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CHAPTER 1 INTRODUCTION

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1.1 INTRODUCTION After the economic reforms introduced by the Government of India in 1991, Indian economy have undergone major transformation and structural changes in all sectors. Mergers and Acquisitions are the major outcome of the financial transformation process occurred in the Indian Banking sector. The key driving force for the merger activity is severe competition to attain market power and the creating synergies and cost- revenue benefits. Consolidation in the banking industry is crucial from various aspects. The factors inducing consolidation include technological progress, excess retention capacity, emerging opportunities and deregulation of various functional and product restrictions. A strong banking system is critical for sound economic growth so it is natural to improve the comprehensiveness and quality of the banking system to bring efficiency in the performance of the real sectors. In the current scenario, if banks are to be made more effective, efficient and comparable with their counterparts functioning abroad and competitors from abroad, they would need to be more capitalized, automated and technology oriented, even while strengthening their internal operations and systems. It would be necessary that Bank Consolidation assumes significance from the point of view of making Indian banking strong and sound apart from its growth and development to become sustainable. The Indian banks are slowly but surely moving from a regime of large number of small banks to small number of large banks. The new era is going to be one of consolidation around identifying core competencies.

1.2 GENESIS OF THE PROBLEM The banking industry in India has been in the process of transformation and consolidation ever since 1961. The Banking Regulation Act, 1949 empowers the regulator with the approval of

the government to amalgamate weak banks with stronger ones. Majority of the mergers in India have been crafted to bail out weak banks to safeguard depositors interest and to protect the financial system. The report of the Committee on Banking Sector Reforms (the Second Narasimham Committee - 1998), however, discouraged this practice. It recommended a multi-tier banking system with existing banks to merge into 3-4

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international banks at the top most level, 8-10 national banks engaged in universal banking at the next level and local and rural banks confined to specific regions. Prior to 1999, the amalgamation of banks was primarily triggered by the weak financials of the bank being merged, whereas in the post-1999 period, there have also been mergers between healthy banks driven by business and commercial considerations. Thus, the new generation mergers on the lines proposed by the Narasimham Committee are a recent phenomenon in the country.

1.3 MAJOR CONCEPTS Merger is a combination of two or more companies into one company. In India, mergers are called as amalgamations, in legal parlance. The acquiring company, (also referred to as the amalgamated company or the merged company) acquires the assets and liabilities of the target company (or amalgamating company). Typically, shareholders of the amalgamating company get shares of the amalgamated company in exchange for their existing shares in the target company. Merger may involve absorption or consolidation.

Benefits of Consolidation In Business the benefit achieved from the thing is the most important than anything else. Any bank goes in for the merger or acquisition due the benefits which are associated with it .Many papers talk about the benefits achieved, we will check empirically if the benefits of the merger in Indian banking sector are really achieved and are they realized over a short period of time. The details for this are given in the empirical methods section below .We have already talked about the motives of the banks to merger and on the lines of these motives, the benefits achieved by the banks after merger are perceived to be as 1. As the single line of business after the merger can be expanded and thus the cost effectiveness is achieved 2. After the merger the bank will have large number of branches and its visibility will be at more places which will help it to build the brand image. Brand plays a big role in increasing the revenue of the bank

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3. Due to the merger the banks get an access to large amount of capital base which in effect leads to the greater avenues for the bank to invest money and earn higher rate of return and this increases the bottom line of the banks 4. Also due to the increase in the scale of the deposits the banks can get higher amount of credit at a lower value .The banks credit worth also is increased due to the large deposit size 5. The large amount of fixed cost which is required for collecting the data of the customers is rationalized by the increase number of the products sold to the customer base by the merged entity .Thus the per product fixed cost gets reduced 6. Also cross selling of the products to the existing customer base can also help increase the revenue 7. This also helps in the diversifications of the products which help to reduce the risk as well.

Synergy Synergy implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It is defined as two plus two equal to five (2+2>4) phenomenon. Synergy refers to benefits other than those related to economies of scale. Operating economies are one form of synergy benefits. But apart from operating economies, synergy may also arise from enhanced managerial capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementarily of resources and skills and a widened horizon of opportunities. An undervalued firm will be a target for acquisition by other firms. However, the fundamental motive for the acquiring firm to takeover a target firm may be the desire to increase the wealth of the shareholders of the acquiring firm. This is possible only if the value of the new firm is expected to be more than the sum of individual value of the target firm and the acquiring firm. For example, if A Ltd. and Ltd. decide to merge into AB Ltd. then the merger is beneficial if V (AB)> V (A) +V (B) Where;

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V (AB) = V (A) V (B) = =

Value of the merged entity Independent value of company A Independent value of company B

A merger which results in meeting the test of increasing the wealth of the shareholders is said to contain synergistic properties. Synergy is the increase in the value of the firm combining two firms into one entity i.e., it is the difference value between the combined firm and the sum of the value of the individual firms.

1.4 NEED FOR THE STUDY "Consolidation alone will give banks the muscle, size and scale to act like world-class banks. We have to think global and act local and seek new markets, new classes of borrowers. It is heartening to note that the Indian Banks' Association is working out a strategy among banks," P. Chidambaram. Consolidation in the banking industry is crucial from various aspects. The factors inducing consolidation include technological progress, excess retention capacity, emerging opportunities and deregulation of various functional and product restrictions. A strong banking system is critical for sound economic growth so it is natural to improve the comprehensiveness and quality of the banking system to bring efficiency in the performance of the real sectors. So it is necessary to identify the whether the consolidations happening in the banking industry is being successful. This will help in the future consolidations happening in the banking industry which will take the Indian banking industry to a greater level. for consolidation

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CHAPTER 2 REVIEW OF LITERATURE

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2.1 IMPORTANCE OF REVIEW OF RELATED LITERATURE Literature review has helped in Identifying relationships between ideas and practices, Discovering important variables relevant to the topic, Synthesizing and gaining a new perspective, Relating ideas and theory to applications and Gaining methodological insights

2.2 STUDIES CONDUCTED ABROAD THE EFFECT OF MERGERS ON BANK PERFORMANCE: EVIDENCE FROM BANK CONSOLIDATION POLICY IN INDONESIA Source: SSRN Author: Viverita, Department Of Management, University of Indonesia Year : 2008 An inclusive merger mechanism became one option for the Indonesian banking industry to response the Asian Financial crisis under its bank consolidation program. This study gives insight into the effectiveness of economic policy reforms in the Indonesian banking industry. This study examines the impacts of merger on commercial banks performance in Indonesia during 1997 to 2006. The period was characterized by financial deregulation, the Asian economic crisis, and bank restructuring programs. The traditional financial ratios and non-parametric Data Envelopment Analysis approach is employed to investigate any efficiency gains both in the pre and post merger periods, in order to detect whether bank mergers produce any efficiency gains as well as factors contributed to the performance. The evidence shows that merger created synergy as indicates by the statistically and significantly increasing the post-merger financial and productive efficiency performances.

AN EMPIRICAL STUDY OF FIRMS MERGER MOTIVATIONS AND SYNERGY FROM TAIWANESE BANKING INDUSTRY

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Source: SSRN Author: Ting Kun Liu, Dept of Finance , Chaoyang University of Technology, Taiwan Year : 2010 In recent years, the activities of merger from global enterprise have become more frequently. Most literatures focus on the statements and explanations of the reasons of merger, but without using empirical model and data to further merger motivations analysis. Besides, they always exclude the financial industry. What are the motivations that influence firms merger? Whether firms can reach the expected effects after merger? These are issues that worthy to discuss. Therefore this paper focuses on financial industry to detect the activities of merger from banking industry. This paper constructs the panel data of financial industry by applying logistic regression model to explore the merger motivations and the impacts of variables on merger. Further by using factor analysis we discuss the difference of performance between holding company banks and ordinary banks after merger. The empirical results show that according to the performance scores there are six banks of holding company on the top ten lists. This reveals that the merger between financial institutions have improved merger synergy.

