PROJECT REPORT

ON

Merger and Acquisitions

Department of Centre of Management and Humanities,

Punjab Engineering College

 Submitted by:

NAME SID
Adarsh Vishwakarma 21102112

Kapil Garg 21102108

Aditya Kumar Singh 21102116

Rajat Kumar 21102115

Ramit Naval 21102128

Submitted to:

Ms. Anju Singla

Department of CMH

Professor

PEC, Chandigarh

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 Acknowledgment

The successful completion of this project required a lot of guidance from those around us. We
are extremely lucky to have had it all along. Whatever we have done is only because of their help
and we will remain indebted to them.
We would like to express our heartfelt gratitude to our professor Anju Single who gave us the
opportunity to do this project "Mergers and Acquisitions" which helped us to do a lot of research
related work and we learned so many new concepts during the course.
We take this opportunity to express our gratitude to everyone who has supported us throughout
the implementation of this project. We are grateful for the ambitious guidance and constructive
criticism of our friends. We are sincerely grateful to them for sharing their insightful views on a
number of issues related to the project.

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TABLE OF CONTENTS
Introduction.................................................................................................................................5
Review of Litreture.....................................................................................................................8
Report 1.......................................................................................................................................8
Report 2.......................................................................................................................................10
Report 3.......................................................................................................................................11
Report 4.......................................................................................................................................12
Report 5.......................................................................................................................................13
Objectives of study......................................................................................................................14
Different waves of Merger..........................................................................................................15
Motive behind Mergers and Acquisitions …..............................................................................17
Synergy Motive………………………………………………………………………...17
Agency Motive…………………………………………………………………………18
Managerial Overconfidence……………………………………………………………18
Efficiency gains………………………………………………………………………...19
Research and Methodology.........................................................................................................19
Data Collection and Analysis......................................................................................................20
Analysis of all mergers in the sample..........................................................................................21
Analysis of operating performance..............................................................................................22
List of some merger companies...................................................................................................27
Conclusion...................................................................................................................................31
Limitation....................................................................................................................................31
References...................................................................................................................................32

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Abstract

From the last few decades, maximum studies have focused on understanding the
importance of going into mergers and acquisitions (M&A) business. The current study
investigated the motivation to recognize whether the supposed benefits of mergers and
acquisitions experienced an increase or not. The current study calculated whether the deal is
beneficial or detrimental to organizations looking to enter an M&A deal. The study examines the
issue using the perspective of history, waves, motives, and methods to determine the value of
M&A. The study focuses on the currently available M&A literature from the recent past to show
differences from the methods used to measure M&A performance. Although the field of M&A
research is too broad and complex to cover in a review article, the study attempts to begin to
cover some of the historical and background, such as history, M&A waves, deal measurement
methods, and M&A motives.

Keywords: Mergers and Acquisitions, Performance, Value

Introduction
The main objective of every organization is to earn maximum profit every year to
increase the wealth of shareholders by paying them high dividends. Every organization adopts
different techniques and tools to maximize their profit and can be able to survive in the fast-
growing market. There is a certain event to which every organization must respond
spontaneously to achieve maximum profits, such as entering new markets, launching new
products, expanding the portfolio, etc. Firms then need financial resources to achieve their goals
as quickly as possible so that they can enjoy a certain monopoly on the market. These events and
transactions create a huge number of problems for those firms and organizations that do not have
enough finance or are unable to secure financing to meet the demands of the growing market.
Small or less profit-oriented organizations had no choice but to exit the market or merge with or
acquire healthy/good financial firms. Mergers and acquisitions are very easy and for small or less
profitable organizations they are the only option to stay and survive in a developing market.

Mergers and acquisitions are a global business strategy that allows companies to enter
new potential markets or a new business area. Mergers and acquisitions are not the same
5
terminologies, but are often used interchangeably. In an acquisition, one organization buys part
or all of another organization. While in merger two or more than two organizations form one
organization (Alao 2010). A merger is a legal activity in which two or more organizations come
together and only one firm survives as a legal entity (Horne and John 2004). According to the
definition of Georgios (2011), in a merger two or more firms come together and become one
firm, while in an acquisition a large and financially sound firm buys a small firm. Khan (2011)
introduced the definition of a merger as two or more firms close to each other forming one or
more firms. Durga, Rao, and Kumar (2013) defined mergers and acquisitions as activities
involving a takeover, corporate restructuring, or corporate control that change the ownership
structure of firms.

The main goal of the M&A business is to work with other companies that can be more
beneficial compared to working alone in the market. As a result of M&A, the return on equity
and shareholder wealth is increased and all associated costs (operating costs) for the firm are also
reduced (Georgios and Georgios 2011). To survive in a rapidly efficient market, another
important goal of mergers and acquisitions is to maximize shareholder wealth. The management
of the firm is also in favor of mergers and acquisitions because their powers will be strengthened
and they can achieve the short- and long-term goals of the firm (Gattoufi et al, 2009).

Mergers and acquisitions are a very important tool for business expansion in different
countries and researchers from all over the world are interested in working in this area (Goyal
and Joshi 2011). If we go into the history of mergers and acquisitions, mergers and acquisitions
were initiated in the United States as far back as the eighteen centuries. In Europe, mergers and
acquisitions begin in the nineteenth century (Focarelli, Panetta and Salleo 2002). Maximum
M&A research has been done in the United States and Europe market. Relatively little research
work has been done on M&A in developing countries such as Pakistan, India, Malaysia and
Bangladesh.

In the last three decades, companies have intensively used mergers and acquisitions
(M&A) as a strategic tool for corporate restructuring. Initially, this consolidation trend was
limited to developed countries, particularly the US and the UK. However, developing countries
later began to follow the same pattern. The growth of the trend can be judged from the fact that
in the US alone, the last decade of the twentieth century saw a three-fold increase in the number
of mergers and acquisitions, while a five-fold increase in value was recorded (Coopland, 2005).

