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Evaluation of Pre and Post Merger between HDFC Bank Ltd.

Centurion Bank of Punjab
In banking sector, Mergers and Acquisitions have become familiar all over the world. Most of
the countries have engaged in International and National Merger and Acquisition activity. As it is
helpful in growth and expansion of business, it is increasing over the years. In Indian Banking
sector, the recent merger is between Kotak Mahindra and ING Vysya Bank. The study focuses on
the acquisition of HDFC bank and Centurion Bank of Punjab. This was on 25 th February, 2008
for Rs.9510 crore. The objective of this study is to find out whether the acquisition between
HDFC Bank and Centurion Bank of Punjab was successful or not? After the study and analysis,
it is found that the acquisition activity has improved the overall efficiency of HDFC Bank.

A merger is a combination of two or more similar business to form a new company where as the
acquisition results when a company purchases another in which no new company is formed.
These are the forms of corporate restructuring done in order to expand the business and to
increase the growth and profitability of the firm. It is used by various sectors. Types of merger
involves Horizontal, Vertical and Conglomerate. In Horizontal merger, merger takes place
between similar lines of business. In vertical merger, two or more business is consolidated in the
same industry but in varied field. The Conglomerate merger is a combination of businesses in
different industry.
Over the years, the volume of mergers and acquisitions in India has increased. This can be seen
in banking sector also and it is a form of horizontal merger as the banks are involved in the
similar commercial activity. It is advantageous because it helps in achieving growth and increase
the profitability. In rare case, the decision of merger becomes a failure.
In this paper, the study is based on the pre and post merger of HDFC Bank and Centurion Bank
of Punjab. The basic idea of the expansion is to increase profitability and productivity and to

make the company efficient enough to compete with the big fishes in its own industry. The
impact of M&A in case of listed bank falls directly on the share holders.
HDFC Bank Limited is a largest private sector bank in India which was incorporated in the year
1994. Its headquarters is in Mumbai. It was promoted by the Housing Development Finance
Corporation, a premier housing finance company of India. Currently, it has 4,014 branches.
Centurion Bank of Punjab Limited was an Indian private sector bank which was incorporated in
the year 1994. After the merger of Centurion Bank and Bank of Punjab, it is renamed as
Centurion Bank of Punjab. The bank was acquired by HDFC Bank Ltd. on 25 th February 2008
for Rs.9510 Crore. As per this acquisition, the shareholders of Centurion Bank of Punjab get one
share of HDFC Bank for every 29 shares held by them.

Literature Review
Several studies have been conducted in order to find out the impact of mergers and acquisition
over the market price of share. Some of them are:
M. Rajamani (2015) examined that after merger the banks achieved significant growth in their
operations. The competitors are reduced and hence the banks contributed more to achieve the
financial performance.
Ms. Mamta Bhardwaj (2014) in her study she proved statistically there is increase in the
performance of the banks after merger. She concluded that there is overall efficiency and
profitability increased and the merger was good for both the banks and it was successful.
Dr. S. Kasturi Rangan (2013) in her opinion the future of the merged business is good if it is
based on the trend but should wait and see the level of performance of the merged entity for a
long period.
Devarajappa S (2012) stated that merger contributed to growth and expansion in the Indian
Banking sector. It has helped the survival of weak banks by merging with other large banks. It
has increased net profit after merger and thereby increased the financial performance.
Dutta and Dawn (2012) studied the performance of the banks which was merged in terms of its
growth of profits, revenue, deposits, assets and number of employees. The findings were positive

and concluded that the merger was successful and there was significant increase in its
Mantravadi Pramod & Reddy A Vidyadhar (2007) evaluated the impact of merger on the
operating performance of acquiring firms in different industries by financial ratios. They selected
all the mergers in India between 1991 and 2003. Banking and Finance Industry showed positive
result whereas other sectors like pharmaceutical, textiles etc showed negative result.

To analyze the pre and post merger stock performance of HDFC Bank Ltd.
To find out the value (Abnormal Returns) to the shareholders of HDFC Bank Ltd.

Null Hypothesis H0: Merger was successful.

In this study, CAPM Method is used and cumulative abnormal returns for a window period of 60
and 20 days were calculated. Early share price reactions of the stock market and after the event
share price were taken into account. The stock returns movement is due to market factors. Here
the purpose is to find out to what extent the price fluctuation is caused by the merger. The
Abnormal return of the jth stock (ARjt) is calculated by using the following formula:
ARjt = Rjt - E(Rjt)
ARjt is Abnormal Returns
Rjt is daily stock return of firm j at time t
E(Rjt) is Estimated daily stock return of firm j at time t

This market model approach relates the stock returns to the market returns and the equation is
expressed as follows:
Where, j is a constant term for the jth stock, j is the market beta of the jth stock, Rmt is
the market returns, and jt is an error term. After Regression analysis, the average abnormal
return and the cumulative abnormal returns is calculated.

