PERFORMANCE EVALUATION OF MERGER - A CASE STUDY ON INDIAN OVERSEAS BANK AND BHARAT OVERSEAS BANK

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1 PERFORMANCE EVALUATION OF MERGER - A CASE STUDY ON INDIAN OVERSEAS BANK AND BHARAT OVERSEAS BANK Nagesh MR Research Scholar DOS in Business Administration BIMS, Manasagangothri, Mysore, Karnataka Prof. B Shivaraj M.B.A. Ph.D., Professor and Research Guide DOS in Business Administration BIMS, Manasagangothri, Mysore, Karnataka ABSTRACT In today s globalized economy, mergers and acquisitions are being increasingly used as corporate growth strategy for improving competitiveness, achieving synergies, greater market share, entering new markets, broadening the portfolio to reduce business risk etc. This paper makes an attempt to examine the impact of mergers on the financial performanceof Indian overseas bank(survivingcompany). It compares the pre and postmerger financial performance of a company undergone for mergers in India in The study reveals that there are no significant improvements in the earning capabilities, value of the shareholders, profitability &creditworthiness of the surviving company in the post-merger period. Keywords: Motives for mergers, due diligence, valuation, financial metrics, synergy. 1. Introduction In the globalized economy, mergers and acquisitions act as an important tool for the growth and expansion of companies. The main motive behind mergers & acquisitions are to create synergy. Mergers & acquisitions help the companies in getting the benefits of greater market share, economies of scale and shareholders wealth maximization etc. The success of the merger depends on how well the two companies integrate themselves in carrying out day to day operations. Page 57

2 Growth of a company relates to achievement of basic corporate goals and maximization of the value of equity in long run. Growth may be attained either internally or externally. Internal growth is achieved through the capital investment process. External growth is accomplished through business combination, commonly known as mergers and acquisitions. Both types of growth have figured importantly in the development of acompany. Mergers & acquisitions is a big part in corporate world. M&A transactions bring together separate companies to make larger ones. The phrase mergers and acquisitions refers to the aspect of corporate strategy dealing with the buying, selling and combining of different companies that can aid a company to grow rapidly without creating another business entity. Growth is always the priority of all companies and confers serious concern to expand the business activities. Mergers & acquisitions are not a single day process, it takes time and decisions are to be taken after examining all the aspects. The process of Mergers & acquisitions includes: Defining the corporate strategy Identification of the target company Mergers & acquisitions valuation (Due Diligence) Mergers & acquisition implementation Post mergers & acquisitions integration 2. Research objectives: To examine whether post-merger earning capabilities of the surviving company has improved To evaluate the impact of mergers on shareholders wealth of the surviving company To examine whether post-merger profitability position of the surviving companyhas improved To analyze whether post-merger creditworthiness of the surviving companyhas improved To identify the synergies from merger. 3. Scope of the study: The present study is mainly intends to examine the performance of survivingcompany s five years before and five years after mergers. Company listed in BSE is considered for the study. 4. Research Design: The study has been carried on with case study methodology to evaluate the pre- & post-merger performance of selected case in India. 5. Data Collection: The study is based on secondary data. The data has been collected through data base of BSE&annual reports of the company. Data on performance evaluation parameters for up to five years prior &five years after the Merger year has taken into consideration. Page 58

3 6. Performance Evaluation Parameters: To analyse the impact of mergers on the performance of the company, the following parameters are used: a) Enterprise Capitalization to EBITDA b) Enterprise Capitalization to Sales c) Equity value to Book value of the stock d) Equity value to Earnings e) Effect on acquiring company s EPS f) Net Profit Margin g) EBITDA to Total Liabilities Table 1: Selected case for the analysis of Pre and Post-Merger Performance: Cases Surviving Company Target Company Year of the Merger 1 Indian overseas bank Bharat overseas bank Hypothesis: H 0 : There is no significant difference in the financial performance of the company between pre and post-merger period. H1:There is a significant difference in the financial performance of the company between pre and postmerger period. 8. Statistical Tools Applied: Arithmetic mean, Standard deviation & T-test. Page 59

