International Journal of Research & Development in Technology and Management...
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International Journal of Research & Development in Technology and Management Science –Kailash
Volume - 22| Issue 1 | 2015 | ISBN - 1-63102-453-1 European Article Number [EAN] - 978-163-102-453-5
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MERGER & ACQUISITION IN THE INDIAN BANKING INDUSTRY:
ITs IMPACT ON OPERATING PERFORMANCE
by
Dr. Anjala Kalsie | Faculty of Management Studies | University of Delhi
&
Jappanjyot Kaur Kalra | Research Scholar | Faculty of Management Studies
| University of Delhi
ABSTRACT
The objective of the paper is to understand the impact of Merger and
Acquisitionon performance in the Indian Banking Industry. To fulfill the
objective five M&A deals which took place in the last decade in the Indian
banking industry have been studied. Hypothesis testing has been
undertaken to understand whether there is significant difference in the
bank’s operating performance pre and post-merger. The results of the
study indicate that the banks have been positively affected by the event of
the M&As. This suggests that merged banks can obtain efficiency and
gains through Merger and Acquisitions and eventually pass the benefits to
the equity share holders.
KEYWORDS: Merger and Acquisition, Indian Banking, operating performance.
I. INTRODUCTION
The Indian banking sector can be divided into two eras; the pre liberalization era and the post
liberalization era. In pre liberalization era the government of India nationalized 14 Banks on 19
July 1969 and later on 6 more commercial Banks were nationalized on 15 April 1980. In the
year 1993 government merged The New Bank of India and The Punjab National Bank and this
was the only merger between nationalized Banks. Afterwards the numbers of nationalized
Banks reduced from 20 to 19. In post liberalization regime, government initiated the policy of
liberalization and licenses were issued to the private banks which led to the growth of Indian
Banking sector.
International Journal of Research & Development in Technology and Management Science –Kailash
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Mergers and acquisitions have been initiated in the Indian banking sector through the
recommendations of Narasimham committee II. The committee recommended that “merger
between strong banks/financial institutions would make for greater economic and commercial
sense and would be case where the whole is greater than the sum of its parts and thus have a
“force multiplier effect”. Quite a few mergers and acquisitions have taken place in the Indian
banking industry across the two eras as can be seen in the table 1 given in the appendix.
In a survey conducted among Indian corporate managers across various industry verticals in
2006 by Grant Thornton, it was observed that M&As are a significant form of business strategy
today for the Indian corporate. The two main objectives behind any M&A transaction were
found to be namelyImproving revenues and profitability &Faster growth in scale and quicker
time to market.
II. LITERATURE REVIEW
The number of studies evaluates the effects of bank mergers comparing pre- and post- merger
performance by measuring performance using either accounting or productive efficiency
indicators. An important starting point for this group is that the latest empirical studies
measuring bank efficiency show that scale economies seem to exist in the banking sector in the
United States and Europe. This finding tentatively suggests that improvements in efficiency
could be expected from banking mergers (see Houston, James and Ryngaert 2001).
The majority of studies comparing pre- and post-merger performance finds that the potential
efficiency gains derived from size rarely materialise (see Piloff, 1996, and Berger, Demsetz
and Strahan, 1999). A possible rationale for this puzzle could be that some efficiency gains
might take a long time to accrue (see Focarelli and Panetta, 2003). More specifically, while
some efficiencies (such as those derived from risk diversification or the benefits of brand
name) can be accrued inthe short run, others such as the benefits derived from cost reductions
or the majority of scope economies might take longer to materialise. This is probably due to the
difficulties of integrating broadly dissimilar institutions (see Vander Vennet, 2002). All other
things being equal, a combination of firms with different culture and strategic characteristics is
expected to be followed by difficulties associated, among other things, with clashes between
corporate cultures that could hinder performance.
Various studies have provided an interesting contribution by sub-sampling the population of
merging banks, according to product or market relatedness, to analyse whether certain shared
characteristics among merging institutions could create or destroy shareholder value or
performance. By and large, the main conclusion of these studies is that while mergers among
banks showing substantial elements of geographical or product relatedness create value,
dissimilarities tend to destroy overall shareholder value (see Amihud, De Long and Saunders,
2002, and Houston and Ryngaert, 1994).
