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EFFECTIVENESS OF MERGERS & ACQUISITIONS IN INDIAN

BANKING SECTOR: AN EMPIRICAL INVESTIGATION ON SBI

1. INTRODUCTION

The Indian economy has undergone a major transformation and structural change
following the economic reforms introduced by the government of India in 1991. Since
then, the M&A mov ement in India have gained momentum. “ In the liberalized
economic and business environment, ‘ magnitude an d competen ce’ have become the
focal points of every business enterprise in Indian as companies have realized the need
to grow and expand in businesses that they understan d well to face the growin g
competition.
The banking industry is an important area in which mergers and acquisitions do make
enormous financial gains. As a resu lt of changes in the expectation of the corporate
customer, banks are now constrained to rethink their business and dev ise new
strategies. “The Indian banking sector is going through a process of restricting, mainly
driven by pervasive trends such as deregulation, disintermediation, technolo gical
progress, innovation and severe competition.” To gain competitive cost advantage,
consolidation of operation in the form of M&A is one of the effective strategies w idely
adopted by the ban kers. Mergers in banks are considered for the purpose of: 1.
Expansion/diversification 2. Up gradation of technology 3. Loss making bank merged
with another healthy bank for revival 4. Healthy bank merged with another healthy
bank to become finan cially stronger, to meet competitive pressures 5. Growth in profits
6. Increase market share, etc.
Consolidation in an Indian Banking Sector

Consolidation of business entities, through mergers and acquisitions, is a world -wide


phenomenon. The nu merous mergers and acquisitions all over the world, inclu ding in
India, in the rea l as w ell as in the finan cial services sector, appear to be driven by the
objective of leveraging the synergies arising from the process of merger and
acquisition . The priv ate sector banks are subject to the prov isions of the Banking
Regulation Act, 1949, the public sector banks are governed by their respective founding
statutes and by those prov isions of the Ban king Regulation Act which have been made
specifically applicable to them. The urban co -operative banks, on the other han d, are
governed by the prov isions of the Cooperative Societies Act of the respective State or
by the Multi-State Cooperative Societies Act, as also by the provision s of the Bankin g
Regulation Act which are specifically applicable to them.

2. IMPORTANCE OF THE STUDY

The banking sector of India consists of pu blic sector banks, private sector banks, co -
operative banks and foreign banks. But PSB s are 70% of the Indian Banking System. Out
of which SBI serves one fourth of the total market share. In view of this a critical
investigation on SBI is required to study the impact on economy. The criticality of PSB s
to the nation's ban king landscape therefore needs little emphasis. The massiv e
recapitalisation of PSBs approved by the Government. It is incumbent on PSBs that
trust reposed by govern ment translates into economic returns for the country. Holistic
and w ide ranging reforms need to therefore take place alongside so that this capital is
effectively utilised towards faster economic growth PSB reform agenda – E ase of
Access Service Excellenc e (EASE).PSBs can and mu st be benchmark of excellence.
No empirical stu dy has been made so far on the perception of the employees about
the M&A activ ity in the SBI, it is therefore significant enough to u ndertake study on the
factors influencing the perceptions of the employees about the M&A process
undertaken by their organization. This attempt would invariably be a source of
information for the managers and business leaders of any merging organization to
understand the relative sign ifican ce of the p rocess and the resultant impact of it on
employees, performance, profitability and organizational sustainability as a whole.
3. STATEMENT OF THE PROBLEM
Banking Sector in any economy con stitutes a major segment of its economic activities.
In the new economic millennium, unlike other sector, Banking has also witnessed
radical transformation in the frontier of policy reforms, techn ology reforms, Human
Resource transformation as well as improv ements in service qu alities coupled with a
strong competition. Another pertinent fact is con solidation phase that currently the
sector is facing set a new trajectory of an alysis and research. A number of banks in
order to compete, survive and excel in its operations have adopted the path of
restructuring and the present time required critical appraisal of such events and deduce
managerial implications from them. In the current research proposal, the problem
being pursued for inv estigation can be summarised as follows:
1. Does there exist any substantial differen ces in the operational efficiency of the
merged banks in the pre and post amalgamation period?
2. Whether Banks undergo the amalgamation decision due to internal pressure or
external environmental issues?
3. Does there exist any variation in the insight and opin ion of the employees in the
pre and post amalgamation of banks?
4. REVIEW OF LITERATURE