FINANCIAL SYNERGY OF BANK MERGERS: THE CASE OF BANK OF AMERICA Source: SSRN Author: Ting Kun Liu, Dept of Finance , Chaoyang University of Technology, Taiwan Year : 2010 The purpose of this study is to identify and describe some of the reasons why BOA's acquisition was a rational step for management to take. This analysis will look at the cost and assets management aspects of the two entities by comparing costs and resources for a five-year period prior to the merger, and by looking at the surviving entity's (BOA's) costs and management of assets for the three-year

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period after the merger. The first part of the study examines the non-interest expense items in an attempt to demonstrate the economic benefits derived from the changes in the cost of operations. The second part examines the effectiveness of managing income-producing assets. The conclusion addresses synergy resulting from combining the management of assets and other resources of the two entities. BANKS CONSOLIDATION IN NIGERIA: A SYNERGISTIC HARVEST Source: SSRN Author: Enyi Patrick, Dept of Accountancy, Ebonyi University, Abakaliki Year : 2009 In order to strengthen the competitive and operational capabilities of banks in Nigeria with a view towards returning global and public confidence to the Nigerian banking sector and the economy in general, the Central Bank of Nigeria instituted a banking reform which saw most of the then existing 89 banks merging with each other. It was earlier speculated in some financial analysis quarters that the exercise might turn out to be one of those overblown hypes of an ailing economy. This, however, has turned out to be the opposite as most post-merger results tend to highlight that financial synergies exist. This paper tries to evaluate the authenticity of this assertion. To do this, pre-merger and post merger financial statements of 4 consolidated banks were obtained, adjusted, carefully analyzed and compared. The result revealed that all the four merger groups produced in addition to operational and relational synergy, financial gains far more than the 2+2=5 synergistic effects. The validating two-way ANOVA test also revealed that variations in shareholders funds can significantly affect the value of total assets of a bank. BANKING SECTOR CONSOLIDATION IN NIGERIA: ISSUES AND CHALLENGES Source: SSRN Author: Dr K.S.Adeyemi, Executive Director, University of Nigeria Year : 2007

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This paper examines the issues and challenges arising from the recently concluded banking sector reform program in Nigeria. It notes that since the consolidation programme was policy induced, the 18 months given for total compliance appeared inadequate, given the number of activities required for a merger or acquisition to be successfully consummated. The author, however, acknowledges that the programme could lead to the emergence of a sound and efficient financial system that would support the growth and development needs and aspirations of the Nigerian economy. Towards fully harnessing the synergies and potentials of the consolidation programme, the paper calls for continuous training and retraining of staff as well as proper handling of post-consolidation challenges.

2.3 STUDIES CONDUCTED IN INDIA MERGERS IN INDIAN BANKING SECTOR-MOTIVES & BENEFITS Source: SSRN Author: Akhil Bhan Year : 2008

This paper gives you an insight into the motives and benefits of the mergers in Indian banking sector .This is done by examining the eight merger deals of the banks in India during the period of reforms from 1999 to 2006 .This paper also uses the empirical methods T-test to study the short term change in the returns of the banks due the merger and EVA (Economic Value added) method to study the efficiencies or benefits achieved due to the merger .Through this paper and the sample taken for analysis it has been concluded that the mergers in the banking sector in the post reform period possessed considerable gains which was justified by the EVA of the banks in the post merger period.

IMPACT

OF

MERGER

ANNOUNCEMENTS

ON

SHAREHOLDERS

WEALTH:EVIDENCE FROM INDIAN PRIVATE SECTOR BANKS Source: SSRN

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Author: Manoj Anand and Jagandeep Singh Year : 2008 This study analyses five mergers in the Indian banking sector to capture the returns to shareholders as a result of the merger announcements using the event study methodology (Brown and Warner, 1980, 1985; and MacKinlay, 1997). These are mergers of the Times Bank with the HDFC Bank, the Bank of Madura with the ICICI Bank, the ICICI Ltd. with the ICICI Bank, the Global Trust Bank with the Oriental Bank of Commerce, and the Bank of Punjab with the Centurion Bank. The Fama and Miller (1972) market model and Cox and Portes. (1998) two factor model form the theoretical framework of this study. The aim is to understand the shareholder wealth effects of bank mergers.

MOTIVES FOR MERGERS AND ACQUISITIONS IN THE INDIAN BANKING SECTOR-A NOTE ON OPPORTUNITIES & IMPERATIVES Source: SSRN Author: Jay Mehta and Ram Kumar Kakani Year : 2006

The aim of this paper is to probe into the various motivations for mergers and acquisitions in the Indian Banking sector. Thus, literature is reviewed to look into the various motivations behind a banks merger/ acquisition event. The paper also takes us through the international mergers & acquisitions scenario comparing it with the Indian scene. Given the increasing role of the economic power in the turf war of nations, the paper looks at the significant role of the state and the central bank in protecting customers interests vis--vis creating players of international size. While, gazing at the mergers & acquisitions in the Indian Banking Sector both from an opportunity and as imperative perspectives, the paper also glances at the large implications for the nation.

DOES THE FUTURE OF INDIAN PUBLIC SECTOR BANKS LIEIN MERGERS & ACQUISITIONS Source: SSRN

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Author: Indrajit Mallick Indian PSBs have long been burdened with the responsibility of development banking through mobilizing deposits at the countryside and providing finance to agriculture and small scale industries at subsidized rates. For some PSBs today, this implies the need for mergers. Given the current distribution of assets and portfolio performance of the PSBs, most of them belong to the residual category. The process of M&A will be socially beneficial and value adding if PSBs are privatized before placing merger bids. Since bank privatization is not immediately on the anvil, one may have to resort to relatively more distortionary means like partial privatization and restructuring the incentives of the bank management.

ASSESSING THE STRATEGIC AND FINANCIAL SIMILARITIES OF MERGED BANKS: EVIDENCE FROM VOLUNTARY AMALGAMATIONS IN INDIAN BANKING SECTOR Source: SSRN Author: Sony Kuriakose and Gireesh Kumar Year : 2010

Synergies arising from the increased efficiency, cost savings, economies of scale etc are the principal factors behind the voluntary amalgamations in the Indian banking sector. Even though, mergers are the major way to adhere to the regulatory requirements and the source of inorganic growth, the strategies adopted by the merging entities have to be critically analyzed, because mergers seem to produce strategic and financial growth and also have considerable public policy implications. The merging partners strategically similarities and relatedness are very important in the synergy creation because the relatedness of the strategic variables have a significant impact on the bank performance. On the basis of existing literature, banks should be similar in some areas and dissimilar in some other areas in order to improve post merger performance. In this paper we use firm specific data to study the strategic similarities of bidder and target banks in the voluntary amalgamations in the Indian banking sector. All relevant strategic and financial variables of respective banks are considered to assess their

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relatedness. It is assumed that balance sheet resource allocation is the indicative of the strategic focus of the banks.

RE-ENGINEERING OF BANKING SECTOR THROUGH MERGER & ACQUISITION Source: SSRN Author: Dr Murthy Pamarty

Merger and acquisition of Indian banking has occupied an important place amongst the personnel and policy-makers of banking system in recent years, as a sequel to economic reforms to bring in equilibrium sand stability in the banking industry. Mergers have been considered as a possible avenue for improving the structure and efficiency of the banking industry. There is variety of reasons to induce merger proposals. Some of them are Synergy, Tax considerations, Economies of scale in operations, Diversification. Merger taking place in India are in line with the trend of consolidation that has characterized the financial services industry and, in particular, the banking industry. The financial and strategic management aspect of merger is to be analyzed from several angles and the study evaluated financial implications before and after mergers in the banking industry. Further, the reaction of security prices to announcement of M & A decisions are also studied.

Bhatnagar.R.G.(2001) in his paper Banking too much on Mergers pointed out that the urge to merge is overwhelming in the corporate sector in the context of globalization. However, size base mergers need not be the best of strategies especially in the banking sector. A cost cut strategy is a better option. The author remarked that bank mergers in India might facilitate compliance with the stipulation of dilution of the promoters stake to 40%.

