Post-Merger Liquidity and Solvency Position: An Empirical Analysis of
selected companies in India
*Abhimanyu Sahoo
Abstract
In the LPG era mergers and acquisitions (M&A) are widely used the world over for
improving competitiveness of Companies. It helps not only in gaining greater market share
but also encourages for entering into new markets and geographies. The present study is an
attempt to examine the impact of merger and acquisition on the operating performance of
acquiring firms in different industries in India by analyzing some pre-merger and postmerger financial ratios of sampled companies. Statistical paired sample t test has been
performed to find out the difference. The results suggested that there are some minor
variations in terms of impact on operating performance following mergers in different
industries in India.
Keywords: Merger and Acquisition, Liquidity, Leverage, Long-run, Short-term
*Abhimanyu Sahoo, Research Scholar, School of Commerce and Management Studies,
Ravenshaw University, Cuttack. E-mail- ca.abhi@outlook.com
1
INTRODUCTION
A company can achieve growth through either internal or external expansion. Internal
expansion refers to extending the horizons of same business by increasing production of same
products and services or through diversification. To increase the shareholders’ value
companies follow external expansion strategy. External expansion strategy leads to growth
resulting from the acquisition or merging another company. The term merger is employed to
describe a process by which one company amalgamates with another company to maximize
the wealth of its shareholders.
Merger and acquisition is believed to be a significant and increasingly popular means for
achieving corporate diversity and growth. The motives of merger include achieving synergies
and influenced by managerial expertise which leads to strengthening their competitive
advantage in the market over their rivalry or competitors. This can be achieved through
utilising their core competence in the area of their expertise which is complementary to each
other so that they can reap the advantage of market opportunities to the fullest extent
together, which they could not achieve individually. With effective control, the experience of
the acquiring company’s management may contribute to synergy and increase post merger
performance. A company may have control on another company only by acquiring shares in
that company. In case of mergers and acquisitions, besides, diversifying business and
increasing shareholders’ value, companies have some auxiliary aims which make extra
benefits such as decreasing cost by sharing activities, increasing competitiveness of the
organisation, enhancing the potential skills of staff, promoting more research and
development facilities, etc.
OBJECTIVES OF THE STUDY
1. To analyze the effect of merger on Liquidity Standards of the surviving entity in each
company under review in the long-run.
2. To examine the effect of merger on the Leverage Standards of the surviving
companies in the long-run.
RESEARCH HYPOTHESIS
H0: There is no significant improvement in the liquidity position of the surviving
companies after merger and acquisition in the long-run.
H0: There is no effect on leverage standards of the surviving companies after the merger
and acquisition in the long-run.
REVIEW OF LITERATURE
Saple V. (2000), “Diversification, Mergers and their Effect on Firm Performance: A Study of
the Indian Corporate Sector” he finds that the target firms were better than industry averages
while the acquiring firm shad lower than industry average profitability. Overall, acquirers
were high growth firms which had improved the performance over the years prior to the
merger and had a higher liquidity.
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Vanitha. S (2007) “Mergers and Acquisition in Manufacturing Industry” she analyzed the
financial performance of the merged companies, share price reaction to the announcement of
merger and acquisition and the impact of financial variables on the share price of merged
companies. The author found that the merged company reacted positively to the merger
announcement and also, few financial variables only influenced the share price of the merged
companies.
Vanitha. S and Selvam. M (2007) in their research article on “Financial Performance of
Indian Manufacturing Companies during Pre and Post Merger”, they analyzed the pre and
post merger performance of Indian manufacturing sector during 2000-2002 by using a sample
of 17 companies out of 58 (thirty percent of the total population). For financial performance
analysis, they used ratio analysis, mean, standard deviation and t-test. They found that the
overall financial performance of merged companies in respect of 13 variables were not
significantly different from the expectations.
Kumar (2009), "Post-Merger Corporate Performance: an Indian Perspective" examined the
post-merger operating performance of a sample of 30 acquiring companies involved in
merger activities during the period 1999-2002 in India. The study attempts to identify
synergies, if any, resulting from mergers. The study uses accounting data to examine merger
related gains to the acquiring firms. It was found that the post -merger profitability, assets
turnover and solvency of the acquiring companies, on average, show no improvement when
compared with pre- merger values.
Pramod Mantravadi & A Vidyasagar Reddy (2008), in their empirical study “Post-Merger
Performance of Acquiring Firms from different Industries in India”, aimed to study the
impact of mergers on the operating performance of acquiring corporate 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 result suggests that there are minor variations in terms of impact
on operating performance following mergers in different Industries in India
Dr. Salma Ahmed & Yasser Mahfooz (2009) in their case study paper, “Consolidation in
the Sky - A Case Study on the Quest for Supremacy between Jet Airlines and Kingfisher
Airlines”, did an attempt to descriptively analyze the rationale for consolidation in the Indian
airline industry. The paper also evaluates major changes in the business environment
affecting the airline industry.
