International Research Journal of Finance and Economics
ISSN 1450-2887 Issue 22 (2008)
© EuroJournals Publishing, Inc. 2008
http://www.eurojournals.com/finance.htm
Post-Merger Performance of Acquiring Firms from Different
Industries in India
Pramod Mantravadi
Engagement Director – Centre for Executive Education
Indian School of Business, Hyderabad
E-mail: pramodmantravadi@yahoo.com
A Vidyadhar Reddy
Professor & Dean, Department of Business Management
Osmania University, Hyderabad
E-mail: vidyadharaileni@yahoo.co.in
Abstract
In today’s globalised economy, mergers and acquisitions (M&A) are being
increasingly used the world over, for improving competitiveness of companies through
gaining greater market share, broadening the portfolio to reduce business risk, for entering
new markets and geographies, and capitalising on economies of scale etc. This research
study was aimed to study the impact of mergers on the operating performance of acquiring
corporates in different industries, by examining some pre- merger and post-merger
financial ratios, with the sample of firms chosen as all mergers involving public limited and
traded companies in India between 1991 and 2003. The results suggest that there are minor
variations in terms of impact on operating performance following mergers, in different
industries in India. In particular, mergers seem to have had a slightly positive impact on
profitability of firms in the banking and finance industry, the pharmaceuticals, textiles and
electrical equipment sectors saw a marginal negative impact on operating performance (in
terms of profitability and returns on investment). For the Chemicals and Agri-products
sectors, mergers had caused a significant decline, both in terms of profitability margins and
returns on investment and assets
1.0. Introduction
In today's globalized economy, competitiveness and competitive advantage have become the
buzzwords for corporates around the world. Corporates worldwide have been aggressively trying to
build new competencies and capabilities, to remain competitive and to grow profitably. In the USA,
since the early 1900s, there have been six distinct waves of mergers and acquisitions, each with its
distinct characteristics and outcomes, as per a BCG report released in July 2007 1 (based on a detailed
analysis of more than 4,000 completed deals between 1992 and 2006 in USA). As per the report, “at
the beginning of the twentieth century, there was a drive for market share, followed three decades later
by a longer and more ambitious wave as companies connected together different elements of the value
chain, from raw materials and production through to distribution. The most recent wave, which started
in 2004, after the internet bubble at the turn of the century and the subsequent downturn, is driven by
consolidation motives” (see Figure 1 below).
1
Boston Consulting Groups’ research report, The Brave new world of M&A – How to create value from Mergers and Acquisitions, July 2007
Electronic copy available at: http://ssrn.com/abstract=1317757
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Figure 1: Six waves of M&A over the past century in USA
Source: Boston Consulting Groups’ research report, The Brave new world of M&A – How to create value from Mergers and Acquisitions, July 2007
1.1. Mergers and Acquisitions in Indian Industry
In Indian industry, the pace for mergers and acquisitions activity picked up in response to various
economic reforms introduced by the Government of India since 1991, in its move towards
liberalization and globalization. The Indian economy has undergone a major transformation and
structural change following the economic reforms, and “size and competence" have become the focus
of business enterprises in India. Indian companies realised the need to grow and expand in businesses
that they understood well, to face growing competition; several leading corporates have undertaken
restructuring exercises to sell off non-core businesses, and to create stronger presence in their core
areas of business interest. Mergers and acquisitions emerged as one of the most effective methods of
such corporate restructuring, and became an integral part of the long-term business strategy of
corporates in India. Over the last decade, mergers and acquisitions in the Indian industry have
continuously increased in terms of number of deals and deal value.
A survey among Indian corporate managers in 2006 by Grant Thornton 2 found that Mergers &
Acquisitions are a significant form of business strategy today for Indian Corporates. The three main
objectives behind any M&A transaction, for corporates today were found to be:
• Improving Revenues and Profitability
• Faster growth in scale and quicker time to market
• Acquisition of new technology or competence
2
Grant Thornton (India), The M&A and Private Equity Scenario, 2006
Electronic copy available at: http://ssrn.com/abstract=1317757
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Table 1:
Objectives of Indian Corporates for M&As
Objective behind the M&A Transaction
To improve revenues & Profitability
Faster growth in scale and quicker time to market
Acquisition of new technology or competence
To eliminate competition & increase market share
Tax shields & Investment savings
Source:
Responses (in %)
33%
28%
22%
11%
3%
Grant Thornton (India), The M&A and Private Equity Scenario, 2006
Given this context, the present study has attempted to examine the performance of companies
that have gone through mergers in India, in the post-reforms period, and see if mergers had a
significant impact on operating financial performance of merging companies. More specifically, the
study has aimed to study mergers of firms in different industry sectors in India, to see if there are
variations in the impact, for different industries.
