FINANCIAL PERFORMANCE OF MERGERS AND ACQUISITIONS OF SELECT BANKS IN INDIA Aruna.G PhD Research Scholar (Fulltime) Dr.S.Nirmala Associate professor and Head Department of Business Management PSGR Krishnammal College for Women, Coimbatore -04 arunamgt@gmail.com nirjaya@rediffmail.com ABSTRACT: In India the concept of mergers and acquisitions was first initiated by the government bodies. Mergers and Acquisitions (M&As) in the banking sector is a common phenomenon across the world. The primary objective behind this motive is to attain growth at the strategic level in terms of size and customer base. The present study is limited to a sample of companies which underwent mergers in banking industry. It is proposed to compare the performance of the acquirer and target companies before and after the period of mergers by using ratio analysis and t-test during the study period of three years. The objectives of the study are to evaluate the pre and post merger financial performance of the acquirer and target companies and to offer the findings, suggestions and conclusion. The study found that the shareholders of the acquirer companies increased their financial performance after the merger event. Keywords: Merger, Acquirer, Target, Financial Performance, Banks INTRODUCTION Mergers and Acquisitions are a tremendously important phenomenon in business both because of their prevalence and because of the value involved. Indian industries were exposed to plethora of challenges both nationally and internationally, since the introduction of Indian economic reform in 1991. The cut-throat competition in international market compelled the Indian firms to opt for mergers and acquisitions strategies, making it a vital premeditated option Sector wise, large volume of mergers and mergers and acquisitions in India have occurred in finance, telecom, FMCG, construction materials, automotives and metals. Mergers and Acquisitions in banking sector have become familiar in the majority of all the countries in the world. A large number of international and domestic banks all over the world are engaged in merger and acquisition activities. With the help of mergers and acquisitions in the banking sector, the banks can achieve significant growth in their operations and minimize their expenses to considerable extent.another important advantage behind this kind of merger is that in this process, competition is reduced because merger eliminates competitor from the banking industry. Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in the banking sector. Global Wisdom Research Publications All Rights Reserved. 90
LITERATURE REVIEW Okpanachi Joshua (2010) evaluated the Mergers and acquisitions in the Nigerian banking sector. This paper used gross earnings, profit after tax and net assets of the selected banks as indices to determine financial efficiency by comparing the pre-mergers and acquisitions indices with the post mergers and acquisitions indices for the period.. It was found that the post mergers and acquisitions period was more financially efficient than the pre-mergers and acquisitions period. However, to increase banks financial efficiency, the study recommend that banks should be more aggressive in their profit drive for improved financial position to reap the benefit of post mergers and acquisitions bid. Dr. Ramachandran Azhagaiah and T. Sathish Kumar (2011) analysed examined the corporate financial and operating performance of Indian manufacturing firms covering a period from 2004 to 2010. To measure the corporate performance, ratios analysis is used. Results show mixed results of pre-and post-merger values computed. The study proves that Indian manufacturing corporate firms involved in merger& acquisition (M&A) have increased their corporate performance. Mahesh R. & Daddikar Prasad (2012) focused on the performance of Indian Airline Companies after the consolidation of Airline sector in year 2007-08. The main objective of this paper is to analyze whether the Indian Airline Companies have achieved financial performance efficiency during the post merger & acquisition period specifically in the areas of profitability, leverage, liquidity, and capital market standards. The finding of this study shows that there is no improvement in surviving Company s return on equity, net profit margin, interest coverage, earning per share and dividend per share post-merger & acquisition. Dr. Konstantin s Agorastos et al (2012) applied examined the effects of mergers and acquisitions (M&As) of acquiring firms in Greece among different industries using accounting data (financial ratios). The main objective of this paper is to evaluate the postmerger performance of Greek listed firms in the Athens Stock Exchange. The results revealed for the examined firms of each industry different results per industry and that there is after their M&As, in general, a worsening at the post-merger performance. From this it could be presumed that their post-merger performance was affected by their different industry type.. OBJECTIVES OF THE STUDY The objectives of the study is to evaluate the banks performance in terms of net profitability, return on capital employed, debt equity ratio, and return on equity before and after merger.. Global Wisdom Research Publications All Rights Reserved. 91