How to evaluate the effect of merger on the Performance of HDFC Bank Ltd.?
For this the study of the daily stock performance of a window period of 20 days before and after
the announcement is selected. This was done in order to check the short term movements of the
price of HDFC Bank Ltd. In spite of short term factors there are many other factors which may
affect the performance of HDFC Bank in the long run. So the daily stock performance of a
window period of 60 days before and after the announcement is also selected. Then the merger
was evaluated based on the abnormal returns generated by the stock.
Table 1: The Result of Regression Analysis (Pre and Post 20 days)

R Square
Co-efficient of Market
Cumulative Abnormal Returns



R Square is the measure that represents the percentage of HDFC Bank share price movements
by the movement in the Nifty. Before announcement, 27% of the share movement of the bank is
explained by the movement in the Nifty but, after announcement it increased to 73% from 27%.
That is 73% of the share movement in the HDFC Bank is due to movement in Nifty.
Alpha is a measure of HDFC Bank performance compared to Nifty. It reflects the degree to
which a stock returns meet or exceed the returns generated by the market. Alpha is assumed as
constant. . In this table, it clearly shows before announcement the constant was -0.30% and after
announcement it increased from -30% to 42%.

Beta is a measure of volatility of HDFC Bank share in comparison to Nifty. It is co-efficient of

market. A higher volatility in the share price increases the risk. The table shows there was an
increase in the risk from 49% to 106% from before announcement period to after announcement
Abnormal Returns is over and above the normal returns. The table depicts that the abnormal
returns was decreased. Before announcement Cumulative Abnormal Returns was 1.49 and after
announcement it decreased to 0.32.
Figure 1: Average abnormal returns of pre and post merger of HDFC Bank Ltd.,
Return (%)

In the above figure, in X Axis before and after announcement days and Y Axis Cumulative
Abnormal Returns are depicted. Here, Announcement day is zero. 18 th day prior to
announcement, the cumulative abnormal return was 1.492 and 18th day after the announcement,
Cumulative Abnormal Returns decreased to 0.3214.
Table 2: The Result of Regression Analysis (Pre and Post 60 days)

R Square
Co-efficient of Market
Cumulative Abnormal Returns



The above table shows before announcement R Square was 51% and it explains the share
movement of HDFC Bank by the movement in Nifty. After announcement it decreased to 48%.
Constant (Alpha) is increased from -0.084 to 0.016 from before announcement period to after
announcement period. Hence, the returns increased.
Co-efficient of Market (Beta) before the announcement was 0.73 and after the announcement
was 1.02. The Risk is increased from before announcement period to after announcement period.
Cumulative Abnormal Returns for the period before announcement was less (i.e., -0.479)
compared to after announcement period (i.e., 0.078). Cumulative Abnormal Returns after
announcement is increased.
Figure 2: Average abnormal returns of pre and post merger of HDFC Bank Ltd.,



In the above figure, X axis is before and after announcement days and Y axis is Cumulative
Abnormal Returns. 58th day prior to announcement, the Cumulative Abnormal Return was -0.480
and 58th day after announcement, Cumulative Abnormal Returns increased to 0.0789.

The daily stock prices for short period say 20 days before and after announcement period and
long period say 60 days pre and post announcement period showed different results. In the short
period it is not possible to measure exactly the share movements in the market and in the long
period, various factors such as government policies, political changes etc. influences the
movement of share price in the market.
In the short period (20 days), R square, Constant and Co-efficient of market is increased but the
Cumulative Abnormal Returns was decreased from before announcement period compared to
after announcement period. It is because the market will take some period to react to the share
prices. After announcement, the risk is increased as the HDFC Bank is merging with another
bank. As the risk increased the return also increased.
In the long period (60 days), Constant, Co-efficient of market and Cumulative Abnormal Return
was increased. As it is a longer period, the various factors which are not there in short period are
shown in the share movement. The Cumulative Abnormal Return increased from the pre to post
announcement period. Risk and Return also increased.

Merger is the useful tool for growth and expansion in Indian Banking Sector. It is helpful for the
survival of weak banks by merging with larger bank. This study shows that impact of merger on
performance of HDFC Bank and Centurion Bank of Punjab. The Merger increased the stock
performance of HDFC Bank Ltd. and the shareholders wealth with the increase in the returns as
well as cumulative abnormal returns. Hence, H0 is accepted and conclude that Merger between
HDFC Bank Ltd., and Centurion Bank of Punjab was successful.


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Volume No.27, Page No.82-83