Article Type : Research Article
Authors : Samuel SM, Peter Arockiam A, Joseph K, Milton C and Ruby Mary N
Keywords : Mergers and acquisitions; Indian banks; Event study analysis; Shareholders wealth
In the backdrop of the current hyperbolic globalization and
development, myriad changes are stunningly emerging and turning heads. The
ramifications stemming out from such mercurial changes are often uncanny and
calls for greater adaptations on the part of organizations who are relentlessly
trying to handle and sustain the impacts of such dramatic changes. The
cut-throat competition prevailing has given the organizational think-tank
plenty to mull over and come up with effective strategies to blunt the adverse
effects percolating relentlessly. In this context, Mergers and Acquisitions
(M&A’s) are prodigiously being resorted to all across the globe amongst the
organizations, even in a developing country like India with the sole objective
of increasing the competitiveness of the firms. There are a plethora of
priceless benefits obtained through M&A’s like reduced business risks,
entering new markets, expanding market base, economies of scale, increased
market share, etc. The objective of the present research study is to examine
and analyse the impact of decision of merger announcement of selected Indian
banks on the wealth of the shareholders of the acquiring banks through the
application of event study analysis. To serve this purpose, we have selected 6
Indian bank mergers having their merger dates announced during a period of 5
years, i.e. 2001-2006.
The present contemporaneous era is always in a
state of flux due to the dramatic changes persistently percolating in it. The
modernized world has posed a plethora of challenges which the society must
effectively respond to. The prevailing competition is only increasing at an
alarming rate and is proving to be a litmus test for all organizations across
the globe. Organizations are continuously in the quest for gaining competitive
edge and attain economies of scale. To serve this purpose, organizations are actively
engaged in merger and acquisition activities. In this light, the landscape of
Indian banking sector has undergone wholesome metamorphosis through mergers and
acquisitions of several banks thereby consolidating the Indian banking sector.
In the 21st century world, banking sector is counted as one of the rapidly
emerging sectors in India. The bewildering transformation of Indian banking
sector from a sluggish business entity to a remarkable industry has been a
story of unprecedented success. The growth rate in this particular sector is
quite stunning and it has established itself as a preferred destination for
international investors. Truth to be told, mergers and acquisitions has been a
nifty driving force in giving the banking sector of India a new dimension. The
two words ‘Mergers’ and ‘Acquisitions’ are often used together and
interchangeably but there lies a difference between the two terms. Merger can
be defined as “a combination of two or more companies into a single company
where one company survives and the other lose its existence. The survivor
company acquire all the assets and liabilities of the merged company.”
Acquisition on the other hand is a process of “taking over or purchase of a
smaller company by a larger company where full ownership and control is gained
by the acquiring company from the acquired company.” Mergers and Acquisitions
remains an alluring inorganic ploy for the Indian banks in order to bolster
growth in a fierce competitive market. However, M&A’s have often been criticized
for its complexity and conundrums like uncertainty, lack of synergy, labour
cuts, etc. It is noteworthy to mention that the study of Mergers and
Acquisitions in the context of Corporate Financing has been jettisoned from the
study of Mergers and Acquisitions in the context of Banking by Banking
Valuations and Merger Financing. This has been ably supported by the data of
Event Study for India where the gains stemming from mergers are not considered
to be obfuscated by near zero or negative returns to the acquirers whilst the
small target company is seen to be quietly walking away with gains. The present
research study is an attempt to prove the fact that acquirers gain from Mergers
and Acquisitions as is deflected in the wealth of the shareholders of the acquiring
banks. Our current endeavour is purported to probe into the impact of
announcement of merger decision on the shareholders’ wealth of the acquiring
banks. For this purpose we have conducted an Event Study Analysis on 6 selected
Indian banks whose merger dates where announced within the range of a 5 year
period starting from 2001-2006
Mergers and Acquisitions has grabbed considerable
amount of attention for academicians and researchers in the past few years
which makes this subject an interesting one for an in-depth study. Myriad
researches conducted in the past have somewhat given us a rather mixed results
when talking about gains stemming from M&A’s. Studies conducted by
researchers, be it Firth in the early 1980’s, all have concluded with the fact
that there will be significant positive returns for the shareholders of the
acquiring firms for different event windows around the dates of announcement of
mergers [1]. Similarly, a lot of studies done in the early 2000’s had opined
that there are significant negative returns for varying windows around the
dates when mergers are announced [2-4]. Have examined ARs relating to
announcement of M&A through event study analysis but failed to address the
robustness of returns. One of the significant studies done on M&A [5].