Mergers and Acquisitions in Indian Industry

In Indian industry, the pace of mergers and acquisitions has accelerated in response to the
various economic reforms introduced by the Indian government since 1991 in its move towards

6
liberalization and globalization. The Indian economy has undergone a major transformation and
structural changes following the economic reforms and "size and competence" have become the
focus of business ventures in India. Indian companies realized the need to grow and expand in
businesses they understood well. increasing competition; several leading companies have
undertaken a restructuring exercise to sell non-core businesses and create a stronger presence in
their core areas of business interest. Mergers and acquisitions have emerged as one of the most
effective methods of such corporate restructuring and have become an integral part of the long-
term business strategy of corporations in India Over the last decade, mergers and acquisitions in
the Indian industry have grown steadily in terms of number of deals and value of deals.

A 2006 survey of Indian corporate executives by Grant Thornton 2 found that mergers
and acquisitions are a significant form of business strategy for Indian corporations today. It has
been found that the three main objectives behind any M&A transaction for today's corporations
are:

 Improving Revenues and Profitability

 Faster growth in scale and quicker time to market
 Acquisition of new technology or competence

7
 Review of Literature
Report 1
Source: https://www.scirp.org/pdf/TEL_2019042311563045.pdf
Written By: ADARSH VISHWAKARMA, SID :-21102112

In the past four decades, many studies on mergers and acquisitions have been conducted
abroad, and several theories have been proposed and tested for empirical validation. Researchers
have studied the economic impact of mergers and acquisitions on industry consolidation, post-
M&A shareholder returns, and post-merger company performance. Whether or not the merged
company will achieve the expected performance is a crucial question that has been addressed by
most researchers. Several measures have been proposed to analyze the success of mergers. These
measures included short- and long-term effects of merger announcements, effects on shareholder
returns from aborted mergers, hostile takeover attempts and open bids, etc.

Several studies have been conducted in the advanced capital markets of Europe, Australia
and the USA on the evaluation of the financial performance of companies after mergers.
Lubatkin () reviewed the results of studies that examined either directly or indirectly the
question: “Do mergers bring real benefits to the acquiring firm? The review indicated that the
acquiring firms could benefit from the merger due to technical, financial and diversification
synergies. Healy, Palepu, and Ruback () examined the post-acquisition performance of the 50
largest US mergers between 1979 and 1984 by measuring cash flow performance and concluded
that the operating performance of merging firms improved significantly after acquisitions
relative to their respective industries. Ghosh () investigated the question of whether operating
cash flow performance improves after corporate acquisitions using a design that accounted for
pre-acquisition superior performance and found that merging firms do not show signs of
improved operating performance after acquisitions.

8
 Weston and Mansingka () studied the performance of conglomerate firms before and after
the merger and found that their earnings rates significantly lagged behind those of the control
sample group, but after 10 years, no significant differences in performance were observed
between the two groups. The improvement in the earnings of conglomerate firms has been
explained as evidence of the successful achievement of defensive diversification.

Marina Martynova, Sjoerd Oosting, and Luc Renneboog () examined the long-term
profitability of corporate takeovers in Europe and found that both acquiring and target companies
significantly outperformed the median performance of their industry before the takeover, but the
profitability of the merged firm declined significantly after the takeover. However, after
controlling for the performance of a control sample of peer companies, the decline became
insignificant. Katsuhiko Ikeda and Noriyuki Doi () studied the financial performance of 43
merging firms in the Japanese manufacturing industry and found that the rate of return on equity
increased in more than half of the cases, but the rate of return on total assets improved in about
half of the cases. However, both profit measures showed improvement in more than half of the
cases in the five-year test, suggesting that post-merger firm performance began to improve along
with the internal adjustment of the merging firms: there was a necessary gestation period during
which the merging firms learned how to manage their new organizations.

Kruse, Park, and Suzuki () examined the long-term operating performance of Japanese
companies in a sample of 56 manufacturing mergers between 1969 and 1997. By examining
cash-flow performance in the five-year period following the mergers, the study found evidence
of improved operating performance and also that performance before and was highly correlated
after merging. The study concluded that long-run operating performance adjusted by the control
firm after mergers for Japanese firms was positive but insignificant, and there was a high
correlation between pre- and post-merger performance.

In summary, the few studies that have been conducted so far in other countries on the
operating performance of acquiring companies have produced mixed results, with findings
ranging from a slightly positive to a significantly negative impact on the operating performance
of acquiring companies after mergers.

9
 Report 2

Source :

https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.oecd.org/daf/

competition/

EconomicEvidenceInMergerAnalysis2011.pdf&ved=2ahUKEwjtkby_1qX7AhU66XMBHR

QBCYwQFnoECBgQAQ&usg=AOvVaw14Rm5TAIxcNouh1XoQCnUe

Written by: - Aditya Kumar Singh, SID :-21102116

A merger between firms selling different products may restrict competition by allowing
the merged firm to profit by unilaterally raising the price of one or both products above the pre-
merger level. A portion of the sales lost as a result of the price increase will only be redirected to
the merger partner's product, and depending on relative margins, capturing such lost sales
through the merger may make the price increase profitable even if it would not have been
profitable before the merger. merger.
When goods are characterized as differentiated by brand, etc., and the price of one
brand's goods is increased, brand users do not necessarily intend to buy other brands' goods as
substitutes without distinction. On the other hand, users can buy goods of another brand that is
next in order of their preference over the first brand; in other words, which has higher
substitutability. In this case, even if the group of firms raises the price of the first brand's goods,
if the group also sells the second brand's goods, which has high substitutability, the increase in
sales of the second brand will compensate for the loss of sales of the first brand. A group of
companies can then raise the price without reducing overall sales.
This approach to the problem suggests that any merger involving substitute products will lead to
post-merger price increases. This is clearly not what is actually believed to be true. The above

10
analysis ignores: the efficiency effects of mergers that reduce firms' marginal costs; potential for
new entry; the potential for competing firms to displace their products; and so on. However, it
provides a clear analytical framework for analyzing a particular merger: given that the merger
leads to a loss of competition between substitute products, what factors will prevent price
increases?

