M&a Prel. Report Sachin

MANAGEMENT RESEARCH PROJECT

Interim Report

Consolidation in Indian banking industry Merger of SBS with SBI

Submitted by: Sachin Jakhar1 Enrollment No-07BS-3664 ON 24th October 2008

I.B.S, Hyderabad

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Student IBS, Hyderabad, Class of 2009

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Objective of the Project The idea behind the research project is to study Merger and Acquisition and based on the study finding out the main reason a firm goes for a merger. Also will try to find if the M&A is always beneficial or it backfires also and the reason for the same. I will be developing a case study on the proposed merger of SBS with SBI the study will help in finding the main reason behind the merger and the advantages and benefits which SBI will derive and the cost it will pay if it goes haywire.

Methodology The project will start with the study of literature (theory and various research papers on ―Mergers and Acquisitions‖). The study of work of various researchers and scholars will help me to have the overview of M&A, how it has evolved and what are the rationale behind the process, motives, benefits and opportunities. Also the problems faced by the firm going for it and the ex-efficiencies developed by the firms during the process. To cover the part related to the literature I will go through books on M&A and the research papers downloaded from internet. Then I will try to narrow down my approach to Indian context. I will study one recent M&A in Indian Banking industry. Finally I will try to develop a case study regarding the proposed merger of the SBS and SBI. As throughout the project I shall be making use of secondary data. So the report will be true only to the extent of the information available on the net.

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LITERATURE REVIEW Mergers and acquisitions in the Spanish banking industry: some empirical evidenceThe paper studies the impact of the consolidation process on the monetary transmission mechanism, the degree of competition in banking markets and the performance of banking institutions. It studies impact that mergers and acquisitions may have had on interest rates set by banks. Five indicators are used in study. First is to measure profit generating capacity; second indicates level of efficiency and productivity; third, indicates changes in market share; fourth, indicates business structure; and lastly, indicators of capital adequacy.

Implications of the bank merger wave for competition and stability- Elena Carletti, Philipp Hartmann, Giancarlo Spagnolo (July/August 2002) Paper discusses the effects of bank consolidation on competition and stability in the banking sector. Many papers have been referred but none of these papers, however, addresses how competition affects banks’ liquidity management and the functioning of the interbank market.

Motives for mergers and acquisitions in the indian banking sector – a note on opportunities & imperatives- Jay Mehta & Ram Kumar Kakani (SPJCM Working Paper: 06-13 (Nov.)) Paper talks about various motivations for mergers and acquisitions in the Indian Banking sector. The reasons include: (a) Fragmented nature of the Indian banking sector resulting in poor global competitive presence and position. (b) Large intermediation costs and consequent probability in increasing its risk profile. (c) To meet the new stringent international regulatory norms.

The economic impact of merger controls what is special about banking? Elena Carletti, Philipp Hartmann and Steven Ongena (working paper series NO.786 / JULY 2007) The paper attempts to shed some new light on by looking at the role legal and other institutional arrangements play in governing the review of mergers and acquisitions (M&As). Causes and consequences of banking mergers and identifying efficiency gains in bank mergers, except for gains in mergers among relatively small banks as studied by Berger and Humphrey (1991) and Wheelock and Wilson (2001) or efficiencies obtained in risk management studied by Hughes and Mester (1998). 3|Page

Efficiency and productivity effects of bank mergers: evidence from the Greek banking industry- Anthony N. Rezitis (University of Ioannina, Accepted 27 April 2007) The paper examines the impact of M&A’s on the technical efficiency and total factor productivity of the Greek banking sector during the period 1993–2004. It used financial performance ratios and the stochastic output distance function approach.

Efficiency effects of bank mergers and acquisitions in EuropeH.P. Huizinga, J.H.M. Nelissen, R. Vander Vennet (TI 2001-088/3, Tinbergen Institute Discussion Paper) The paper analyzes the efficiency effects of 52 horizontal bank mergers over the period 19941998; dynamic merger analysis indicates that the cost efficiency of merging banks is positively affected by the merger, while the relative degree of profit efficiency improves only marginally.

Do mergers improve the x-efficiency and scale efficiency of U.S. banksStavros Peristiani, (Federal Reserve Bank of New York Research Paper No. 9623, August 1996) The paper discusses the issue currently debated among bank analysts and economists i.e. Do mergers enhance the efficiency of surviving banks? This paper investigates the post merger performance of acquiring banks that participated in a merger during 1980-90. The evidence suggests that acquiring banks failed to improve post merger X-efficiency. Paper uses regression analysis to identify factors influencing the performance of bank merger survivors.

Banking consolidation- Simon Kwan (FRBSF economic letter, No. 2004-15, June 18, 2004)

There are a number of possible economic drivers for megamergers, from economic efficiency to the self interest of bank management four economic forces that may be driving large bank mergers. Economies of scale—the relationship between the average production cost per unit of output and production volume. Economies of scope. Potential for risk diversification. Bank managements’ personal incentives.

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The impact of mergers and acquisitions in the banking and insurance sector- Tina Weber, ECOTEC, Prof. Andrew Leyshon, University of Nottingham, Prof. Hans Schenk, Tilburg University ( January 2000). The paper looks at the outcome of M&A’s on shareholders. It concludes that it is unlikely that mergers among large banks, as well as take-over’s of small banks by large banks, are able to create much economic wealth. Most of the studies the underlying assumption is that improved stock performance (ex-ante studies) or improved profitability (ex-post studies) are best indicators of true performance increases.

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