4 9. Findings: a) Case- Indian Overseas Bank(Indian Overseas Bank&Bharat Overseas Bank) Sl.N0. Financial Metrics Table 2: Pre-Merger and Post-Merger Performance of Indian Overseas Bank Before & After Mean Std Dev Mean Difference T- Value P- Value Inference 1 E C to EBTDA Before After Not Sig. 2 EC to Sales Before After Not Sig. 3 E V to B V of Stock Before After Not Sig. 4 E V to Earnings Before After Sig. 5 Effect on EPS (Rs.) Before After Not Sig. 6 Net Profit Margin (%) Before After Not Sig. 7 EBITDA to Total Liabilities (%) Before After Not Sig. {Note: Level of Significance-5%, Statistical Test- Paired Sample T-Test (Two tailed test)} The result from paired sample t-test at significance level of 0.05 indicates that overall thereis no significant improvements in Indian Overseas Bankperformance. Null hypothesis is not rejected and alternative hypothesis is rejected for Parameter 1, 2, 3, 5, 6 and 7 since it has p-value more than The p-value for parameter 4 is less than 0.05, therefore null hypothesis is rejected and alternative hypothesis is accepted there by it shows that EV to Earnings has been increased significantly. 10. Conclusion This study was undertaken to analyse the pre- and post-merger financial performance of the merger case-indian Overseas Bank&Bharat Overseas Bankand to see the effect of merger on the earning Page 60

5 References capabilities, profitability of the company and wealth of shareholders. The study shows that the surviving company couldn t able to improve the financial performance significantly. It was observed that financial synergies were insignificant (Based on paired t-test) in this merger. 1) Does Corporate Performance Improved after Mergers? by Paul M. Healy, Krishna C. Palepu& Richard S. Rubak (1990) National Bureau of Economic Research, Cambridge, May ) Changes in Corporate Performance Associated with Bank Acquisitions by Cornett and Tehranian (1992) Journal of Financial Economics, 1992, Volume 31 3) Analysis on Financial Performance and Efficiency Changes of Malaysian Commercial Banks after Mergers and Acquisitions by Tze San Ong, Cia Ling Teo& Boon HengTeh (2001)International Journal of Business and Management Tomorrow, ) A Study of the Corporate Restructuring of Indian Industries in the Post New Industrial Policy Regime, the Issue of Mergers by Nandita Das (2000) Asian Journal of Business and Management Sciences, vol. 1 (2), pp ) Effect of Mergers on Corporate Performance in India by VardhanaPawaskar (2001) Vikalpa,Journal for Decision Makers Vol. 26, No. 1, January-March ) Motives for Mergers and Acquisitions in the Indian Banking Sector, by Jay Mehta and Ram Kumar Kakani. (2006) SPJCM Working Paper, vol. 6 (13), pp ) A Study on Relative Size in Merger and Operating Performance, by PramodMantravadi and A. Vidyadhar Reddy.(2007) Indian Experience, Economic and Political Weekly, vol. 42 (39), pp ) Long-term Post-merger Performance of Firms in India by K Ramakrishnan (2008) International Journal of Contemporary Business Studies, VOLUME 33, NO 2, APRIL JUNE ) Impact of Merger Announcements on ShareholdersWealth: Evidence from Indian Private Sector Banks, by ManojAnandandJagandeep Singh.(2008) Vikalpa: Journal for Decision Makers, vol. 33 (1), pp , 10) Voluntary Amalgamations in Indian Banking Sector:Valuation Practices and Adequacy of Swap Ratios, by Sony Kuriakose, M.S. Raju and N. Narasimham.(2009) Indian Journal of Commerce, vol. 62 (3), pp ) Comparison of Post-Merger Performance of Acquiring firms (India) involved in Domestic and Cross- Border Acquisitions by SidharthSaboo& Sunil Gopi (2009) MPRA Paper from University Library of Munich, Germany, ) Assessing the Strategic and Financial Similarities of Merged Banks: Evidence from Voluntary Amalgamations in Indian BankingSector, by Sony Kuriakose and G.S. Gireesh Kumar.(2010) Science and Society, vol. 8 (1), pp Page 61