Dr. Neena Sinha, Dr.K.P.Kaushik & Ms. Timcy Chaudhury (2010) in their research
article on “Measuring Post Merger and Acquisition Performance: An Investigation of Select
Financial Sector Organizations in India”, examines the impact of mergers and acquisitions on
the financial efficiency of the selected financial institutions in India. The analysis consists of
two stages. Firstly, by using the ratio analysis approach, they calculate the change in the
position of the companies during the period 2000-2008. Secondly, they examine changes in
the efficiency of the companies during the pre and post merger periods by using nonparametric Wilcoxon signed rank test. The result of the study indicate that M&A cases in
3
India show a significant correlation between financial performance and the M&A deal, in the
long run, and the acquiring firms were able to generate value.
N. M. Leepsa & Chandra Sekhar Mishra (2012) in their research paper on “Post Merger
Financial Performance: A Study with Reference to Select Manufacturing Companies in
India”, intends to study the trend in merger and acquisition (M&A) particularly with
reference to manufacturing companies. The present study is an attempt to find out the
difference in post-merger performance compared with pre-merger in terms of profitability,
liquidity and solvency. The statistical tools used are descriptive statistics, paired sample t-test
Sunil Kumar (2013) in his research article “Impact of Substantial Shareholdings on Synergy
Creation in Post-mergers and Acquisitions Period” attempts to study the impact of substantial
shareholdings on Synergy Creation in Post-mergers and Acquisitions Period. In this paper, it
has been investigated that how the substantial shareholding of acquirer company in the target
company lead to create synergy after mergers. With the help of Anova and TUKEY HSD
test, it has been observed that substantial shareholding of Acquirer Company before merger
has impact on research and development and represented as synergy after merger.
The present study is an existing gap which attempts to find out the difference in post-merger
performance compared with pre-merger in terms of liquidity and leverage standards in the
long-run in different Industries in India. The statistical tools used are descriptive statistics,
paired sample t-test.
RESEARCH METHODOLOGY
Sampling Technique: In the present study Convenience Sampling method has been used
depending upon the availability of data. Such a selection represents the sample in a better
way and reflects better relationship with the other variables.
Selection of the Sample: This empirical study analyses the financial data of selected firms in
diversified sectors including Steel, Chemicals, Telecommunication, Information Technology,
Automobile and Power for a period ranging from 8 to 10 years which were merged during
the period 2000-2010.
Sources and Collection of Data: In order to judge the financial performance of the merging
firms at least 5 years financial data is required. The required data have been collected from
different websites.
Period of the Study: The year 2000-13 is considered as the event years to identify the major
M&A deals in different industries and to compare the corporate performance on different
parameters like liquidity and leverage standards.
Tools used for Analysis: The financial performance of the 7 sample merging firms before
and after the M&A deal has been analyzed with the help of following ratios:
4
Type
Liquidity Ratio
Leverage Standard
Table-1 (Ratios Used)
Ratio
Formula
Current Ratio
Current Assets/Current Liabilities
Quick Ratio
Liquid Assets / Liquid liabilities
Debt-Equity Ratio
Long Term Debt/ Equity
DATA ANALYSIS
(i)
Liquidity Analysis: Liquidity or short term solvency means the ability of the
enterprise to meet the short-term obligations as and when they become due. An
inability to pay off short-term liabilities affects the credibility of the entity. Shortterm creditors are primarily interested in liquidity or short-term solvency of the
enterprise since their claims are to be met in the short term. Continuous default on
part of the enterprise leads to commercial bankruptcy which may lead to its sickness
and dissolution. For liquidity analysis Current Ratio and Quick Ratio are used.
(a)Current Ratio: This ratio establishes a relationship between current assets and
current liabilities. Current Assets refer to those assets which are held for their
realization into cash in the normal course of business normally within a year. Current
Liabilities are those liabilities basically incurred in the normal business operation and
mature nearly within a year. The objective of computing this ratio is to measure the
ability of an entity to meet its short-term obligations and to reflect short-term
financial strength or solvency of business. It shows the safety margin available for
short-term creditors.
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
Table-2 (Current Ratio)
Company Name
Before
After
D
Merger
Merger
1.715
0.86
-0.855
TATA Communication Ltd.
4.675
1.62
-3.055
Dr Reddys Lab.
1.03
1.6675
0.6375
Graphite India Ltd.