1 (b) Review of Literature
1 (b) (i) Global Literature
There have been numerous studies on mergers and acquisitions abroad, in the last four decades, and
several theories have been proposed and tested for empirical validation. Researchers have studied the
economic impact of mergers and acquisitions on industry consolidation, returns to shareholders
following mergers and acquisitions, and the post-merger performance of companies. Whether or not a
merged company achieves the expected performance is the critical question that has been examined by
most researchers. Several measures have been postulated for analysing the success of mergers. Such
measures have included both short term and long-term impacts of merger announcements, effects on
shareholder returns of aborted mergers hostile takeover attempts and open offers etc.
A number of studies were done in developed capital markets of Europe, Australia, and the
USA, on evaluation of corporate financial performance following mergers. Lubatkin (1) reviewed the
findings of studies that have investigated either directly or indirectly the question, “Do mergers provide
real benefits to the acquiring firm?” The review suggested that acquiring firms might benefit from
merging because of technical, pecuniary and diversification synergies.
Healy, Palepu, and Ruback (2) examined post-acquisition performance for 50 largest U.S.
mergers between 1979 and 1984 by measuring cash flow performance, and concluded that operating
performance of merging firms improved significantly following acquisitions, when compared to their
respective industries. Ghosh (3) examined the question of whether operating cash flow performance
improves following corporate acquisitions, using a design that accounted for superior pre-acquisition
performance, and found that merging firms did not show evidence of improvements in the operating
performance following acquisitions.
Weston and Mansingka (4) studied the pre and post-merger performance of conglomerate
firms, and found that their earnings rates significantly underperformed those in the control sample
group, but after 10 years, there were no significant differences observed in performance between the
two groups. The improvement in earnings performance of the conglomerate firms was explained as
evidence for successful achievement of defensive diversification.
Marina Martynova, Sjoerd Oosting and Luc Renneboog (5) investigated the long-term
profitability of corporate takeovers in Europe, and found that both acquiring and target companies
significantly outperformed the median peers in their industry prior to the takeovers, but the profitability
of the combined firm decreased significantly following the takeover. However, the decrease became
insignificant after controlling for the performance of the control sample of peer companies. Katsuhiko
Ikeda and Noriyuki Doi (6) studied the financial performances of 43 merging firms in Japanese
manufacturing industry and found that the rate of return on equity increased in more than half the
cases, but rate of return on total assets was improved in about half the cases. However, both profit rates
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showed improvement in more than half the cases in the five-year test, suggesting that firm
performances after mergers began to be improved along with the internal adjustment of the merging
firms: there was a necessary gestation period during which merging firms learnt how to manage their
new organizations.
Kruse, Park and Suzuki (7) examined the long-term operating performance of Japanese
companies using a sample of 56 mergers of manufacturing firms in the period 1969 to 1997. By
examining the cash-flow performance in the five-year period following mergers, the study found
evidence of improvements in operating performance, and also that the pre- and post-merger
performance was highly correlated. The study concluded that control firm adjusted long-term operating
performance following mergers in case of Japanese firms was positive but insignificant and there was a
high correlation between pre- and post-merger performance.
In summary, the few studies done on operating performance of acquiring firms, thus far, in
other countries, have reported mixed results, with findings ranging from slightly positive to
significantly negative impact on operating performance of acquiring companies, following mergers.
1 (b) (ii) Research on post-merger performance in India
The research on post-merger performance following mergers and acquisitions in India thus far has been
limited. Surjit Kaur (8) compared the pre and post-takeover performance for a sample of 20 acquiring
companies during 1997-2000, using a set of eight financial ratios 3, during a 3-year period before and
after merger, using t-test. The study concluded that both profitability and efficiency of targeted
companies declined in post- takeover period, but the change in post-takeover performance was
statistically not significant.
Beena (9) analysed the pre and post-merger performance of a sample of 115 acquiring firms in
the manufacturing sector in India, between 1995-2000, using a set of financial ratios 4 and t-test. The
study could not find any evidence of improvement in the financial ratios during the post-merger period,
as compared to the pre-Merger period, for the acquiring firms. Pawaskar (10) analysed the pre-merger
and post-merger operating performance of 36 acquiring firms during 1992-95, using ratios 5 of
profitability, growth, leverage, and liquidity, and found that the acquiring firms performed better than
industry average in terms of profitability. Regression Analysis however, showed that there was no
increase in the post-merger profits compared to main competitors of the acquiring firms.
