Asia Pacific Journal of Research Vol: I.

Issue XXXIII, November 2015

ISSN: 2320-5504, E-ISSN-2347-4793

PERFORMANCE EVALUATION OF MERGER - A CASE STUDY ON INDIAN OVERSEAS BANK

AND BHARAT OVERSEAS BANK

Nagesh MR
Research Scholar
DOS in Business Administration
BIMS, Manasagangothri, Mysore, Karnataka

Prof. B Shivaraj M.B.A. Ph.D.,

Professor and Research Guide
DOS in Business Administration
BIMS, Manasagangothri, Mysore, Karnataka

ABSTRACT

In today’s globalized economy, mergers and acquisitions are being increasingly used as corporate growth
strategy for improving competitiveness, achieving synergies, greater market share, entering new markets,
broadening the portfolio to reduce business risk etc. This paper makes an attempt to examine the impact of
mergers on the financial performanceof Indian overseas bank(survivingcompany). It compares the pre and post-
merger financial performance of a company undergone for mergers in India in 2007. The study reveals that there
are no significant improvements in the earning capabilities, value of the shareholders, profitability
&creditworthiness of the surviving company in the post-merger period.

Keywords: Motives for mergers, due diligence, valuation, financial metrics, synergy.

1. Introduction
In the globalized economy, mergers and acquisitions act as an important tool for the growth and
expansion of companies. The main motive behind mergers & acquisitions are to create synergy. Mergers
& acquisitions help the companies in getting the benefits of greater market share, economies of scale and
shareholders wealth maximization etc. The success of the merger depends on how well the two companies
integrate themselves in carrying out day to day operations.

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Asia Pacific Journal of Research Vol: I. Issue XXXIII, November 2015
ISSN: 2320-5504, E-ISSN-2347-4793
Growth of a company relates to achievement of basic corporate goals and maximization of the
value of equity in long run. Growth may be attained either internally or externally. Internal growth is
achieved through the capital investment process. External growth is accomplished through business
combination, commonly known as mergers and acquisitions. Both types of growth have figured
importantly in the development of acompany.

Mergers & acquisitions is a big part in corporate world. M&A transactions bring together separate
companies to make larger ones. The phrase mergers and acquisitions refers to the aspect of corporate
strategy dealing with the buying, selling and combining of different companies that can aid a company to
grow rapidly without creating another business entity.

Growth is always the priority of all companies and confers serious concern to expand the business
activities. Mergers & acquisitions are not a single day process, it takes time and decisions are to be taken
after examining all the aspects. The process of Mergers & acquisitions includes:
 Defining the corporate strategy
 Identification of the target company
 Mergers & acquisitions valuation (Due Diligence)
 Mergers & acquisition implementation
 Post mergers & acquisitions integration

2. Research objectives:
 To examine whether post-merger earning capabilities of the surviving company has improved
 To evaluate the impact of mergers on shareholders wealth of the surviving company
 To examine whether post-merger profitability position of the surviving companyhas improved
 To analyze whether post-merger creditworthiness of the surviving companyhas improved
 To identify the synergies from merger.

3. Scope of the study:

 The present study is mainly intends to examine the performance of survivingcompany’s five years
before and five years after mergers.
 Company listed in BSE is considered for the study.

4. Research Design:
The study has been carried on with case study methodology to evaluate the pre- & post-merger
performance of selected case in India.

5. Data Collection:
 The study is based on secondary data.
 The data has been collected through data base of BSE&annual reports of the company.
 Data on performance evaluation parameters for up to five years prior &five years after the Merger
year has taken into consideration.

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Asia Pacific Journal of Research Vol: I. Issue XXXIII, November 2015
ISSN: 2320-5504, E-ISSN-2347-4793
6. Performance Evaluation Parameters:
To analyse the impact of mergers on the performance of the company, the following parameters
are used:
a) Enterprise Capitalization to EBITDA
b) Enterprise Capitalization to Sales
c) Equity value to Book value of the stock
d) Equity value to Earnings
e) Effect on acquiring company’s EPS
f) Net Profit Margin
g) EBITDA to Total Liabilities

Table 1: Selected case for the analysis of Pre and Post-Merger Performance:

Year of
Cases Surviving Company Target Company the
Merger

1 Indian overseas bank Bharat overseas bank 2007

7. Hypothesis:
H0: There is no significant difference in the financial performance of the company between pre and
post-merger period.
H1:There is a significant difference in the financial performance of the company between pre and post-
merger period.

8. Statistical Tools Applied:

Arithmetic mean, Standard deviation & T-test.

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Asia Pacific Journal of Research Vol: I. Issue XXXIII, November 2015
ISSN: 2320-5504, E-ISSN-2347-4793
9. Findings:
a) Case- Indian Overseas Bank(Indian Overseas Bank&Bharat Overseas Bank)
Table 2: Pre-Merger and Post-Merger Performance of Indian Overseas Bank
Before
Financial Std Mean T- P-
Sl.N0. & Mean Inference
Metrics Dev Difference Value Value
After

E C to Before 38.46 11.57

Pair-
EBTDA 10.90 1.213 0.292 Not Sig.
1
(Times) After 49.36 8.70

Pair- EC to Sales Before 10.38 1.09

0.98 1.636 0.177 Not Sig.
2 (Times)
After 11.36 1.11

Pair- E V to B V of Before 0.86 0.52

0.03 0.088 0.934 Not Sig.
3 Stock (Times) After 0.89 0.39

E V to Before 3.48 2.08

Pair-
Earnings 3.07 5.566 0.005 Sig.
4 After 6.55 1.95
(Times)

Pair- Effect on EPS Before 10.06 3.43

7.93 2.292 0.084 Not Sig.
5 (Rs.) After 17.98 5.14

Pair- Net Profit Before 13.42 4.14

-3.33 -0.932 0.404 Not Sig.
6 Margin (%) After 10.09 4.12

EBITDA to Before 2.50 0.67

Pair-
Total -0.61 -1.359 0.246 Not Sig.
7 After 1.89 0.33
Liabilities (%)

{Note: Level of Significance-5%, Statistical Test- Paired Sample T-Test (Two tailed test)}

The result from paired sample t-test at significance level of 0.05 indicates that overall thereis no
significant improvements in Indian Overseas Bankperformance. Null hypothesis is not rejected and
alternative hypothesis is rejected for Parameter 1, 2, 3, 5, 6 and 7 since it has p-value more than 0.05.
The p-value for parameter 4 is less than 0.05, therefore null hypothesis is rejected and alternative
hypothesis is accepted there by it shows that EV to Earnings has been increased significantly.

10. Conclusion
This study was undertaken to analyse the pre- and post-merger financial performance of the
merger case-Indian Overseas Bank&Bharat Overseas Bankand to see the effect of merger on the earning

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Asia Pacific Journal of Research Vol: I. Issue XXXIII, November 2015
ISSN: 2320-5504, E-ISSN-2347-4793
capabilities, profitability of the company and wealth of shareholders. The study shows that the surviving
company couldn’t able to improve the financial performance significantly. It was observed that financial
synergies were insignificant (Based on paired t-test) in this merger.

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