International Journal of Research & Development in Technology and Management Science –Kailash
Volume - 22| Issue 1 | 2015 | ISBN - 1-63102-453-1 European Article Number [EAN] - 978-163-102-453-5
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The recent Indian studies are listed below:
Mantravadi Pramod & Reddy A Vidyadhar (2007) in their paper “Type of Merger and Impact
on Operating Performance: The Indian Experience” evaluated the impact of merger on the
operating performance of acquiring firms in different industries by using pre and post financial
ratios analysis. Result suggested that there was little variation in terms of impact as far as
operating performance after mergers was concerned. In India particularly banking and finance
industry had a slightly positive impact of profitability.
Anand Manoj & Singh Jagandeep (2008) in their paper “Impact of Merger Announcements on
Shareholders' Wealth: Evidence from Indian Private Sector Banks” studied the impact of
merger announcements of five banks in the Indian Banking Sector on the share holder bank.
The announcement of merger of Bank had a significant positive impact on share holder’s
wealth.
Goyal K.A. & Joshi Vijay (2011) in their paper “Merger and Acquisition in Banking Industry:
A Case Study of ICICI Bank Ltd.” discuss all the mergers, acquisitions and amalgamations of
ICICI Bank from various aspects. It also mentions the benefits that come out through M&As.
III. OBJECTIVE AND METHODOLOGY
The scope and objectives of this paper is to analyze 5 M&A deals that took place in the Indian
banking sector in the last decade. The 5 deals are:
Nedungadi Bank Ltd & Punjab National Bank; February 1, 2003
Bank of Punjab Ltd & Centurion Bank Ltd; October 1, 2005
United Western Bank Ltd & IDBI Bank Ltd; October 3, 2006
Centurion Bank of Punjab Ltd & HDFC Bank Ltd; May 23, 2008
The Bank of Rajasthan & ICICI Bank Ltd; August 13, 2010
These deals are analyzed from a qualitative as well as quantitative aspect. For the quantitative
part, the banks’ performances in terms of the major financial ratios are analyzed pre- and post-
merger using statistical tools. The null and alternate hypothesis are stated as follows:
H0 (Null Hypothesis) There is no significance difference between the pre and post merger on
Net Profit Margin.
H1 (Alternative Hypothesis) There is significance difference between the pre and post merger
on Net Profit Margin.
H0 (Null Hypothesis) There is no significance difference between the pre and post merger on
Return on Capital Employed.
H1 (Alternative Hypothesis) There is significance difference between the pre and post merger
on Return on Capital Employed.
International Journal of Research & Development in Technology and Management Science –Kailash
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H0 (Null Hypothesis) There is no significance difference between the pre and post merger on
Return on Equity.
H1 (Alternative Hypothesis) There is significance difference between the pre and post merger
on Return on Equity.
H0 (Null Hypothesis) There is no significance difference between the pre and post merger on
Debt Equity Ratio.
H1 (Alternative Hypothesis) There is significance difference between the pre and post merger
on Debt Equity Ratio.
IV. METHODOLOGY
Data Collection: For the purpose of quantitative analysis data has been sourced from the
banks’ annual report and financial statements. Data has also been taken from the Bombay
Stock Exchange, the National Stock Exchange and money control.