Deeksha Verma (2001) in her study stated that Indian banking system has decisively entered the consolidation phase through mergers. The merger of UTI bank with Global Trust Bank enhanced the branch network to 158, most of them

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in metro and urban areas. The challenges in future will be in the form of integration of work culture and higher exposure of Global Trust Bank to sensitive sector financing. According to Sangita Mehta (2001), in the study of major financial institutions of India like IDBI, IFCI and ICICI etc., are in a restructuring phase. These institutions are shunned by the bourses because of the problems of rising nonperforming assets and high fund costs. The author pointed out that Government interference and disparity in pay scales are the hindering factors towards restructuring. The article entitled Mergers The Emerging Reality written by Giridharan. R. (2001) points out the possible causes for the explosive spurt in mergers that have rocked the banking industry. The author elaborated the risk associated with mergers and remarks that the success or otherwise of mergers would depend on the success of the measures discussed in the article. ALTERNATIVE FOR PAYMENT IN M & A DEALS: a Strategic Evaluation of the Choices at Hand by Anurag Saxena and Naresh Grandhy (2001) proposes to demystify the strategic intent behind each of the modes of payment in M & A deals. The issues including Indian legal framework, the tax and accounting implications have also been discussed. The authors attempt to deal with quantifying the financial risk involved in such deals.

ASSESING THE STRATEGIC AND FINANCIAL SIMILARITIES OF MERGED BANKS:EVIDENCE FROM VOLUNTARTY AMALGAMATIONS IN INDIAN BANKING SECTOR Source: SSRN Synergies arising from the increased efficiency, cost savings, economies of scale etc are the principal factors behind the voluntary amalgamations in the Indian banking sector. Even though, mergers are the major way to adhere to the regulatory requirements and the source of inorganic growth, the strategies adopted by the merging entities have to be critically analyzed, because mergers seem to

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produce strategic and financial growth and also have considerable public policy implications. The merging partners strategically similarities and relatedness are very important in the synergy creation because the relatedness of the strategic variables have a significant impact on the bank performance. On the basis of existing literature, banks should be similar in some areas and dissimilar in some other areas in order to improve post merger performance. In this paper we use firm specific data to study the strategic similarities of bidder and target banks in the voluntary amalgamations in the Indian banking sector. All relevant strategic and financial variables of respective banks are considered to assess their relatedness. It is assumed that balance sheet resource allocation is the indicative of the strategic focus of the banks.

Ravens craft and Scherer (1989) have examined pre-merger (251 companies) and post-merger (2732 companies) performance for the period 1950-1977 in US. He used cash flow over sales for analysis and found negative abnormal return in postmerger period.

Healy, Pelpu, and Ruback (1992) addressed the issue of long term economic gains due to mergers in US corporate sector. They used cash flow analysis [sales-(cost of goods sold+selling and administration expenses) + depreciation + goodwill expenses].They found an increase of 2.8% in operating cash flow. They also found a positive correlation Figure 1. Reasons and context of bank mergers in India 53 between this gain and share price movement.

Ghosh and Jain (2001), using the same methodology, they analysed 315 mergers in US and found positive abnormal return. Further they suggested that cash offers are associated with higher performance.

Cornett and Tehranian (1998) compared the pre and post merger performance and found positive abnormal growth. Sara B Moeller, Federric.P.Schcingemann and Rane N .Statz (2005) analysed 12023

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acquisitions (1980-2001).They observed that acquiring shareholders lost 12% around acquisition announcement. Dirk Hackbarth and Erwan Morellec (2008) have developed a framework to analyse dynamics of stock returns and firm level betas. They concluded that a run-up (rundown) in the beta of bidding firm prior to the announcement and a drop (rise) in beta at the time of announcement when acquiring firm has a higher (lower) preannouncement beta than its target. Geoffrey Meeks (1977) explored the gains from merger for a sample of 233 transactions in UK (1969-1971). He analysed the data by ROA (Return on assets) method and found underperformance in 75% deals. Jason Karceski, Steven ongena, and David smith (2005) established the impact on welfare of the borrowers. They took the sample of Norwegian banks and found 8% decline in the return of targets borrowers and increase in acquirers borrowers. Marina Martinova, sjoerd Oosting and Luc Renneboog (2006) investigated the long term profitability of companies in continental Europe or UK. They found abnormal return for the acquirer. Sharma and Ho (2002) observed negative return post- merger performance from a sample of 36 Australian companies. Rehman and Limmack (2004) investigated 94 mergers in Malaysia (1998-1992). Using operating cash flow returns on assets they found positive merger gains. Cybo-Ottone and Murgia.s (2000) event study analysis of 54 mergers and acquisitions deals covering 13 European banking markets of the European Union and the Swiss market for the period 1988 to 1997 find positive and significant increase in the shareholder value of bidder and target banks at the time of the deal.s announcement. Ismail and Davidson.s (2005) examination of 102 merger announcements in the European financial services industry between 1987 and 1999 finds positive returns for target bank shareholders in different event windows.

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Penas and Unal (2004) find positive and significant adjusted returns of merging banks. bonds across premerger and announcement months due to diversification gains and gains associated with too-big-to-fail statu.

Pandey (2001) has examined the issue of takeover announcements, open offer and its impact on shareholder value in the Indian corporate sector. Kumar and Rajib (2007) identify the characteristics of merging firms in India based on their study of 227 acquirer and 215 target firms during the period 19932004.

Pawaskar analysed 36 mergers (1992-1995) using operating cash flow returns and do not found any increase in profitability Rajesh Chakrabarti (2008) examined both domestic as well as foreign deals, and found that they are associated with positive announcement results and in long term it is worse than pre-merger performance.

M.Jayadev and Rudrasensarma (2007) analysed the critical issues of consolidation in the Indian banking sector from the point view of shareholders and managers. They found that in forced merger, both bidders and targets share price has been reduced. In case of voluntary merger results are mixed.

Levine and Aaronovich (1981) and Lubatkin (1983) are introduced the relevance of studying the strategical and organisational aspects of M&As. Ramaswamy (1997) analysed the impact of strategic similarities on bank performance in US and found banks exbiting similar features result in better performance.

Yener Altunbas, David Margues Ibanez (2004) analysed the impact of strategic similarities of bidder and target banks in European banking sector and they found different results for both domestic and cross-boarder mergers.

Andreas Behr and Frank Heid (2008) suggested a new matching strategy to control for the selection bias.

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2.4 HOW THE REVIEW WAS USEFUL The literature concerned with empirical research reveals that there are various factors affecting merger decisions. It also helps to identify the importance of the merger and the synergy benefits realized there in. it gives us the idea about determining the performance of various banks using various methods and the importance of the variables.

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CHAPTER 3 DESIGN AND METHOD OF STUDY

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3.1 STATEMENT OF THE PROBLEMDue to the fragmented nature of the banking industry, Indian banks are not able to compete globally in terms of fund mobilization, credit disbursal, investment and rendering of financial services. To overcome this problem Indian banks are considering mergers and acquisitions with other banks. But there are many factors for a merger to be successful.

3.2 OBJECTIVE OF THE STUDY The purpose of this study is to identify whether the merger between Oriental Bank of Commerce and Global Trust Bank proved to be successful and also to identity whether the synergy benefits are realized. And also To compare the financial and performance productivity of Oriental Bank Of Commerce, pre- and post-mergers To identify the factors that drive the mergers in banking industry To see if bank mergers in India are able to deliver according to the pre-merger expectations

3.3 HYPOTHESIS Null Hypothesis: Synergy benefits are realized after the merger between oriental Bank of Commerce and Global Trust Bank. Alternate Hypothesis: Synergy benefits are not realized after the merger between oriental Bank of Commerce and Global Trust Bank.

