Merger and Acquisitions are strategic decisions taken for maximization of a company's growth by increasing its production and marketing operations. Therefore many companies find the best way to go ahead and like to expand ownership precincts through Merger and acquisitions (M&As). Merger creates synergy and economies of scale. For expanding the operations and cutting costs, business entrepreneur and banking sector are using Merger and Acquisitions worldwide as a strategy for achieving larger size, increased market share, faster growth, and synergy for becoming more competitive through economies of scale. The companies must follow legal procedure of Merger and Acquisitions (M&As) as enshrined by RBI, SEBI, Companies’ Act 1956 and Banking Regulation Act 1949. The mergers which are taking place in the present era are mainly motivated by strategic and economic gains in the longer run, synergy opportunities may exist only in the mind of corporate leaders. A merger can also improve company’s standing in the investment community; bigger firms often have an easier time raising capital than smaller ones. Many of the mergers were successful but history trends show that roughly two-third of the merger would disappoint on their own terms, which means they lose value in the stock market. But still this strategy used by corporate in a wide assortment of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional businesses are purported at gaining strength, expanding the customer base, cutting competition or entering into a new market or product segment.

The present study has aimed to analyze the post-merger operating performance appraisal of Acquiring Banks in terms of profitability in the Indian Banking Industry and compare the pre and post-Merger performance of Acquiring Banks.

1) Merger of weak banks- Practice of merger of weak banks with strong banks was going on in order to provide stability to weak banks but Narsimhan committee opposed this practice. Mergers can diversify risk management. 2) Increase in market competition- Innovation of new financial products and consolidation of regional financial system are the reasons for merger. 3) Markets developed and became more competitive and because of this market share

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4) Capability of generating economies of scale when firms are merged. 5) Transfer of skill takes place between two organization takes place which helps them to improve and become more competitive. 6) Globalization of economy impacted bank mergers. 7) New services and products- Introduction of e- banking and some financial instruments / derivatives. 8) Technology- Removal of entry barrier opened the gate for new banks with high technology and old banks can’t compete with them so they decide to merge. 9) Positive synergies- When two firms merge their sole motive are to create a positive effect which is higher than the combined effect of two individual firms working alone. Two aspects of it are cost synergy and revenue synergy. Cost Synergy is the savings in operating costs expected after two companies that complement each other's strengths join. Revenue Synergy is refers to the opportunity of a combined corporate entity to generate more revenue than its two predecessors stand-alone companies would be able to generate.

1) Diversification- When two firms merge their risk in investing assets diversify accordingly. When a firm is operating alone then they don’t have many options to diversify their portfolio investment that they can get after merger. 2) Mergers and Acquisition allows firms to obtain efficiency gains through cost reductions (cost synergies) , revenue increases( revenue synergies). 3) Broader array of products- When two firms merge they have diversified variety of products and after the merger each consumer in both the firms will be benefited with the range of products or services to choose from. 4) Mergers and Acquisition helps firms to widen its consumer portfolio but it also leads to a more diversified range of services and offer scope economies by optimizing the synergies between the merged activities. 5) Domestic mergers cut costs for both the partners whereas for the majority of cases sources of revenue was apparent 6) In terms of cost efficiency and revenue efficiency it has been noticed that in domestic merger organisation get the benefit of cost efficiency( reduction in operating cost) and in cross border merger organisation get the benefit of revenue efficiency (increase in revenue) because of the benefit of geographical expansion and diversification. 7) Improvement in the activities of organisation, however, offer benefits from product complementarities which helps to enhance revenues. 8) Efficiency may be improved after merger and acquisition, if the acquiring company is more efficient already and brings the efficiency of the target up to its own level by providing its managerial expertise, policies and other operations.

To substantiate the objectives mentioned above, the hypothesis has been formulated and tested. H0 (Null Hypothesis) = There is no significance difference between the Pre-merger and Post-merger Profitability H1 (Alternative Hypothesis) = There is significance difference between the Pre-merger and Post-merger Profitability

For the purpose of analyzing the profitability of acquiring banks after Merger and Acquisitions various financial and accounting ratios are undertaken. Data of operating performance ratios for up to four years prior and seven years after the Merger and Acquisitions were collected from the financial statement of company’s extracted from the website of money control. With the help of Independent sample t-test the pre-merger spanning for four years and post-merger seven years financial ratios have been compared. The Student’s t- distribution is as follows:

Where is the mean of pre-merger ratios of acquiring bank, is the mean of post-merger ratios acquiring bank, and are the number of observations of 1st and 2nd series respectively. S is the combined standard deviation, is Degree of freedom

Operating Profit Margin = EBIT /Net Sales*100 Net Profit Margin = Net Profit /Net sales*100 Return on Net Worth= Pat /Net Worth*100 Return on Capital Employed = Net Profit /Total Assets*100