Thus, empirical testing of corporate performance following mergers of Indian companies has
been quite limited so far, with some studies that were focused on mergers in manufacturing sector, and
study of mergers during short time intervals.
2. Research Methodology
(a) Research Objectives
Considering the limited research on mergers and acquisitions in Indian industry, the present research
study has been aimed at reviewing the operating performance of firms going through mergers in Indian
industry, in the post-reforms period. The study has further attempted to investigate and test if there are
any significant deviations in the results achieved by mergers in different industry sectors in India, by
analyzing sub-samples representing industry sectors.
3
4
5
Ratios used were Modified Net Profit Margin (EBIT/ Sales), Return on Capital Employed (ROCE), Debt- Equity Ratio, Assets Turnover Ratio, Current
Ratio, Cash Flow to Sales, EV/EBITDA, Market Price to Book Value (MP/BV).
The financial ratios used were Price - Cost Margin (Profit after Tax / Net Sales), Rate of return (Profit Before Tax /Total Capital Employed),
Shareholders’ Profit (Profit After Tax /Net Worth), Dividend per equity (Dividend Per Share / Earnings Per Share), Debt-equity ratio, Export intensity
(Export/Gross sales), R&D intensity (R&D expenditure/Gross sales) and Capacity utilization (Net Sales/Total Assets).
Ratios used were: Operating Return on Assets (PBIDT/ Net Assets), Growth Rate (average growth rate in total assets), Leverage (Total Debt /(Total
Debt + Equity Capital)), Tax Provision (Tax / Operating Profit) and Liquidity ((Current Assets – Inventory) / Current Liabilities)
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(b) Methodology
The pre-merger and post-merger averages for a set of key financial ratios6 were computed for 3 years
prior to, and 3 years after, the year of merger completion (or the year of approval when the time of
merger completion is not available). The merger completion year was denoted as year 0. For the years
prior to a merger, the operating ratios of the acquiring firm alone are considered. Post the merger, the
operating ratios for the combined firm are taken. The post-merger performance was compared with the
pre-merger performance and tested for significant differences, using paired “t” test. Only mergers
where equity stock of acquiring firm was issued to acquired firm (target) shareholders, as consideration
for the acquisition / merger have been considered for the study. Instances where there have been only
cash acquisitions are excluded from this study, to ensure comparability of results across the sample.
Also deleted from the list were mergers where the relative size7 was less than 10%, as it was felt that
such low-size acquisition cannot make a significant impact on operating performance of the acquiring
company. Also eliminated from the sample were cases where sick (BIFR) companies have been taken
over by companies for getting tax credits, as it could reflect in lower operating performance post the
merger due to write-offs of depreciation and losses. Further, companies in the sample should not have
been engaged in further mergers/acquisitions within four years after the merger under study.
A list of companies involved in mergers during 1991-2003 was compiled from several sources
like newspapers, magazines, investment web sites, web sites of the BSE and NSE (for names of
delisted companies), SEBI’s web site (for details of companies making open offers for takeovers), and
databases of Capitaline and Prowess. The screening criteria described earlier were applied to such a list
to arrive at the final sample. Merger cases where at least two years of data for pre-merger period and at
least four years data for post-merger period was not available were removed from the study sample.
The final sample included 118 cases of mergers, in the defined period of study
(c) Research Hypotheses
To test the objectives mentioned above, the following hypotheses were formulated:
(i) H1: Mergers in India in the post-reform period have improved the operating performance of
acquiring firms
and
(ii) H2: Post-merger operating performance of acquiring companies is not affected by industry
type
3. Data Collection and Analysis
(a) Data Collection
Data on operating performance ratios for up to three years prior and three years after the acquisition
year for each acquiring company in the sample was extracted from Prowess database of CMIE. The
sample list of firms was further divided into industry-wise sub-samples (for significant sample sizes).
The final sample for the study had the industry-wise break-up as shown in Table 2 below.
6
7
The following Financial Ratios were used in the study: Operating Profit Margin (PBDIT/ Net Sales), Gross Profit Margin (PBIT / Net Sales), Net Profit
Margin (PAT / Net Sales), Return on Net worth (PBIT / Net worth), Return on Capital Employed (PAT / Capital Employed) and Debt Equity Ratio
(Book value of Debt / Book value of Equity)
Relative Size was measured as additional equity of acquiring firm that is issued to target firm shareholders, divided by pre-issue paid-up equity capital
of acquiring firm. It is an indicator of the relative sizes of the acquiring and acquired firms, as measured by their market capitalisation
International Research Journal of Finance and Economics - Issue 22 (2008)
Table 2:
197
Industry Wise Distribution of merging firms in the sample
Industry (acquiring Company)
Sugar & Agri- Products
Organic & Inorganic chemicals
Textiles
Banking & Finance
Pharmaceuticals & Healthcare
Electrical Equipment
Total
No of mergers
15
11
11
10
10
11
68
(b) Data Analysis
Pre-merger and post-merger operating performance ratios were estimated and the averages computed
for the entire set of sample firms, which have gone through mergers during the period 1991 to 2003.