3.4 DESIGN OF THE STUDY The information required for the study is collected through (i) (ii) Primary Data Secondary Data

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Primary Data: The primary data was collected by interacting with various Managers and Employees of Oriental Bank of Commerce. This helped to understand the impact of merger on the Oriental Bank of Commerce and the forces which drive the merger in the banking industry.The questionnaire was prepared keeping the requirements in mind. Secondary Data: The secondary data were collected through various mediums including newspapers, internet, magazines, etc which provided useful insights into the research and study of the project.

3.5 SAMPLING PROCEDURE 3.5.1 Sample Selection: The technique used for sampling is Deterministic Sampling, as we collected a list of Oriental Bank of Commerce in Bangalore region. Hence the size of the sample can be determined.

3.5.2 Scaling Technique: One scaling technique that will be used to measure the attitudinal change is the questionnaire will be 5 point scale. The questions in the main questionnaire will be extracted answers by this scale. This was maintained throughout the questionnaire to keep the reliability and validity in control. The 5 point scale technique is widely used to determine the level of preferences of an issue in the questionnaire. The scale was designed with five response categories as shown below.

1--- Least Important 2--- Less Important 3---Neutral 4---More Important 5---Most Important

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3.5.3 Designing Questionnaire: Based on the extensive reading about the factors that banks look in to before they merge with any other bank and using scaling method the final questionnaire is prepared.

3.6 EXPLANATION ABOUT THE INPUT 3.6.1 Data Collection Data will be collected from different small and medium enterprises companies which are within the reach.

3.6.2 Analysis of the Data Collected All the data collected will be fed into a database created in Microsoft Excel especially for this purpose. The various tools and functions available on excel will be used for necessary calculation. SPSS software was used for the purpose of detailed analysis.

3.6.3 Data Analysis Data analysis model is econometric model and was planned to be done with the statistical tool SPSS. The data was got mainly in the semantic differential for this purpose. The various tools and functions available on Excel were used for necessary calculations. Bar graphs and pie charts were generated to make the interpretation of the results. SPSS software was used for the purpose of descriptive analysis.

3.6.4 Plan of Data Analysis:The data analysis done as in the plan given below 1. Filtering of the questionnaire will be done 2. The questionnaires will be sorted into the respective groups. 3. Coding of the questions will be done 4. All the data will be entered into different excel sheets 5. This data will be copied to the SPSS tool and all the variable will be explained

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6. Analysis will be done for proving the hypothesis is framed 7. Results are tabulated and conclusion and recommendations are drawn

3.7 TOOLS USED IN THE STUDY Tool used for analysis is IBM SPSS Statistics 19.0. It is a computer program used for statistical analysis. And also Microsoft excel is used to draw various graphs.

3.8 STATISTICAL ANALYSIS Factor analysis attempts to identify underlying variables, or factors, that explain the pattern of correlations within a set of observed variables. Factor analysis is used here in data reduction to identify a small number of factors that explain most of the variance that is observed in a much larger number of manifest variables. Principle component analysis extraction method is used for the study and Varimax with Kaiser Normalization method is used for rotation. A chi-square test (also chi squared test or 2 test) is any statistical hypothesis test in which the sampling distribution of the test statistic is a chi-square distribution when the null hypothesis is true, or any in which this is asymptotically true, meaning that the sampling distribution (if the null hypothesis is true) can be made to approximate a chisquare distribution as closely as desired by making the sample size large enough. Some examples of chi-squared tests where the chi-square distribution is only approximately valid: Pearson's chi-square test, also known as the chi-square goodness-offit test or chi-square test for independence. When mentioned without any modifiers or without other precluding context, this test is usually understood.

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CHAPTER 4 ANALYSIS

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4.1 DATA: Primary Data: Primary data is obtained from various respondents from various banks. It is obtained using the questionnaire method. From the primary data obtained from the bank, the various factors affecting the merger of Oriental Bank of Commerce with the Global Trust bank is ranked. This data is used in the Factor analysis to reduce the ten factors in to the most important factors. Secondary Data: Historical data is obtained and analyzed for the research problem. The before and after effects of the merger is compared with the help of Paired t test. Secondary data is used for paired t test.

4.1.1 Case Study Approach Global Trust Bank Ltd has been amalgamated with the Oriental Bank of Commerce. The merger took place on 14th August, 2004. Global Trust Bank Ltd provided various kinds of services to its clients prior to its amalgamation with the Oriental Bank of Commerce. The various services provided by the Bank had been overdrafts, term loans, letters of credit, cash credit, bank guarantees, and bill inland discounting. Global Trust Bank Ltd had also launch in partnership with Visa, the Proton International Debit Card.

After the amalgamation, the depositors as well as the other customers of Global Trust Bank Ltd function as the customers of the Oriental Bank of Commerce. Oriental Bank of Commerce has taken steps in order to ensure that the customers of Global Trust Bank Ltd continue to receive proper services. According to the Amalgamation Scheme, the shareholders of Global Trust Bank Ltd may receive pro- rata payment, if extra money is left behind after all the liabilities of the Bank are met with the realization of its assets.

Before the deal Global trust banks operations were suspended by the Central bank of India

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.The GTBs bad loans accounted for about fifty of its 32.7 billion rupees of deposits .This deal was driven by the Central bank .At that time OBC was looking for merger options with other banks and RBI decided to merge GTB with OBC to safeguard the interests of the depositors. So at that time OBC took this opportunity and decided to acquire GTB and turn it around in one and a half year .GTB had 103 branches in southern part of India and has a strong retail products in the market which proved to be a value adds for the synergy of the deal .

Intent For Oriental Bank of Commerce there was an apparent synergy post merger as the weakness of Global Trust Bank had been bad assets and the strength of OBC lay in recovery.10 In addition, GTB being a south-based bank would give OBC the muchneeded edge in the region apart from tax relief because of the merger. GTB had no choice as the merger was forced on it, by an RBI ruling, following its bankruptcy. Benefits OBC gained from the 104 branches and 276 ATMs of GTB, a workforce of 1400 employees and one million customers. Both banks also had a common IT platform. The merger also filled up OBC's lacunae - computerization and high-end technology. OBC's presence in southern states increased along with the modern infrastructure of GTB. Drawbacks The merger resulted in a low CAR for OBC, which was detrimental to solvency. The bank also had a lower business growth (5% vis-a-vis 15% of peers). A capital adequacy ratio of less than 11 per cent could also constrain dividend declaration, given the applicable RBI regulations.

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4.2 ANALYSIS I: Identification of major factors affecting the mergers in banks in India: There are various factors which are taken into consideration when it comes to mergers and acquisitions in banking industry. These factors lead to the choice of a particular bank for meeting their requirements. Therefore it becomes important to understand the major reasons which drive a particular bank to the merger, and hence analyzing the importance of these factors in knowing the determinant factors amongst the mergers in banking industry. A number of variables were considered out of which ten major variables were taken into account, which would further reduce to principal components depending upon the score given by the respondents (sample) to the importance of these variables. Respondents were asked to rate these variables based upon the importance of them for merger in Indian banking Industry.

The ratings were done on a scale of 1 to 5 (1-least important, 5- Most important) The variables defined are-

Table:1

Factors affecting Merger Decision

1. Merger Waves 2. Economies of scale 3. Restructuring of Weak banks 4. Size expansion 5. Greater market share 6. BASEL norms 7. Tax shield 8. Diversified risk 9. Increased capital 10. Operational efficiency

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Table 2

:Communalities Initial Extraction .965 .882 .999 .992 .988 .998 .957 .878 .965 .801 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000

Wave Economies Restructuring Size Market Basel Tax Risk Capital OPFF

Extraction Method: Principal Component Analysis Communalities indicate the amount of variance in each variable that is accounted for. Initial communalities are estimates of the variance in each variable accounted for by all components or factors.Extraction communalities are estimates of the variance in each variable accounted for by the factors (or components) in the factor solution.Table 3

:Total Variance Explained Initial Eigenvalues Extraction Sums of Squared Loadings of Cumulative % 55.014 82.186 94.256 100.000 100.000 100.000 100.000 100.000 100.000 100.000 Total 5.501 2.717 1.207 % Variance 55.014 27.172 12.070 of Cumulative % 55.014 82.186 94.256

Component Total 1 2 3 4 5 6 7 8 9 10 5.501 2.717 1.207 .574

% Variance 55.014 27.172 12.070 5.744

7.396E-16 7.396E-15 2.873E-16 2.873E-15 5.394E-17 5.394E-16 -6.699E-17 -6.699E-16 -5.869E-16 -5.869E-15 -1.677E-15 -1.677E-14

Extraction Method: Principal Component Analysis.