Methodology: To test the hypothesis, the methodology of comparing the pre- and post-
merger performances of banks has been adopted by using certain financial ratios such as
Gross profit margin, Net profit margin, Operating profit margin, Return on capital
employed, Return on equity, and Debt equity ratio. The pre merger (3years prior) and post
merger (after 3 years) financial ratios are being compared. The observation of each case in
the sample is considered to be an independent variable. Before merger two different banks
carried out operating business activities in the market and after the merger the bidder bank
is carrying out the business of both the banks. Independent t- test has been used keeping in
view the purpose & objectives of the study. The year of merger has been considered as a
base year and hence denoted as 0 and 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. The Student’s t- distribution is
t = ( 1 - 2) √N / S
1 = ∑x1/n1
2 = ∑x2/n2
N = n1 + n2
S = √ [∑ (xi - )2 * (1/ (N-2)]
( 1 is the mean of combined pre merger ratios of both banks and 2 is the mean of
acquiring bank post merger. n1 and n2 are the number of observations of 1st and 2nd series
respectively. S is the combined standard deviation)
Financial Ratios
Gross Profit Margin = Gross Profit/Revenue * 100
Net Profit Margin = Net Profit/Revenue * 100
Operating Profit Margin = Operating Profit/Revenue * 100
Return on Capital Employed = EBIT/(Total Assets – Current Liabilities)
International Journal of Research & Development in Technology and Management Science –Kailash
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Return on Equity = Net Profit/ Shareholder’s Equity
Debt-Equity Ratio = Total Liability/Shareholder’s Equity
V. ANALYSIS AND INTERPRETATION
In this section we look at the quantitative and qualitative analysis of each of the 5 deals.
Bank of Rajasthan & ICICI Bank:
The Bank of Rajasthan Ltd. was incorporated on May 7, 1943. It had a network of 463
branches and 111 ATMs as of March 31, 2009. It had a strong presence in Rajasthan with
branch network of 294 that is 63 percent of the total branches of BoR with men power strength
of more than 4300. The bank had total assets of Rs. 173 billion but its net profit was Rs. -1.02
billion as on March 2010 which shows that the bank was not in good financial condition. The
ICICI Bank Ltd. was incorporated on January 5, 1994. It had a network of 2,000 branches and
extension counters and over 5,300 ATMs as of May 21, 2010. The bank had total assets of Rs.
3634 billion and a net profit of Rs. 42.25 billion as on March 2010.
The objective of this merger from ICICI Bank’s perspective was its customer centric strategy.
This strategy of ICICI considers branches as the focal points of relationship management, sales
and service in geographical micro markets. It was a known fact that the BoR had deep
penetration with huge brand value in the State of Rajasthan where it had 294 branches with a
market share of 9.3% in total deposits of scheduled commercial banks. ICICI wanted this
merger to place it among the top three banks in Rajasthan in terms of total deposits and thus
considerably augment its presence and customer base in Rajasthan. The merger was valued at
Rs 3041 crores and was carried out on a swap ratio of 25:118. (A BoR shareholder will receive
25 ICICI shares for every 118 BoR shares held.) The deal priced the market capitalization per
branch for about Rs 6.5 crores, which is similar to other old private sector banks. Moving on to
the quantitative analysis part, the financial ratios of the combined and individual profiles of
both the banks pre-merger and the acquirer bank post merger have been calculated.
Table 1
ICICI
Ratios Mar '06 Mar '05 Mar '04 Mar '02 Mar '01
Mar
'00
Gross Profit Margin 45.87 44.43 48.02 42.04 40.80 45.39
Net Profit Margin 17.19 15.75 15.79 9.58 10.48 10.38
Operating Profit Margin 26.25 25.20 26.25 12.78 11.97 14.03
Return on Capital Employed (%) 0.13 0.11 0.12 0.05 0.05 0.07
Return on Equity (%) 7.22 5.61 4.47 3.38 3.74 3.46
Debt-Equity Ratio 465.31 424.26 352.69 340.70 359.31 383.23
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Volume - 22| Issue 1 | 2015 | ISBN - 1-63102-453-1 European Article Number [EAN] - 978-163-102-453-5
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Table 2
Bank of Rajasthan
Ratios Mar '02 Mar '01 Mar '00
Gross Profit Margin 34.09570957 38.1146679 50.833613
Net Profit Margin 7.769636964 9.69166702 12.372161
Operating Profit Margin 6.881188119 11.663652 13.045765
Return on Capital Employed (%) 0.051204346 0.07449558 0.095374
Return on Equity (%) 0.729532073 0.85676037 1.0278888
Debt-Equity Ratio 106.7517818 117.523055 112.45673
Table 3
Combined (BoR & ICICI)
Ratios Mar '02 Mar '01 Mar '00
Gross Profit Margin 41.74537 40.71878 45.55142
Net Profit Margin 9.51703 10.45855 10.43984
Operating Profit Margin 12.55949 11.96416 14.00505
Return on Capital Employed (%) 0.053466 0.053377 0.06739
Return on Equity (%) 3.040733 3.426183 3.198687
Debt-Equity Ratio 311.0881 333.2402 354.3068
The mean and standard deviation of these 2 sets of data have been calculated and the
corresponding t-value has also been computed.
