A Wave of Mergers and Acquisitions: Are Indian Banks Going Up a Blind Alley?

Abstract

Mergers and acquisitions are strategic decisions taken for maximization of a company’s growth. But the point of the matter is, how far does the empirical evidence support this notion? An examination of the existing literature suggested no conclusive evidence about the impact of M&A on corporate performance. Therefore, this article investigates the mergers in the Indian Banking industry to find out whether Indian banks have achieved performance efficiency during the post-merger period namely in the areas of profitability, liquidity, shareholders wealth and share price volatility. Basically, two methods are employed to compare pre-post merger performance, of Indian banks from 2000 to 2011. First, paired sample t-test determines the significant differences in financial performance before and after the merger activity, and second, a standard event study approach examines the announcement effect of mergers and acquisitions on share price volatility (event window of 120 days) and the efficiency of the Indian stock market.

An overall assessment (accounting performance measures and stock market reaction) of mergers in Indian banking sector indicates absence of any significant impact on their financial performance. The merger in Indian banks only brings significant improvement in EPS and Market value to book value of equity. The study exposed the fact that the stock prices react significantly to merger announcements in the short period (30 days pre- and post-merger announcement) but not in long period which also indicated that Indian stock market is efficient in the long-run.