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Table 4

:Component Matrixa Component 1 2 .339 .858 -.248 -.828 -.221 .480 .526 .686 .539 .781 3 .220 .316 .982 -.472 -.103 -.691 .031 -.155 .220 .208 Component

Wave Economies Restructuring Size Market Basel Tax Risk Capital OPFF

.895 .215 -.840 .289 .964 .639 .322 .420 -.595 -.384

Extraction Method: Principal Analysis. a. 3 components extracted.

This table reports the factor loadings for each variable on the unrotated components or factors. Each number represents the correlation between the item and the unrotated factor. These correlations can help to formulate an interpretation of the factors or components. This is done by looking for a common thread among the variables that have large loadings for a particular factor or component. It is possible to see items with large loadings on several of the unrotated factors, which can make interpretation difficult. In these cases, it can be helpful to examine a rotated solution.KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy. Bartlett's Test of Sphericity Approx. Chi-Square Df Sig. .555 385.415 36 .000

P a g e | 30Graph 1

: Scree Plot

Interpretation:

The scree plot is graph representing the set of Eigenvalues against the component number in the order of their extraction.

The graph shows a bent near the 3rd component after which it begins to trail of steeply which indicates that out of the 10 variables indentified 3 Components have been extracted

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Table 5

:Rotated Component Matrixa Component 1 2 -.160 .590 -.266 .994 .481 -.170 -.044 .247 -.160 .843 3 .230 .723 .336 .055 .236 -.938 .082 .037 .230 -.280

Wave Economies Restructuring Size Market Basel Tax Risk Capital OPFF

.941 -.108 -.903 .021 .837 -.300 .974 .903 .941 -.110

Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 4 iterations.Table 6

:Component Transformation Matrix 1 .939 .338 -.064 2 .258 -.814 -.520 3 .228 -.472 .851

Component 1 2 3

Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. Roatation converged in 4 iterationsRotation is a method used to simplify interpretation of a factor analysis.

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Interpretation:

The rotated component matrix shows that from the 10 variables identified, they have been classified into 3 components which are important for the mergers in banking industry.

The components have been classified as*component 1-External forces *component 2- Internal factors *component 3-Restructuring of weak banks

Component 1 external forces, which includes Merger Waves, Market share, BASEL norms are the most important factors affecting the mergers in banking industry.

Component 2 internal forces, which include economies of scale, diversified risk, capital requirements, tax shield. Component 3 Restructuring of weak banks is another important factor which determines the mergers and acquisitions in banking industry.

CHI SQUARE TEST:

Hypothesis 1: Null hypothesis: Merger decision is independent of external forces. Alternate hypothesis: Merger decision is not independent of external forces.

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Table 7 : Case Processing Summary-1Cases Valid N Row * Column 60 Percent 100.0% N 0 Missing Percent .0% N 60 Total Percent 100.0%

Table 8 :Row * Column Cross tabulation-1Column 1.00 Row 1.00 Count Expected Count 2.00 Count Expected Count 3.00 Count Expected Count Total Count Expected Count 1 1.0 1 1.0 1 1.0 3 3.0 2.00 2 2.3 3 2.3 2 2.3 7 7.0 3.00 5 5.7 8 5.7 4 5.7 17 17.0 4.00 8 5.7 4 5.7 5 5.7 17 17.0 5.00 4 5.3 4 5.3 8 5.3 16 16.0 Total 20 20.0 20 20.0 20 20.0 60 60.0

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Table 9 :Chi-Square Tests-1Asymp. Sig. (2Value Pearson Chi-Square Likelihood Ratio Linear-by-Linear Association N of Valid Cases 5.345a

df 8 8 1

sided) .720 .745 .493

5.118 .470 60

6 cells (40.0%) have expected count less than 5. The minimum expected count is 1.00

Calculated Value = 5.345 Table Value = 3.482 Since Calculated value > Table value, Reject Null Hypothesis. External Forces are not independent of Merger Decision.

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Graph 2 : External Forces

HYPOTHESIS 2: Null Hypothesis: Merger decision is independent of the internal forces. Alternate Hypothesis: Merger decision is not independent of the merger decision.

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Table 10:Case Processing Summary-2Cases Valid N Row * Column 90 Percent 100.0% N 0 Missing Percent .0% N 90 Total Percent 100.0%

Table 11:Row * Column Crosstabulation-2Column 1.00 Row 1.00 Count Expected Count 2.00 Count Expected Count 3.00 Count Expected Count 4.00 Count Expected Count Total Count Expected Count 1 3.3 3 2.2 2 2.2 4 2.2 10 10.0 2.00 11 9.3 10 6.2 3 6.2 4 6.2 28 28.0 3.00 7 8.3 4 5.6 4 5.6 10 5.6 25 25.0 4.00 10 6.3 2 4.2 6 4.2 1 4.2 19 19.0 5.00 1 2.7 1 1.8 5 1.8 1 1.8 8 8.0 Total 30 30.0 20 20.0 20 20.0 20 20.0 90 90.0

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Table 12: Chi-Square Tests-2 Asymp. Sig. (2Value Pearson Chi-Square Likelihood Ratio Linear-by-Linear Association N of Valid Cases 27.106a

df 12 12 1

sided) .007 .009 .770

26.484 .085 90

a. 11 cells (55.0%) have expected count less than 5. The minimum expected count is 1.78.

Calculated Value = 27.105 Table Value = 21.02 Since Calculated value > Table value, Reject Null Hypothesis. Internal Forces are not independent of Merger Decision.

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Graph 3:Internal

Forces

HYPOTHESIS 3: Null Hypothesis: Merger decision is independent of restructuring of weak banks. Alternate Hypothesis: Merger decision is not independent of restructuring of weak banks.

Table 13:Case Processing Summary-3Cases Valid N Row * Column 40 Percent 100.0% N 0 Missing Percent .0% N 40 Total Percent 100.0%

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Table 14:Row * Column Crosstabulation-3Column 1.00 Row 1.00 Count Expected Count 2.00 Count Expected Count Total Count Expected Count 2 4.0 6 4.0 8 8.0 2.00 2 5.0 8 5.0 10 10.0 3.00 2 2.0 2 2.0 4 4.0 4.00 8 5.0 2 5.0 10 10.0 5.00 6 4.0 2 4.0 8 8.0 Total 20 20.0 20 20.0 40 40.0

Table 15 :Chi-Square Tests-3Asymp. Sig. (2Value Pearson Chi-Square Likelihood Ratio Linear-by-Linear Association N of Valid Cases 11.200a

df 4 4 1

sided) .024 .018 .003

11.896 9.100 40

a. 6 cells (60.0%) have expected count less than 5. The minimum expected count is 2.00.

Calculated Value = 11.2 Table Value = 9.4877 Since Calculated value > Table value, Reject Null Hypothesis. Restructuring of Weak Bank is not independent of Merger Decision.

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4.3 ANALYSIS II:

Identifying Synergy effects of merger using paired t test:(Hypothesis Testing) To identify the synergy benefits various ratios are calculated. The CAMEL ratios are taken before and after merger.

