Mergers and Acquisitions in Banking Sector

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MERGERS AND AQUISITIONS IN BANKING SECTOR

Research project submitted to

Deppt. Of Management Studies
and
Computer Applications
For

Partial fulfilment for award of degree in
Masters of Business Administration,
(MBA)

Punjab Technical University, Jalandhar.
(2011)

Supervised By: Submitted By: Dr. H. S. Gill Ravinder Preet Assistant Professor Univ. Roll No. 90032265819 A. C. E. T Amritsar

CHAPTER-I

INTRODUCTION

Globally mergers and acquisitions have become a major way of corporate restructuring and the financial services industry has also experienced merger waves leading to the emergence of very large banks and financial institutions. The key driving force for merger activity is severe competition among firms of the same industry which puts focus on economies of scale, cost efficiency, and profitability. The other factor behind bank mergers is the “too big to fail” principle followed by the authorities. In some countries like Germany, weak banks were forcefully merged to avoid the problem of financial distress arising out of bad loans and erosion of capital funds. Several academic studies (Berger, 1999) examine merger related gains in banking and these studies have adopted one of the two following competing approaches. The first approach relates to evaluation of the long term performance resulting from mergers by analyzing the accounting information such as return on assets, operating costs and efficiency ratios. A merger is expected to generate improved performance if the change in accounting-based performance is superior to the changes in the performance of comparable banks that were not involved in merger activity. An alternative approach is to analyze the merger gains in stock price performance of the bidder and the target firms around the announcement event. Here a merger is assumed to create value if the combined value of the bidder and target banks increases on the announcement of the merger and the consequent stock prices reflect potential net present value of acquiring banks.

Strategic alliances and Mergers and Acquisitions (M&A) are the dominant corporate strategies followed by organizations looking for enhanced value creation. The growing tendency towards mergers and acquisitions (M&As) world-wide, has been driven by intensifying competition. There is a need to reduce costs, reach global size, take benefit of economies of scale, increase investment in technology for strategic gains, desire to expand business into new areas and improve shareholder value. During the first wave (1990-95), the Indian corporate houses seem to have been bracing up to face foreign competition while the second wave (1995-2000) experienced a large presence of multinational firms (Beena 2000). The third wave of M&As in India (2000-till date) is evident of Indian companies venturing abroad and making acquisitions in developed and developing countries and gaining entry abroad. The relative size of target and acquiring firm has also increased. The size differences between the bidder and target firms influence acquisition performance and large acquisitions would have a greater combination potential (Kitching 1967). M&As also determined, to a large extent, the nature of foreign investment in the country during this period. M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals. Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the...
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