HYPOTHESIS Testing the significance difference between and Post merger Net Profit Margin H0 (Null Hypothesis) There is no significance difference between the pre and post merger performance in terms of Gross profit margin, Net profit Margin, Return on capital employed, Return on equity and Debt equity ratio. H1 (Alternative Hypothesis) There is significance difference between the pre and post merger gross profit margin, Net Profit Margin, Return on capital employed, Return on equity and Debt equity ratio. DATA AND METHODOLOGY For the purpose of evaluation investigation data is collected from Merger and Acquisitions (M&As) of the Indian banking industry in post liberalization regime. The financial and accounting data of banks is collected from companies Annual Report to examine the impact of M&As on the performance of sample banks. Financial data has been collected from Bombay Stock Exchange (BSE), National Stock Exchange (NSE), Securities and Exchange Board of India (SEBI) & money control for the study. To test the research prediction, methodology of comparing the pre and post performances of banks after Merger and Acquisitions(M&As) has been adopted, by using following financial parameters(ratio Analysis) such as Gross profit margin(gross Profit/Sales 100), Net profit margin (Net Profit/Sales 100), Return on capital employed(net Profit/Total Assets 100), Return on equity(net Profit/Equity Share Holder s Funds 100), and Debt equity ratio (Total Debt/ Share Holder Equity). Researcher has taken two cases of Merger and Acquisitions (M&As) randomly as sample. The pre merger (3years prior) and post merger (after 3 years) of the financial ratios are being compared. The observation of each case in the sample is considered as an independent variable. Before merger two different banks carried out operating business activities in the market and after the merger the bidder bank carrying business of both the banks. Keeping in view the purpose & objectives of the study independent t- test is being employed under this study. The year of merger was considered as a base year and denoted as 0 and it is excluded from the evaluation. For the pre (3 years before) merger the combined ratios of both banks are considered and for the post merger (after 3 years) the ratios of acquiring bank were used. Two bank mergers cases taken for the study are Case 1: Bharat Overseas Bank and Indian overseas Bank Case 2: Global Trust Bank Ltd and Oriental bank of commerce ANALYSIS AND INTERPRETATION In Table 1, researcher selected two cases for study with the date of merger, first the merger of Bharat Overseas Bank and Indian Overseas Bank (case 1) and Global Trust Bank Ltd and Oriental Bank of Commerce (case 2). In order to analyze the financial performance of banks after Merger and Acquisitions. (M&As). The financial and accounting ratio like Gross profit margin, Net profit margin, Operating profit margin, Return on capital employed, Return on equity, and Debt equity ratio have been calculated. Global Wisdom Research Publications All Rights Reserved. 92
Table No: 1- Merger Dates Sl. No Bidder Bank Target Bank Date of Announcement Case 1 Indian Overseas Bank Bharat Overseas Bank Ltd March 31, 2007 Case 2 Oriental Bank of Commerce Global Trust Bank Ltd August 14, 2004 CASE 1 Table 2 shows the pre merger performance of bidder and target banks after merger. Table 3 shows the post merger performance of bidder bank, Table 4 shows the combined performance of both banks prior to merger. Similarly, in second case, Table 5 shows Mean and Standard Deviation of -merger and Post-merger Ratios of combined Banks (Indian Overseas Bank and Bharat Overseas Bank Ltd and Acquiring Bank (Indian Overseas Bank). In first case, the merger of the Indian Overseas Bank and Bharat Overseas Bank Ltd is shown and then the financial performance between the & Post merger has been compared on the basis of key ratios. It is found that there is no difference in the mean of gross profit margin (17.73 percent Vs 18.02 percent) and t-value -.462 It is seen that the mean value of gross profit margin has increased so it is considered that it effects by merger, so it is shows significant, however the net profit margin does not show significance with mean value (11.455percent Vs 10.648 percent) and t- value 0.698, similarly the mean value of operating profit margin shows