank (acquisition of Ganesh Bank

of Kurundwad) appears to increase during the year of merger and the
subsequent year after merger. Profit efficiency was the highest one year
before merger, during the year of merger and one year after merger. However,
both cost efficiency and profit efficiency had declined in the second and third
year after merger. This could be attributed to the higher interest expenses and
operating expenses in the later years. Interest expenses were Rs. 1.1 billion
 100

during the year of merger and in the subsequent years it was Rs. 1.6 billion,
Rs. 2 billion and Rs. 2.3 billion. The operating expenses were Rs. 0.4 billion
in the year of merger and Rs. 0.5 billion, Rs. 0.6 billion and Rs. 0.7 billion in
the following years.

The cost efficiency of IDBI Bank appears to be unaffected by the

merger its merger with United Western Bank. Though the interest expenses
and operating expenses increased, the income and profit after tax also
increased due to higher loan disbursements. Consequently, profit efficiency
appeared to increase after merger. The interest expenses increased from
Rs. 56.9 billion in the year of merger to Rs. 73.6 billion, Rs. 103.1 billion and
Rs. 130 billion in the later years. The operating expenses too increased from
Rs. 7.8 billion during the year of merger to Rs. 9.6 billion, Rs. 13.4 billion
and Rs. 18.3 billion in the subsequent years. However, these additional
expenses were compensated by higher loan disbursements of Rs. 624.7 billion
during the year of merger and Rs. 822.1 billion, Rs. 1,034.4 billion and
Rs. 1,382 billion in the following years. Consequently profit efficiency
appears to increase and cost efficiency was not affected by merger.

The cost efficiency of Indian Overseas Bank appeared to increase

during the year of merger and the subsequent year (acquisition of Bharat
Overseas Bank). However, the improvement was not sustained during the
later years. The sharp decline during the third year could be attributed to
lower growth in loan disbursements. The loan disbursement during the year of
merger was Rs. 470.6 billion. In the subsequent years it was Rs. 604 billion,
Rs. 748.9 billion and Rs. 790 billion. However, the operating expenses and
interest expenses were high which led to reduced cost efficiency. Unlike cost
efficiency, the profit efficiency declined after the year of merger mainly due
to higher expenses and declined profitability. The profit after tax during the
 101

year of merger was Rs. 1,008 billion and it had declined to Rs. 707 billion in
the third year after merger. This contributed to the sharp decline in profit
efficiency.

Cost efficiency of Centurion Bank of Punjab (acquisition of Lord

Krishna Bank) was the highest during the year of merger and two years before
merger. However, the trend indicates that the cost efficiency was unaffected
by merger. Profit efficiency was the highest two year before merger and the
trend indicates that the merger had resulted in lower profit efficiency.
Centurion Bank of Punjab was acquired by HDFC Bank one year after it
acquired Lord Krishna Bank and the efficiencies for the later years were not
computed since the financial structure would have changed. Yet, analysis of
the available data shows that profit efficiency was mainly affected by the
increase in interest expenses. Interest expenses were Rs. 7 billion one year
before merger and during the year of merger the expenses were Rs. 14.9 billion.
Though the loan disbursement was also higher, it was not proportionate to the
increase in expenses and hence the profit efficiency had declined.

The cost efficiency of ICICI Bank (acquisition of Sangli Bank)

appeared to decline marginally in the year of merger and considerably in the
subsequent years. The interest expenses were Rs. 234.8 billion during the year
of merger and later the expenses declined to Rs. 227.3 billion, Rs. 176 billion
and Rs. 169.6 billion in the subsequent years. The operating expenses also
showed a declining trend. The operating expenses which were Rs. 81.5 billion
during the year of merger declined to Rs. 70.4 billion, Rs. 58.6 billion and
Rs. 66.2 billion in the following years. However, growth in loan
disbursements was less at the time when share capital had increased and
hence the profit efficiency was adversely affected. Loans during the year of
merger were Rs. 2,256.1 billion and it declined to Rs. 2,183.1 billion and
Rs. 1,812.1 billion in the later years.
 102

The cost efficiency of HDFC Bank (acquisition of Centurion Bank

of Punjab) appears to have marginally declined after merger and in
comparison the profit efficiency appears to have declined considerably after
merger.

