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Dr Poonam Bassi
Assistant Professor
Email: [email protected]
Ph No: 9418039595
Institute: School of Management Studies
Baddi University of Emerging Sciences & Technology
Village - Makhnumajra, Baddi, NH-21A,
Distt Solan -173205 , Himachal Pradesh
Tel/fax: 01795-24788
Varsha Gupta
Assistant Professor
Email: [email protected]
Ph No: 9736276229
Institute: School of Management Studies
Baddi University of Emerging Sciences & Technology
Village - Makhnumajra, Baddi, NH-21A,
Distt Solan -173205, Himachal Pradesh
Tel/fax: 01795-24788
A Study on impact of announcement of Merger and Acquisition on the valuation of the
companies (With special reference to banks)
Abstract
The banking sector is one of the most important instrument of the national development,
occupies a unique place in a nation’s economy. Economic development of the country is evident
through the soundness of the banking system. Deregulation in the financial market, market
liberalization, economic reforms have witnessed astounding changes in banking industry leading
to incredible competitiveness and technological sophistication leading to a new era of in banking.
Since then, every bank is relentless in their endeavor to become financial strong and
operationally efficient and effective. In order to achieve goals, organizations need to remain
competitive and work towards its long term sustainability. Corporate restructuring has facilitated
thousand of companies to re-establish their competitive advantage and respond more quickly and
effectively to new opportunities and unexpected challenges. Since last two decades as especially
after, the liberalization and consequent globalization and privatization have resulted into tough
competition not only in Indian business but globally as well. This paper is an attempt to evaluate
the impact of Mergers and acquisition on the performance of the banks. The study is based on
secondary data of five banks. In order to calculate the impact of merger and acquisition ratio
analysis, mean, and standard deviation have been used as tools of analysis. The study concludes
that investors are getting abnormal returns due to announcement of merger and acquisition.
Moreover the event had positively impacted overall financial valuation of the company.
Keywords: Economic Development, Financial Performance, Merger and Acquisition, Ratio
Analysis.
Introduction
Indian banks are the dominant financial intermediaries in India and have made good progress
during the global financial crisis; it is evident from its annual credit growth, profitability and
trends in NPAs. Companies’ growth is possible in two ways, organic or inorganic. Organic
growth is also referred as internal growth, occurs when the company grows from its own
business activity using funds from one year to expand the company the following year. Such
growth is a gradual process spread over a few years but firms want to grow faster. Inorganic
growth is referred as external growth and considered as a faster way to grow which is most
preferred. Inorganic growth occurs when the company grows by merger or acquisition of another
business. The main motive behind the Merger is to create synergy, that is one plus one is more
than two and this rationale beguile the companies for merger at tough times. Merger and
Acquisitions help the companies in getting the benefits of greater market share and cost
efficiency. For expanding the operations and cutting costs, Banks are using Merger and
Acquisitions as a strategy for achieving larger size, increased market share, faster growth, and
synergy for becoming more competitive through economies of scale.
Concept of Merger or amalgamation
Mergers or Amalgamations result in the combination of two or more companies into one where
the merging entities lose their identities. No fresh investment is made through this process.
However an exchange of shares takes place between the entities involved in such a process.
Generally the company that survives is the buyer which retains its identity and the seller
company is extinguished.
Merger
Merger as being a corporate combination of two or more independent business corporations into
a single enterprise, usually the absorption of one or more firms by a dominant one. The reasons
for a merger are many. The acquiring company may seek to eliminate competition, increase its
own efficiency, or diversify its products, services, and markets or to reduce its tax liability.
Merger activity varies with the business cycle, being higher when the business is good.
Amalgamation
Amalgamation is the blending of two or more existing undertaking into one undertaking with the
shareholder of each blending company becoming substantially the shareholders in the company
which is to carry on the blended undertakings.
Acquisition
Acquisition in general sense is acquiring the ownership in the property. Acquisition is the
purchase by one company of controlling interest in the share capital of another existing
company. This means that even after the takeover although there is change in the management of
both the firms retain their separate legal identity. This may be defined as an act of acquiring
effective control by one corporate over the assets or management of the other corporate without
any combination of both of them.