The average ratios for each of the industry sub-samples were also computed. Average pre merger and
post merger financial performance ratios were compared to see if there was any statistically significant
change in operating performance due to mergers, using “paired two sample t-test” at confidence level
of 0.05
4. Results
(a) Analysis of all Mergers in the sample
Table 3:
All Mergers: Mean pre-merger and post-merger Ratios for merging firms
Operating Profit Margin
Gross Profit Margin
Net Profit Margin
Return on Net worth
Return on Capital Employed
Debt-equity Ratio
Pre-merger (3 yrs before)
19.467
15.599
6.265
15.368
24.541
1.254
Post-merger (3 yrs after)
18.772
13.900
3.353
6.880
16.988
1.382
t (0.05 significance)
0.779
1.845
2.695
3.886
5.936
-1.162
The comparison of the pre-merger and post-merger operating performance ratios for the entire
sample set of mergers showed that there was a decline in the mean operating profit margin (19.467% to
18.772%), but the decline was not statistically significant (t-statistic value of 0.779). However gross
profit margin (15.599% to 13.900%) and net profit margin (6.265% to 3.353%) ratios showed
statistically significant declines in the post-merger period (t-statistic values of 1.845 and 2.695).
Mean return on net worth (15.368% to 6.880%) and return on capital employed (24.541% to
16.988%) showed statistically significant decline post the merger (t- values of 3.886 and 5.936
respectively). There was a marginal but statistically insignificant increase in leverage after the merger
(1.254 vs.1.382), confirmed by the low t-value of -1.162.
The results suggest that operating financial performance of all mergers in the sample from
Indian industry had declined following mergers, as there was a decline in both the profitability ratios
and returns on net worth and invested capital. The results are comparable to those obtained by Beena
who found that most mergers during 1995-2000 in India were focused on asset growth through
restructuring, rather than focusing on improving operational efficiencies. The results above also agree
with the results of research studies in USA and Europe on operating performance of acquiring firms that the operating performance of acquiring firms had either stagnated or declined after mergers.
Based on the results of the analysis, the Hypothesis H1: Mergers in India in the post-reform
period have improved the operating performance of acquiring firms was rejected, since mergers were
found to negatively impact the performance in terms of both profitability and returns on investment.
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(b) Analysis of Operating Performance of acquiring firms in different industries
(i) Agri-Products
Table 4:
Mean pre-merger and post-merger Ratios for acquiring firms in Agri- Products Sector
Operating Profit Margin
Gross Profit Margin
Net Profit Margin
Return on Net worth
Return on Capital Employed
Debt-equity Ratio
Pre-merger
(3 years before)
16.973
14.036
6.590
22.047
30.278
1.175
Post-merger
(3 years after)
13.540
10.558
2.752
5.598
16.236
1.697
t-value (0.05 significance)
1.812
1.849
1.979
2.932
3.191
-1.267
The results indicated that the mean operating profit margin had declined following merger
(16.973% to 13.540%), and the decline was close to being statistically significant (t- value of 1.812).
Similarly, the mean gross profit margin (14.036% to 10.558%) and net profit margin (6.590% to
2.752%) also declined during post-merger period, and the declines were close to being statistically
significant (t-values of 1.849 and 1.979)
The mean return on net worth (22.047% to 5.598%) and mean return on capital employed
(30.278% to 16.236%) both showed a statistically significant decline during the post-merger period (tvalues of 2.932 and 3.191 respectively). The mean debt-equity ratio had marginally increased after
merger (1.175 to 1.697) but the change was not statistically significant (“t” value of -1.1267)
The above results suggested that for the agri-products sector, mergers had caused a significant
decline in terms of both profitability and returns on investment and capital deployed in the business.