Their study focused on Malaysian banking sector probing into the wealth of
shareholders which were affected by merger announcement and the results were
quite surprising as the bank mergers advocated by the Malaysian government
actually dismantled the aggregate economic worth for the acquiring banks. As
per the study conducted, it was found out that the value of shareholders
actually increased by mergers and acquisitions in the banking sector. The study
also found substantial proof of the fact that mergers and acquisitions enhance
the performance of the merged institutions as well as reduces their operational
costs [6-10].
A rigorous research has been conducted by making a
balanced and robust use of both conceptual as well as numerical data. To make a
strong theoretical foundation of the present research study, secondary data has
been resorted to. Various authentic and reliable databases such as Google
Scholar, INFLIBNET, J-Stor, BASE has been accessed for the purpose of doing an
in-depth study on previous researches conducted in the domain of Mergers and
Acquisitions of Banks. For the purpose of assessing the impact of the
announcement of merger and acquisition on the wealth of the shareholders of the
acquiring banks, the announcement of all the mergers between the banks for a
financial period of 5 years (1st April, 2001- 31st March, 2006) has been taken
into consideration. In the event of examining the acquisition of two banks
successively within a period of one year, it is to be noted that we have taken
into consideration only that particular merger which is larger in size in
comparison to the other one. To this end, the numerical facts and figures form
the fulcrum of our research and we have collected such numerical data from the
website of National Stock Exchange of India. It is from here where we have
collected all the details of our data relating to daily returns of individual
stock of banks and market index [11,12]. The tool used for analysing the
results is the Standard Event Study which is also known as the Market Model
which has been applied in the Excel sheet containing the collected data about
the selected banks (Table 1) [13-15].
Invented by Ball & Brown in the year 1968, Event
Study is a unique statistical technique for assessing the impact of an event on
the value of a firm. “An event study conducted on a specific company examines
any changes in its stock price and how it relates to a given event. It is used
as a macroeconomic tool as well analysing the influence of an event on an
industry, sector or the overall market by looking at the impact of change in
demand and supply (Figure 1).”
The standard event methodology has been successfully
employed and hence has been depicted as follows:
Where, =
return of the particular stock ‘j’ on the day‘t’
= intercept term measuring the return over a particular period which is not explained by the market
Table 1: List of selected Bank Mergers in India for our research study.
Sl.
No. |
Acquiring
Banks |
Acquired
Banks |
Date
of Merger Announcement |
1 |
Bank of Baroda (BOB) |
Benaras State Bank
Ltd. |
24-10-2001 |
2 |
Oriental Bank of
Commerce (OBC) |
Global Trust Bank |
14-06-2004 |
3 |
Centurion Bank (CB) |
Bank of Punjab |
20-06-2005 |
4 |
Federal Bank (FB) |
Ganesh Bank of
Kurundwad |
10-01-2006 |
5 |
IDBI Bank Ltd. (IDBI) |
United Western Bank |
04-09-2006 |
6 |
Indian Overseas Bank
(IOB) |
Bharat Overseas Bank
Ltd. |
28-01-2006 |
Table 2: Alphas and betas of sample acquiring banks.
Acquiring name of bank |
Alpha (?j) |
Beta(?j) |
Bank of Baroda (BOB) |
-0.0015 |
0.8897 |
Oriental Bank of commerce (OBC) |
-0.0012 |
1.2843 |
Centurion bank (CB) |
0.0036 |
0.8358 |
Federal Bank (FB) |
-0.0009 |
0.6698 |
IDBI Bank ltd. (IDBI) |
-0.0023 |
1.2501 |
Indian Overseas Bank(IOB) |
0.0002 |
0.6853 |
Figure 1: Pictorial depiction for event study technique (Self-developed by authors).
Table 3: Daily AAR and CAAR of the acquiring bank in the event window period.