2.183
0.862
-1.321
HINDALCO
1.37
3.8
2.43
Mahindra Lifespace Developers
1.33
1.33
0
Aditya Birla Nuvo
6.013
2.21
-3.913
GTL Ltd.
TOTAL
-6.0765
Source: Compiled & Computed Data
̅=
𝑫
∑𝑫
𝒏
5
D2
0.731025
9.333025
0.406406
1.745041
5.9049
0
15.31157
33.43197
= -0.86807
𝒅=√
̅ )𝟐
∑ 𝑫𝟐 − 𝒏(𝑫
𝒏−𝟏
= 2.1662998
𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐄𝐫𝐫𝐨𝐫(𝐒. 𝐄) =
𝐝
√𝐧
= 0.8187844
𝐭=
̅
𝐃
𝐒. 𝐄
= -1.060195
(b) Quick Ratio: This ratio establishes a relationship between comparatively liquid
assets (Quick Assets) and current liabilities. The objective of computing this ratio is
to measure the ability of the firm to meet its short term obligations as and when due
without relying upon the realization of stock.
(𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 – 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 − 𝑃𝑟𝑒𝑝𝑎𝑖𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Table-3 (Quick Ratio)
Company Name
Before
After
D
D2
Merger
Merger
1.995
0.85
-1.145
1.311025
TATA Communication Ltd.
4.015
1.673
-2.342
5.484964
Dr Reddys Lab.
1.28
1.541
0.261
0.068121
Graphite India Ltd.
1.973
0.5922
-1.3808
1.906609
HINDALCO
1.445
1.585
0.14
0.0196
Mahindra Lifespace Developers
1.413
1.767
0.354
0.125316
Aditya Birla Nuvo
6.223
2.501
-3.722
13.85328
GTL Ltd.
TOTAL
-7.8348
22.76892
Source: Compiled & Computed Data
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 =
∑𝑫
𝒏
= -1.11926
̅=
𝑫
̅ )𝟐
∑ 𝑫𝟐 − 𝒏(𝑫
√
𝒅=
𝒏−𝟏
= 1.5275123
𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐄𝐫𝐫𝐨𝐫(𝐒. 𝐄) =
𝐝
√𝐧
= 0.5773454
6
̅
𝐃
𝐒. 𝐄
= -1.938627
(ii) Leverage Standard:
Leverage Analysis is the technique, which is used to quantify the Risk Return
Relationship of different capital structure. Risk exists because of lack of certainty.
Risk attached to the firm can be divided into two categories- Business Risk and
Financial Risk. Business risk arises due to cost structure of trading or manufacturing
particularly of fixed nature which are basically internal and also due to the nature
operation the company is undertaking, for instance, risk of business cyclical
fluctuations, technological obsolescence etc which are mainly of external nature. On
the other hand financial risk arises due to inclusion of fixed cost bearing securities,
like debentures and long term debts in the capital structure of an entity.
In the current article the data is analysed mainly on the basis of financial leverage
arising out of financial risk with the help of debt-equity ratio.
𝐭=
(a)Debt-to-Equity Ratio: This ratio explains the extent of financial leverage in the
capital structure of an entity. It is one of the basic principles of cost of capital and
capital structure that “If you include debt financing in the capital structure without
affecting risk perception of shareholders to certain extent, you can minimize the
overall cost of capital of the firm simultaneously maximize the wealth of
shareholders and value of the firm”. It has been analysed here to identify, whether
the companies under consideration have been able to take higher financial risk after
merger or not.
𝑳𝒐𝒏𝒈 𝑻𝒆𝒓𝒎 𝑫𝒆𝒃𝒕
𝑬𝒒𝒖𝒊𝒕𝒚
Table-4 (Debt Equity Ratio)
Company Name
Before
After
D
Merger
Merger
0.035
2.33
2.295
TATA Communication Ltd.
0.015
0.61
0.595
Dr Reddys Lab.
0.526
0.615
0.089
Graphite India Ltd.
0.253
1.062
0.809
HINDALCO
0.97
0.613
-0.357
Mahindra Lifespace Developers
0.353
1.361
1.008
Aditya Birla Nuvo
0.07
1.64
1.57
GTL Ltd.
TOTAL
6.009
Source: Compiled & Computed Data
𝑫𝒆𝒃𝒕 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
∑𝑫
𝒏
= 0.858429
̅=
𝑫
7
D2
5.267025
0.354025
0.007921
0.654481
0.127449
1.016064
2.4649
9.891865
̅ )𝟐
∑ 𝑫𝟐 − 𝒏(𝑫
√
𝒅=
𝒏−𝟏
= 0.8882162
𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐄𝐫𝐫𝐨𝐫(𝐒. 𝐄) =
𝐝
√𝐧
= 0.3357142
𝐭=
̅
𝐃
𝐒. 𝐄
= 2.5570223
INFERENCES
1. The tabulated value of t for 6 d.f. and at 5% level of significance for a two-tailed test
is 2.447. Since calculated value of‘t’ is less than tabulated t, it is not significant at 5%
level of significance. Hence, the data do not provide any evidence against the null
hypothesis which may be accepted. We may, therefore, conclude that there is no
significant improvement in the Current Ratio after the merger and acquisition.