(ii) Chemicals
Table 5:
Mean pre-merger and post-merger Ratios for acquiring firms in Chemicals Sector
Operating Profit Margin
Gross Profit Margin
Net Profit Margin
Return on Net worth
Return on Capital Employed
Debt-equity Ratio
Pre-merger (3 years before)
Post-merger (3 years after)
t (0.05 significance)
14.407
11.107
4.317
15.065
24.898
0.889
10.324
7.420
2.221
8.490
15.287
0.550
4.267
3.668
1.386
2.146
2.935
1.586
The results showed that the mean post-merger operating profit margin had declined in the postmerger period (14.407% to 10.324%), and the decline was statistically significant (high t-value of
4.267). Likewise, the mean gross profit margin also had declined in the post-merger period (11.107%
to 7.420%), and the decline was statistically significant, as indicated by the high t-value of 3.668. The
mean net profit margin also declined marginally in the post-merger period (4.317% to 2.221%) but the
decline was not statistically significant (t-value of 1.386)
Similarly, the mean return on net worth showed a significant decline during the post-merger
period (15.065% to 8.490%) and the decline was statistically validated (t-value of 2.146). Mean return
on capital employed also showed a significant decline during the post-merger period (24.898% to
15.287%). The decline was also statistically validated (t-value of 2.935). The debt-equity ratio had
marginally declined after merger (0.889 to 0.550) but the decline was not statistically significant (tvalue of 1.586).
The above findings suggested that for the Chemicals sector, mergers had caused significant
decline both in profit margins and the returns on net worth and capital deployed in the business.
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199
(iii) Textiles and textile products
Table 6:
Mean pre-merger and post-merger Ratios for acquiring firms in Textiles and textile products Sector
Operating Profit Margin
Gross Profit Margin
Net Profit Margin
Return on Net worth
Return on Capital Employed
Debt-equity Ratio
Pre-merger (3 years before)
Post-merger (3 years after)
t (0.05 significance)
14.897
9.928
2.262
9.886
19.596
1.539
12.994
6.822
-0.905
-5.232
10.723
1.535
1.155
1.514
1.195
1.319
2.734
0.013
The results showed that the mean operating profit margin had marginally declined during postmerger period (14.897% to 12.994%), but the decline was not statistically significant, the t-value being
1.155. Likewise, the mean gross profit margin (9.928% to 6.822%)) and mean net profit margin
(2.262% to -0.905%) had also declined during the post-merger period, but the declines were again not
statistically significant, (t- values of 1.514 and 1.195 respectively)
The mean return on net worth showed a significant decline during the post-merger period
(9.886% to -5.232%) but the decline was not statistically validated, with a “t” value of 1.319. However,
the mean return on capital employed showed a significant decline during the post-merger period
(19.596% to 10.723%) and the decline was statistically validated (t-value of 2.734. The debt-equity
ratio did not show any change after merger (1.539 vs. 1.535 ), and the low “t” value of 0.013 confirmed
the same.
The above findings suggested that for the Textiles and textile products sector, mergers had
caused a marginal but statistically insignificant decline in operating performance, in terms of
profitability margins and returns on invested capital
(iv) Banking & Finance
Table 7:
Mean pre-merger and post-merger Ratios for acquiring firms in Banking & Finance Sector
Operating Profit Margin
Gross Profit Margin
Net Profit Margin
Return on Net worth
Return on Capital Employed
Debt-equity Ratio
Pre-merger (3 years before)
55.658
46.883
17.888
10.277
25.041
1.323
Post-merger (3 years after)
65.565
51.970
9.918
14.665
21.867
2.203
t (0.05 significance)
-1.377
-0.626
0.860
-0.615
0.569
-1.971
The results showed that the mean operating profit margin had marginally increased during postmerger period (55.658% to 65.565%), but the low t-value of -1.377 suggested that the difference was
not statistically significant. Likewise, the mean gross profit margin had also increased during the postmerger period (46.883 % to 51.970%), but the increase was not statistically significant, as indicated by
the low t-value of -0.626. The mean net profit margin had however declined during post-merger period
(17.888% to 9.918%), but again this was not statistically significant, as indicated by the very low tvalue of 0.860.
The mean return on net worth showed an increase during the post-merger period (10.277% to
14.665%) but the increase was not statistically validated (low t-value of -0.615). In contrast, the return
on capital employed showed a marginal decline during the post-merger period (25.041% to 21.867%),
but the decline was again not statistically validated (low t-value of 0.569). The mean debt-equity ratio
showed a significant rise after merger (1.323 to 2.203), as suggested by the “t” value of -1.971.