Day |
BOB |
OBC |
CB |
FB |
IDBI |
IOB |
AAR |
CAAR |
SD |
t_CAAR |
-20 |
- 0.035 |
- 0.071 |
- 0.034 |
0.006 |
- 0.002 |
0.004 |
- 0.013 |
-0.013 |
0.027 |
-0.478 |
-19 |
- 0.085 |
0.010 |
- 0.003 |
0.017 |
- 0.025 |
- 0.002 |
- 0.010 |
-0.023 |
0.029 |
-0.873 |
-18 |
0.029 |
0.010 |
- 0.011 |
- 0.028 |
- 0.016 |
- 0.003 |
0.021 |
-0.002 |
0.050 |
-0.076 |
-17 |
0.030 |
- 0.003 |
- 0.017 |
- 0.010 |
0.006 |
0.013 |
0.005 |
0.003 |
0.023 |
0.108 |
-16 |
- 0.009 |
- 0.010 |
- 0.003 |
0.002 |
0.041 |
0.013 |
0.003 |
0.005 |
0.016 |
0.365 |
-15 |
- 0.025 |
0.050 |
- 0.010 |
0.013 |
0.040 |
0.064 |
0.004 |
0.009 |
0.036 |
0.290 |
-14 |
0.026 |
0.024 |
0.002 |
- 0.007 |
0.005 |
0.079 |
0.015 |
0.024 |
0.025 |
1.023 |
-13 |
0.002 |
- 0.004 |
- 0.006 |
0.005 |
- 0.003 |
0.059 |
0.008 |
0.032 |
0.019 |
1.7777** |
-12 |
0.005 |
- 0.037 |
0.028 |
- 0.002 |
- 0.001 |
- 0.004 |
- 0.001 |
0.031 |
0.017 |
1.648 |
-11 |
0.018 |
0.020 |
0.001 |
- 0.027 |
0.008 |
- 0.024 |
- 0.002 |
0.029 |
0.016 |
1.786 |
-10 |
0.004 |
0.083 |
- 0.009 |
0.027 |
- 0.018 |
0.003 |
0.011 |
0.040 |
0.028 |
3.3470* |
-9 |
- 0.002 |
- 0.010 |
- 0.019 |
0.014 |
0.005 |
- 0.008 |
- 0.003 |
0.037 |
0.011 |
1.382 |
-8 |
- 0.025 |
- 0.040 |
- 0.009 |
0.017 |
-0.017 |
0.025 |
-0.002 |
0.035 |
0.021 |
3.2612* |
-7 |
0.005 |
- 0.003 |
- 0.001 |
- 0.019 |
- 0.004 |
0.002 |
- 0.002 |
0.033 |
0.009 |
1.695 |
-6 |
0.006 |
- 0.001 |
0.000 |
- 0.010 |
0.002 |
- 0.002 |
- 0.007 |
0.026 |
0.014 |
1.728 |
-5 |
- 0.016 |
0.027 |
- 0.025 |
0.007 |
0.000 |
0.010 |
- 0.001 |
0.025 |
0.014 |
2.0086** |
-4 |
0.010 |
0.024 |
- 0.001 |
- 0.012 |
0.014 |
- 0.018 |
0.002 |
0.023 |
0.012 |
1.522 |
-3 |
- 0.001 |
- 0.023 |
- 0.015 |
0.020 |
0.031 |
- 0.021 |
0.004 |
0.019 |
0.021 |
1.410 |
-2 |
0.008 |
- 0.029 |
0.024 |
- 0.015 |
-0.010 |
- 0.008 |
0.001 |
0.018 |
0.017 |
1.8402** |
-1 |
0.001 |
- 0.021 |
- 0.018 |
0.002 |
- 0.003 |
0.010 |
0.001 |
0.017 |
0.026 |
1.270 |
0 |
- 0.032 |
0.018 |
0.055 |
- 0.006 |
- 0.005 |
- 0.013 |
- 0.006 |
0.011 |
0.027 |
1.010 |
1 |
0.001 |
0.020 |
0.024 |
- 0.017 |
0.009 |
- 0.002 |
0.005 |
0.006 |
0.016 |
2.0168** |
2 |
0.012 |
- 0.013 |
- 0.034 |
- 0.006 |
0.015 |
- 0.007 |
- 0.005 |
0.001 |
0.016 |
1.605 |
3 |
0.000 |
0.035 |
- 0.037 |
- 0.004 |
- 0.011 |
- 0.035 |
0.001 |
0.002 |
0.024 |
1.150 |
4 |
0.007 |
0.015 |
- 0.001 |
0.033 |
0.001 |
- 0.022 |
0.005 |
0.007 |
0.023 |
1.9810** |
5 |
- 0.015 |
0.038 |
- 0.009 |
0.024 |
-0.015 |
0.013 |
0.004 |
0.011 |
0.019 |
1.572 |
6 |
- 0.006 |
0.005 |
0.001 |
0.016 |
- 0.024 |
0.000 |
0.000 |
0.011 |
0.010 |
3.6435* |
7 |
- 0.004 |
0.000 |
0.005 |
0.030 |
0.093 |
0.006 |
0.011 |
0.022 |
0.030 |
1.682 |
8 |
- 0.003 |
0.008 |
- 0.065 |
- 0.026 |
- 0.054 |
0.025 |
- 0.011 |
0.011 |
0.028 |
1.292 |
9 |
0.010 |
0.007 |
- 0.033 |
- 0.010 |
0.025 |
- 0.003 |
0.005 |
0.016 |
0.020 |
2.1389** |
10 |
0.002 |
0.017 |
0.018 |
- 0.032 |
0.011 |
- 0.014 |
- 0.004 |
0.012 |
0.020 |
1.9293* |
11 |
0.005 |
0.013 |
- 0.009 |
0.015 |
0.008 |
- 0.001 |
0.004 |
0.016 |
0.015 |
2.8799* |
12 |
0.004 |
- 0.001 |
0.003 |
- 0.015 |
0.040 |
0.001 |
0.006 |
0.022 |
0.016 |
3.102** |
13 |
- 0.004 |
0.010 |
- 0.015 |
0.000 |
0.001 |
- 0.023 |
- 0.007 |
0.015 |
0.009 |
4.4401* |
14 |
0.004 |
- 0.002 |
- 0.008 |
0.000 |
- 0.015 |
0.001 |
- 0.002 |
0.013 |
0.007 |
1.3626 |
15 |
0.001 |
0.009 |
- 0.005 |
0.004 |
0.006 |
- 0.013 |
- 0.001 |
0.012 |
0.009 |
3.8696** |
16 |
- 0.001 |
0.004 |
0.009 |
- 0.007 |
- 0.021 |
- 0.007 |