The present section deals with the review of existing literature available on the
research work. Various studies have been conducted by researchers on the different
aspects of Merger and Acquisition of banks. More than ever, today mergers and
acquisitions is an area of immense research potentials to both academicians an d
practicing managers for over three decades. Economic globalization has created a
sense of urgency among companies resultin g in an acute significance of examining the
effect of corporate restructuring and change in itiatives on the organizational
performances. Studies on M & A in India su ggest a wider framework for understanding
the implications of merger from varied perception s. There have been numerous stu dies
on mergers and acquisitions abroad, in the last four decades. An extensive review of

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literature has been carried o ut in order to enhance the present level of understanding
in the area of mergers and acquisitions, gain insight into the success of failure of
mergers and formulate the problem for further research in this area. Broadly, literature
review has been don e on empirical studies in books, journals, published paper etc.,
these are discussed in detail in the follow ing
4.1 International Studies
Fotios Pasiouras & Chrysovalantis Gaganis (2007) examined the financial
characteristics of 52 targets and 47 acqu irers that were involved in acquisitions in the
Asian commercial ban king sector over the period 1998 to 2004 an d a control sample of
non-merged banks matched by country and year. The results indicated that more asset
risky portfolios in crease this probability. Higher liquidity also increases the probability
of being acquired.

Mark Walker & Chi - Sheng(2007) study observed that an acquiring firm's strategic
objective and post -acquisition stock price performance are determined, at least in part,
by the industry's outlook and structure, an d by the acquiring firm's market position.
Brian, Robert, Tustin (2008) in their work focused on a sample of about 50 mergers
and acqu isitions involving Australian companies from 1996 to 2003, examin ing the
impact on share prices of the announcement of these mergers both on the firms
involved and on rival firms.

Jens, Kevin(2009) study examined the type of operational strategies adopted by


banking firms in the years following a deal in the USA and Europe. The study compared
the design and performance implications of different post -merger strategies. It was
found that European banks pursue a cost -cutting strategy by increasing efficiency
levels vis- a` -vis non -merging banks and by cutting back on both labour costs and
lending activities. US banks, on the other hand, raised both interest and non -interest
income in the post -merger period.

Ahmad Ismail, Davidson & Frank (2009) study among European banks investigated
post-merger operating performance for 35 publicly listed bank mergers that were
completed between 1992 and 1997. The study found that indu stry -adjusted mean cash
flow return did not significantly change after merger but stayed positive. It was also
found that the merger led to a significant decrease in profitability and capitalization
and an improvement in cost -efficien cy ratios, although the improvement was not large
enough to offset the profitability decrease.

Sheng , Lin, C hou & Hsiao(2010) observed that firms with good stock performance are
more likely to acqu ire other firms. With 4 12 US -listed bidders, results from the event
study method clearly supported this hypot hesis by showing a strong upward movement
of cumulative abnormal returns across groups in the pre -merger period. Resu lts also
suggested that bidders of different characteristics have different preference for
payment methods an d thus the market reactions to them are different, despite the
noise that frequently accompanies merger activ ity.

Jeungbo Shim (2011) study found that acquirers’ financial performance decreases an d
earnings volatility in creases during the gestation period after the M & A due to

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increased frictional costs associated with post - merger in tegration an d agen cy
problems. The study observed that more focused insurers ou tperform the produ ct -
diversified in surers, implying that the costs of diversification outweigh the benefits.

4.2 Indian Studies


Surjit Kaur (2002) compared the pre - an d post-takeover performance of a sample of 20
merging firms, using a set of eight financial ratios, for a period of three years each,
immediately precedin g and succeeding the merger. The study found th at Gross Profit
Margin (EBITDA/Sales), Return on Capital Employed (ROCE) an d Asset Turnover Ratio
Declined Significantly in the Post -takeover period, suggesting that both profitability
and efficiency of merging companies declined in the post - takeover period.
Chanda (2005) concluded that profitability of the public sector banks has not been
affected by deregulation in India. The Indian banking industry was second to none in
the world from the viewpoint of its profitability. The stock prices of the public s ector
banks were impressiv e. In addition, it cou ld be said that bank mergers might not always
be a blessings for the customers. I t might increase the opportunities for monopolistic
pricing. As a resu lt, the customer would earn a lower rate of in terest on d eposit in a
more concentrated banking market.
Mohan (2006) lamented that the Indian market was over banked, but under serviced. As
a result, Indian Banks clearly lack global scale. From the poin t of view of financial
system, consolidation of banks was imp erative. The objective would be strengthen ing
of banks, economies of scale, global competitiveness, and cheaper financial series and
retaining of employees for merging skill sets.
Seetharaman, and Raju (2007) studied that effect on the role an d consequences of the
bank mergers, post - merger performance of the local banks and the foreign banks. The
consolidate the financial an d corporate sector were objectives as relieving institution
of their non -performing l oans, strengthening and recapitalizing banking institutions,
facilitating corporate debt restru cturing and enhance efficiency within the system.
Singh and Mogla (2010) in their research paper examined the profitability of acquirin g
firms in the pre - an d - post merger periods. The sample consists of 153 listed merged
compan ies. Five alternative measures of profitability were employed to study the
impact of merged on the profitability of acquiring firms.
Sinha Pankaj & Gup ta Sushant (2011) studied a pre and post analysis of firms an d
concluded that it had positive effect as their profitability, in most of the cases
deteriorated liqu idity.Study showed the comparison of pre an d post analysis of the
firms. It also indicated the positive effects on the basis of s ome finan cial parameter
like Earn ings before Interest and Tax (EBIT), Return on shareholder funds, Profit
margin, Interest Coverage, Current Ratio and Cost Efficien cy etc.
Khan (2011) explain ed that the purpose of this paper was to explore variou s
motivations of mergers and acquisition s in the Indian banking sector. I t was helped to
get the benefits of greater market share an d cost efficiency.