Take Over
Under the monopolies and restrictive trade practices act, take over means acquisition of not less
than 25% of voting powers in a corporate.
HDFC bank merges Centurion bank of Punjab (CBoP) for the sake of their growth prospects.
The swap ratios led to 25 shares of Rs 1 of CBoP, converted into one share of Rs 10 of HDFC
Bank. After announcement of the news share price of CBoP moved from Rs 49.85 to Rs 56.40
within two days. The ICICI Bank Merger with Bank of Rajasthan was the seventh voluntary
merger and the latest in India after the merger of HDFC Bank - Centurion Bank of Punjab in the
year 2008, compared with other voluntary mergers. Bank of Rajasthan agreed to merger with
ICICI bank on 18th May 2010. Swap ratio for the deal was decided at 25 shares in ICICI for
every 118 shares in Bank of Rajasthan. SBI had merger with one of the associate bank State bank
of Indore on 28th July 2010. The deal became effective from 26th August 2010 and the swap
ration was 34 shares of SBI for 100 shares in state bank of Indore. United western bank was
merged with IDBI on 12th September 2006. Company decided to pay 28 per share to all the
share holders of united western bank. Bharat oversea bank was merged with Indian Overseas
Bank. The deal became effective from April 01, 2007.
Review of Literature
Joydeep Biswas (2004)“Recent trend of merger in the Indian private corporate sector”. They
research about Corporate restructuring in the form M&A has become a natural and perhaps a
desirable phenomenon in the current economic environment. In the tune with the worldwide
trend, M&A have become an important conduit for FDI inflows in India in recent years. In this
paper it is argued that the Greenfiled FDI and cross-border M&As are not alternatives in
developing countries like India.
Vanitha. S (2007) “Mergers and Acquisition in Manufacturing Industry” she analyzed the
financial performance of the merged companies, share price reaction to the announcement of
merger and acquisition and the impact of financial variables on the share price of merged
companies. The author found that the merged company reacted positively to the merger
announcement and also, few financial variables only influenced the share price of the merged
companies.
Vanitha. S and Selvam. M (2007) “Financial Performance of Indian Manufacturing Companies
during Pre and Post Merger” they analyzed the pre and post merger performance of Indian
manufacturing sector during 2000-2002 by using a sample of 17 companies out of 58 (thirty
percent of the total population). For financial performance analysis, they used ratio analysis,
mean, standard deviation and ‘t’ test. They found that the overall financial performance of
merged companies in respect of 13 variables were not significantly different from the
expectations.
Kumar (2009), "Post-Merger Corporate Performance: an Indian Perspective “examined the post-
merger operating performance of a sample of 30 acquiring companies involved in merger
activities during the period 1999-2002 in India. The study attempts to identify synergies, if any,
resulting from mergers. The study uses accounting data to examine merger related gains to the
acquiring firms. It was found that the post-merger profitability, assets turnover, and solvency of
the acquiring companies, on average, show no improvement when compared with pre-merger
values.
Sinha Pankaj & Gupta Sushant (2011) studied a pre and post analysis of firms and concluded that
it had positive effect as their profitability, in most of the cases deteriorated liquidity. After the
period of few years of Merger and Acquisitions (M&As) it came to the point that companies may
have been able to leverage the synergies arising out of the merger and Acquisition that have
not been able to manage their liquidity. Study showed the comparison of pre and post analysis of
the firms. It also indicated the positive effects on the basis of some financial parameter like
Earnings before Interest and Tax (EBIT), Return on share holder funds, Profit margin, Interest
Coverage, Current Ratio and Cost Efficiency etc.
Objective of the study
1. To study the impact of Merger and acquisition on the fundamental value of Acquirer bank
2. To analyze the status of target bank before the event of M&A.
3. To study the impact of the event announcement on the stock price of the acquirer firm.
4. To analyze whether the stock market provides an opportunity to make abnormal returns
during the announcement period.
Research Hypotheses
A research hypothesis is a tentative statement created by researchers upon the outcome of a
research or experiment. A hypothesis is provisionally accepted as a basis for further research in
the hope that a tenable theory will be produced, even if the hypothesis ultimately fails.
Ho1: Null hypothesis; Merger and acquisition effects positively the financial valuation of the
acquirer company.
