Review of Literature

2. Review of Literature
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M&A is an important strategic option that firms can leverage to make necessary
competitive advantage in the market. It can help the firms to obtain higher earnings
per share and a broader customer base and gain to new products and services. At
the same time, mergers are very risky and deals fail, because of the opportunistic
M&As and overpayment to poor integration. M&A have become a company‟s
strategy and organic growth depends on the industry the company operates in and
its market position and its strategy for valuation. M&A can help companies to take
advantage of the scale that result from consolidation and gain access to markets
and products.

A comprehensive review of the previous research studies pertaining to the Mergers

and Acquisitions and the impact of financial and operational consequences have
been discussed with various methodologies in this chapter. The reviewed articles
have been categorized into year wise. Literature related to mergers and acquisitions
in Airline Industry, the impact of financial performance on Industry have been
dealt in this section. The chapter concludes with the research gap identified
through the review of literature.

2.1 Reviews of Literature on Mergers and Acquisitions

1
Asquith, Bruner and Mullins (1983) examine the effect of mergers on the
wealth of acquiring firm‟s shareholders. Acquiring firms gain during the twenty
one days leading to the announcement of each of their merger deals. The results
fail to support the capitalization hypothesis that acquirer‟s gains are captured at the
beginning of merger programs. Deals abnormal returns are positively related to the
relative size of the merger partners, and the gains during the announcement period
are larger for mergers which are successful. Though the gains are larger prior to
1969, merger bids after 1969 also significantly increase the wealth of acquiring
firms' shareholders. The results suggest that the inconclusive findings of the earlier
studies may be due to methodological deficiencies. The findings of this study are
consistent with value-maximizing behavior by the management of bidding firms.

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 Review of Literature

Kyong rock lee and Byung Ihm Leem, (1994)2 in their paper introduced a MPI
using DEA frontier in stata. It measures productivity changes for units between
time periods. The user-written MPI approach in Stata will provide some possible
future extensions of Stata programming in the productivity analysis

Akhil Bhan P (1998) 3has conducted a study into the motives and benefits of the
mergers in Indian banking sector .This is done by examining the eight merger deals
of the banks in India during the period of reforms from 1999 to 2006 . Through the
empirical methods by applying t-test and EVA value calculations the potential of
the mergers has been evaluate to study the efficiencies or benefits achieved due to
the merger .The study has been concluded that the mergers in the banking sector in
the post reform period possessed considerable gains which was justified by the
EVA of the banks in the post merger period.

Simon Feeny and Mark Rogers (1998)4 in their research work entitled
„Profitability in Australian Enterprises‟ analyzes profitability in a sample of larges
Australian companies over the period 1985 to 1996. Various measures of
profitability are used and provide a discussion of the theoretical basis for these
measures. The key issues investigated are a comparison of the profitability
measures, the distribution of profitability between firms, and the persistence of
firm profitability. The results are compared with previous studies on firm
profitability.

Avkiran N K (1999)5 examines the Technical efficiency of seventy one banks

operating world-wide in the maritime sector from 2005 to 2010. Based on the
findings, the banks during the study period are technically inefficient, where as TE
is proved to be higher under the assumption of Variable returns to scale when
comparing constant returns to scale.

Anup Agrawal Jeffrey F. Jaffe (1999)6 examined “The Post-merger Performance

Puzzle”, on long-run abnormal returns following mergers. The paper also gives
explanations for the findings of underperformance following mergers. It can be
concluded that the evidence does not support the conjecture that underperformance
is specifically due to a slow adjustment to merger news. The results reject the EPS

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 Review of Literature

myopia hypothesis, i.e. the hypothesis that the market initially overvalues acquirers
if the acquisition increases EPS, ultimately leading to long-run under-performance.

Saple V. (2000)7 identified in his research thesis on “Diversification, Mergers and

their Effect on Firm Performance: A Study of the Indian Corporate Sector”, that
the target firms were better than industry averages while the acquiring firms had
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.

Andrade, G, Mitchell M and Stafford E (2001)8examines in his articles whether

there is a correlation between a company‟s M&A behavior and the situation in
capital market. The analysis is done with regard to the development of the DAX,
the German stock exchange market index. 78 transactions by German purchasing
companies during the period 1998 to 2009 were analyzed. The results show that
M&A behavior is a procyclical phenomenon and that anticyclical transactions are
more successful than procyclical ones in the long term.