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 Report 3

Source: Merger and Acquisition (Theories and Previous Studies) | Request PDF

(researchgate.net)

Written by: - Kapil Garg, SID:- 21102108

Mergers and acquisitions (M&A) are a way for companies to grow faster than organic

business growth and can be a channel for companies to strengthen their position in the global

market and increase competitiveness. M&A activity in the world has a large volume and value of

several major commodities such as coal, industrial metal, silver, lead, zinc, copper, steel,

aluminum, etc. In 2018 (January to December), the total value of M&A transactions was for the

coal and metal sectors reached $60 bio with the largest share in coal commodities and a

transaction volume of 320 transactions. M&A is one of the strategic options within the

restructuring activities of enterprises, which can provide companies with a better approach in

increasing profit, market control or market share, and increasing competitiveness (competitive

advantage) to face the world market, which is currently unstoppable. In this study, the problem to

be answered is what are the theories behind the occurrence of M&A as well as the previous

research that has been done in relation to M&A. A literature review method will be used to

answer this problem. It is expected that the obtained results will be used in future research in all

M&A actions. Due to this literature review, the motive of M&A occurrence can also be well

known.

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 Report 4

Source: Mergers and Acquisitions: Types, Motives and Legal Procedures

(economicsdiscussion.net)

Written by: Rajat Kumar SID: - 21102115

A takeover generally involves the acquisition of a certain block of a company's equity,

which allows the acquirers to exercise control over the company's affairs. In theory, the acquirer

(must) buys more than 50 percent of the paid-up capital of the acquired company in order to have

full control.

In practice, however, effective control can be exercised with a smaller share, usually

between 10 and 40 percent, because the remaining dispersed and poorly organized shareholders

are unlikely to challenge the acquirer's control.

The main objective of the takeover bid is to obtain legal control over the company. The

acquired company continues to exist as a separate entity unless a merger results in the acquired

company retaining its separate existence, whereas in a merger the two companies merge into a

single corporate law and at least one of the companies loses its identity.

According to Charles A Scharf, what distinguishes an acquisition from a takeover is the

element of willingness on the part of the buyer and the seller. If there is a willingness of the

acquired company, it is called an acquisition. If the willingness is absent, it is called a takeover.

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 Report 5(Research on post-merger performance in India)

Source: https://www.scirp.org/pdf/TEL_2019042311563045.pdf

Written by: RAMIT NAVAL, SID: - 21102128

Research on post-merger performance following M&A in India has so far been limited.
Surjit Kaur () compared the pre- and post-takeover performance of a sample of 20 acquiring
companies in 1997-2000 using a set of eight financial ratios 3 over a 3-year pre- and post-merger
period using a t-test. The study concluded that both profitability and efficiency of the target
companies declined in the post-takeover period, but the change in post-takeover performance
was not statistically significant.

Beena () analyzed the pre- and post-merger performance of a sample of 115 acquiring
firms in the manufacturing sector in India during 1995–2000 using a set of 4 financial ratios and
a t-test. The study found no evidence of improved financial conditions in the post-merger period
compared to the pre-merger period for acquiring firms. Pawaskar () analyzed the operating
performance of 36 acquiring firms during 1992-95 pre-merger and post-merger using 5 ratios of
profitability, growth, leverage and liquidity and found that the acquiring firms performed better
than the industry average. profitability. However, the regression analysis showed that there was
no increase in post-merger profits compared to the main competitors of the acquiring firms.

Thus, empirical testing of the post-merger corporate performance of Indian companies is

still quite limited, with some studies focusing on mergers in the manufacturing sector and studies
of mergers in short time intervals.

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OBJECTIVES OF STUDY
The following are the objective are taken

 To improve revenue and profitability

 Faster scale growth and faster time-to-market
 Acquisition of new technology or competence
 To eliminate competition and increase market share
 Tax shields and investment savings

In this context, this study attempted to examine the performance of companies

undergoing mergers in India in the post-reform period and to determine whether mergers had a
significant impact on the operational financial performance of the merging companies.
Specifically, the study aimed to study mergers of firms in different industries in India to see if
there were differences in the impact across industries.

15
 Different Waves in Mergers

In the existing literature on mergers and acquisitions, it has appeared in five distinct
waves, which are as follows:
First Wave
The first wave began in 1897 and lasted until 1904. In the recorded period, mergers and
acquisitions began to grow in those firms and organizations that want to benefit from their
production as a single market seller, such as railways, light and power, etc. The period discussed
appeared on screens as horizontal mergers and happened in deep industries (Fatima and Shehzad,
2014). Maximum deals that were initiated in the first M&A period turned out to be unsuccessful
as the deals did not meet the stated goals and objectives.
Second Wave
The second period of mergers and acquisitions started from 1916 and lasted until 1929.
The main goal in this period was to enter the business of mergers and acquisitions that want to
use oligopoly and not monopoly. In the mentioned period, hi-tech expansion took place with the
development of railways and transport. This M&A wave was horizontal or conglomerate
(Golubov & Petmezas, 2013). The firms and organizations that entered into the M&A deal were
key producers of ore and minerals, food, oil and fuel, transportation and chemicals, etc. Banks
played a serious role in facilitating M&A deals. As investment banks, banks provided loans to
investors for easy installments. In 1929, it became clear that the wave was crumpled in the stock
market.
Third Wave
The third wave of mergers took place in 1965 and ended in 1969. Most of the deals were
conglomerate in nature. M&A deals were supported primarily by equity of the owners, and banks
seemed to be off the screen. The wave began to come to an end when the consolidation of
disparate firms and organizations reported unsatisfactory results in 1968 (Fatima and Shehzad,
2014).
Fourth Wave
The fourth wave of mergers (1981-89) was exceptional in terms of the notable role of
enemy mergers. Hostile mergers proved to be an acceptable type of business expansion by the
1980s. The trade invasion has reached the rank of a highly profitable speculative action.
Moreover! Organizations and speculative affiliates began to take over businesses, taking it as a
way to benefit from high profits in a short period of time. Takeovers in the current wave were
either considered friendly or hostile. It mainly depended on the reaction of the target company's
board of directors. If the board approved the takeover, it was well thought out to be friendly, and
if the board opposed the deal, the takeover was supposed to be hostile. According to Golubov &
Petmezas (2013), the merger that started between oil and gas, pharmaceutical, banking and
aviation companies is basically recorded in the fourth wave.