Ho2: Event announcement positively affect the stock prices of all the acquirer banks equally.
Ho3: Stock market provides an opportunity to make abnormal returns during the announcement
period.
Research Methodology
Data Collection
The study has been carried out on the micro-level, as it is not possible for the researcher to
conduct it on the macro-level. The population of the study consists of banking companies. So,
selection is based on the latest examples of amalgamation. Secondary data has been taken from
the annual reports, news papers and various websites of selected banks.
Period of the Study
The present study is mainly intended to examine the financial performance of merged companies
five years before merger and five years after merger.
Tools and Techniques
Mathematical tool: Percentage change in return of security’s stock price has been calculated.
Window of (T-30 to T+30) where in T is the Announcement Date. So Price of Security and
Sensex Index value is taken for the window and Return is calculated:
1) Percentage changeover in return is calculate using formula P₁ -Po/ Po * 100 where in P₁
stands for current day price and Po stands for Previous day price
2) Abnormal Return is the excess of security return over market return for the period.
3) CAR (Cumulative abnormal return is calculated by adding next day value in previous value.
4) CAAR (Cumulative average abnormal return) is calculating by dividing the summation of
CAR of all the securities by the no of mergers.
Statistical tool: Mean and Standard deviation has been calculated.Mean and standard deviation
of abnormal return of all the securities (using SPSS)
Ratio analysis: Ratios are among the well known and most widely used tools of financial
analysis. Ratio can be defined as “The indicated quotient of two mathematical expressions.” It is
the relationship between one item to another expressed in simple mathematical form.
a. Earnings per share: Total earnings of equity share holders/ No of outstanding equity
shares.
b. Return to capital employed= A financial ratio that measures a company's profitability
and the efficiency with which its capital is employed. Return on Capital Employed (ROCE)
is calculated as:
ROCE = Earnings before Interest and Tax (EBIT) / Capital Employe
c. Debt to Equity ratio: The debt to equity ratio is a financial, liquidity ratio that compares a
company's total debt to total equity. The debt to equity ratio shows the percentage of
company financing that comes from creditors and investors. A higher debt to equity ratio
indicates that more creditor financing (bank loans) is used than investor financing
(shareholders).A lower debt to equity ratio usually implies a more financially stable
business
Debt to equity ratio: Total outside liabilities/ Total equities
d. Adjusted return on Net worth: Profit after Tax/ Total net worth of the company
Table:1 Net worth
Pre Merger Values Post Merger Values
T-5 T-4 T-3 T-2 T-1
Merg
er
Year
T+1 T+2 T+3 T+4 T+5
HD
FC
2,251
.74
2,693
.33
4,520
.28
5,299
.60
6,433
.15
11,49
7.23
15,05
2.73
21,52
2.49
25,37
9.27
29,92
4.68
36,21
4.14
ICIC
I 12,89
9.97
22,55
5.99
24,66
3.26
46,82
0.21
49,88
3.02
51,61
8.37
55,09
0.93
60,40
5.25
66,70
5.96
73,21
3.32
SBI
24,07
2.14
27,64
4.09
31,29
8.56
49,03
2.66
57,94
7.70
65,94
9.20
64,98
6.04
83,95
1.20
98,88
3.68
IOB
932.7
6
1,132
.63
1,459
.59
2,081
.09
2,575
.19
3,177
.44
3,990
.36
4,856
.67
7,150
.96
7,524
.58
9,324
.93
IDB
I
9,161
.85
6,695
.14
6,978
.09
5,834
.90
5,928
.40
6,372
.05
8,299
.86
8,821
.96
9,423
.86
10,16
4.84
14,56
7.58
(Source: Moneycontrol.com)
T-5
T-4
T-3
T-2
T-1
Mer
ger Y
ear
T+1
T+2
T+3
T+4
T+5
Premeger Values Post Merger Values
0.00
20,000.00
40,000.00
60,000.00
80,000.00
100,000.00
120,000.00 Networth
HDFCICICISBIIOBIDBI
Valu
e
Source: Table 1
Table 1 reveals that net worth had increased three times in case of four banks out of five in the
pre acquisition years but after acquisition, there was again tremendous growth in net worth.