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Mantravadi Pramod & Vidyadhar (2007) evaluated that the impact of merger on the
operating performan ce of acqu iring firms in different industries by u sing pre and post
financial ratio to examine the effect of merger on firms. In different industries in India
particularly banking and finance indu stry had a slightly positive impact of profitability .
S.Balasubramaniam (20 12): This analysis investigates the In dian banking system
financial sector to bring down Non - Performing Assets ( NPA) , to improve the
profitability and overall financial health in the banks, in general. My analysis is useful
to the investors of the bankin g sector of equity.
Shipra Saxena (2013): This study is the concept of Non - performing Asset (NPA) can
be understood in simple terms as an Asset, which ceases to yield income to the Bank.
The present study is aimed at understanding the concept of non - performing assets
and the efforts on behalf of the banks and financial institutions in harnessing the
NPA's. The growth in NPA's can be checked considerably if banks and finan cial
institutions take suitable internal measures. My analysis has been done on the only SBI
Stock returns were not caused b y the NPA levels.
5. RESEARCH GAP

From the literature review, the followin g research gaps or deficiencies in earlier
research was found an d presented below:
1- A little research has been performed on profitability and liquidity of SBI who
serves around one four th of market share as comparison with total banking
sector research shou ld be done to fin d out the short term financial position of
the bank.
2- NPA position of the banks has been greatly affected by the newly introduced
Insolvency & Bankruptcy Code (IBC). There does not exist any impactfu l eviden ce
to understand the effect of post implementation of Insolvency & Bankruptcy
Code (IBC).
3- Security prices are very much sensitive to any announcement of financial
decision. In the earlier studies inadequate focus was given on the reaction of
stock prices on announcement of banks and that to be SBI.
4- No empirical survey was conducted on perception of employees of Odisha to
analyse the effect of merger and acquisition.
6. OBJECTIVES OF THE STUDY
The researcher of t his study will tend to bridge the above mentioned research gaps by
formulating following objectives;

1. To analyze the pre and post -merger Financial performance of SBI


 Liquidity position
 Operational performance
 Profitability performance
2. To find out the impact of merger & acqu isition on SBI’s NPA Position.
3. To identify the reaction of security prices to announcement of
Mergers/acquisiti ons decision of the study units.

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4. To understand employees’ perception abou t the implications of mergers in the
merged banks .

7. RESEARCH METHODOLOGY

A research method is a systematic plan for condu cting research. This is an empirical
research which will be con duct for analysing the performance of SBI. Basically this
section will address 3 major and pertinent issues about the research work like data
collection , method of sampling and data an alysis tools.
7.1 Data Collection
Data required for this study will primary data as well as secondary data. Secondary data
will be collect from various secondary sources like rbi.org.in, sbi.co.in, NSE India, CMI E
database, Moneycontrol.com, Books an d Wikipedia etc. Primary data will be collect
from the employees of SBI and its associate banks through a structured interview
schedu le/ Questionnaire .
7.2 .Sample Size
Simple random stratified sampling will be used to obtain the primary data from the
employees
7.3 Period of the Study
Hence the researcher wants to know the short term financial performance by taking pre
and post merger. So period of the stu dy will be carried out two years of pre merger and
two years of post merger i.e four financial years as 2015 -16, 2016- 17, 2017-18, 2018-19.
7.4 Scope of the Study
For the study of perception of employees , study area w ill be the Odisha state . By u se of
cluster sampling th e demographic profile of Odisha, four major cities will be con sidered
for collection of primary data from the employees.
7.5 Tools and Techniques of Data Analysis
The proposed study is an exploratory study. For analysis of data, Statistical Package for
Social Sciences (SPSS) and MS Ex cel will be used. Main ly researcher will u se the
descriptive statistical tolls like mean, median, mode , standard deviation etc and
inferential statistical tolls like regression , correlation, mu ltivariate analysis, factor
analysis, ANOVA ( F test), paired t-test etc. for objective wise data analysis .