CAMEL RATING SYSTEM The CAMEL rating system is based upon an evaluation of five critical elements of a credit union's operations: Capital Adequacy, Asset Quality, Management, Earnings and Asset/Liability Management. This rating system is designed to take into account and reflect all significant financial and operational factors examiners assess in their evaluation of a credit union's performance. Credit unions are rated using a combination of financial ratios and examiner judgment. Since the composite CAMEL rating is an indicator of the viability of a credit union, it is important that examiners rate credit unions based on their performance in absolute terms rather than against peer averages or predetermined benchmarks. The examiner must use professional judgment and consider both qualitative and quantitative factors when analyzing a credit union's performance. Since numbers are often lagging indicators of a credit union's condition, the examiner must also conduct a qualitative analysis of current and projected operations when assigning CAMEL ratings. CAPITAL ADEQUACY Capital base of financial institutions facilitates depositors in forming their risk perception about the institutions. Also, it is the key parameter for financial managers to maintain adequate levels of capitalization. Moreover, besides absorbing unanticipated shocks, it signals that the institution will continue to honor its obligations. The most widely used indicator of capital adequacy is capital to risk-weighted assets ratio (CRWA). According to Bank Supervision Regulation Committee (The Basle Committee) of Bank for International Settlements, a minimum 8 percent CRWA is required. Capital adequacy ultimately determines how well financial institutions can cope with shocks to their

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balance sheets. Thus, it is useful to track capital-adequacy ratios that take into account the most important financial risksforeign exchange, credit, and interest rate risksby assigning risk weightings to the institutions assets. Determining the adequacy of a credit union's capital begins with a qualitative evaluation of critical variables that directly bear on the institution's overall financial condition. The examiner should also consider the interrelationships with the other areas: Capital level and trend analysis; Compliance with earnings transfers requirements and risk-based net worth requirements; Composition of capital; Interest and dividend policies and practices; Adequacy of the Allowance for Loan and Lease Losses account; Quality, type,liquidity and diversification of assets, with particular reference to classified assets; Loan and investment concentrations; Growth plans; Ability of management to control and monitor risk, including credit and interest rate risk; Earnings: Good historical and current earnings performance enables a credit union to fund its growth, remain competitive, and maintain a strong capital position; Liquidity and funds management; Economic Environment.

ASSET QUALITY Asset quality determines the robustness of financial institutions against loss of value in the assets. The deteriorating value of assets, being prime source of banking problems, directly pour into other areas, as losses are eventually written-off against capital, which ultimately jeopardizes the earning capacity of the institution. With this backdrop, the asset quality is gauged in relation to the level and severity of non-performing assets, adequacy of provisions, recoveries, distribution of assets etc. Popular indicators include

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nonperforming loans to advances, loan default to total advances, and recoveries to loan default ratios. Asset quality is rated in relation to: The quality of loan underwriting, policies, procedures and practices; The level, distribution and severity of classified assets; The level and composition of nonaccrual and restructured assets; The ability of management to properly administer its assets, including the timely identification and collection of problem assets; The existence of significant growth trends indicating erosion or improvement in asset quality; The existence of high loan concentrations that present undue risk to the credit union; The appropriateness of investment policies and practices; The investment risk factors when compared to capital and earnings structure; and the effect of fair (market) value of investments vs. book value of investments MANAGEMENT Management of financial institution is generally evaluated in terms of capital adequacy, asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition, performance evaluation includes compliance with set norms, ability to plan and react to changing circumstances, technical competence, leadership and administrative ability. In effect, management rating is just an amalgam of performance in the above-mentioned areas. Sound management is one of the most important factors behind financial institutions performance. Indicators of quality of management, however, are primarily applicable to individual institutions, and cannot be easily aggregated across the sector. Furthermore, given the qualitative nature of management, it is difficult to judge its soundness just by looking at financial accounts of the bank.

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EARNINGS Earnings and profitability, the prime source of increase in capital base, is examined with regards to interest rate policies and adequacy of provisioning. In addition, it also helps to support present and future operations of the institutions. The single best indicator used to gauge earning is the Return on Assets (ROA), which is net income after taxes to total asset ratio. Strong earnings and profitability profile of banks reflects the ability to support present and future operations. More specifically, this determines the capacity to absorb losses, finance its expansion, pay dividends to its shareholders, and build up an adequate level of capital. Being front line of defense against erosion of capital base from losses, the need for high earnings and profitability can hardly be overemphasized. Although different indicators are used to serve the purpose, the best and most widely used indicator is Return on Assets (ROA). However, for in-depth analysis, another indicator Net Interest Margins (NIM) is also used. Chronically unprofitable financial institutions risk insolvency. Compared with most other indicators, trends in profitability can be more difficult to interpretfor instance, unusually high profitability can reflect excessive risk taking. Key factors to consider when assessing the credit union's earnings are: Level, growth trends, and stability of earnings, particularly return on average assets; Quality and composition of earnings; Adequacy of valuation allowances and their effect on earnings; Future earnings prospects under a variety of economic conditions; Net interest margin; Net non-operating income and losses and their effect on earnings; Quality and composition of assets; Net worth level; Sufficiency of earnings for necessary capital formation

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LIQUIDITY An adequate liquidity position refers to a situation, where institution can obtain sufficient funds, either by increasing liabilities or by converting its assets quickly at a reasonable cost. It is, therefore, generally assessed in terms of overall assets and liability management, as mismatching gives rise to liquidity risk. Efficient fund management refers to a situation where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is maintained. The most commonly used tool to evaluate interest rate exposure is the Gap between RSA and RSL, while liquidity is gauged by liquid to total asset ratio. Initially solvent financial institutions may be driven toward closure by poor management of short-term liquidity. Indicators should cover funding sources and capture large maturity mismatches The L of CAMEL represents the concept of Asset/Liability Management - the

identification, monitoring and control of: Interest rate risk sensitivity and exposure Liquidity risk and control Technical competence in asset/liability management techniques

Table 16 : CAMEL ratios

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2003 CAPITAL ADEQUACY 1 capital adequacy ratio 2 Debt to equity ratio debt=deposits+borrowings+unsecured debts equity=capital+reserves and surplus 3 Advance/total assets ASSET QUALITY 1 gross NPA ratio 2 Loans Turnover 3 Asset Turnover Ratio 4 fair market value/book value MANAGEMENT 1 market value/equity capital 2 total advance/total deposits 3 business per employee business=advance+deposits 4 profit per employee profit=net profit EARNINGS 1 operating profit to average working funds interest spread=interest earned interest 2 expenditure 3 net profit to avg assets avg assets=(opening assets+closing assets)/2 4 interest income to total income 5 non interest income to total income 6 operating expense to average assets LIQUIDITY 1 liquid assets to total assets liquid assets=cash with RBI+cash for short notice 2 liquid assets to total deposits 4.323493 15.875 7.3 15 5.15 14.04

2004

2005

2006

2007

14.47

9.21

11.04

12.51 11.5384

14.49511 13.58861 14.60123 9.877405

46.12631 47.99416 46.79018 56.97105 59.69799

6.2 14 5.87

6.4 15 7.54

5.95 16 4.66

3.2 15 5.3

27.90116 35.72577 34.07891

18.4151 25.02822

25.797

30.585

15.17

22.33 68.9707

52.59215 55.16913 52.87153 66.89032

4.30375 4.049324 5.108207 5.599165 7.100095 5.0188 5.312919 5.367999 5.428825

6.721504 5.532357 4.394385 4.964558 5.306502 36.56672 44.10793 42.65741 38.96822 32.74642 1.37946 1.829661 1.600424 1.421436 1.244506 85.32151 81.95152 93.12493 93.42115 93.38989 14.67849 18.04848 6.875065 6.578846 6.610107 3.064487 2.630043 2.020572 1.718763 1.323408

7.426849 8.779983 13.95111 9.375546 10.15633

8.46792 10.09256 15.76434 11.00793 11.73388

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Weightages are given to each ratios in each category like Capital adequacy, asset quality, Management ratios, Earnings and Liquidity ratios.

