Mergers in Banking Industry of India

There are few efforts have been made to measure the impact of banks M&A on their employees and staff. However, apart from this some efforts have been made to study the state of customers in the course of M&A. Acquisitions often have a negative impact on employee behavior resulting in counterproductive practices, absenteeism, low morale, and Job dissatisfaction. It appears Society for Business Research Promotion 1158 that an important factor affecting the successful outcome of acquisitions is top management’s ability to gain employee trust.

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Panama (2011) studied ongoing merger trends in Indian banking from the viewpoint of two important stakeholders of a banking firm- stockholders and managers. The findings shows that the trend of consolidation in Indian banking industry has so far been limited mainly to restructuring of weak banks and harmonistic of banks and financial institutions. Voluntary mergers demonstrating market dynamics are very few. She concluded that Indian financial system requires very large banks to absorb various risks emanating from operating in domestic and global environments.

It is evident from large number of studies conducted on Mergers & Acquisition that it is most widely used strategic option adopted by organizations for growth purpose. Rhodes (1998) summarized nine case studies, by nine authors, on the efficiency effects of bank mergers. The mergers selected for study were ones that seemed relatively likely to yield efficiency gains. That is, they involved relatively large banks generally with substantial market overlap, and most occurred during the early sass when efficiency was getting a lot of attention in banking.

All nine of the mergers resulted in significant cost cutting in line with pre-merger projections. Four of the nine mergers were clearly successful in improving cost efficiency but five were not. It was found in the studies of Humphrey, Wilson, Brigandage & Limbo (2006) that industry consolidation occurred primarily because of financial and technological innovation that altered the optimal production functions of financial firms. The enabling force was a wave of financial deregulation that was necessary for banks and other financial services to take full advantage of the new production processes and systems, and payments systems.

Sergei & Loyola (2008) finds that financial deregulation and technological progress has an important role in the process of mergers and acquisitions in the banking sector during the period 1995-2001. They used Multinomial logic analysis to conclude the characteristics of continental European financial institutions and observed that size is an important factor in mergers and acquisitions. Denying, Ivanhoe & Molybdenum (2009) have found in their study that the changes in deregulation, allowed commercial banks and other financial services firms to expand through mergers and acquisition into geographic markets and product markets.

Caliph, Tara & Brock (2011) have reviewed M motives and success factors in their article such as entering a new market, gaining new scarce resources, achieving synergies and other managerial and organizational factors that are associated with M I. E. Relative size of M partner, managerial involvement, culture and organizational structural issues etc. On the basis of our studies of 17 bank mergers in India, we can identify following motives and rationale for mergers. 1 . Market Leadership The merger can enhance value for shareholders of both companies through the amalgamated entity’s access to greater number of market resources.

With addition to market share a company can afford to control the price in better manner with a consequent increase in profitability. 2. Growth and Diversification Companies that desire rapid growth in size or market share or diversification in the range of their products may find that a merger can be used to lawful the objective instead of going through the volume consuming process of internal growth or diversification. The firm may 1159 achieve the same objective in a short period by merging with an existing firm.

In addition, such a strategy is often less costly than the alternative of developing the necessary production capability and capacity. 3. Synergy Implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It refers to benefits other than those related to economies of scale. Operating economies are one form of synergy benefits. 4. Risk Managing Bankruptcy and organizational risks, recent studies have established that if merger and acquisitions in banks if allowed in a controlled manner would significantly reduce the bankruptcy risk of the merged entity.

Obviously, mergers would also provide these benefits to banks in India reducing their bankruptcy concerns. 5. Economies of Scale With the help of mergers and acquisitions in the banking sector, the banks can achieve significant growth in their operations and minimize their expenses to a considerable extent. Another important advantage behind this kind of merger is that in this banking industry. 6. Economies of Scope An ability to grow products and segments and an opportunity to cross sell would enhance revenue. This could also result in more geographic growth.