- 0.004 |
0.008 |
0.026 |
2.2334* |
17 |
- 0.008 |
- 0.004 |
- 0.001 |
- 0.009 |
0.062 |
- 0.002 |
0.014 |
0.022 |
0.030 |
1.524 |
18 |
0.037 |
0.014 |
- 0.009 |
- 0.001 |
- 0.010 |
- 0.006 |
0.005 |
0.027 |
0.018 |
2.9616* |
19 |
-0.021 |
0.011 |
- 0.035 |
0.001 |
0.007 |
0.015 |
0.001 |
0.028 |
0.019 |
2.8960* |
20 |
0.010 |
0.017 |
0.034 |
0.123 |
0.018 |
0.026 |
0.021 |
0.049 |
0.039 |
2.0092** |
An intimate observation of the above depicted table
will give us a very unique observation. Speaking in the broader sense, it can
be said that albeit the observations in the table shows us a downward spiral in
the bank stocks of the acquiring banks as they lost value in the initial days
during the announcement of the merger, but ultimately it has proven to be
beneficial and a positive AAR of 2.1% accrued to the investors on the 20th day
of the announcement of the merger. This is not a co-incidence or a miracle as
it can be argued that the initial wobbles faced by the acquiring banks were
largely due to the banks they acquired which were financially weak, bearing the
burden of huge non-performing assets (NPAs). This instantaneously triggered a
negative reaction among the shareholders who were pessimistic about the cynics
swirling the acquiring banks but gradually the expectation of long term
benefits by the shareholders propelled an astounding comeback in the market by
the banks which helped them to overcome the spiral and positive returns accrued
to the shareholders of the acquiring banks. We have also conducted a T-test to
probe into the statistical significance of CAAR. It has been found that CAAR is
significant at 0.05 (5% level) on -10, -8, 6, 10, 11, 13, 14, 16, 18 and 19th
day in the event period and at 0.10 (10% level) on -13, -5, -2, 1, 4, 9, 12, 15
and 20th day which provides substantial evidence that the announcement of
merger has made a significant impact on the wealth of the shareholders of the
acquiring banks.
·
The present research
study has been conducted selecting only 6 banks within a specified time period
of 5 years (2001-2006). Taking into consideration a longer time window beyond
2006 would have given us a more robust results as we more banks could have been
taken into consideration.
·
Application of a
different methodology might give us different results which may be
contradicting to the results of our study.
In the current era of hypercompetitive business
milieu, the Indian banks are mulling over restructuring strategies and
fulfilling standard of capital requirements. The primary area of concern for
Indian banks is probably the adoption of sophisticated technology and more wise
decision making especially in the context of mergers and acquisitions as it a
tremendous tool of corporate restructuring which helps to bolster the wealth of
shareholders of the acquiring banks in the event window period. Albeit several
research studies have opined that announcement of mergers do not have any impact
on the wealth of the shareholders, but, through our current study we have
proved that there is a positive impact on shareholders’ wealth with the
announcement of merger dates. We have proved the above statement by analysing
our data through event study approach which bears a string testimony to this
fact. The study though conducted on only 6 Indian banks still give us a
positive result. The further ameliorate the present research study, an in-depth
study on more Indian bank mergers is strongly recommended.