significant decline in the mean (20.72 percent Vs 18.96 percent) and t- value2.26 which indicates that it has no effect after merger and statically it is not significant, result also shows the mean difference on return on capital employed (103.44 percent Vs 140.3167 percent) and t-value-5.643 which is confirmed significant statically, this shows the return on capital employed has increased after the merger and bank has shows positive impact of merger on investment, the mean value of return on equity of bank has been increased after merger and indicated that bank give more return on equity after merger to the equity share holders and the mean value of return on equity (17.251 percent Vs 19.66 percent) and t-value -.618- and shows significance, while lastly debt equity ratio shows significance with mean value (16.7133 percent Vs 17.3600 percent) and t-value-1.571. Therefore this indicates that the debt equity ratio also improved after merger so it directly increased the performance of the banks, and majority of financial parameter indicate that bank performance has improved after merger. Global Wisdom Research Publications All Rights Reserved. 93
Table 2:- Profile of Indian Overseas Bank and Bharat Overseas Bank for the last three Financial years before the merger announcement Indian Overseas Bank (Bidder Bank) Bharat Overseas Bank Ltd (Target Bank) As on 31 March 2004 As on 31 March 2005 As on March 31,2006 As on march 31,2004 As on March 31,2005 As on March 31,2006 Gross Profit Margin 18.90 21.60 23.40 22.63 11.07 8.79 Net profit margin 11.40 14.27 16.44 15.31 9.20 2.11 Operating Profit Margin 22.41 23.20 25.70 25.85 14.91 12.20 Return on Capital Employed 149.51 125.82 107.40 92.51 69.71 75.69 Return on Equity 30.25 29.85 28.55 20.37 10.10 2.72 Debt-Equity Ratio 21.49 18.18 16.54 14.35 13.86 15.86 Financial Ratios (in Percentage) Global Wisdom Research Publications All Rights Reserved. 94
Table 3:- Profile of Indian Overseas Bank (Bidder Bank) for the next three financial years was ending after the merger announcement. Financial Ratios (in Percentage) Indian Overseas Bank(Bidder Bank) As on 31 March 2008 As on 31 March 2009 As on March 31,2010 Gross Profit Margin 19.83 17.45 16.78 Net profit Margin 13.94 11.87 6.14 Operating Profit Margin 20.83 18.35 17.71 Return on Capital Employed 146.37 145.71 128.87 Return on Equity 25.35 22.31 11.13 Debt-Equity Ratio 17.78 16.85 17.45 Table 4:- Combined profile of Indian Overseas Bank and Bharat Overseas Bank Ltd for the last three financial years ending before the merger announcement. Financial Ratios (in Percentage) Indian Overseas Bank and Bharat Overseas Bank Ltd As on 31 March 2004 As on 31 March 2005 As on March 31 2006 Global Wisdom Research Publications All Rights Reserved. 95
Gross Profit Margin 20.765 16.335 16.095 Net profit Margin 13.355 11.735 9.275 Operating Profit Margin 24.13 19.105 18.95 Return on Capital Employed 121.01 97.765 91.545 Return on Equity 16.1435 19.98 15.64 17.92 16.02 16.2 Debt-Equity Ratio Table 5:- Mean and Standard Deviation of -merger and Post-merger Ratios of combined Banks (Indian Overseas Bank and Bharat Overseas Bank Ltd) and Acquiring Bank (IOB). Mean Std.Deviation t-value Sig Gross Profit Margin 17.7317 2.62968 Post 18.0200 1.60290 -.462.105 Net profit Margin Post 11.455 2.05 10.64 4.03 0.698.090 20.72 2.94695 2.262 Global Wisdom Research Publications All Rights Reserved. 96
Operating Profit Margin Post 18.9633 1.64795 0.108 Return on Capital Employed Post 103.4400 15.53064 140.3167 9.91860-5.643 0.517 Return on Equity Post 17.2512 2.37257 19.6633 7.37521 -.618.730 Debt-Equity Ratio Post 16.7133 1.04887 17.3600.47149-1.571.384 CASE 2 Table 6 depicts the profile of both the banks before merger, Table 7 indicates the performance of acquiring bank after merger and Table 8 shows combined financial performance of both the banks before merger, Table 9 shows Mean and Standard Deviation of -merger and Post-merger Ratios of Combined (Global Trust Bank Ltd Ltd &Oriental Bank of Commerce) and Acquiring Bank (Oriental Bank of Commerce) In second case, the merger of the Oriental Bank of Commerce and Global Trust Bank Ltd Ltd, the comparison between pre and post merger performance we see that the mean value of gross profit margin (16.40percent Vs 21.62 percent) has increased with t-value-2.443 which shows significance improvement in the gross profit margin after merger but in net profit margin and operating profit margin you can see the increase in the mean of both parameters that indicates that there is change in the performance of banks net profit margin and operating profit margin after merger and result shows that there is significance with mean (.390percent Vs 16.32 percent) and t-value-3.375 0.610 and (20.94 percent Vs 24.30percent) and t-value-1.647 and the mean return on capital employed 151.31 percent Vs 88.88 percent) and t-value 2.935 which is also not significant statically and shows that no change has been seen in term of investment after the merger. The mean of return on equity and debt equity ratio shows improvement, and statically conformed significant to mean value (-3.31 percent Vs 21.99 percent) and t-value -1.886 and (17.16 percent Vs12.47 percent) and t-value1.662. The mean value of equity in post merger Global Wisdom Research Publications All Rights Reserved. 97