The interest expenses had increased from Rs. 89.1 billion during
the year of merger to Rs. 77.9 billion, Rs. 93.85 billion and Rs. 149.9 billion
in the later years. Apart from this, the operating expenses had also increased
substantially from Rs. 55.3 billion during the year of merger to Rs. 57.6
billion, Rs. 71.5 billion and Rs. 85.9 billion in the following years. Hence,
inspite of higher loan disbursements the efficiencies appear to have declined.

Cost efficiency and profit efficiency of SBI (acquisition of State

Bank of Saurashtra) appear to have declined after merger. The interest
expenses had increased from Rs. 429.2 billion in the year of merger to
Rs. 473.2 billion, Rs. 488.7 billion and Rs. 632.3 billion in the subsequent
years. Likewise, the operating expenses had increased from Rs. 156.5 billion
during the year of merger to Rs. 203.2 billion, Rs. 230.2 billion and Rs. 260.7
billion in the following years. The increase in expenses led to reduced income
and profitability, thereby affecting the cost efficiency and profit efficiency.

The cost efficiency of SBI (acquisition of State Bank of Indore) had

slightly improved during the year of merger. However, it declined marginally in
the second and third year after merger. Profit efficiency was the maximum two
years before merger and the trend was negative post-merger. Interest expenses had
increased from Rs. 488.7 billion during the year of merger to Rs. 632.3 billion and
Rs. 753.3 billion in the later years. Third year values could not be computed since
the financial results were not announced during the time of this analysis. Operating
expenses had also increased from Rs. 230.2 billion during the year of merger to
Rs. 260.7 billion and Rs. 292.8 billion in the subsequent years. Overall, this could
have caused the marginal decline in cost efficiency and decline in profit efficiency.
 103

This acquisition happened before completion of three years of SBI’s earlier

acquisition and hence there could be some noise in the above two results.

The cost efficiency of ICICI Bank (acquisition of Bank of

Rajasthan) appears to improve marginally after merging with Bank of
Rajasthan. This could be attributed to higher disbursement of loans which had
resulted in higher income generation. During the year of merger the income
was Rs. 326.2 billion and later it increased to Rs. 410.5 billion and Rs. 484.2
billion in the following years. The profit efficiency had also increased after
the merger. Though the interest expenses and operating expenses increased
over the years, the profit after tax was high due to substantially higher loan
disbursements. During the year of merger the loan disbursement was
Rs. 2,163.6 billion and it increased to Rs. 2,537.3 billion and Rs. 2,903.5 billion
in the following years. This could have contributed to higher profitability and
profit efficiency. The efficiencies for third year were not computed since the
financial results were not declared at the time of this analysis.

Among the sixteen mergers that were analysed favourable results

were observed only in case of IDBI Bank’s merger with United Western
Bank, and ICICI Bank’s merger with Bank of Rajasthan. Otherwise, mergers
do not appear to have resulted in higher cost efficiency or profit efficiency for
acquiring banks.

4.3 Stockholders Expectation and Efficiency Gains/Losses

In the mergers between HDFC Bank & Times Bank, ICICI Bank &
Bank of Madura and Bank of Baroda & Benares State Bank, the stockholders
reaction was positive and not consistent with the negative consequences
observed in profit efficiency and cost efficiency. In the merger between ICICI
Bank and Bank of Rajasthan the stockholders reaction was negative and was
 104

not consistent with the positive outcome of merger. In all the other mergers
stockholders were at least partly correct and their reaction was generally
negative either about the acquiring bank or acquired bank.

Overall, stockholders do not appear to prefer mergers between

strong banks and weak banks and their concerns were confirmed by the
results of DEA analysis. In many such mergers the post-merger cost
efficiency and profit efficiency of acquiring banks appears to have declined.

Though bank managers, RBI and the government cite various

reasons in support of banking consolidation this analysis presents a different
picture. In most of the mergers between financially distressed banks and
strong banks, stock returns appear to have declined and the financial
performance of acquiring banks also appears to have declined. Interestingly,
similar results were observed in mergers between strong banks too.

These findings nullify the arguments of Akhavein et al (1997) and

DeLong (2003) that gains could be made when the acquiring bank was strong.
Increase in post-merger operating expenses, lower loan disbursements and
inefficient use of shareholders capital tend to reduce the efficiency of
acquiring banks. In general, the stock returns and financial performance of
acquiring banks appear to have been adversely affected by mergers,
irrespective of whether the acquired bank was financially weak or strong.