Table: 2 EPS
Pre Merger Values Post Merger Values
T-5 T-4 T-3 T-2 T-1Merger
YearT+1 T+2 T+3 T+4 T+5
HD
FC
15.5
3
21.1
6
27.5
5 35.64 43.29 44.87
52.7
7 64.42 84.40
22.0
2
28.2
7
ICIC
I
27.2
0
28.5
5
34.5
9 37.37 33.76 36.10
44.7
3 56.09 72.17
84.9
5
SBI
81.7
9
83.7
3
86.2
9
106.5
6
143.6
7 144.37
116.
07
174.4
6
206.2
0
IOB 2.61 5.18 9.35 9.41 11.96 14.38
18.5
1 22.07 24.34
12.9
8
17.3
3
IDB
I
10.2
0 6.50 7.25 8.74 6.36 7.75 8.70 10.06 11.85
14.2
3
16.7
6
(Source: moneycontrol.com)
Figure: 2
T-5
T-4
T-3
T-2
T-1
Mer
ger Y
ear
T+1
T+2
T+3
T+4
T+5
Premeger Values Post Merger Values
0.00
100.00
200.00
300.00
400.00
EPS
IDBIIOBSBIICICIHDFCva
lue
Source: Table 2
Table 2 depicts that although merger and acquisition is affecting the earning per share of the
banks positively but this effect is better seen after one year of M&A.
Table: 3 Total Income / Capital Employed(%)
Pre Merger Values Post Merger Values
T-5 T-4 T-3 T-2 T-1Merge
r YearT+1 T+2 T+3 T+4 T+5
HDF
C 9.20 8.33 7.99 8.96 10.21 11.05 12.50 9.85 9.71 10.57 11.36
ICICI 8.39 8.58 9.65 10.62 9.90 8.90 8.48 9.17 9.44 9.65
SBI 8.58 8.24 8.46 8.96 8.99 8.62 8.54 9.45 9.35 9.22
IOB 10.69 11.26 10.32 10.18 9.33 8.67 8.82 9.38 10.08 9.21 8.67
IDBI 18.06 10.37 16.79 12.95 4.51 7.79 7.57 8.07 8.55 8.61 8.41
(Source: moneycontrol.com)
Table 3 shows that return on capital employed of IDBI had declined since last five years and
stabilized after the event year. For rest of the banks even had impacted moderate but positively
the returns.
Table: 4 Total Debt to Owners Fund (LTB/ Net worth)
Pre Merger Values Post Merger Values
T-5 T-4 T-3 T-2 T-1Merge
r YearT+1 T+2 T+3 T+4 T+5
HDF
C 9.97
11.3
0 8.04
10.5
3 10.62 8.76 9.75 7.78 8.22 8.24 8.18
ICICI 8.39 8.58 9.65
10.6
2 9.90 8.90 8.48 9.17 9.44 9.65
SBI
15.2
5
13.7
5
13.9
2
10.9
6 12.81 12.19
14.3
7
12.4
3
12.1
6
11.7
9
IOB
29.3
9
28.0
8
25.1
4
21.4
9 18.18 16.54
17.7
5
17.7
8
16.8
5
17.4
5
17.7
9
IDBI 0.29 0.51 6.61 8.16 2.58 4.08 6.95
10.7
4
15.1
0
20.3
8
14.2
4
(Source: moneycontrol.com)
Table 4 depicts that after M&A, debt to equity ratio of all the banks has increased the very next
year and stabilized then onward but the same for IDBI bank has increases continuously.