The above results suggested that for the Banking & Finance Sector in India, mergers had
caused an improvement in the profit margins and returns on net worth, though not substantiated
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statistically. At the same time, due to increase in leverage and interest costs, the net profit margin and
return on capital employed had declined marginally, though again not statistically significant. These
findings suggested that for this industry, mergers had improved operational cost efficiencies and
increased operating profitability margins, but the increased efficiencies could not be translated into
higher net profit, due to increase in debt levels consequent to the merger
(v) Pharmaceuticals
Table 8:
Mean pre-merger and post-merger Ratios for acquiring firms in Pharmaceuticals Sector
Operating Profit Margin
Gross Profit Margin
Net Profit Margin
Return on Net worth
Return on Capital Employed
Debt-equity Ratio
Pre-merger (3 years before)
16.738
14.312
7.696
31.204
30.658
1.680
Post-merger (3 years after)
17.375
14.260
6.107
11.386
23.590
1.180
t (0.05 significance)
-0.266
0.020
0.525
1.961
1.411
1.112
The results showed that the mean operating profit margin had marginally increased during the
post-merger period (16.738% to 17.375%) but the increase was not statistically significant, as
confirmed by the low t-value of -0.266. The mean gross profit margin seemed unchanged after merger
(14.260% vs. 14.312%), and confirmed by the low t-value of 0.020. The mean net profit margin had
marginally declined during post-merger period (7.696% to 6.107%) but the decline was not statistically
significant (low t-value of 0.525)
The mean return on net worth showed a significant decline during the post-merger period.204%
to 11.386%) and the decline was just short of being statistically significant, with a t-value of 1.961.
The mean return on capital employed also showed a significant decline during the post-merger period
(30.658% to 23.590%) but the decline was not statistically validated (t- value of 1.411). The mean
debt-equity ratio had declined marginally after merger, (1.680 to 1.180) but the change in leverage was
not statistically significant (t- value of 1.112).
The above findings suggested that for the Pharmaceuticals Sector, mergers had caused no
change in profitability while there was a decline in return on net worth and capital deployed in the
business. For this industry, the consolidation through mergers had helped increase the scale of
operations and asset size without affecting the profit margins, but a marginal decline in return on assets
and investments.
(vi) Electrical Equipment
Table 9:
Mean pre-merger and post-merger Ratios for acquiring firms in Electrical Equipment Sector
Operating Profit Margin
Gross Profit Margin
Net Profit Margin
Return on Net worth
Return on Capital Employed
Debt-equity Ratio
Pre-merger (3 years before)
Post-merger (3 years after)
t (0.05 significance)
12.128
9.221
1.883
8.220
21.376
1.381
11.630
8.321
1.973
7.354
20.842
1.402
0.243
0.461
-0.035
0.099
0.126
-0.049
The results showed that the mean operating profit margin had declined marginally after merger
(12.128% to 11.630%) but not significant statistically (low t-value of 0.243). Mean gross profit margin
also declined marginally during the post-merger period (9.221% to 8.321% but again the decline was
not statistically significant (low t-value of 0.461). However, mean net profit margin showed a marginal
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201
rise during post-merger period (1.883% to 1.973%), but the rise was not statistically significant, as
confirmed by the low t-value of -0.035
Mean return on net worth showed a marginal decline during the post-merger period (8.220% to
7.354%) but the decline was not statistically significant (t- value of 0.099). Similarly, the mean return
on capital employed also showed a marginal decline during the post-merger period (21.376% to
20.842%) but again the decline was not statistically significant (low t-value of 0.126). The debt-equity
ratio seemed unchanged after merger (1.402 vs. 1.381) and confirmed by the low t-value of -0.049
The above findings suggested that for the Electrical Equipment Sector, mergers had caused
marginal but statistically insignificant negative impact on the profitability margins and returns on
capital deployed in the business, while debt levels had not changed significantly. The results seem to
indicate that for this industry, the consolidation through mergers had helped in increasing the scale of
operations and asset base, without impacting the profitability and returns on investment
Based on above results, the hypothesis H2: Type of industry does not affect on change in
operating performance of acquiring companies following mergers was rejected, since different
results were obtained for merger samples in different industry sectors, in terms of the impact on
operating performance (though some of the differences were not statistically significant). While the
banking sector saw a marginal improvement in profitability after merger, the pharmaceuticals, textiles
and electrical equipment sectors saw a marginal negative impact on operating performance (in terms of
profitability and returns on investment). For the Chemicals and Agri-products sectors, mergers had
caused a significant decline, both in terms of profitability margins and returns on investment and assets
5. Conclusions
This study was undertaken to test whether the industry type has an impact on the outcome of merger
for the merging firm, in terms of impact on operating performance. The results from the analysis of
pre- and post-merger operating performance ratios for the acquiring firms in the sample showed that
there was a differential impact of mergers, for different industry sectors in India. Type of industry does
seem to make a difference to the post-merger operating performance of acquiring firms
6. Limitations of the study
The study has ignored the impact of possible differences in the accounting methods adopted by
different companies in the sample, as the sample included only stock-for-stock mergers. The study has
also not used any control groups for comparison (industry average or firms with similar characteristics)
as was done in other studies. A sample spanning a longer period was considered adequate to arrive at
unbiased results, and to account for cross-sectional dependence. The above differences in methodology
could likely have affected the out comes reported, when compared with other studies on post-merger
performance. Another limitation of the study was the small sample size of mergers in each industry
sector, which might bring in the question of statistical validity of the results.