Researcher has selected two cases for the study that are shown in table-1. First the Merger of the Global Trust Bank Ltd with the Oriental Bank of Commerce on 14th August 2004, and the second the Merger of the South Gujarat Local Area Bank Ltd with Bank of Baroda on 25th June 2004 has been undertaken. In order to analyze the financial profitability of Acquiring Banks after the merger the Financial and Accounting ratios like Operating Profit Margin, Net Profit Margin, Return on Net Worth & Return on Capital Employed have been calculated. Tables: 2 & 3 show the Pre-merger and the Post-merger financial performance of acquiring bank (Oriental Bank of Commerce) in terms of above ratios. The Premerger financial performance appraisal of the acquiring bank (Oriental Bank of Commerce) on the basis of ratio analysis is done. The operating profit margin for the year 2000 was 73.3314 percent. The net profit margin was 7.35447 percent with RONW & ROCE at 19.50574 and 1.13531 percent. The operating profit margin decreased at 71.8403 percent in 2001 but the net profit margin increased at 11.33495 percent. The RONW & ROCE reduced at 13.101 and However, the RONW & ROCE shows improvement in the year 2002 at 19.79033 and 0.99355 percent. But in the financial year before the merger, the operating profit margin dropped at 69.33823 percent as well as the net profit margin, RONW & ROCE escalate in the year 2003 at 13.86928, 21.66317 and 1.34445 percent. The Post-merger performance appraisal of acquiring bank (Oriental Bank of Commerce) for the very next year declined in terms of operating profit margin at 66.51977 percent but the net profit margin mount at 20.32727 percent. The RONW & ROCE remain unchanged at 21.82349 and 1.34284 percent in the year 2005. The operating profit margin has improved in the year 2006 with 71.03755 percent however the net profit margin, RONW & ROCE reduced at 13.52684, 10.77516 percent and 0.94534 percent. The operating profit margin has increased in the year 2007 at 75.96332 percent but the other ratios like net profit margin & RONW remain unchanged except the return on capital employed show declined with 11.24532, 10.37103 and 0.78555 percent. The net profit margin, RONW & ROCE reduced in the year 2008 at 5.16454, 6.11541 & 0.38941 percent but the operating profit show improved performance and moved up to 84.8385 percent. The net profit margin, RONW &ROCE again shows positive movement in the year 2009 after declined in the previous year at 10.22326, 12.2297 & 0.80422 percent and the only operating profit margin slightly decline in the year 2009 at 78.45936 percent. The operating profit margins again fell at 75.60757 percent and the net profit margin, RONW & ROCE rose in the year 2010 at 11.06236, 13.77381 & 0.82563 percent. The ratio analyses for the year 2011 had declined in terms of operating profit margin, net profit margin, RONW & ROCE moved at 74.36245, 8.71017, 9.48775 & 0.65256 percent. In tables 4 & 5 further shed the light on the Pre-Merger and Post-Merger ratios of Bank of Baroda (Acquiring Bank) which is used for the analysis. The ratio analyses of the Pre-merger period of acquiring bank (Bank of Baroda) for the years 2000 to 2003.The operating profit margin for the year 2000 at 64.51834 percent with the net profit margin was 9.63125 percent along with the ratios like RONW & ROCE at 15.54349 and 0.85789 percent. The operating profit margin and net profit margin declined in the year 2001 at 58.8454 & 4.7706 percent. The RONW and ROCE also dropped off at 8.18346 and 0.43375 percent. Later in 2002 all the ratios such as operating profit margin, net profit margin, RONW & ROCE improved with 65.12541, 9.16659, 14.26212 & 0.76987 percent. In the year 2003 operating profit margin decreased at 64.00915 percent and the ratios like net profit margin, RONW & ROCE improved before the merger of banks at 12.67361, 17.61534 & 1.01125 percent. The Post-merger ratios of acquiring bank for the very next year 2005 were declined, the operating profit margin and