Table 4
Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined
Banks (Bank of Rajasthan & ICICI) and Acquiring Bank (ICICI)
Ratios Mean Standard Deviation
t-value Pre Post Pre Post
Gross Profit Margin 42.67185453 46.1076221 2.5460509 1.80557021 -2.7350
Net Profit Margin 10.13847594 16.2454834 0.5382692 0.82152097 -15.557
Operating Profit Margin 12.84290103 25.900363 1.0495462 0.60492074 -13.669
Return on Capital Employed
(%) 0.058077849 0.11993962 0.008065 0.00893056 -12.608
Return on Equity (%) 3.22186775 5.76584524 0.1937677 1.37891013 -5.6035
Debt-Equity Ratio 332.8783955 414.083005 21.611627 56.993304 -3.5786
Calculated at 5% level of significance, critical t value = 2.132
From the above table we can see that the performance of ICICI after it acquired BoR has been
improved in terms of Net Profit Margin,Return on Capital Employed, Return on Equity and
Debt Equity Ratio as it is evident from the t value. All the Alternative Hypotheses have been
accepted and hence we can safely conclude that the merger of banks has been beneficial to the
Equity share holders and increases the overall bank performance in terms of profitability.
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Centurion Bank of Punjab & HDFC:
Centurion Bank of Punjab is India’s fourth largest private sector bank. It has a strong
nationwide franchise of 394 branches and 452 ATMs and is supported by an employee base of
over 7,500 employees. It had total assets of Rs 184 billion and a net profit of Rs 121 crores as
of March 2007.
Promoted in 1995 by housing development finance corporation, HDFC Bank is one of India’s
premier banks. It has over 11 million customers across over three hundred cities. As on
December 31, 2007, the bank had a network of 754 branches and 1,906 ATMs in 327 cities.
For the quarter ended December 31, 2007, the bank reported a net profit of Rs. 4.3 billion, up
45.2%, over the corresponding quarter of previous year.
HDFC looked at this merger to provide a greater presence in states like Punjab, Haryana and
Kerala and also give some headroom for greater capital market lending. Besides, it will help
HDFC bank to step up its retail and SME assets. Also the addition of 394 branches of CBoP
(32% of which are in the metros) will help the bank overtake ICICI Bank in terms of branch
presence. HDFC Bank has always maintained that fast branch expansion is a key ingredient
that will sustain its high CASA deposits and margins. Thus it gives HDFC a bigger metro
presence (44% increase) which is now hard to come by because of stringent RBI guidelines.
The acquisition makes HDFC Bank the seventh largest bank in terms of assets to take it past
other banks such as IDBI, Union Bank and Axis Bank. The total assets would rise to
Rs.1,10,110 crores, with branch network of 1150 and ATM network of 2100.
The deal worth Rs 3.6 billion was considered the biggest merger in Indian banking sector at
that time. It was carried out in the ratio of 1:29(1 share of HDFC Bank for 29 shares of CBoP).
Moving on to the quantitative analysis part, the financial ratios of the combined and individual
profiles of both the banks pre-merger and the acquirer bank post merger have been calculated.