8. ORGANIZATION OF THE STUDY


It is proposed that the study will be organ ized into n ine chapters.

First chapter is the introduction of the work. It includes Objective of the Study, Scope of
the Study, and Research Problem of the Study.
Second chapter is the Review of Literature which will deal with the study of past
research on the related area of the topic to find the research gap.
Third c hapter is the Research Methodology which will deal w ith the study of tools an d
techniques to be used throughout the research .
Fourth chapter is the conceptual framework which will deal w ith the Introduction to the
subject matter which covers brief history of merger & acqu isition in Indian Banking

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sector, conceptual and contextual framework of merger & acquisition with global as
well as Indian banking point of v iew, legal framework of merger & acquisition etc.
Fifth chapter is the Impact of Merger & Acquisition on SBI which will cover analysis of pre and post
merger performance of SBI which in cludes liquidity position, operational performance,
profitability position and overall financial position. By u sing of ratio analysis and
CAMELS rating technique different major performance indicators like cur rent ratio,
liquid ratio, asset turnover ratio, net profit margin, ROCE, RONW etc will be measured
and evalu ated.
Sixth chapter is the Management of NPA which will deal w ith the analysis of NPA position of
SBI for pre and post merger period . Some statistical tools shall be used for the
calculation of NPA of standalone position during pre merger period and consolidate
position during post merger period.
Seventh chapter is the Analysis of Security Prices which will cover the analysis of reaction of
security prices on the declaration of merger deal of SBI with its associate banks. To
find out the normal and abnormal return to the transferee bank or transferor bank two
models shall be used as MM Model and MAM Mode l.
Eighth chapter is the Study Of Perception of Employees will cover the implication of merger on
the perception of employees of merged banks i.e SBI & it’s associate banks including
Bharatiya Mahila Bank (BMB) through a structured and tested interview s chedule or
questionnaire.
Ninth chapter is the Summary and Conclusion of the study. The major findings, research
implications and direction for future research will be discussed in this chapter.

REFERENCE S

1- Aloke Ghosh. (2004). “Increasing Market Share as a Rationale for Corporate Acquisitions”, Journal of Business
Finance & Accounting, 31. 1 & 2, 209-247.
2- Amitabh Gupta (2008)“Market Response to Merger Announcements”The Icfai Journalof Applied Finance,Vol.14,
No.8, 2008.
3- Dr.A. Ramachandran & N.Kavitha (2008) “Financial Performance of New Private Banks With Other Bank Groups
in the Banking Industry” Indian journal of Finance.August, 2008 PP. 33- 38.
4- D Satyanarayana, D. G. (2017). A case study on mega merger of SBI with its five Subsidaries. National Journal of
Multidisciplinary Research and Development , 2 (1), 22-25.
5- Dr. A.N.Tamragundi, D. S. (2016). Impact of mergers on Indian Banking Sector: A comparative study of Public
and Private Sector merged Banks. Acme Intellects International Journal of Research in Management, Social
Sciences & Technology , 13 (13), 1-18.
6- Dr.Smita Meena, D. K. (2014). Mergers and acquisitions prospects: indian banks study. International Journal of
Recent Research in Commerce Economics and Management (IJRRCEM) , 1 (3), 10-17.
7- Gurbaksh Singh, S. G. (2015). An impact of mergers and acquisitions on productivity and profitability of
consolidation banking sector in india. Abhinav International Monthly Refereed Journal of Research in Management
& Technology , 4 (9), 33-48.
8- Kotnal, D. J. (2016). The economic impact of merger and acquisition on profitability of SBI. International Journal
of Applied Research , 2 (7), 810-818.
9- Neha Verma, R. S. (2013). impact of mergers on firm’s performance: An analysis of the Indian telecom industry.
Asian journal of management research , 4 (1), 163-175.

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10- Sulagna Das, A. D. (2014). A study on NPA of public sector banks in india. IOSR Journal of Business and
Management (IOSR-JBM) , 16 (11), 75-83.

Submitted by

DIBAKAR SAHOO
[Ph.D - Research Scholar]

Approved by

Prof. BHAGABAN DAS


PG Department of Business Management,
Fakir Mohan University, Balasore, Odisha

[Research Supervisor]

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