REASONS FOR WEIGHTAGE 1. Capital In Capital ratios, we have given 0.5 to capital adequacy ratio as it is the most important ratio which has significant impact on capital of the bank. Second most important ratio which affects the capital ratio is debt equity ratio and rest of them are of low impact. 2. Assets In assets Ratio, there is no specific ratio which has specific importance. All ratios have equal impact so here we have equal weightage to all the ratios. 3. Management In management ratios, there is no specific ratio which has specific importance. All ratios have equal impact so here we have equal weightage to all the ratios. 4. Earnings In Earnings ratios, there is no specific ratio which has specific importance. All ratios have equal impact so here we have equal weightage to all the ratios. 5. Liquidity In Liquidity ratios, there is no specific ratio which has specific importance. All ratios have equal impact so here we have equal weightage to all the ratios

P a g e | 47 EARNINGS 1 operating profit to average working funds 2 interest spread 3 net profit to avg assets 4 interest income to total income Total Liquidity 1 liquid assets to total assets 2 liquid assets to total deposits Total CAPITAL ADEQUACY 1 capital adequacy ratio 2 Debt to equity ratio 3 Advance/total assets TOTAL MANAGEMENT 1 market value/equity capital 2 total advance/total deposits 3 business per employee 4 profit per employee Total ASSET QUALITY 1 gross NPA ratio 2 Loans Turnover 3 Asset Turnover Ratio 4 fair market value/book value totalTable 17:CAMEL ratios

2003 (0.2) (0.2) (0.2)

2004

2005

2006

20071.0613 6.549285 0.248901 18.67798 0.264682 26.80215

1.344301 1.106471 0.878877 0.992912 7.313344 8.821587 8.531482 7.793645 0.275892 0.365932 0.320085 0.284287 17.0643 26.61074 16.3903 18.62499 18.68423 27.2103 28.75955 28.09883 0.612897 0.526009 0.404114 0.343753

5 operating expense to average assets (0.2)

(0.5) (0.5)

3.713425 4.389992 6.975555 4.687773 4.23396 5.046281 7.882171 5.503964 7.947385 9.436273 14.85773 10.19174

5.078164 5.86694 10.9451

(0.5) (0.3) (0.2)

7.02

7.235

4.605

5.52

6.255 3.461519 11.9396 21.65612

4.348532 4.076584 4.380368 2.963222 9.225262 9.598833 9.358037 11.39421 20.59379 20.91042 18.34341 19.87743

(0.25) (0.25) (0.25) (0.25)

3.96875

6.44925

7.64625

3.7925

5.5825 17.24268 1.775024 1.357206 25.95741

13.14804 13.79228 13.21788 16.72258 1.075937 1.012331 1.277052 1.399791 1.080873 1.2547 1.32823 1.342 19.2736 22.50856 23.46941 23.25687

(0.25) (0.25) (0.25) (0.25)

1.825 3.75 1.2875

1.55 3.5 1.4675

1.6 3.75 1.885

1.4875 4 1.165

0.8 3.75 1.325 6.257055 12.13206

6.975291 8.931444 8.519728 4.603774 13.83779 15.44894 15.75473 11.25627

with weightages

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2003 CAPITAL ADEQUACY ASSET QUALITY MANAGEMENT EARNINGS Liquidity 20.59379 13.83779 19.2736 26.61074 7.947385

2004 20.91042 15.44894 22.50856 27.2103 9.436273

2005 18.34341 15.75473 23.46941 28.75955 14.85773

2006 19.87743 11.25627 23.25687 28.09883 10.19174

2007 21.65612 12.13206 25.95741 26.80215 10.9451

Table 18:Sum

of all values

35 30 25 20 15 10 5 0 Capital Adequacy Asset Quality Management Earings Liquidity 2003 2004 2005 2006 2007

Graph 4: CAMEL ratios(2003-2007)

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T-TestTable 19:PairedMean Pair 1 Y03 Y06 17.6527 18.5362

Samples StatisticsStd. Deviation 5 5 7.07585 7.71613 Std. Error Mean 3.16441 3.45076

N

Table 20:Paired

Samples CorrelationsN Correlation 5 .943 Sig. .016

Pair 1

Y03 & Y06

Table 21:Paired

Samples Test

Paired Differences 95% Confidence Interval Std. Mean Pair 1 Y03 Y04 .88357 Deviation 2.56865 Std. Error Mean 1.14874 of the Difference Lower -4.07297 Upper 2.30584 t .769 df 4 Sig. (2tailed) .485

Calculated Value = 0.769 Table value = 0.542 Accept null Hypothesis if calculated value < table value Reject null Hypothesis if calculated value > table value

Null Hypothesis: Synergy benefits are realized after the merger

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Alternate Hypothesis: Synergy benefits are not realized after merger.

Based on the above results the null hypothesis is accepted which proves that the synergy benefits are realized after the merger of Oriental Bank Of Commerce and Global Trust bank. This proves that the merger between the banks is successful.

4.4 QUESTION NAIRE ANALYSIS:

Are you of the opinion that the merger happened as a result of merger waves ? a. Yes - 14 b. No - 6

Merger Decision as a result of Merger WavesYes No

Rank the factors based on importance in driving banking industry into merger (in the view of the acquirer)? 1 Merger Waves Economies of Scale Restructuring of Weak Banks Expansion of size 1 1 2 2 2 1 2 3 2 3 5 7 2 7 4 8 10 8 7 5 4 1 6 1

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To achieve greater market share To adhere to BASEL norms To avoid Tax constraints Diversified Risk Increased Capital Operational Efficiency

1 1 4 3 2 3

3 2 4 10 3 2

8 4 10 4 4 4

4 5 1 2 6 5

4 8 1 1 5 6

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

5 4 3 2 1

Please rate the following factor in the order of their importance being post merger financial benefits 1 2 3 4 5 Improved Revenue Cost reduction Increased Capital Increase reach Diversified Risk Tax Shield 4 4 3 1 3 4 3 3 5 2 4 5 5 7 5 2 4 6 4 3 3 7 5 3 4 3 4 8 4 2

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100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Improved Revenue Cost reduction Increased Capital Incresed reach Diversified Risk Tax sheild 5 4 3 2 1

Which among the following contributes the most towards achieving cost efficiency? a. Ability to raise resources b. Current funding profile c. Portfolio yield -6 -3 -6

d. Asset liability management -5

Cost EfficiencyAbility to raise resources Current funding profile Portfolio Yeild Asset Liability

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Rank the importance of the following to the success of a merger FACTORS Cultural integration Management integration Resource integration Did the acquiring company overvalue the target? Is the acquisition EPS accretive for the shareholders of the acquiring company? Will the acquisition affect the capital structure of the acquiring company? Time frame for acquisition process 3 3 2 4 3 1 4 3 3 4 6 2 4 3 6 5 5 3 4 6 5 4 3 4 5 5 4 3 3 5

1

4

6

5

4

3

4

4

5

4

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

5 4 3 2 1

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Merger & Acquisition in Indian banking industry have been successful and banks have achieved their target synergic financial benefits. What is your opinion about this statement? a. Completely Successful b. Partially Successful -5 -7

c. Completely Unsuccessful - 2 d. Partially Unsuccessful -6

Mergers in Indian Banking IndustryCompletely Successful Partially Successful Completely unsuccessful Partially unsuccessful

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CHAPTER 5 CONCLUSION

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5.1 MAJOR FINDINGS The merger decision is based on several factors in the banking industry. Ten such factors are identified and bank professionals are asked to rate the factors on the order of importance. Using Factor Analysis, the factors are reduced to three components. The three components are named as External forces, internal forces and Restructuring of banks. Component 1 external forces, which includes Merger Waves, Market share, BASEL norms are the most important factors affecting the mergers in banking industry. Component 2 internal forces, which include economies of scale, diversified risk, capital requirements, tax shield. Component 3 Restructuring of weak banks is another important factor which determines the mergers and acquisitions in banking industry Chi Square- Test of independence test results on the above mentioned extracted components indicate that they are not independent of the merger decision. This is proved by forming a hypothesis. Performance of the bank before and after merger is found by calculating the capital adequacy ratios for the period before and after merger. The results indicate that the performance has increased after merger but the benefits are not realized immediately. This is proved by using a Paired t test with the help of the hypothesis.