16
 Fifth Wave
The wave started from 1992 and lasted until 2000. It draws its inspiration from the global
increase and boom in the stock market, and then deregulation took place. This wave took place in
the banking and telecommunications segments. The deals were somewhat equity backed
compared to debt financing (Kouser & Saba, 2011).

Sixth Wave
The sixth wave of mergers (2003-2007) was described by mergers in the Metals, Oil and
Gas, Telecommunications Banking, Utilities, and Healthcare Centers industries. This wave was
fueled by expanding globalization and government support for specific nations such as France,
Italy, and Russia to become solid national and global champions. Private equity buyers took an
indispensable part, representing a quarter of the total takeover movement, thanks to the
availability of loans that companies were prepared to provide at low interest rates. Cash-financed
trades were significantly more widespread during this period (Alexandridis, 2012).
Six waves of M&A over the past century

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Motives behind Mergers and Acquisitions
The current study elaborates some of the key and essential motives behind the deal of M&A.
Some of them are as follows:
Synergy Motive
The general goal of all mergers and acquisitions is the pursuit of synergistic gains. Synergy is
achieved when the value of the combination of two firms is greater than the sum of the two
separate values (Jensen and Ruback 1983, Bradley 1988). This effect is often depicted as 1+1=3.

Synergistic gains can be operational or financial. They can take the form of cost reduction and
operational efficiency excellence; revenue improvement through distribution network
optimization, eg cross-selling, increased market power, eg foreclosure of competitors, or a range
of financial benefits such as tax efficiency and leverage (Seth, 1990a, 1990b).

Cost reduction is a usual source of synergies and can be achieved through economies of scale
and scope; to get rid of duplicate facilities or alternatives and to increase bargaining power
towards the merchant or supplier (Fatima and Shehzad, 2014).

Increased revenue, another often cited cause of synergy (Krishnakumar & Sethi 2012) It occurs
when the combined entity achieves a better level of sales or growth than the two separate
companies. This can only happen through more elegant product offerings such as complementary
commodities and better distribution work.

Diversification is another oft-cited basis for synergy in mergers, eg diversified organizations can
create so-called internal capital markets that allow resources to be allocated between divisions
without resistance and inefficiency (Travlos and Doukas, 1988). Their study suggested that
mergers and acquisitions of overseas organizations serve as a diversification medium that
facilitates the acquirer to expand its boundaries.

Corporate governance can be an additional source of synergy because the effectiveness of the
governance mechanism varies between firms. Wang and Xie, (2009), demonstrate that
18
“corporate governance transfers” affect merger synergies, which are subsequently distributed
among the merging firms. This resource turns out to be even more important in global
acquisitions, as corporate governance principles vary significantly in different markets. Bris and
Cabolis (2008) explain how differences in corporate governance across countries can be a reason
for cross-border mergers.

Financial synergy is another source that stimulates firms to merge, such as tax consideration.
Scholes and Wolfson (1990) show the result of the US tax reforms of the 1980s on the M&A
market. Also, Hayn, (1989) explains that merger gains are positively associated with the target's
tax features, such as loss carryforwards, tax credits, and increased asset depreciation
opportunities. Finally, Manzon (1994) provides evidence that differences in tax regimes affect
the returns of cross-border acquisitions.

Agency Motive:
From the agency motive, managers can obtain acquisitions against the attention of
shareholders. E.g., Amihud and Lev (1981) describe that managers engage in conglomerate
mergers to expand the firm's activities and equalize earnings, thereby securing their jobs;
however, this is against the interest of shareholders as they can diversify on their own at very low
cost.

In addition, Jenson (1986) explains in his theory of free cash flow that managers who
admit to conserving cash engage in popular projects and disadvantageous or unsuccessful
acquisitions instead of returning them to shareholders. This is a sign of agency conflict between
owners and managers.

First, executive pay is often tied to firm size, so managers have first choice for firm
growth. Because paying shareholders cash reduces the size of the firm and their freedom,
managers tend to engage in negative NPV investments.
Second, it is simply more valued to head huge organizations, CEOs seek greater
dominance over shareholder interests than managers who actually believe in their ability to build
and create value. Thus, the prospect of lofty and high rewards and the glory of leading large
firms pushes managers to make acquisitions, even when the deal is disadvantageous, harmful, or
unprofitable to the firm's value.
Managerial Overconfidence (Hubris Hypothesis)
The merger wave was originally hypothesized by Roll in 1986. The theory is that
managers mistakenly believe that they are better than the rest of management to control and
supervise different firms. This means they are arrogant and self-centered in their decision-
19
making and end up paying more for the target, causing the bidders to decline. Moreover! The
result of hubris has been found to be similar to the winner's curse that occurs in frequent value
auctions where bidders pay more for the auctioned item. Here, the bidder with the highest bid
would yield the highest positive valuation error (reflecting his boldness) and is successful in
winning the target. Ultimately, the shareholders of the offering firms lose out of the deal because
the market reacts to a mistake made by the offering manager.