has been increased so it increased the shareholder return so it also shows the improved performance of bank after merger. The debt equity ratio has declined after the merger the mean value shows the no significant change in debt equity ratio after merger. So we conclude that some ratios indicate no effect but most of ratios shows the positive effect and increased the performance of banks after the merger. Table 6:- Profile of Oriental Bank of Commerce and Global Trust Bank Ltd for the last three financial Years is ending before the merger announcement. Financial Ratios (in Percentage) Oriental Bank of Commerce Bidder Bank Global Trust Bank Ltd Target Bank As on March 31 2001 2002 2003 2001 2002 2003 Gross Profit Margin 13.90 16.20 18.30 15.61 33.65 0.79 Net profit Margin 6.70 9.12 11.89 7.56 4.36-37.29 Operating Profit Margin Return on Capital Employed 17.60 18.30 23.10 20.12 39.39 7.16 140.15 147.19 134.72 132.17 221.49 132.17 Return on Equity 13.63 20.23 24.31 13.65 10.2-101.93 Debt-Equity Ratio 15.94 17.59 14.13 13.14 16.34 25.87 Global Wisdom Research Publications All Rights Reserved. 98
Table 7:- Profile of Oriental Bank of Commerce (Bidder Bank) for the next three financial years was ending after the merger announcement. (Financial ratios in percentage) Oriental Bank of Commerce As on 31 March 2005 As on 31 March 2006 As on March 31 2007 Gross Profit Margin 22.10 25.87 16.90 Net profit Margin 17.03 19.40 12.54 Operating Profit Margin 25.39 28.04 19.11 Return on Capital Employed 112.30 87.09 67.27 Return on Equity 28.67 24.19 13.11 Debt-Equity Ratio 13.33 14.38 9.71 Table 8:- Combined Profile of Oriental Bank of Commerce and Global Trust Bank Ltd for the last three financial years was ending before the merger announcement. Financial Ratios (in Percentage) Oriental Bank of Commerce and Global Trust Bank Ltd As on 31 March 2005 As on 31 March 2006 As on March 31,2007 14.755 24.925 9.545 Global Wisdom Research Publications All Rights Reserved. 99
Gross Profit Margin 7.13 6.74-12.7 Net profit Margin 18.86 28.845 15.13 Operating Profit Margin Return on Capital Employed 136.16 184.34 133.445 13.64 15.215-38.81 Return on Equity 14.54 16.965 20 Debt-Equity Ratio Table 9:- Mean and Standard Deviation of -merger and Post-merger Ratios of Combined (GTB &OBC Banks) and Acquiring Bank (OBC Bank) Financial Ratios (in Percentage Mean Std. Deviation t-value Sig Gross Profit Margin Net profit Margin Operating Profit Margin Return on Capital Employed 16.4083 7.82216 Post 21.6233 4.50396.3900 11.33795 Post 16.3233 3.48417 20.9450 7.09124 Post 24.3000 4.73995 151.3150 28.63269 Post 88.8867 22.56870-2.443.176-3.375.232-1.647.292 2.935.986 Return on -3.3183 30.74677-1.886.197 Global Wisdom Research Publications All Rights Reserved. 100
Equity Post 21.9900 8.00989 Debt- Equity Ratio 17.1683 2.73567 Post 12.4733 2.45003 1.662.430 FINDINGS The result suggest that the performance of the Indian Overseas Bank after acquired the Bharat Overseas Bank has been improved in terms of Gross Profit Margin with t-value -0.462 which leads to the conclusion that the difference is statistically significant therefore, the H1 (Alternative Hypothesis) is accepted which say that there is significance difference between the pre and post merger gross profit margin. The performance of the Indian Overseas Bank in terms of Return on Capital Employed has been improved after the merger with t-value -5.643 which is significant therefore, the H1 (Alternative Hypothesis) is accepted. The bank performance is improved after merger in relation to the Return on Equity with t- value-.618 which leads to the conclusion that the difference is statistically significant therefore the H1 (Alternative Hypothesis) is accepted. In the Debt Equity Ratio, the performance of bank after the merger seems improvement with t-value-1.571 which shows significant statistically therefore H1 (Alternative Hypothesis) is accepted, which leads to the conclusion that there is a significance difference between pre and post merger Debt Equity Ratio. The performance of the Indian Overseas Bank in terms Net profit margin and Operating profit margin has not improved after the merger with t-value 0.698 and 2.262 which is significant therefore, the Ho (Null Hypothesis) is accepted. Most of the Alternative Hypothesis is accepted in case of the Indian