MERGERS AND ACQUISITIONS IN INDIAN BANKING SECTOR

Executive Summary

Merger is a combination of two or more companies into one company. The acquiring company, (also referred to as the amalgamated company or the merged company) acquires the assets and the liabilities of the target company (or amalgamating company). Typically, shareholders of the amalgamating company get shares of the amalgamated company in exchange for their shares in the Target Company.

There are two ways which company can grow; one is internal growth and the other one is external growth. The internal growth suffers from drawbacks like the problem of raising adequate finances, longer implementation time of the projects, uncertain etc. in order to overcome these problems a company can grow externally by acquiring the already existing business firms. This is the route of mergers and acquisition.

List of Tables

Page no.

1. Bank mergers in the post reforms period ..............................24

2. NOPAT and cost of debts of HDFC Bank.................................35

3. Beta and cost of equity of HDFC Bank...................................36

4. Economic Value Added of HDFC Bank post Merger..................37

5. Financial performance of HDFC BANK and Centurion Bank of Punjab (Pre and post merger)............................................................38

6. Financial performance of HDFC Bank (Pre and Post Merger).....46

TABLE OF CONTENTS

Sr. No.

Topic Page no.

1. M&A in Indian Banking Industry 1

2. Introduction 7

3. Change in scenario of Indian Banking Sector 21

4. RBI Guidelines on Mergers & Acquisitions of Banks 22

5. Analysis of Merger between HDFC Bank and Centurion Bank of Punjab

29

6. Analysis of Merger between ICICI Bank and Bank of Madura

40

7. Findings 48

8. Conclusion 49

OBJECTIVE:

The main objectives of the study are: 1. To study the performance of Mergers on Profitability on Acquiring Banks. 2. To study the operating performance of the banks in the pre and post M & A.

PROBLEM STATEMENT:

To investigate whether M&A have an impact on operating performance of the acquiring firm and does it create wealth for the shareholders.

SAMPLE SELECTION:

There are two major Mergers and acquisition exists in Indian Banking Sector. These are –

1. Merger between ICICI BANK and Bank of Madura in 2001.

2. Acquisition of Centurian Bank of Punjab by HDFC bank in 2008

METHODOLOGY:

I have adopted the methodology of comparing pre- and post – merger performance of companies, using the following financial ratios:

ROCE = EBIT / Total Capital Employed

ROE = Net Profit / Equity

CURRENT RATIO = Current Assets / Current Liabilities DEBT-EQUITY RATIO = Debt / Equity

ROA = Net Profit / Total Assets

EPS = PAT - Preference dividend / No. Of equity shares

Book Value = Net Worth / No. Of equity shares

LIMITATIONS OF THE STUDY:

1. The study ignores the impact of possible differences in the accounting methods adopted by different companies.

2. The factors which effect the M & A performance may not be same for all companies.