Table 5
Centurion Bank of Punjab
Ratios Mar '02 Mar '01 Mar '00
Gross Profit Margin 59.10636032 63.7142575 59.786273
Net Profit Margin 7.101609534 10.9889913 7.207918
Operating Profit Margin 12.12328647 7.26289062 5.5631261
Return on Capital Employed
(%) 0.077082179 0.04308188 0.0224278
Return on Equity (%) 0.774650584 0.86970106 0.297572
Debt-Equity Ratio 117.9576233 80.4529575 45.515989
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Table 6
HDFC
Ratios Mar
'06
Mar
'05
Mar
'04
Mar
'02
Mar
'01
Mar
'00
Gross Profit Margin 61.32 61.04 55.00 62.15 66.08 64.74
Net Profit Margin 16.18 14.76 11.34 16.46 19.62 22.88
Operating Profit Margin 29.79 3.52 1.97 20.03 8.21 13.49
Return on Capital Employed (%) 0.13 0.02 0.01 0.08 0.04 0.05
Return on Equity (%) 8.44 6.44 5.28 4.33 3.56 2.75
Debt-Equity Ratio 596.16 485.99 430.84 285.66 234.74 165.96
Table 7
Combined
Ratios Mar '02 Mar '01 Mar '00
Gross Profit Margin 61.6321 65.69541 64.2391
Net Profit Margin 14.87785 18.20256 21.30008
Operating Profit Margin 22.94437 17.75867 21.13763
Return on Capital Employed (%) 0.101678 0.080398 0.081039
Return on Equity (%) 3.158965 2.727978 2.149246
Debt-Equity Ratio 230.4621 186.8771 136.2857
The mean and standard deviation of these 2 sets of data have been calculated and the
corresponding t-value has also been computed.
Table 8
Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined
Banks (Centurion Bank of Punjab & HDFC) and Acquiring Bank (HDFC)
Ratios Mean Standard Deviation
t-value Pre Post Pre Post
Gross Profit Margin 63.8555 59.1191 2.0586 3.5692 -2.9154
Net Profit Margin 18.1268 14.0915 3.2117 2.4903 -2.4515
Operating Profit Margin 20.6135 11.7598 2.6322 15.6334 -1.6791
Return on Capital Employed (%) 0.0877 0.0533 0.0121 0.0690 -1.4682
Return on Equity (%) 2.6787 6.7196 0.5066 1.5993 6.6469
Debt-Equity Ratio 184.5416 504.3319 47.1316 84.1729 8.4367
Calculated at 5% level of significance, critical t value = 2.132
From the above table we can see that the performance of HDFC after it acquired CBoP has
improved in terms of Net Profit Margin and Return on Capital Employed as it is evident from
the t value. Debt Equity Ratioand Return on Equity has not improved after the merger.
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United Western Bank & IDBI:
United Western Bank (UWB) was founded in 1936. It had 230 branches and 75 ATMs spread
over 47 districts in 9 states. It had total assets of Rs 70 billion and a net loss of Rs 98 crores as
on March 2005. The bank was put under moratorium by the RBI on September 2, 2006 due to
its ailing condition.
Industrial Development Bank of India was established in 1964 by an Act of Parliament to
provide credit and other facilities for the development of the fledgling Indian industry. IDBI
had total assets of Rs 829 billion and a net profit of Rs 415 crores as on March 2005. The bank
had a network of 195 branches and was looking forward to expand its presence.
On September 12, 2006 RBI had announced its decision to allow IDBI to acquire the bank.
RBI, for the first time, fixed a price of Rs 28 a share, which was to be paid by IDBI to UWB
shareholders. IDBI had to make upfront cash payment of Rs 28 per share and the shares of
UWB were extinguished. Against an outgo of Rs 150 cr, IDBI got access to 230 branches and
75 ATMs of UWB, mainly located in Maharashtra, which is one of the richest loan markets.
IDBI looked forward to use the branches of UWB to meet their priority sector targets, since
UWB had a good rural presence. The merger will also help IDBI diversify its credit profile and
improve its deposit mix. It will also expand IDBI's asset base by Rs 7,166 crores
Moving on to the quantitative analysis part, the financial ratios of the combined and individual
profiles of both the banks pre-merger and the acquirer bank post merger have been calculated.