Ping-wen Lin (2002)9 in his findings establishes there is a negative correlation and
statistical significance exists between cost inefficiency index and bank mergers.
The data envelopment analysis found that bank mergers did not improve
significantly cost efficiency of banks. In another study, he found that bank mergers
tend to upgrade the technical efficiency, allocative efficiency, and cost efficiency
of banks. In terms of technical efficiency and allocative efficiency improvement,
the effect of bank mergers was significant, however, in terms of cost efficiency
improvement, the effect was insignificant.

Ramaswamy and Waegelein (2003)10 identified in their study the “Firm Financial
Performance Following Mergers,” that the post-merger financial performance of
162 merged firms that occurred during 1975-1990 in the US. They used industry
adjusted operating cash flow returns on market value of assets as the measure of
performance and used only firms that had not gone in for any merger during the
study period as part of their control sample, since they felt that only that would
make the data incorruptible and the results more robust. The study found a

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 Review of Literature

significant increase of 12.7 per cent in firm performance after the merger had taken
place.

Robert W. Kaps (2004)11 studied the importance of published research in the field
of aviation in the academic environment. Providing a five-part argument supports
the publishing process. The discussion addresses why publishing is important,
through identifying three distinct groups of individuals who may desire and or be
encouraged to publish, while providing the academic community with three
distinct lists of publications where manuscripts may be submitted for
consideration. The article serve as a ready reference for answering the question
where you can publish my research'. This article continues an earlier effort (Truitt
& Kaps, 1995) to identify the number and type of academic publications serving
the field of aviation research.

Jose Manuel Campa & Ignacio Hernando (2005)12, in the research paper “M&A
performance in the European Financial industry”, reports the evidence on
shareholders returns from mergers. Mergers announcements brought positive
returns to the shareholders of the target company around the date of the
announcement. Returns to shareholders of the acquiring firms were essentially zero
around announcement. One year after the announcement, excess returns were not
significantly different from zero for either targets or acquirers. The paper also
gives insight on changes in operating performance for the subsample of mergers
involving banks.

Morris Knapp, Alan Gart &Mukesh Chaudhary (2006)13 examined the

tendency for serial correlation in bank holding company profitability, finding
significant evidence of reversion to the industry mean in profitability. It proves the
impact of mean reversion on the evaluation of post-merger performance of bank
holding companies. The research concludes that when an adjustment is made for
the mean reversion, post-merger results significantly exceed those of the industry
in the first 5 years after the merger.

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 Review of Literature

Rajesh Kumar B and Prabina Rajib (2007)14 analyzed in their paper the
distinctive financial characteristics of the acquirer and the target firms during the
period of merger. This study developed a predictive model for target firms based
on different financial and market variables. The study observed that the mergers
have resulted a higher cash flow, PE ratio and lower debt to total assets ratio in
acquirer firms which are statistically significant. The study concludes that smaller
firms with lower price earnings ratio are more likely to be acquired.

C. Lanier Benkard, Aaron Bodoh, John Bajari (2008)15 examined a new method
for studying the medium and long run dynamic effects of mergers. The method
builds on the two step estimator. Using data for 2003-2007.They apply model to
some airline mergers. An airline‟s entry or exit decisions are made jointly across
routes, and depend on features of its own route network as well as the networks of
the other airlines. The model allows for city-specific profitability shocks that affect
all routes out of a given city, as well as route-specific shocks.

Dr. Neena Sinha, Dr. K.P.Kaushik & Ms. Timcy Chaudhary (2010)16 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 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.

Joe zhu (2011)17 in his paper measured the airline performance using a two stage
process. In the first stage the resources are used to maintain fleet size and load
factor. In the second stage, the fleet size and the load factor generate revenue. The
model is known as the centralized efficiency model. This helps to enable obtaining
insights not available from the standard DEA model.

Alok kumar singh (2011)18 aimed at calculating the relative performances of

different Indian domestic airline industry using DEA framework. Data

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 Review of Literature

Envelopment Analysis is used to construct performance indices on the basis of the

multiple outputs which airlines produce and the multiple inputs which they utilize.
The findings are used to identify which variables the managers have some control
over and what the relative importance of each variable is that affecting
performance.

Shobhana and Deepa N(2011)19 has attempted to conduct a study into the
fulfillment of motives as viewed in the merger deals of the nine select merged
banks. The study uses Summary Statistics, Wilcoxon Matched Paired Signed Rank
Test and t test for analysis and interpretation of data pertaining to the five pre and
post merger periods each. The result indicates that there has been only partial
fulfillment of the motives as envisaged in the merger deals.

Maarkku kuula (2012)20Measuring customer expectations of service quality case

study give an overview of the service quality taking airline industry. Study
revealed that the customers value basic services in service process such as flight
schedule, reservation information delay flights, baggage delivery. No significant
differences were found between male and female passengers. The respondents do
not differentiate between in flight or ground services.