Table: 5 Adjusted Return on Net Worth (%)
Pre Merger Values Post Merger Values
T-5 T-4 T-3 T-2 T-1Merge
r YearT+1 T+2 T+3 T+4 T+5
HDF
C 17.21
18.9
4
14.7
2
16.4
2 17.75 13.82
15.2
9
13.6
8
15.4
7
17.2
6 18.57
ICICI 15.99
11.4
0
12.3
1 8.80 7.55 7.53 9.35
10.7
0
12.4
8
13.4
0
SBI 19.35
15.9
3
14.4
7
13.7
0 15.74 13.91
12.7
1
13.9
4
14.2
6 9.20
IOB 12.38
20.2
6
28.4
1
26.4
7 26.53 24.21
25.9
7
25.3
1
21.1
6
11.1
0 13.12
IDBI 7.26 6.33 5.75 7.86 5.02 8.70 7.24
10.7
1
11.3
5
12.5
5 13.04
(Source: moneycontrol.com)
Figure: 3
T-5
T-4
T-3
T-2
T-1
Mer
ger Y
ear
T+1
T+2
T+3
T+4
T+5
Premeger Values Post Merger Values
0.0020.0040.0060.0080.00
Adjusted Return on Net Worth(%)
IDBIIOBSBIICICIHDFCva
lue
Source: Table 5
Table 5 depicts that adjusted return had increased after the event which was falling in previous
years in case of most of the banks but the impact better can be seen for 3 years after the event.
Table: 6 Status of Target Banks before the event
Dividend
Per share
Earnings per
share
Adjusted
Return on Net
Worth (%)
Total Debt to
Owners Fund
(LTB/net worth)
T-1 T-2 T-1 T-2 T-1 T-2 T-1 T-2
Centurion bank of
Punjab 0 0 0.77 0.87 8.69 13.15 10.65 10.09
Bank of Rajasthan 0 0.2 -6.33 7.3 -18.82 18.3 27.82 23.6
State bank of Indore 15 150 175.9 1,593.82 16.71 17.82 16.63 18.11
Bharat Overseas bank 1.2 15 3.51 126.85 2.7 10.07 15.86 13.86
United western Bank - 1.5 -33 10.36 -44.46 11.02 29.11 22.89
(Source: http://money.rediff.com)
Table 6 states that dividend per share of all the target banks was almost nil and even negative
before the event, even adjusted return on net worth and EPS was also declining .
Table: 7 % change over in Returns
HDFC ICICI SBI IOB IDBI
T 0-30 -20.4262 -9.65104 4.65269 14.1779 8.638743
T 0-15 -8.10916 -6.02314 7.244081 -6.81918 -1.03339
T 0-7 -7.56286 1.471847 0.598498 4.489393 -5.32319
T 0+7 -6.06593 -3.68246 6.036384 -0.70822 20.80321
T 0+15 -13.4252 -8.1464 13.92436 -2.92729 33.81526
T 0+30 -6.82857 -4.55389 17.13378 -10.8593 32.36948
(Source: bseindia.com)
Figure: 4
T 0-30 T 0-15 T 0-7 T 0+7 T 0+15 T 0+30
-30
-20
-10
0
10
20
30
40
HDFC ICICI SBI IOB IDBISource: Table 7
Table 7 reveals that announcement of the event has positively affected IDBI and SBI the most.
Table 8 AVERAGE RETURNS AAR CAAR
Days HDFC ICICI SBI IOB IDBI
T+30 -3.07 -0.92 1.95 -2.26 0.82 -0.69449 -0.69449
T+29 4.2 0.16 -1.27 -1.4 1.95 0.727324 0.032834
T+28 1.17 -2.21 1.22 0.62 -0.03 0.151961 0.184796
T+27 -1.85 -1.76 0.65 -0.17 2.47 -0.13084 0.053957
T+26 0.51 0.96 -0.85 -2.16 -1.38 -0.58645 -0.53249
T+25 -0.21 -0.16 -0.87 -1.44 -0.36 -0.60793 -1.14041
T+24 0.29 2.15 -0.96 -1.93 -1.72 -0.43297 -1.57339
T+23 -0.78 -1.65 -0.25 -0.57 -1.08 -0.86516 -2.43854
T+22 -1.35 -0.15 -0.91 0.36 -1.64 -0.73783 -3.17637
T+21 -4.58 2.09 1.21 -1.07 -0.45 -0.56179 -3.73816
T+20 0.01 -0.13 -0.1 -1.7 -2.32 -0.84495 -4.58312
T+19 2.45 -0.5 1.39 -0.67 -0.99 0.335705 -4.24741
T+18 -0.05 1.1 1.36 -0.06 0 0.466819 -3.78059
T+17 3.34 -1.31 -0.5 -1.86 -0.04 -0.07372 -3.85431
T+16 2.03 0.98 -1.41 -1.49 -0.2 -0.01791 -3.87222
T+15 -0.71 -2.03 -1.27 -0.72 0.07 -0.93219 -4.80441
T+14 0.15 -0.83 -0.06 2.66 2.76 0.936056 -3.86835
T+13 -1.09 1.04 -0.38 -2.28 -0.66 -0.67475 -4.5431