Table 9
IDBI Bank
Ratios Mar '09 Mar '08 Mar '07 Mar '05 Mar '04 Mar '03
Gross Profit Margin 21.37 24.64 23.06 24.98 13.53 14.40
Net Profit Margin 6.55 7.46 8.53 12.63 6.94 7.43
Operating Profit Margin 5.82 8.87 2.22 8.59 3.01 4.25
Return on Capital Employed (%) 0.05 0.04 0.01 0.02 0.02 0.02
Return on Equity (%) 1.18 1.01 0.87 0.58 0.87 0.73
Debt-Equity Ratio 240.17 182.88 146.26 114.96 97.80 96.68
Table 10
United Western Bank
Ratios Mar '05 Mar '04 Mar '03
Gross Profit Margin 38.43299118 42.7950529 42.390815
Net Profit Margin -17.8569489 5.19541542 3.6180614
Operating Profit Margin -15.9814624 10.1844238 16.409918
Return on Capital Employed (%) -0.14890279 0.09349581 0.1929805
Return on Equity (%) -3.30010037 1.03579793 0.7527601
Debt-Equity Ratio 236.9902978 238.853797 199.78722
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Table 11
Combined
Ratios Mar '05 Mar '04 Mar '03
Gross Profit Margin 26.91106 15.50973 16.88829
Net Profit Margin 8.248131 6.825048 7.093962
Operating Profit Margin 5.054089 2.634945 5.334807
Return on Capital Employed (%) 0.011225 0.018973 0.030688
Return on Equity (%) 0.421568 0.881562 0.726638
Debt-Equity Ratio 119.8101 103.975 101.1944
The mean and standard deviation of these 2 sets of data have been calculated and the
corresponding t-value has also been computed.
Table 12
Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined
Banks (United Western Bank & IDBI) and Acquiring Bank (IDBI)
Ratios Mean Standard Deviation
t-value Pre Post Pre Post
Gross Profit Margin 19.7697 23.0245 6.2229 1.6323 -1.4353
Net Profit Margin 7.3890 7.5138 0.7560 0.9893 -0.2477
Operating Profit Margin 4.3413 5.6368 1.4844 3.3249 -0.9331
Return on Capital Employed (%) 0.0203 0.0336 0.0098 0.0215 -1.4793
Return on Equity (%) 0.6766 1.0204 0.2340 0.1577 -3.0406
Debt-Equity Ratio 108.3265 189.7706 10.0418 47.3353 -4.9171
Calculated at 5% level of significance, critical t value = 2.132
From the above table we can see that the performance of ICICI after it acquired BoR has been
improved in terms of Net Profit Margin, Return on Capital Employed, Return on Equity and
Debt Equity Ratio as it is evident from the t value. From this we can infer that the merger of
banks has been beneficial to the bank’s operational performance as well as the balance sheet as
IDBI has been able to capitalize on UWB’s network and resources.
Bank of Punjab & Centurion Bank:
The Bank of Punjab was founded in 1995. It had total assets of Rs 48 billion and a net loss of
Rs 61 crores as on March 2004. Centurion Bank was incorporated on 30 June 1994. The bank
had total assets of Rs 35 billion and a net loss of Rs 67 crores as on March 2004. While Bank
of Punjab had 1,900 persons on its rolls, the number of employees of Centurion Bank now
stands at 1,300.
The deal was undertaken in a share swap ratio of 9:4. This means, for every four shares of Rs
10 of Bank of Punjab, its shareholders will receive nine shares of Re 1 of Centurion Bank.
After the merger, the paid up capital of the merged entity was about Rs 128 crores and the net
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worth was around Rs 692 crores. After the merger, the bank had total assets of Rs 9,395 crores
and deposits of Rs 7,837 crores. The merger also changed the holding pattern in the bank. Bank
Muscat, which held 31% in CB, now held 25% in the merged bank. The holdings of Capital
Corporation and Sabre Capital, which were 14% and 5.4% respectively in CB, came down to
11% and 4.4% respectively in the new bank. The new bank had a presence of 240 branches and
extension counters, 386 ATMs and about 2.2 million customers within the retail, SME and
agricultural segment. The capital adequacy ratio of the combined entity was 16.1 per cent. It
was thus an extremely well capitalized bank. The merger was a great fit in terms of achieving
scale and geographical presence. Moving on to the quantitative analysis part, the financial
ratios of the combined and individual profiles of both the banks pre-merger and the acquirer
bank post merger have been calculated.
