Impact of Mergers and Acquisitions on Shareholder Wealth in Indian Banks: A Data Envelopment Analysis Approach

Impact of Mergers and Acquisitions on Shareholder Wealth in Indian Banks: A Data Envelopment Analysis Approach

Copyright: © 2024 |Pages: 26
DOI: 10.4018/979-8-3693-0255-2.ch014
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In today's changing business environment characterized by complexity and volatility, the Indian banking sector is witnessing tough competition from national and multinational players. In this study, the authors studied the Indian bank mergers between 2006 and 2018 to measure the impact of mergers and acquisitions (M&A) on efficiency in financial performance. A sample of four Indian banks—State Bank of India, Bank of Baroda, HDFC Bank, and Kotak Mahindra Bank—was selected based on market capitalization. This chapter evaluated five years of pre- and post-merger financial efficiency to measure the impact of M&A on efficiency in financial performance. The authors considered seven critical variables impacting the performance of Indian banks for the study. The non-parametric technique data envelopment analysis (DEA) is used for efficiency measurement over the period. The study shows that mergers and acquisitions positively impact the enhancement of financial efficiency.
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All the business houses accommodate operations with changes which are only constant in today’s economic scenario. The objectives of profit maximization or cost minimization have become direct proportional to the growth of the business. The competitive global world has adopted Merger and Acquisition (M&A) as a corporate strategy to survive and experience growth. Inorganic growth, expansion, diversification and restructuring of corporate sectors are the outcomes of M&A. Synergistic impact originated by M&A increases efficiencies to achieve the target strategy. In recent times, M&A has become an important instrument all over the world to lift the financial and economic status of a nation providing synergy to companies to face the challenges of increased worldwide competition and rapid growth of markets (Distler, 2018). Synergy to experience growth in term of sales, expansions in operations, enhancement of market share, reduction of cut-throat competition and overall cost of production, wealth, and profit maximization lead to consolidation of business resulted through mergers and acquisitions which have been taking momentum since 1991 in India. There are multiple reasons, motives, economic forces, and institutional factors that can be taken together or in isolation, which influence corporate decisions to engage in M&A (Khemani, 1991). Mergers and Acquisitions in banking sectors in India have rapidly taken momentum as it is witnessed in 2017 when State Bank of India acquired most of the public sector banks which subsequently forced other public sectors banks Like Punjab National Bank and Bank of Baroda to adopt the same strategy to face the challenges. Mergers and acquisitions help the banks to achieve significant growth in their day-to-day operations, help in minimizing their expenses to a considerable extent and reduces its competition as merger eliminates competitors from the banking industry. The main objectives of instigating the Banks through mergers and acquisitions is to plan for gaining ‘cost efficiency’ by improving performance to result in maximizing profit by eliminating tough competition.

Indian Banking system started its journey in 1770 when Bank of Hindustan started its operation to help colonial government for effecting fund transfer. Subsequently, Bank of Bombay in 1840, Bank of Calcutta in 1840 and Bank of Madras in 1843 got established under the charter of British East India company. First bank mergers took place in India in 1921 when all these four banks merged and formulated Imperial Bank of India. The concept of nationalization of bank came in 1955 when Imperial Bank of India was nationalized on 1st July 1955 with the name of State Bank of India along with its 8 associate banks. Government of India nationalized 14 banks on 19th July 1969 and 6 banks on 15th April 1980. The year 1991 is reckoned as the year of industrial development in India when Indian Government initiated the liberalization policy and started issuing licenses to private banks which resulted massive growth in Indian banking sector. Mergers and Acquisitions in banking sectors in India taken the momentum with the recommendation of Narasimha Committee in 1988 for Mergers among the strong banks (Rajamani & Ramkrishnan, 2015). Reserve Bank of India (RBI) always plays the role to protect the interest of depositors and rescue the banks from liquidation with preventive measures to abstain banks from unfair practices. To achieve this, RBI recommends forced or hostile mergers to merge weak banks with strong banks. On the contrary, friendly, or voluntary mergers are also recommended by the RBI to have synergistical impact on market dynamics, business diversification, economies of scale, strong credit rating, minimization of costs and enhancement of efficiency effectively (Madan Lal Singla, 2015).

Key Terms in this Chapter

Mergers and Acquisitions (M&A): Business activities where companies are combined or purchased to consolidate market presence and enhance operational efficiency.

Data Envelopment Analysis (DEA): A method used to assess the efficiency and productivity of decision-making units, like banks, by comparing various input and output factors.

State Bank of India: The largest public sector bank in India, playing a key role in the Indian banking system and known for its extensive reach and services.

Performance Measurement: The process of evaluating the effectiveness and efficiency of a company's operations, typically involving financial and operational indicators.

Financial Efficiency: The effectiveness with which a bank or financial institution manages its resources to maximize profits and minimize costs.

Market Capitalization: The total market value of a company's shares of stock. It is used as a measure of corporate size and health in the financial industry.

Kotak Mahindra Bank: An Indian private sector bank recognized for its innovative banking practices and significant role in the Indian banking landscape.

Non-Parametric Techniques: Statistical methods that do not assume a specific data distribution, often used in diverse research areas for more flexible analysis.

HDFC Bank: A major Indian banking and financial services company known for its significant presence in the Indian banking sector.

Indian Banking Sector: The network of banking institutions operating in India, comprising a mix of public sector, private sector, and foreign banks.

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