Doukas and Petmezas, (2007) and Billet and Qian, (2008) hypothesize that overconfident
managers, stemming from the self-attribution bias, tend to attribute their prior success from
previous business decisions to their own abilities, and as a result perform worse business later
on., when it drastically lags behind acquisitions initiated by less confident managers
Efficiency gains:
Farrell in 1990 and Shapiro in 2001 differentiated efficiencies as technical and synergy
efficiency. They recorded technical efficiency as one that could be achieved by other ways than
M&A. They concluded joint ventures, agreements, interior growth and licensing, as other ways
of achieving efficiency than M&A. As per the study of instigators, technical efficiency
communicates to the amendments that occur inside the combined manufacturing potential of the
merging firms. In short, they can be increased by a redeployment of output across the merging
entities or scale economies, provided the capital is portable. In long, they can be marked by
starting investment on a mega scale. On the other side, synergy may be defined as efficiency
attained through the close mixture of the merging firms and are intrinsically merger-oriented.
Farrell and Shapiro (1990 and 2001).

Research Methodology
(a) Research Objectives
Given the limited research on mergers and acquisitions in Indian industry, this research
study aims to examine the operational performance of merging firms in Indian industry in the
post-reform period. The study further attempted to explore and test whether there is any
significant variation in merger outcomes across different industries in India by analyzing sub-
samples representative of the industries.

(b) Methodology
Pre-merger and post-merger averages for a set of key financial ratios6 were calculated for
the 3 years before and 3 years after the year of merger completion (or the year of approval when
the time of merger completion is not available) . The year the merger was completed was marked
as year 0. For the years preceding the merger, only the operating conditions of the acquiring firm
20
are taken into account. After the merger, the operating conditions of the combined company will
be taken over. Post-merger performance was compared to pre-merger performance and tested for
significant differences using a paired "t" test. For the purpose of the study, only mergers where
shares of the acquiring firm were issued to shareholders of the acquired firm (the target) as
consideration for the acquisition/merger were considered. Cases where only cash was acquired
are excluded from this study to ensure comparability of results within the sample. Mergers where
the relative size7 was less than 10% were also removed from the list, as it was believed that such
a small-scale acquisition could not have a significant impact on the operating performance of the
acquiring company.

Also excluded from the sample were cases where sick (BIFR) companies were taken over
by companies to obtain tax breaks, as this could be reflected in lower post-merger operating
performance due to write-offs of depreciation and losses. Furthermore, the companies in the
sample should not have been involved in further mergers/acquisitions within four years of the
merger under investigation.

The list of companies involved in mergers between 1991-2003 has been compiled from
several sources such as newspapers, magazines, investment websites, BSE and NSE websites
(for names of delisted companies), SEBI website (for details of companies opening offers for
takeover) and the Capitoline and Prowess databases. The screening criteria described above were
applied to such a list to arrive at the final sample. Merger cases where data were not available for
at least two years for the pre-merger period and for at least four years for the post-merger period
were removed from the study sample. The final sample included 118 fusion cases in the defined
study period.
Research Hypotheses
To test the above objectives, the following hypotheses were formulated:

(i) H1: Mergers in post-reform India have improved the operating performance of acquiring
firms and companies.

(ii) H2: The operating performance of the acquiring companies after the merger is not affected
by the type of industry
Data Collection and Analysis
(a) Data Collection
Data on operating performance measures for up to three years before and three years after
the year of acquisition for each acquiring company in the sample were extracted from the

21
Prowess CMIE database. The sample list of companies was further divided into sub-samples by
sector (for significant sample sizes). The final sample for the study had an industry breakdown as
shown in Table 1 below.
Table 1: Industry Wise Distribution of merging firms in the sample
Industry (acquiring Company) No of mergers
Sugar & Agri- Products 15
Organic & Inorganic chemicals 11
Textiles 11
Banking & Finance 10
Pharmaceuticals & Healthcare 10
Electrical Equipment 11
Total 68

(b) Data Analysis

Pre-merger and post-merger operating performance ratios were estimated and averages
calculated for the entire set of selected firms that underwent mergers between 1991 and 2003.
Average ratios were also calculated for each of the industry subsamples. . The mean pre-merger
and post-merger financial performance ratios were compared to determine whether there was any
statistically significant change in operating performance due to the mergers using a "paired two-
sample t-test" at the 0.05 confidence level.

(a) Analysis of all Mergers in the sample

Table 2: All Mergers: Mean pre-merger and post-merger Ratios for merging firms
Pre-merger (3 Post-merger t (0.05
yrs. before) (3 yrs. after) significance)
Operating Profit 19.467 18.772 0.779
Margin
Gross Profit Margin 15.599 13.900 1.845
Net Profit Margin 6.265 3.353 2.695
Return on Net worth 15.368 6.880 3.886
Return on Capital 24.541 16.988 5.936
Employed
Debt-equity Ratio 1.254 1.382 -1.162

22
 A comparison of the pre-merger and post-merger operating performance measures for the
entire sample set of mergers showed that there was a decrease in the average operating profit
margin (19.467% to 18.772%), but this decrease was not statistically significant (t-statistic value
of 0.779). However, the gross profit margin (15.599% to 13.900%) and net profit margin
(6.265% to 3.353%) ratios showed a statistically significant decrease in the post-merger period
(t-statistics 1.845 and 2.695).
Average return on net worth (15.368% to 6.880%) and return on capital employed
(24.541% to 16.988%) showed a statistically significant decrease after the merger (t-values 3.886
and 5.936). After the merger, there was a slight but statistically insignificant increase in debt
(1.254 vs. 1.382), as confirmed by the low t-value of -1.162.
The results indicate that the operating financial performance of all mergers in the Indian
industry sample decreased post-merger as both profitability ratios and return on equity and
capital employed declined. The results are comparable to those obtained by Beena, who found
that most mergers between 1995-2000 in India were aimed at growing assets through
restructuring rather than improving operational efficiency. The above results also agree with the
results of research studies in the US and Europe on the operating performance of acquiring firms
- that the operating performance of acquiring firms 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.