overseas Bank, so the conclusion suggests that the merger of banks has been beneficial to the Equity share holders. It may be possible the performance of bank in terms of net profitability will increase in longer run. Similarly in the case of the Oriental Bank of Commerce and Global Trust Bank Ltd, the Gross Profit Margin shows change after the merger with t-value-2.443 0.610 which is statistically insignificant therefore H1 (Alternate Hypothesis) is accepted,the Net Profit Margin does increases after the merger with t-value -3.375 which is statistically significant therefore H01(Alternate Hypothesis) is accepted which leads to the conclusion that there is difference between pre and post merger net profitability. The Return on Capital Employed shows no change after the merger with t- value 2.935 which is statistically insignificant thereforeh0 (Null Hypothesis) is accepted which also leads to the conclusion that there is no significance difference between pre and post merger Return on Capital Employed. The Return on Equity shows improvement after the merger with t- value-1.886 which is statistically significant therefore H1 (Alternative Hypothesis) is accepted, which leads to the conclusion that there is significance difference between pre and post merger Return on Equity. The performance of bank has not improved in terms of Debt Equity Ratio with t- value 1.662 which is statistically insignificant therefore Ho(Null Hypothesis) is accepted, which leads to the conclusion that there is no significance difference between pre and post merger Debt Equity Ratio. The results suggest that the performance of banks has not improved in terms of Return on Capital employed and Debt Equity Ratio, but changes have been seen in Net Profit Margin, operating profit, Gross profit and Return on equity. So the conclusion suggests that the merger of banks has been beneficial to the Equity share holders and increases the overall bank performance in terms of profitability. Global Wisdom Research Publications All Rights Reserved. 101
After the merger we see that in various financial parameter of the bank performance have improved in both cases and some parameter have shown no change but it may be possible that improved performance of merged Bank will show in later years the profit are not visible because we compared only three years financial ratios, it may be possible that profit will be seen in future. Finally the Indian Banking Sector has used Merger and Acquisitions (M&As) for Sick bank survival after merger, enhanced branch network, rural reach, increase market share and improve infrastructure all achieved through Merger and Acquisitions (M&As). CONCLUSION Merger and Acquisition is the useful tool for growth and expansion in the Indian banking sector. It is helpful for survival of weak banks by merging into larger bank. This study shows the impact of M&As in the Indian banking sector and researcher took two cases for the study as sample and examine that merger led to a profitable situation or not. And results suggest that after the merger the efficiency and performance of banks have increased. The most important is that to generate higher profits after the merger in order to justify the decision of merger undertaken by the management to the shareholders. Researcher suggests, for future research in this area could be the study of impact of merger only on acquiring banks by comparing pre and post merger performance and take more banks to a larger sample concerning a longer time period for the study which would have given better result. REFERENCES. 1. Boeh.K.Kevin and Beamish.W.Paul.Mergers and Acquisitions-Text and Cases-Sage publications India Pvt Ltd-2008 2. Azhagaiah, R. (n.d.). Corporate Restructuring & Firms Performance : An Empirical Analysis of Selected Firms of Across Corporate Sectors in India, 2011(April 2011), 58 82. 3. Sinha, N. (1967). Measuring Post Merger and Acquisition Performance : An Investigation of Select Financial Sector Organizations in India, (November 2010), 190 200. 4. Agorastos, K. (2012). The Post-Merger Performance of Acquiring Listed Firms among Different Industries in Greece Research design, (May), 1 22. 5. Mahesh, r., & prasad, d. (n.d.). Post merger and acquisition financial performance analysis : a case study of select indian airline companies, 3(3), 362 369. 6. Joshua, O. (2004). Comparative analysis of the impact of mergers and acquisitions on financial efficiency of banks in Nigeria, 3(May 2011), 1 7. 7. Schiereck Dirk, Grüb Christof Sigl & Unverhau Jan (2009), Investment Bank Reputation and Shareholder Wealth Effects in Mergers and Acquisitions, Research In International Business and Finance, 23, 257 273, Retrieved from Http://Www.Sciencedirect.Com/Science/Article/Pii/S027553190800041x. Global Wisdom Research Publications All Rights Reserved. 102