2. The tabulated value of t for 6 d.f. and at 5% level of significance for a two-tailed test
is 2.447. Since calculated value of‘t’ is less than tabulated t, it is not significant at 5%
level of significance. Hence, the data do not provide any evidence against the null
hypothesis which may be accepted. We may, therefore, conclude that there is no
significant increase in the Quick Ratio after the merger and acquisition.
3. The tabulated value of t for 6 d.f. and at 5% level of significance for a two-tailed test
is 2.447. Since calculated value of‘t’ is greater than tabulated t, it is significant at 5%
level of significance. Hence, the data provide evidence against the null hypothesis
which may be rejected. We may, therefore, conclude that there is significant effect on
leverage standards of the surviving companies after the merger and acquisition in the
long-run.
FINDINGS
The main findings of the study are as follows:
1. There is no effect on liquidity standards of the surviving companies after merger and
acquisition in each sector under study in India.
2. There is significant effect on leverage standards of the surviving companies after the
merger and acquisition in the long-run.
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CONCLUSION
From the above discussion it may be concluded that Merger and Acquisition has not achieved
a good result in terms of Liquidity position. Companies from different sectors in India are
not efficient enough to have a good liquidity position after the merger and acquisition. This
study was undertaken to test whether there was any significant impact on operating
performance on the outcome of merger and acquisition. The results from the analysis of preand post-merger operating performance ratios for the acquiring firms in the sample showed
that there was a very negligible impact of merger. In terms of solvency position a very few
companies are improving. There is a very small significant effect on leverage standards of the
surviving companies after the merger and acquisition in the long-run. Merger and acquisition
may not be fruitful to all companies in all times. The benefits of Merger and acquisition
differs from Company to Company and from business to business. The success of Merger and
Acquisition deals depends upon the efficiency of the management and proper utilization of
human resources.
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REFERENCES
1. Saple V. (2000) “Diversification, Mergers and their Effect on Firm Performance: A
Study of the Indian Corporate Sector”, Review of Quantitative Finance and
Accounting. Page No.67.
2. Vanitha, S. 2006.Mergers and Acquisitions in the Manufacturing Sector: An
Evaluation Study, PhD Dissertation, Bharathidasan University, Tiruchirappalli.
3. Vanitha, S. and M. Selvam (2007).“Financial Performance of Indian Manufacturing
Companies during Pre and Post Merger”, International Research Journal of Finance and
Economics, Page No12:7-35
4. Kumar, R., (2009). "Post-Merger Corporate Performance: an Indian Perspective",
Management Research News 32 (2), Page No. 145-157.
5. Pramod Mantravadi & A Vidyadhar Reddy (2008) “Post-Merger Performance of
Acquiring Firms from Different Industries in India”, International Research Journal of
Finance and Economics, ISSN 1450-2887
6. Dr. Salma Ahmed & Yasser Mahfooz (2009),“Consolidation in the Sky - A Case
Study on the Quest for Supremacy between Jet Airlines and Kingfisher Airlines”
Working paper series Aligarh Muslim University
7. Dr. Neena Sinha, Dr. K.P.Kaushik & Ms. Timcy Chaudhary, (2010), “Measuring Post
Merger and Acquisition Performance: An Investigation of Select Financial Sector
Organizations in India”, International Journal of Economics and Finance Vol. 2, No. 4;
November,2010
8. N. M. Leepsa & Chandra Sekhar Mishra, (2012), “Post Merger Financial
Performance: A Study with Reference to Select Manufacturing Companies in India”,
International Research Journal of Finance and Economics ISSN 1450-2887
9. Sunil Kumar (2013), “Impact of substantial shareholdings on Synergy Creation in Postmergers and Acquisitions Period”, The Indian Journal Of Commerce, Vol.66,No.1, JanuaryMarch,2013
WEBSITES
1. www.moneycontrol.com
2. www.tatacommunications.com
3. www.drreddys.com
4. www.graphiteindia.com
5. www.hindalco.com
6. www.mahindralifespaces.com
7. www.adityabirlanuvo.net
8. www.gtllimited.com
9. www.economictimes.com
10. www.indiatimes.com
11. www.thehindu.com
12. www.imaa-institute.org
13. www.assocham.org
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