Table 13
Centurion Bank
Ratios Mar '04 Mar '03 Mar '02
Gross Profit Margin 48.63019 40.31736 31.51336
Net Profit Margin -16.909 -7.59275 -17.0018
Operating Profit Margin -80.8705 -42.6821 -15.244
Return on Capital Employed (%) -0.67394 -0.39282 -0.1623
Return on Equity (%) -1.1822 -0.2247 -0.61658
Debt-Equity Ratio 62.53515 22.20417 27.19387
Table 14
Bank of Punjab
Ratios Mar '04 Mar '03 Mar '02
Gross Profit Margin 55.15708358 47.8920224 43.167249
Net Profit Margin 7.833008722 6.51631124 7.4342324
Operating Profit Margin 5.025827758 2.83246695 1.7149517
Return on Capital Employed (%) 0.03705785 0.02494323 0.0174832
Return on Equity (%) 0.352380952 0.3032381 0.3401905
Debt-Equity Ratio 46.09009524 40.8259048 36.97981
Table 15
Combined
Ratios Mar '04 Mar '03 Mar '02
Gross Profit Margin 52.17746 44.25541 36.93174
Net Profit Margin -3.46208 -0.25749 -5.64049
Operating Profit Margin -34.1871 -19.0192 -3.09748
Return on Capital Employed (%) -0.26607 -0.17103 -0.03231
Return on Equity (%) -0.18603 -0.0094 -0.2264
Debt-Equity Ratio 51.85985 29.79838 31.18472
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Table 16
Centurion Bank of Punjab
Ratios Mar '06 Mar '07
Gross Profit Margin 59.10636032 63.71425752
Net Profit Margin 7.101609534 10.98899127
Operating Profit Margin 12.12328647 7.262890621
Return on Capital Employed (%) -0.033565586 -0.10740934
Return on Equity (%) 0.774650584 0.869701058
Debt-Equity Ratio 117.9576233 80.45295747
The mean and standard deviation of these 2 sets of data have been calculated and the
corresponding t-value has also been computed.
Table 17
Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined
Banks (Bank of Punjab & Centurion Bank) and Merged Bank (Centurion Bank of Punjab)
Ratios Mean Standard Deviation
t-value Pre Post Pre Post
Gross Profit Margin 44.4549 61.4103 7.6248 3.2583 -5.3969
Net Profit Margin -3.1200 9.0453 2.7078 2.7488 -7.7232
Operating Profit Margin -18.7679 9.6931 15.5463 3.4368 -5.1937
Return on Capital Employed (%) -0.1565 -0.0705 0.1176 0.0522 -1.7544
Return on Equity (%) -0.1406 0.8222 0.1154 0.0672 -18.2630
Debt-Equity Ratio 37.6143 99.2053 12.3564 26.5198 -5.4881
Calculated at 5% level of significance, critical t value = 2.132
From the above table we can see that the performance of ICICI after it acquired BoR has been
improved in terms of Net Profit Margin, Return on Capital Employed, Return on Equity and
Debt Equity Ratio as it is evident from the t value. All the Alternative Hypotheses have been
accepted and hence we can safely conclude that the merger of banks has been beneficial to the
Equity share holders and increases the overall bank performance in terms of profitability.
Nedungadi Bank &Punjab National Bank:
Nedungadi Bank was set up in 1899 in Kerala. It was the first private sector commercial bank
to be set up in South India. Over time, the bank established some 174 branches, including
branches in all major metropolitan cities. In 2002 the Joint Parliamentary Committee probing a
stock scam pointed out discrepancies in the conduct of its business. It had total assets of Rs 15
billion as on March 2002 and a net profit of Rs 1.27 crores after having suffered a net loss of
678 million in the year ended March 31, 2001.
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Founded in 1895, Punjab National Bank has over 5,800 branches and 6,000 ATMs across 764
cities and serves over 80 million customers. It had total assets of Rs 729 billion and a net profit
of Rs 562 crores as on March 2002.