(b) Analysis of Operating Performance of acquiring firms in different industries

(i) Agri-Products
Table 3: Mean pre-merger and post-merger Ratios for acquiring firms in Agri- Products Sector

Pre-merger (3 Post-merger t (0.05

yrs. before) (3 yrs. after) significance)
Operating Profit 16.973 13.540 1.812
Margin
Gross Profit Margin 14.036 10.558 1.849
Net Profit Margin 6.590 2.752 1.979
Return on Net worth 22.047 5.598 2.932
Return on Capital 30.278 16.236 3.191
Employed

23
 Debt-equity Ratio 1.175 1.697 -1.267

The results showed that the average operating profit margin decreased after the merger
(16.973% to 13.540%) and the decrease was close to statistically significant (t-value 1.812).
Similarly, the average gross profit margin (14.036% to 10.558%) and net profit margin (6.590%
to 2.752%) also decreased during the post-merger period and the decreases were almost
statistically significant (t-values 1.849 and 1.979)
Average return on equity (22.047% to 5.598%) and average return on capital employed
(30.278% to 16.236%) both showed a statistically significant decline during the post-merger
period (t-values 2.932 and 3.191). The average debt-to-equity ratio increased slightly after the
merger (1.175 to 1.697), but the change was not statistically significant ("t" value -1.1267).
The above results indicate that in the agricultural products sector, mergers have caused a
significant decline in both profitability and return on investment and capital put into the business.

(ii) Chemicals
Table 4: Mean pre-merger and post-merger Ratios for acquiring firms in Chemicals Sector
Pre-merger (3 Post-merger t (0.05
yrs. before) (3 yrs. after) significance)
Operating Profit 14.407 10.324 4.267
Margin
Gross Profit Margin 11.107 7.420 3.668
Net Profit Margin 4.317 2.221 1.386
Return on Net worth 15.065 8.490 2.146
Return on Capital 24.898 15.287 2.935
Employed
Debt-equity Ratio 0.889 0.550 1.586

The results showed that the average post-merger operating profit margin decreased
(14.407% to 10.324%) in the post-merger period, and the decrease was statistically significant
(high t-value 4.267). Likewise, the average gross profit margin in the post-merger period also
decreased (11.107% to 7.420%) and the decrease was statistically significant as indicated by the
high t-value of 3.668. The average net profit margin also decreased slightly in the post-merger
period (4.317% to 2.221%), but the decrease was not statistically significant (t-value 1.386).
Similarly, the average return on net worth showed a significant decrease during the post-
merger period (15.065% to 8.490%) and this decrease was statistically verified (t-value 2.146).
The average return on capital employed also showed a significant decline in the post-merger
period (24.898% to 15.287%). The decrease was also statistically verified (t-value 2.935). The

24
debt-to-equity ratio decreased slightly after the merger (0.889 to 0.550), but the decrease was not
statistically significant (t-value 1.586).
The above findings suggest that in the chemical sector, mergers have caused a significant
decline in both profit margins and returns on net worth and capital employed in the business.

(iii) Textiles and textile products

Table 5: Mean pre-merger and post-merger Ratios for acquiring firms in Textiles and textile
products Sector
Pre-merger (3 Post-merger t (0.05
yrs. before) (3 yrs. after) significance)
Operating Profit 14.897 12.994 1.155
Margin
Gross Profit Margin 9.928 6.822 1.514
Net Profit Margin 2.262 -0.905 1.195
Return on Net worth 9.886 -5.232 1.319
Return on Capital 19.596 10.723 2.734
Employed
Debt-equity Ratio 1.539 1.535 0.013

The results showed that the average operating profit margin decreased slightly during the
post-merger period (14.897% to 12.994%), but the decrease was not statistically significant, the
t-value was 1.155. Similarly, average gross profit margin (9.928% to 6.822%) and average net
profit margin (2.262% to -0.905%) also decreased during the post-merger period, but again the
decreases were not statistically significant (t-values 1.514 and 1.195 respectively)

The average return on net worth showed a significant decrease during the post-merger
period (9.886% to -5.232%), but this decrease was not statistically verified, with a "t" value of
1.319. However, the average return on capital employed showed a significant decrease during the
post-merger period (19.596% to 10.723%) and this decrease was statistically verified (t-value
2.734. The debt-to-equity ratio showed no change after the merger (1.539 vs. 1.535) and a low
value A "t" of 0.013 confirmed the same.

The above findings show that in the textile and textile products sector, mergers caused a
slight but statistically insignificant decrease in operating performance in terms of profit margins
and return on capital employed.
(iv) Banking & Finance

25
 Table 6: Mean pre-merger and post-merger Ratios for acquiring firms in Banking & Finance
Sector
Pre-merger (3 Post-merger t (0.05
yrs. before) (3 yrs. after) significance)
Operating Profit 55.658 65.565 -1.377
Margin
Gross Profit Margin 46.838 51.970 -0.626
Net Profit Margin 17.888 9.918 0.860
Return on Net worth 10.277 14.665 -0.615
Return on Capital 25.041 21.867 0.569
Employed
Debt-equity Ratio 1.323 2.203 -1.971

The results showed that the average operating profit margin increased slightly during the
post-merger period (55.658% to 65.565%), but the low t-value of -1.377 indicated that the
difference was not statistically significant. Similarly, the average gross profit margin 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. However, the average net profit
margin decreased during the 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.