T+12 -0.46 -0.53 1.83 2.35 3.78 1.396086 -3.14701
T+11 2.66 -0.46 6.91 -0.04 7.71 3.356327 0.209314
T+10 0.36 -1.11 -0.24 -2.32 -0.94 -0.85191 -0.64259
T+9 2.23 -0.1 -0.3 -3.07 0.99 -0.04817 -0.69077
T+8 -0.32 -0.35 0.33 -1.75 -2.49 -0.91507 -1.60584
T+7 -2.78 -0.64 -0.84 5.78 0.4 0.38531 -1.22053
T+6 -0.36 2.44 2.24 -1.28 3 1.206857 -0.01367
T+5 0.8 0 -0.89 -1.19 0.48 -0.1617 -0.17537
T+4 0.18 -0.48 0.66 -2 1.13 -0.10144 -0.2768
T+3 1.34 0.62 1.9 -0.59 1.73 0.999422 0.722619
T+2 -0.33 0.33 1.92 -2.17 -4.32 -0.91154 -0.18892
T+1 1.39 -4.47 -0.1 0.08 12.46 1.872554 1.68363
T=0 -5.28 -1.68 2.14 -0.64 -0.79 -1.25193 0.4317
T-1 -2.23 -0.09 0.77 -1.67 -2.39 -1.12232 -0.69062
T-2 -0.12 0.11 -2.83 -0.52 -0.24 -0.72112 -1.41174
T-3 0.37 0.74 0.61 2.42 -1.86 0.454475 -0.95726
T-4 0.58 -0.44 0.89 0.89 0.58 0.50103 -0.45623
T-5 -0.08 0.5 -1.02 0.38 1.14 0.184953 -0.27128
T-6 -0.34 1.77 -0.03 -0.12 -0.78 0.101063 -0.17022
T-7 0.09 -1.62 0.77 -1.61 0.25 -0.42678 -0.59699
T-8 2.82 0.48 -0.19 -3.72 -1.15 -0.35338 -0.95038
T-9 -0.68 -0.98 -0.85 -2.56 3.62 -0.28997 -1.24035
T-10 2.32 -0.98 1.76 -0.63 1.5 0.794028 -0.44632
T-11 -2.71 -0.34 0.92 -2.14 0.32 -0.79108 -1.2374
T-12 2.97 0.28 0.71 1.95 1.38 1.457379 0.219976
T-13 1.66 2.15 -0.52 -2.63 -0.85 -0.03834 0.181638
T-14 -2.16 -1.17 1.26 -2.75 -2.82 -1.52777 -1.34613
T-15 -3.5 -1.12 0.42 -1.52 0.56 -1.03335 -2.37948
T-16 -3.41 -1.89 0.79 0.82 -0.32 -0.8037 -3.18318
T-17 2.98 2.68 0.44 -2.21 -0.45 0.687701 -2.49548
T-18 1.85 -1.47 0.43 0.34 -1.2 -0.00999 -2.50547
T-19 -3.02 1.95 -0.67 1.7 0.98 0.185097 -2.32037
T-20 0.11 1.15 -0.64 -0.73 -0.43 -0.10584 -2.42622
T-21 -0.37 0.89 1.04 -0.02 2.1 0.729768 -1.69645
T-22 0.32 0.66 -1.09 -1.75 5.3 0.688732 -1.00772
T-23 1.44 -1.52 -1.48 -2.13 0.96 -0.54662 -1.55433
T-24 -0.16 -2.2 0.43 8.38 0.23 1.336722 -0.21761
T-25 3.71 -0.83 -0.26 7.44 -0.41 1.931178 1.713569
T-26 -0.84 0.52 -0.64 7.8 -2.63 0.843648 2.557217
T-27 -0.87 -1.22 -1.14 1.87 0.01 -0.27167 2.285543
T-28 -4.23 -1.29 1.43 0.57 -0.63 -0.83001 1.455532
T-29 2.14 1.35 -1.55 0.03 -1.29 0.136265 1.591797
T-30 1.93 1.91 -0.41 0.34 1.91 1.13556 2.727357
Table 8 (a)
N Minimum Maximum Mean Std. Deviation
HDFC_AR 61 -5.28 4.20 .0075 2.09536
ICICI_AR 61 -4.47 2.68 -.1577 1.37944
SBI_AR 61 -2.83 6.91 .2272 1.40507
IOB_AR 61 -3.72 8.38 -.2420 2.49195
IDBI_AR 61 -4.32 12.46 .3890 2.52725
Valid N (listwise) 61
Table 8 (b) Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
AAR 61 -1.53 3.36 .0447 .91505
Valid N (list wise) 61
Figure: 5 Analysis of AAR
DaysT+29T+2
7T+2
5T+2
3T+2
1T+1
9T+1
7T+1
5T+1
3T+1
1 T+9 T+7 T+5 T+3 T+1 T-1 T-3 T-5 T-7 T-9 T-11
T-13
T-15
T-17
T-19
T-21
T-23
T-25
T-27
T-29
-2
-1
0
1
2
3
4
Five bank average abnormal return
five bank average abnormal returnSource: Table 8
Table 8 and figure 5 reveal that before the announcement of the event. AAR was maximum on
T-12 and in between T-24 to T-26. On T-25 day, AAR was maximum at 1.93. Immediately after
the announcement on T +1 day AAR was 1.87 and was highest on 3.35 on T +11 day, which
proves that market offers sufficient option to investor to gain abnormal return.
Table 8 (c)
As this is clear from the above table that mean value
