Mergers and acquisitions in the Indian banking sector: an analytical study

Abstract

Mergers and Acquisitions (MandAs) continue to be a significant force in the restructuring of the financial services industry. The Indian Commercial Banking Sector, which has played a pivotal role in the country?s economic development, is currently passing through an exciting and challenging phase. With the onset of economic reforms, the banking sector in India has embarked upon mergers and acquisitions to capture the synergistic benefits like economies of scale and scope, in the face of increasing competition from domestic as well as foreign players and rapid technological developments. Several research studies examine merger related gains in banking and these studies have adopted one of the two approaches, based on either accounting information or market prices. The first stage of the research evaluates the impact of merger on financial performance of merging commercial banks in India by analyzing the accounting based information such as Return On Assets(ROA), operating costs and efficiency and productivity gains. A merger is expected to improve performance of the merging entities, if the resulting change in accounting based measures is superior to the change in the performance of comparable banks that were not involved in mergers. The findings (results of the t-test) indicate that while there is significant difference in a majority of business and productivity parameters before and after merger, the results also point to the fact that there is no significant difference in quite a few operational and profitability parameters(ratios). The results are at best mixed. The second stage of the research examines the post-merger efficiencies of the select commercial banks using the non-parametric Data Envelopment Approach (DEA).In this context, Malmquist Productivity Index (MPI) and Tobit regression techniques have been employed to evaluate the impact of mergers on the technological progress and to identify the critical factors influencing the efficiency of the Indian commercial banking sector respectively.