Capital Inadequacy and a high level of Non-Performing Assets (NPA) were the main reasons
that led Nedungadi Bank into a severe financial crisis forcing the centre to put the bank under
moratorium. RBI merged the sick bank with the healthy bank to protect depositor's interests. At
the time of the merger with PNB, Nedungadi Bank's shares had zero value, with the result that
its shareholders received no payment for their shares. As a result of this merger PNB ended up
with a total of around 4,000 branches across the country with the addition of 174 branches of
NBL. But the important aspect here is that PNB didn’t have much presence in South India
which it wanted to overcome and through NBL it was able to establish a significant presence in
Kerala where it had only 20 branches earlier. The deal was a pure bail out for Nedungadi Bank.
There was a lot of skepticism around whether the deal was a win for PNB giving the financial
troubles of NBL.
Moving on to the quantitative analysis part, the financial ratios of the combined and individual
profiles of both the banks pre-merger and the acquirer bank post merger have been calculated.
Table 18
Punjab National Bank
Ratios Mar '06 Mar '05 Mar '04 Mar '02 Mar '01 Mar '00
Gross Profit Margin 55.55 56.83 57.45 43.35 42.63 39.85
Net Profit Margin 13.01 13.67 11.35 7.32 6.87 6.94
Operating Profit Margin 18.59 17.48 3.07 16.09 10.80 10.56
Return on Capital Employed (%) 0.11 0.09 0.02 0.15 0.11 0.10
Return on Equity (%) 4.56 4.47 4.18 2.65 2.16 1.92
Debt-Equity Ratio 460.73 400.38 385.72 343.55 299.21 255.03
Table 19
Nedungadi Bank
Ratios Mar '02 Mar '01 Mar '00
Gross Profit Margin 35.51335522 23.629838 36.777194
Net Profit Margin 16.90478303 -32.8838879 7.3948645
Operating Profit
Margin 11.14118378 -4.01590843 9.962596
Return on Capital
Employed (%) 0.189081325 -0.05871924 0.1524126
Return on Equity (%) 0.124509804 -6.64705882 1.4343137
Debt-Equity Ratio 154.6166667 186.362745 170.50098
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Table 20
Combined
Ratios Mar '02 Mar '01 Mar '00
Gross Profit Margin 43.1301 42.06281 39.74918
Net Profit Margin 7.126691 5.67994 6.953397
Operating Profit Margin 15.95344 10.35113 10.54202
Return on Capital Employed (%) 0.148176 0.103996 0.104865
Return on Equity (%) 2.533987 1.755215 1.900602
Debt-Equity Ratio 334.8847 294.0389 251.1585
The mean and standard deviation of these 2 sets of data have been calculated and the
corresponding t-value has also been computed.
Table 21
Mean and Standard Deviation of Pre-merger and Post-merger Ratios of combined
Banks (Nedungadi Bank & PNB) and Acquiring Bank (PNB)
Ratios Mean Standard Deviation
t-value Pre Post Pre Post
Gross Profit Margin 41.6474 56.6074 1.7283 0.9682 -4.8046
Net Profit Margin 6.5867 12.6789 0.7900 1.1936 -2.6598
Operating Profit Margin 12.2822 13.0457 3.1808 8.6547 -0.2235
Return on Capital Employed (%) 0.1190 0.0734 0.0253 0.0449 2.2502
Return on Equity (%) 2.0633 4.4054 0.4141 0.2015 -3.2952
Debt-Equity Ratio 293.3607 415.6110 41.8672 39.7540 -1.2971
Calculated at 5% level of significance, critical t value = 2.132
From the above table we can see that the performance of ICICI after it acquired BoR has been
improved in terms of Net Profit Margin, Return on Equity and Debt Equity Ratio as it is
evident from the t value.Return on Capital Employed has not shown any improvement after the
merger.
VI. CONCLUSION
In this paper we have dealt with mergers and acquisitions specific to the Indian banking sector
and analyzed five deals that happened in the last decade. Using data collected from annual
reports and financial statements we were able to analyze the banks’ performance post merger
using statistical tools and were able to formulate inferences on whether the merger was
beneficial or not.Overall it was observed that the merger in the banking sector of India has
improved the key financial ratios. The results of the study indicate that the banks have been
positively affected by the event of the M&As. This suggests that merged banks can obtain
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efficiency and gains through Merger and Acquisitions and eventually pass the benefits to the
equity share holders.
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International Journal of Research & Development in Technology and Management Science –Kailash
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