of abnormal return of sample banks for the event
window is 0.0447 while the minimum return was (-
Days AAR
t-30 days to T+30 days 0.0447
t-30 days to t-1 day 0.07652
t=0 to t+1 0.3103
t+1 days to t+30 0.0561
1.53) on T-14th day and highest return of 3.36 was on T+11th day. Using the complete window
an investor could have made a return of 1.83%.
Considering the pre announcement period, the average return is 0.07652 and the same for post
announcement period is 0.0561. The minimum return in preannouncement window is -1.52777
on t-14 days and maximum is 1.931178 on T-25th day while minimum return for post
announcement window is -0.93219 and maximum is 3.36 which is the highest return of the event
window also. So market provides an option of earning 2.424 percent abnormal return after
announcement of the event and 0.4 percent returns before the announcement window.
Considering the individual performance of banks IDBI has given the maximum return
opportunity by offering 8.14% abnormal return chance after announcement period within the two
days of the event. SBI has offered 5.50 percent of abnormal return opportunity in between 11th
day and 16th day for post announcement period. So this proves that stock market provide an
opportunity to investors to gain abnormal return in case of banking stocks M&A.
Findings
The study has proved that the event of merger and acquisition has positively affected the net
worth, earning per share, return on capital employed as per Ho1. Stock prices of two banks out of
five have shown the positive movement after announcement of event. So Ho2 is discarded her
that event affect all the banks equally. As per Ho3, considering the average abnormal return of
all the banks, stock market provide good opportunity to the investors to gain abnormal returns.
Limitations of the Study
Every live and non-live factor has its own limitations which restrict the usability of that factor.
The same rule applies to this research work. The major limitations of this study are as under:
1. This study is mainly based on secondary data derived from various financial websites of
bseindia.com, moneycontrol.com etc. The reliability and the finding are contingent upon the data
published in therein
2. This study is restricted to five banks only.
3. The study is limited to five years before merger and five years after merger only.
4. Financial analyses do not depict those facts which cannot be expressed in terms of money,
for example –efficiency of workers, reputation and prestige of the management
Conclusion: Generally the news like Merger and acquisition is perceived as positive. Moreover
these events also affect the fundamental value of Acquirer Company but considering their stock
market movement, no doubt market provide an opportunity to investor to gain some profits but
not for all the stock equally.
Area for future research
State bank of India is about to take over state bank of Patiala and three other banks, state bank of
Mysore and state bank of Travancore and state bank of Bikaner and Jaipur are in pipeline. Kotak
Mahindra bank has already announced its takeover of Vijaya bank in this year (2014).
References:
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