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improved performance as comparing with the previous year, the OPM, NPM and ROCE mount at 53.49295, 11.64732 & 0.72928 percent except the return on net worth 10.54198 percent. For the year 2007, the operating profit margin increased at 64.12472 percent and net profit margin has remained same at 11.4197 percent. The return on net worth and return on capital employed were at 11.86678 and 0.71707 percent. The operating profit margin increased in the year 2008 was at 68.2084 percent and ratios like NPM, RONW & ROCE shows improvement and moved at12.15155, 12.99827 and 0.79928 percent. The operating profit margin and net profit margin showed a positive improvement and moved up to at 69.92945 and 14.75789 percent, while the return on net worth and return on capital employed increased up to at 17.35182 and 0.97939 percent in the year 2009. All the ratios shows positive improvement in the year 2010 the performance of acquiring bank in terms of OPM, NPM,RONW & ROCE and stimulated at 73.00462, 18.31517, 20.24527 & 1.09886 percent. The performance of acquiring bank for the year 2011 continuously increased except the operating profit margin which had slightly reduced. But the net profit margin & return on capital employed moved the highest level at 19.38086 and 1.8351 percent along with return on net worth for the same year was 20.2051 percent. Table 6 shows t-test analysis of case I (the Global Trust Bank Ltd with the Oriental Bank of Commerce). The analysis indicates that the mean of operating profit margin (71.4201 vs 75.2555) and t-value of -1.279 which leads to the conclusion that there is improvement in the Operating Profit Margin after the Merger but not significant statistically, the results also indicate that the mean of Net Profit Margin (10.7754 vs 11.4658) and t-value of -.267 which shows the performance in terms of net profit margin of oriental bank of commerce improved but not significant statistically, it is found that there is increase in the mean of Return on Net Worth (18.5151 vs 12.0823) and t-value 2.254. It seems to have declined so it is considered that it is not affected by merger therefore it is not significant statistically. The mean value of Return on Capital Employed(1.0557 vs 0.8208) and t-value 1.352 which leads to the conclusion that the performance of bank in terms of return on capital employed has declined so it is not significant statistically. Table 7 shows the case II (the South Gujarat Local Area Bank Ltd with the Bank of Baroda). The comparison of the Pre-Merger and Post-Merger operating performance ratios for the sample of banks merger shows that there is no change in the mean of Operating Profit Margin (63.1446 vs 64.0480) and t-value -.174 which is statistically insignificant but there is positive improvement in the Net Profit Margin after the merger with mean value (9.0605 vs 14.0281) and t-value - 2.292 which is however significant the conclusion that it is not significant statistically. The mean value of Return on Capital Employed (0.7682 vs 0.8889) and t- value -0.901 which leads to the conclusion that there is no change in the return on capital employed after the merger therefore it is statistically insignificant. It is therefore concluded that all the financial ratios do not improve after the merger so the performances of banks in terms of financial profitability remain unchanged.

Source: Researcher’s compilation from Report on Trend and Progress, RBI, Various Issues, VIII competition and consolidation, 04 Sep 2008.

Source: Researcher’s compilation from financial statement of Banks retrieved from http://www.moneycontrol.com/stocksmarketsindia/

Source: Researcher’s compilation from financial statement of Banks retrieved from http://www.moneycontrol.com/stocksmarketsindia/

Source: Researcher’s compilation from financial statement of Banks retrieved from http://www.moneycontrol.com/stocksmarketsindia/

Source: Researcher’s compilation from financial statement of Banks retrieved from http://www.moneycontrol.com/stocksmarketsindia/

Source: Researcher’s compilation based on tables 2&3, 5% level of significance

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The analysis suggests that the performance of Oriental Bank of Commerce after acquired global trust bank Ltd has not been improved in terms of Operating Profit Margin, Net Profit Margin, Return on Net Worth & Return on Capital Employed with t- values (-1.279, -.267, 2.254, 1.352) which led to the conclusion that there is no significance difference in all the ratios after the merger and the performance of Oriental Bank of Commerce was not improved in terms of profitability, similarly the performance of Bank of Baroda after acquired South Gujarat Local Area Bank ltd has not been improved in terms of Operating Profit Margin, Return on Net Worth & Return on Capital Employed. Only Net Profit Margin shows improvement after the merger with t-values (-.174,-2.292,-.440,-901) which concludes that there is no difference in the mean value of the Pre-Merger and Post-Merger operating performance of acquiring (Bank of Baroda) and concluded that it is not significant statistically. The profitability of both acquiring banks has not improved after the merger, therefore Null Hypothesis is accepted and Alternative Hypothesis is rejected. The results say that though Merger is helpful for expansion and growth but no guarantee for improving the profitability of acquiring banks.

It is clear from the analysis that the only hypothesis set for the validation has been accepted. Both the acquiring banks (Oriental Bank of Commerce & Bank of Baroda) have not created positive difference after the merger in terms of profitability. For comparing the accounting ratios like, Operating Profit Margin, Net Profit Margin, Return on Net worth etc. of the Pre and Post-merger the t-test is applied. After the merger we see that the various financial parameters of the bank performance have not improved in both cases, the profits are not visible but it may be possible that improved performance of merged Bank will show in later years. There are various motives, which attract the bank for merger but it is not necessary to achieve all objectives after merger. The size of the bank may increase but no guarantee to increase net profitability after merger. Result concluded that the merger and acquisitions is the useful tool for growth and expansion in the Indian banking sector. Future research in this area could be the study of impact of merger on shareholder’s wealth and take more banks to a larger sample concerning a longer time period for the study which would have given better result.

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