Post-Merger Performance of Acquiring Firms from DifferentIndustries in India
Pramod MantravadiEngagement Director – Centre for Executive Education
Indian School of Business, HyderabadE-mail: pramod m antravadi@yahoo . com
A Vidyadhar ReddyProfessor & Dean, Department of Business Management
Osmania University, HyderabadE-mail: vid y adharaile ni @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. IntroductionIn today's globalized economy, competitiveness and competitive advantage have become thebuzzwords 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
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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 IndustryIn 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 focusof business enterprises in India. Indian companies realised the need to grow and expand in businessesthat 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
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Table 1: Objectives of Indian Corporates for M&As
Objective behind the M&A Transaction Responses (in %)To improve revenues & ProfitabilityFaster growth in scale and quicker time to marketAcquisition of new technology or competenceTo eliminate competition & increase market shareTax shields & Investment savings
33%28%22%11%3%
Source: 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 Literature1 (b) (i) Global LiteratureThere 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 IndiaThe 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 ObjectivesConsidering 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 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).4 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).
5 Ratios used were: Operating Return on Assets (PBIDT/ Net Assets), Growth Rate (average growth rate in total assets), Leverage (Total Debt /(Total
196 International Research Journal of Finance and Economics - Issue 22 (2008)Debt + Equity Capital)), Tax Provision (Tax / Operating Profit) and Liquidity ((Current Assets – Inventory) / Current Liabilities)
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(b) MethodologyThe 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 HypothesesTo 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 CollectionData 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 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)
7 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
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Table 2: Industry Wise Distribution of merging firms in the sample
Industry (acquiring Company) No of mergersSugar & Agri- ProductsOrganic & Inorganic chemicalsTextilesBanking & Finance Pharmaceuticals & Healthcare Electrical Equipment
151111101011
Total 68
(b) Data AnalysisPre-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
Pre-merger (3 yrs before) Post-merger (3 yrs after) t (0.05 significance)Operating Profit MarginGross Profit Margin Net Profit Margin Return on Net worthReturn on Capital EmployedDebt-equity Ratio
19.46715.5996.26515.36824.5411.254
18.77213.9003.3536.88016.9881.382
0.7791.8452.6953.8865.936-1.162
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% to18.772%), 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% to16.988%) 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
Pre-merger(3 years before)
Post-merger(3 years after)
t-value (0.05 significance)
Operating Profit MarginGross Profit Margin Net Profit Margin Return on Net worthReturn on Capital EmployedDebt-equity Ratio
16.97314.0366.59022.04730.2781.175
13.54010.5582.7525.59816.2361.697
1.8121.8491.9792.9323.191-1.267
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% to2.752%) 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 (t- values 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
Pre-merger (3 years before) Post-merger (3 years after) t (0.05 significance)
Operating Profit MarginGross Profit Margin Net Profit Margin Return on Net worthReturn on Capital EmployedDebt-equity Ratio
14.40711.1074.31715.06524.8980.889
10.3247.4202.2218.49015.2870.550
4.2673.6681.3862.1462.9351.586
The results showed that the mean post-merger operating profit margin had declined in the post- merger period (14.407% to 10.324%), and the decline was statistically significant (high t-value of4.267). 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% to15.287%). 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 (t- value 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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(iii) Textiles and textile products
Table 6: Mean pre-merger and post-merger Ratios for acquiring firms in Textiles and textile products Sector
Pre-merger (3 years before) Post-merger (3 years after) t (0.05 significance)
Operating Profit MarginGross Profit Margin Net Profit Margin Return on Net worthReturn on Capital EmployedDebt-equity Ratio
14.8979.9282.2629.88619.5961.539
12.9946.822-0.905-5.23210.7231.535
1.1551.5141.1951.3192.7340.013
The results showed that the mean operating profit margin had marginally declined during post- merger period (14.897% to 12.994%), but the decline was not statistically significant, the t-value being1.155. 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
Pre-merger (3 years before) Post-merger (3 years after) t (0.05 significance)Operating Profit MarginGross Profit Margin Net Profit Margin Return on Net worthReturn on Capital EmployedDebt-equity Ratio
55.65846.88317.88810.27725.0411.323
65.56551.9709.91814.66521.8672.203
-1.377-0.6260.860-0.6150.569-1.971
The results showed that the mean operating profit margin had marginally increased during post- merger 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 post- merger 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 t- value of 0.860.
The mean return on net worth showed an increase during the post-merger period (10.277% to14.665%) 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
Pre-merger (3 years before) Post-merger (3 years after) t (0.05 significance)Operating Profit MarginGross Profit Margin Net Profit Margin Return on Net worthReturn on Capital EmployedDebt-equity Ratio
16.73814.3127.69631.20430.6581.680
17.37514.2606.10711.38623.5901.180
-0.2660.0200.5251.9611.4111.112
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
Pre-merger (3 years before) Post-merger (3 years after) t (0.05 significance)
Operating Profit MarginGross Profit Margin Net Profit Margin Return on Net worthReturn on Capital EmployedDebt-equity Ratio
12.1289.2211.8838.220
21.3761.381
11.6308.3211.9737.354
20.8421.402
0.2430.461-0.0350.0990.126-0.049
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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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% to7.354%) 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% to20.842%) 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. ConclusionsThis study was undertaken to test whether the industry type has an impact on the outcome of mergerfor 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 studyThe study has ignored the impact of possible differences in the accounting methods adopted bydifferent 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 post- merger performance.
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Annexure 1
List of mergers used in the studyS.No. Merging Company Merged Company
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