5.2 CONCLUSION Mergers and acquisitions in the Banking sector are going to be the order of the day. India is slowly but surely moving from the regime of large number of small banks to small number of large banks. The new era in banking is going to be one of consolidation over identified core competencies. The trend in Indian Banking industry is mainly for the restructuring of the weak banks and one such example is taken is the study.

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In this research to study about the synergy on bank consolidation in Indian Banking industry a case study approach is taken. The merger which took place in August 2004 between Oriental Bank of Commerce and Global trust Bank is taken. Through this research we have looked into various factors which affect the merger decision for a particular bank. Hypothesis is created and with the help of CAMEL ratios and Paired t tests the performance before and after the merger is identified. Based on the findings from the paper it is clearly identified that mergers and acquisitions strategy in the Indian Banking industry has proved to be successful if done rightly for the right cause. In the Indian Banking industry the effects of the merger is not seen immediately and it takes atleast two to three years to reap the benefits fully. As the mergers and acquisitions is proved to be successful in the Indian banking Industry, many future voluntary mergers should be done in order to improve the banking industry in India and to make them compete with the International standards. It is also clear from above research that the mergers should be synergy driven. It is also important to consider the Shareholders of both the acquiring company and the target company. It is important to raise their wealth after the merger. Overall the banks mergers are proved to be beneficial and India is yet to recognize the potential for large number of merger deals in the Banking industry. 5.3 LIMITATIONS OF THE STUDY The research is subjected to the following limitations Since case study approach is taken only one merger deal is taken for study. Non-availability of matters regarding confidential matters Not able to reach the required persons with in the timeframe. Secondary data used to calculate the CAMEL ratios are subject to errors as different sites give different data. Questionnaire is collected from bank people and it is subject to their mood and situation. The findings are limited due to lack of time.

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5.4 SUGGESTIONS FOR FURTHER STUDY Since only one merger is taken for study, further study can be carried by taking many mergers. Here in the study only the synergy effects based on the CAMEL ratios is discussed, whereas the further study can be carried out by considering other synergy factors. The study is carried out only from the companies point of view and the further study can be done by considering the shareholders point of view and maximizing their wealth. Qualitative factors like brand image etc are not discussed in the study which can be included in the further study. Premium paid for the mergers is not discussed as it is a forced merger but this cannot be same for all the mergers and can be included in the further study. Post merger reforms are very important for the success of a merger and they can be discussed in the further study of the merger.

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BIBILIOGRAPHY 1. Bhatnagar.R.G. (2001) Banking too Much on Mergers , Professional Banker. 2. Deeksha Verma. (2001). Banking on Merger, Professional Banker. 3. Sangita Mehta.(2001). The Writing on the Wall, Professional Banker. 4. Giridaran.R. (2001). Mergers- The Emerging Reality, IBA Bulletin. 5. .Anuraag Saxena and Naresh Grandly. (2001). Alternative for Payments in M &A Deals.. A Strategic Evaluation of the Choices at Hand The Management Accountant. 6. Manoj Anand and Jagandeep , 2007 Impact of Merger Announcements on Shareholders' Wealth: Evidence from Indian Private Sector Banks SSRN . 7. TNN ,24.02.2009 Commission should be set up to decide on mergers 8. Dario Fokarelli and other , 2001 ,Why do banks merge 9. Akhil Bhan ,2009 , Merger in Indian banking sector benefits and motives 10. Berger, A. (1998). The Efficiency Effects of Bank Mergers and Acquisition: A Preliminary Look at the 1990s Data. in Bank Mergers & Acquisitions, edited by Y. 11. Amihud and G. miller. Boston, MA. Kluwer Academic: 79-111. 12. Berger.A, R. S. Demsetz, and P.E.Strahan (1999). The Consolidation of the Financial Services Industry: Causes, Consequences and Implications for the Future, Journal of Banking and Finance, 23, 135-90 13. Chandler, Jr A. D, (1962). Strategy and Structure. (Cambridge, MA, MIT Press) 14. Dymski, A. (2002). The Global Bank Merger Wave: Implications for Developing Countries. The Developing Economies XL-4: 435-66. 15. Lakshminarayanan, P. (2005) Consolidation in the Banking Industry through mergers and Acquisitions, IBA Bulletin, 92-99 16. Mallick, I. (2004). Comparative Advantage in Banking and Strategic Specialization in

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17. Cournot Games, in Trade, Finance and Development, edited by B.Chatterjee and 18. A.Raychaudhuri. DEEP & DEEP Publications Pvt. Limited. 19. P. Milgrom and J. Roberts (1992). Economics, Organization and Management. (Prentice 20. Hall, Englewood Cliffs, New Jersey 07632)

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APPENDIX Dear Madam/ Sir , I am an MBA finance student of Christ University .I am conducting a study on the Synergy Benefits in Consolidation of banking industry. This is for educational purpose only .Kindly extend your corporation in filling up this questionnaire .

Name :................................................................................ Name of company :........................................................... Designation :......................................................................

1. Are you of the opinion that the merger happened as a result of merger waves ? c. Yes d. No

2. What type of merger it was? a. Horizontal b. Vertical c. Conglomerate d. Others

3. How was the purchase consideration settled? a. Cash b. Share swap c. Both d. Others

4. Do you think the deal was rightly priced? a. Yes b. No c. Cant say

5. Rank the factors based on importance in driving banking industry into merger (in the view of the acquirer)? 1 To achieve economies of scale Restructuring of weak banks 2 3 4 5

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Expansion of size To achieve greater market share To avoid Competition To adhere to BASEL norms To become an International bank To avoid Tax constraints Others

6. Mergers have helped banks to achieve financial synergies? a. Strongly agree b. Agree c. Cant say d. Disagree e. Strongly disagree

7. Please rate the following factor in the order of their importance being post merger financial benefits 1 2 3 4 5 Business development Best Investment Improved Revenue Economies of Scale Cost reduction Increased Capital Increase reach Diversified Risk Tax Shield

8. The merger have helped in achieving cost efficiencies? a. Yes b. No c. Cant Say

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9. Which among the following contributes the most towards achieving cost efficiency? e. Ability to raise resources f. Current funding profile g. Portfolio yield h. Asset liability management

10. Why that particular bank was chosen for merger? a. To gain its resource b. Tax benefit c. Market share d. Diversification e. Others ..................................

11. Rank the importance of the following to the success of a merger FACTORS Cultural integration Management integration Resource integration Did the acquiring company overvalue the target? Is the acquisition EPS accretive for the shareholders of the acquiring company? Will the acquisition affect the capital structure of the acquiring company? Time frame for acquisition process 1 2 3 4 5

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12. Merger & Acquisition in Indian banking industry have been successful and banks have achieved their target synergic financial benefits. What is your opinion about this statement? e. Completely Successful f. Partially Successful g. Completely Unsuccessful h. Partially Unsuccessful

13. Loss of identity of acquired company effect the employee performance? a. Yes b. No c. Cant say

14. Was any special training or orientation given to the employees prior to merger? a. Yes b. No c. Others

15. Time frame required by the acquired company to adjust to cultural diversity? a. 0-2 months b. 2- 6 months c. 6 12 months d. > 12 months

16. Has the merger contributed to improving the capital adequacy ratios, consider each of the parameters given below?

1 Debt equity ratio Capital Buffer ratio Advances to total assets

2

3

4

5

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17. Merger has helped in improving the asset quality in terms of portfolio risks, write offs etc ? a. Agree b. Cant Say c. Disagree

18. Indicate the level of increment in the following factors due merger? 1 EPS Interest earning ratio Price earning Return on total assets Profit margin Return on share holders fund 2 3 4 5

19. Liquidity of the bank has improved post merger? a. Agree b. Cant say c. Disagree

20. The merger has helped in improving the operational efficiency of the bank? a. Yes b. No c. Cant say