Future research in this area could be an extension of the present study, by estimating and
comparing with industry/sector averages, and the differences, if any, could be explored further to
derive further insights. Researchers could also analyse the post-merger returns to shareholders of
acquiring firms involved in mergers in India, to correlate with findings of studies indicating poor postmerger performance.
202
International Research Journal of Finance and Economics - Issue 22 (2008)
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International Research Journal of Finance and Economics - Issue 22 (2008)
Annexure 1
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List of mergers used in the study
Merging Company
A B B Ltd.
Aban Offshore Ltd.
Abhishek Industries Ltd.
Abhishek Industries Ltd.
A C I Infocom Ltd.
Aarti Industries Ltd.
Amforge Industries Ltd.
Asahi India Safety Glasses
Atlas Copco (India) Ltd.
Balaji Industrial Corpn. Ltd.
Balrampur Chini Mills Ltd.
Bambino Agro Inds. Ltd.
Bannari Amman Sugars Ltd.
Bayer (India) Ltd.
B A S F India Ltd.
Berger Paints India Ltd.
Bright Brothers Ltd.
Camphor & Allied Products Ltd.
Ceekay Daikin Ltd.
Cimmco Birla Ltd.
Core Healthcare Ltd.
Carbon Everflow Ltd
Carbon Corporation Ltd.
Century Enka Ltd.
TCFC Finance
Cheminor Drugs Ltd.
Delton Cables Ltd.
D S P Merrill Lynch Ltd.
Dhampur Sugar (Kashipur) Ltd.
Dr. Reddy's Laboratories Ltd.
Eicher Ltd.
E L Forge Ltd.
Emami Ltd.
Essar Shipping Ltd.
G K W Ltd.
Gillette India Ltd.
Glaxo Wellcome
G M R Industries Ltd.
Granules India Ltd.
Gujarat Ambuja Exports Ltd.
Godrej Soaps Ltd
Gulshan Sugars & Chemicals Ltd.
Gujarat Petrosynthese Ltd.
Gulf Oil Corporation Ltd.
Hawkins Cookers Ltd.
Himachal Futuristic Communications Ltd.
H B L Nife Power Systems Ltd.
Himadri Chemicals & Inds Ltd.
Ideaspace Solutions Ltd
India Foils
Indo Flogates Ltd
J C T Ltd.
Jai Corp Ltd.
Jain Irrigation Systems Ltd.
Joindre Capital Services Ltd.
Kalpataru Power Transmission Ltd.
Kei Industries Ltd.
Khoday Distilleries
Kirloskar Investments & Finance Ltd.
Kirloskar Pneumatic Co. Ltd.
Kitply Industries Ltd.
La Opala
Loyal Textile Mills Ltd
Merged Company
Flakt India Ltd.
Hitech Drilling Services India Ltd
Abhishek Spinfab Corporation Ltd.
Varinder Agro Chemicals Ltd.
ACI Computer (India) Ltd.
Salvigor Laboratories Limited
Isha Steel Processors Ltd.
Floatglass (India) Ltd.
Chicago Pneumatic India Ltd.
Nivee Industries Ltd.
Babhnan Sugar Mills
Bambino Food Industries
Coimbatore Alcohol & Chemicals Ltd
Aventis Cropscience India Ltd.
Cyanamid Agro
Rajdoot Paints Ltd
Brite Automative & Plastics Ltd.
Pine Chemicals Ltd
Exedy Ceekay Ltd
Biax Ltd.
Core Laboratories Ltd.
Graphite India Ltd.
Graphite Vicarb India Ltd.
Rajashree Polyfil Ltd.
20th Century Finance Corporation
Globe Organics Ltd.
Delton Sales & Services Ltd.
DSP Merrill Lynch Securities Ltd.
DSM Sugar (Kashipur)
Cheminor Drugs Ltd
Eicher Tractors Limited
Chendur Forge Exports Ltd.
Himani Limited
South India Shipping
Powmex Steels
Duracell India Ltd.
Smithkline Pharmaceuticals Ltd
Varalakshmi Sugars Ltd
Triton Laboratories Ltd
Gujarat Ambuja Cotspin
Gujarat Godrej Innovative Chemicals
Prestige Fibres Ltd
Karnataka Petrosynthese Ltd.
IDL Industries Ltd.