Average return on net worth showed an increase during the post-merger period (10.277%
to 14.665%), but this increase was not statistically verified (low t-value -0.615). In contrast,
return on capital employed showed a marginal decline in the post-merger period (25.041% to
21.867%), but again the decline was not statistically verified (low t-value 0.569). The average
debt-to-equity ratio showed a significant increase after the merger (1.323 to 2.203) as indicated
by the "t" value of -1.971.
The above results suggest that for the banking and financial sector in India, mergers have
caused improvements in profit margins and return on equity, although this has not been
statistically supported. At the same time, due to the increase in leverage and interest costs, net
profit margin and return on invested capital decreased slightly, although again not statistically
significant. These findings suggest that in this industry, mergers improved operating cost
efficiency and increased operating profitability margins, but the increased efficiency could not be
translated into higher net profit due to the increase in debt levels due to the merger.
(v) Pharmaceuticals
Table 7: Mean pre-merger and post-merger Ratios for acquiring firms in Pharmaceuticals Sector
Pre-merger (3 Post-merger t (0.05
yrs. before) (3 yrs. after) significance)
Operating Profit 16.738 17.375 -0.266
26
 Margin
Gross Profit Margin 0.020
Net Profit Margin 14.312 14.260 0.525
Return on Net worth 7.696 6.107 1.961
Return on Capital 31.204 11.386 1.411
Employed 30.658 23.590
Debt-equity Ratio 1.112
1.680 1.180
The results showed that the average operating profit margin increased slightly during the
post-merger period (16.738% to 17.375%), but this increase was not statistically significant as
confirmed by the low t-value of -0.266. The average gross profit margin did not change after the
merger (14.260% vs. 14.312%) and was confirmed by a low t-value of 0.020. The average net
profit margin decreased slightly during the post-merger period (7.696% to 6.107%), but the
decrease was not statistically significant (low t-value 0.525).
The average return on net worth showed a significant decline in the post-merger period.
204% to 11.386%) and this decrease was just before statistically significant, with a t-value of
1.961. The average return on capital employed also showed a significant decrease during the
post-merger period (30.658% to 23.590%), but this decrease was not statistically confirmed (t-
value 1.411). The average debt-to-equity ratio decreased slightly after the merger (1.680 to
1.180), but the change in leverage was not statistically significant (t-value 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 8: Mean pre-merger and post-merger Ratios for acquiring firms in Electrical Equipment
Sector
Pre-merger (3 Post-merger t (0.05
yrs. before) (3 yrs. after) significance)
Operating Profit 12.128 11.630 0.243
Margin
Gross Profit Margin 9.221 8.321 0.461
Net Profit Margin 1.883 1.973 -0.035
Return on Net worth 8.220 7.354 0.099
Return on Capital 21.376 20.842 0.126
Employed
Debt-equity Ratio 1.381 1.402 -0.049

27
 The results showed that the average operating profit margin after the merger decreased
slightly (12.128% to 11.630%), but statistically insignificant (low t-value 0.243). The average
gross profit margin also decreased slightly during the post-merger period (9.221% to 8.321%, but
again this decrease was not statistically significant (low t-value 0.461). However, the average net
profit margin showed during the post-merger period (1.883% to 1.973 %), but the increase was
not statistically significant as confirmed by the low t value of -0.035

Average return on net worth showed a marginal decline (8.220% to 7.354%) in the post-
merger period, but this decline was not statistically significant (t-value 0.099). Similarly, average
return on capital employed showed a marginal decline (21.376% to 20.842%) in the post-merger
period, but again this decline was not statistically significant (low t-value 0.126). The debt-to-
equity ratio did not change after the merger (1.402 vs. 1.381) and was confirmed by a 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 the above results, the hypothesis H2: Industry type does not affect the change in
operating performance of acquiring companies after mergers was rejected, as different results
were obtained for the samples of mergers in different industries in terms of the impact on
operating performance (although some differences were not statistically significant ). While the
banking sector saw a marginal improvement in profitability after the merger, the pharmaceutical,
textile and electrical sector saw a marginally negative impact on operational performance (in
terms of profitability and return on investment). In the chemicals and agricultural products
industries, mergers have caused significant declines, both in terms of profit margins and return
on investment and assets.

List of mergers used in the

study
S.No. Merging Company Merged Company
1 ABB Ltd. Flakt India Ltd.

2 Aban Offshore Ltd. Hitech Drilling Services India

Ltd
3 Abhishek Industries Ltd. Abhishek Spinfab
Corporation Ltd.

28
 4 Abhishek Industries Ltd. Varinder Agro Chemicals
Ltd.
5 ACI Infocom Ltd.
ACI Computer (India) Ltd.
6 Aarti Industries Ltd.
Salvigor Laboratories Limited
7 Amforge Industries Ltd.
Isha Steel Processors Ltd.
8 Asahi India Safety Glasses
Floatglass (India) Ltd.
9 Atlas Copco (India) Ltd.
Chicago Pneumatic India Ltd.
10 Balaji Industrial Corpn. Ltd.
Nivee Industries Ltd.
11 Balrampur Chini Mills Ltd.
Babhnan Sugar Mills
12 Bambino Agro Inds. Ltd.
Bambino Food Industries
13 Bannari Amman Sugars Ltd.
Coimbatore Alcohol &
Chemicals Ltd
14 Bayer (India) Ltd.
Aventis Cropscience India
Ltd.
15 BASF India Ltd.
Cyanamid Agro
16 Berger Paints India Ltd.
Rajdoot Paints Ltd
17 Bright Brothers Ltd.
Brite Automative & Plastics
Ltd.
18 Camphor & Allied Products
Ltd. Pine Chemicals Ltd

19 Ceekay Daikin Ltd.

Exedy Ceekay Ltd
20 Cimmco Birla Ltd.
Biax Ltd.
21 Core Healthcare Ltd.
Core Laboratories Ltd.
22 Carbon Everflow Ltd
Graphite India Ltd.
23 Carbon Corporation Ltd.

29
 Graphite Vicarb India Ltd.
24 Century Enka Ltd.
Rajashree Polyfil Ltd.

25 TCFC Finance
20th Century Finance
26 Cheminor Drugs Ltd. Corporation
Globe Organics Ltd.
27 Delton Cables Ltd.
Delton Sales & Services Ltd.
28 DSP Merrill Lynch Ltd.
DSP Merrill Lynch Securities
29 Dhampur Sugar (Kashipur) Ltd.
Ltd. DSM Sugar (Kashipur)

30 Dr. Reddy's Laboratories Ltd.

Cheminor Drugs Ltd
31 Eicher Ltd.
Eicher Tractors Limited
32 EL Forge Ltd.
Chendur Forge Exports Ltd.
33 Emami Ltd.
Himani Limited
34 Essar Shipping Ltd.
South India Shipping
35 GKW Ltd.
Powmex Steels
36 Gillette India Ltd.
Duracell India Ltd.
37 Glaxo Wellcome
Smithkline Pharmaceuticals
Ltd
38 GMR Industries Ltd.
Varalakshmi Sugars Ltd
39 Granules India Ltd.
Triton Laboratories Ltd
40 Gujarat Ambuja Exports Ltd.
Godrej Soaps Ltd Gujarat Ambuja Cotspin
41
Gulshan Sugars & Chemicals
42 Ltd. Gujarat Godrej Innovative
Chemicals
Gujarat Petrosynthese Ltd.

30
 43 Prestige Fibres Ltd
Gulf Oil Corporation Ltd
44 Karnataka Petrosynthese Ltd.
Hawkins Cookers Ltd.
45 IDL Industries Ltd.
Himachal Futuristic
46 Communications Ltd. PCA Engineers Ltd

HBL Nife Power Systems

47 Ltd. Himachal Telematics Ltd.

Himadri Chemicals & Inds Hyderabad Batteries Ltd

48 Ltd. (HBL Ltd)

Ideaspace Solutions Ltd Himadri Ispat Ltd

49
India Foils Esteem Capital Services Ltd
50
Indo Flogates Ltd Namtok Invst. and Maknam
Investment.

Advantages of a Merger
1. Increases market share
When companies merge, the new company gains more market share and gains a
competitive advantage.
2. Reduces the cost of operations
Companies can achieve economies of scale, such as purchasing raw materials in bulk,
which can lead to lower costs. Investment in assets is now spread over greater output,
leading to technical savings.
3. Avoids replication
Some companies making similar products may merge to avoid duplication and eliminate
competition. This also leads to lower prices for customers.
4. Expands business into new geographic areas
A company that wants to expand its business in a certain geographical area can merge
with another similar company operating in the same area to start a business.
5. Prevents closure of an unprofitable business
31
 Mergers can save a company from bankruptcy and also save many jobs.
Disadvantages of a Merger
1. Raises prices of products or services
A merger has the effect of reducing competition and increasing market share. Thus, the
new company can gain a monopoly and raise the prices of its products or services.
2. Creates gaps in communication
Companies that have agreed to merge may have different cultures. This can result in a
communication gap and affect employee performance.
3. Creates unemployment
In an aggressive merger, a company may decide to eliminate non-performing assets of the
other company. This can lead to employees losing their jobs.
4. Prevents economies of scale
In cases where there is little in common between the companies, it may be difficult to
gain synergies. Also, a bigger company may be unable to motivate employees and
achieve the same degree of control. Thus, the new company may not be able to achieve
economies of scale.

Conclusions
This study was conducted to test whether the type of industry has an impact on the
merger outcome for the merging company in terms of impact on operational performance. The
results of the analysis of pre-merger and post-merger operating performance ratios of the
acquiring firms in the sample showed that mergers had a different impact on different industries
in India. Industry type appears to have an effect on the operating performance of acquiring firms
after a merger.
Several studies have been conducted over the years to evaluate whether mergers and
acquisitions add value to organizations or are destructive. The methods that have been used to
analyze acquisition performance are varied. The aim of our study is to review the literature on
the study of M&A history, phases, motives and different methods used to measure performance;
evaluate benefits and drawbacks; examine whether there have been new developments in the
techniques used over the last few years. The study initiated a review of the M&A literature to
understand the processes involved and synthesize research findings for the benefit of managers
and future researchers. Thus, the scope of the study was limited to M&A history, stages, motives
and methods. In conclusion, the current study shows that there are several methods of measuring
acquisition performance, each with its own merits and demerits. The choice of measurement
method is essential for the results obtained and should therefore be chosen with great care.
Limitations of the study
32
 The study ignored the impact of possible differences in accounting methods used by the
different companies in the sample because the sample included only stock-for-stock mergers.
The study also did not use any control groups for comparison (industry average or firms with
similar characteristics) as other studies have done. A sample covering a longer period was
considered adequate to obtain unbiased results and to account for cross-sectional dependence.
The aforementioned differences in methodology may have possibly influenced the reported
results compared to other studies on post-merger performance. Another limitation of the study
was the small sample size of mergers in each industry, which could raise the question of the
statistical validity of the results.
Future research in this area could be an extension of this study by estimating and
comparing with industry/sector averages and any differences could be further explored to gain
further insights. Researchers could also analyze post-merger returns to shareholders of acquiring
firms involved in mergers in India to correlate with the findings of studies indicating poor post-
merger performance.

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