PCA Engineers Ltd
Himachal Telematics Ltd.
Hyderabad Batteries Ltd (HBL Ltd)
Himadri Ispat Ltd
Esteem Capital Services Ltd
Namtok Invst. and Maknam Investment.
IFGL Refractories
JCT Fibres Ltd.
Sipta Coated Steels and Comet Steels
Jain Plastic & Chemicals
Joindre Shares & Stocks Ltd
Vihar Securities Pvt. Ltd.
Matchless Engineers Ltd.
Khodayss Systems Ltd.
Kirloskar Leasing & Finance
K G Khosla Compressors Ltd.
Nuboard Mfg. Co.
Radha Glass & Industries Ltd.
Valli Cotton Traders Ltd.
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Makers Laboratories Ltd
Manugraph India Ltd
Mcleod Russel (India)
Max India Ltd
Modern Threads (India) Ltd
Nahar Industrial Enterprises Ltd
Nahar Exports Ltd
Nagpur Engineering Company (NECO)
Natco Pharma Ltd
Nestle India Ltd
Nirma Ltd
Northeast Securities
GVK Hotels & Resorts Ltd
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Parry Agro Inds. Ltd
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
Pix Transmissions Ltd
Phoenix Lamps Ltd
Polar Industries Ltd
Polar Industries Ltd
Polaris Software Lab Ltd
Poona Dal & Oil Inds Ltd
Precision Wires India Ltd
Quintegra Solutions Ltd
Ratnabali Capital Markets Ltd
Ratnamani Metals & Tubes Ltd
Reliance Industries Ltd
Riddhi Siddhi Gluco Biols Ltd
Sainik Finance & Inds. Ltd
Sakthi Sugars Ltd
Salzer Electronics Ltd
Saregama India Ltd
Samtel Color Ltd
Sinclairs Hotels Ltd
Sky Industries Ltd
S K P Securities Ltd
S O L Pharmaceuticals Ltd.
Spartek Ceramics India Ltd.
Sree Rayalaseema Hi-Strength Hypo
Super Tannery Ltd.
Suzlon Fibres Ltd
Consolidated Coffee Ltd
Tata Finance Ltd.
Tata Investment Corpn Ltd.
Tata Power Co. Ltd.
Special Steels
Textool Co. Ltd.
Tirupati Texknit
Today's Writing Products Ltd.
TRF Ltd
Tulsyan N E C Ltd.
Twilight Litaka Pharma Ltd.
Usha Beltron
Videocon International Ltd
Warren Tea Ltd.
Whirlpool Of India Ltd.
W S Industries (India) Ltd.
Makers Drugs & Food Products Ltd.
Manuweb International Ltd
Eveready Industries (India) Ltd.
Maxxon India Ltd.
Modern Woollens Ltd.
Nahar Fabrics
Nahar Fibres
Nagpur Alloy Castings & Jayaswals Neco
Natco Laboratories
Nutritional Food Products
Nilnita Chemicals
Nettlinx Ltd
Novopan Industries Ltd
Kasturi Agro Products Pvt Ltd (KAPL) &
Sweetdream Investments Pvt Ltd (SIPL)
Pix Autos Ltd
Phoenix Electric (India) Ltd
Polar Electrotech
Polar Fan Industries Ltd (PFIL)
Orbitech Solutions Limited
Poona Agro Foods Ltd
Atlas Wires Ltd
Transys Technologies Pvt. Ltd
Ratnabali Securities Ltd
Ratnamani Engineering Ltd
Reliance Petroleum Ltd
K.G. Gluco Biols Ltd
Ramanuj Leasing Ltd
Sakthi Soyas Ltd
Salzer Controls Ltd
RPG Music International and Gramco
Samtel Electron Devices Ltd
Pressman Resorts Ltd
Eskay Narrow Fabrics Pvt. Ltd
SKP Brokerage Ltd
Standard Organics Ltd
Spartek Granites
Sree Rayalseema Petrochemicals Ltd
Super Agro tech Ltd.
Suzlon Synthetics Ltd.
Asian Coffee (ACL)
Telco Dealers Leasing & Finance Co
Varuna Investments Ltd.
Andhra Valley Power Supply Company
Tata Metals & Strips
Coimbatore Cots and Coatings Ltd.
T T Finance
Today's Writing Instruments Ltd
Tata Material Handling Systems Ltd
Tulsyan Synthetics Ltd
Pegasus Laboratories Ltd.
Usha Martin Industries Limited
Videocon Narmada Electronics Ltd.
Warren Metal Industries Ltd.
Whirlpool Financial India Private Limited
SSB Industries Ltd