Subha M V, Archana R, (2012)21 examines the factors of service quality

influences on passenger‟s satisfaction in aircraft transport. The study identifies the
service dimensions have a positive influence on service quality and which
dimensions have the most and least important impact on service quality in
international air travel, as perceived by airline passengers. The findings are based
on the analysis of a sample of 270 respondents. This study analyzed the data from
passengers of three classes, economy, business and premium. The results suggest
that there are different factors of in-flight service quality that are important
according to the customer seat class. The dimensionality of perceived service
quality in international air travel was explored and three dimensions were
identified. These dimensions include in-flight service, in-flight digital service and
back-office operations. The findings reveal that these three dimensions are
positively related to perceive service quality in international air travel and of these

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 Review of Literature

dimensions, Cuisines provided, seat comfort safety are the most important
dimension in in-flight service quality.

Mahesh R &Daddikar Prasad (2012)22 in the post merger and acquisition

financial performance analysis paper focused on the performance of Indian Airline
companies after the merger in 2008. The paper analyses whether the Indian
Airlines companies have achieved financial performance efficiency during the post
merger & acquisition period in the areas of profitability, leverage liquidity and
capital market standards. In this study, airline companies do not bring significance
on the financial performance after merger.

Mani Arora & Anil kumar (2012)23 studied the concept of Mergers in detail to
find out the major issues associated with the pre and post merging situations with
special emphasize on human aspect. Merger&Acquisition is a phenomenon which
is easy to think but hard to implement. Three phases of mergers via pre merger,
deal phase and the post mergerhave its own advantages as well as difficulties, if
handled with proper care synergies can be withdrawn but a little mistake can spoil
the whole transition. Both management and employees have to work hard at their
own level to make it a successful one because man is the major factor during the
whole deal. Post merger transition phase is the most difficult one as in any
organization whether large or small cultural clashes exist which may turn up a
merger into the failure. Merger& Acquisition is a process which is very essential
nowadays for the growth and survival of the business. Companies are acquiring
more and more firms in order to expand their business and with lots of reasons
which are discussed here. If any company is not adopting this way either they will
not grow or will be acquired by the other major big firm.

N. M. Leepsa & Chandra Sekhar Mishra (2012)24 in the research paper on “Post
Merger Financial Performance: A Study with Reference to Select Manufacturing
Companies in India”, aimed to study the trend in merger and acquisition (M&A)
particularly with reference to manufacturing companies. The 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.

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 Review of Literature

David Mc. A Baker (2013)25 in the research of Quality and Customer Satisfaction
in the Airline Industry: A Comparison between Legacy Airlines and Low-Cost
studies the customer satisfaction and service quality with respect to airlines. It
revealed that that the airline industry has been struggling with many challenges
like increasing fuel cost, managing fluctuating demand, keeping up with tight
quality requirements; and satisfies the needs of various customer groups. The
findings indicate that while the traditional carriers are converging toward a higher
level of service quality, using the four measures, there continue to be significant
variation. In this study, over a five year period 2007 to 2011, the service quality of
low cost airlines generally found to be higher than that of traditional legacy
airlines. Implications related to operating costs, market share, infrastructure and
customer service were evident.

Kumara, Manoh N V and Satyanarayana (2013)26, studied pre and post

corporate merger revealed that M&A determine the synergistic effect through
which firms undertake global strategies as well as domestic. The study explores the
capabilities of the firms by looking at the pre and post merger activities.The
samples taken from a list of merger and acquisition in India by 2010. The findings
indicated that a significant positive value to the acquired firms.

Fallah M, Mohajeri A, (2014)27 in their paper proposes a VIKOR method for

calculating productivity index. The VIKOR method is used for two times t and t+1,
in order to calculate the progress or regression through Malmquist productivity
index, the positive and negative ideals at time t and t+1are calculated first. Then
they introduce the multi-criteria ranking index based on the particular measure of
"closeness" to the ideal solution and calculate the separation of each alternative
from the ideal solution at time t and t+1. The Malmquist productivity index is used
to calculate the progress or regression of all alternatives.

Jayaraman A R, Srinivasan M R (2014)28examines the impact of Indian banks

analyses the M&A using Data envelopment analysis. The impact has been studied
by comparing the efficiency of merged banks three years before and after the
merger. To analyse whether change in efficiency of banks is due to merger effect,
this study compares the efficiency of merged banks with non-merged banks. This

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 Review of Literature

paper provides how close or far away the banks are from the efficient frontier. It is
observed that technical efficiency of merged banks deteriorated immediately after
the merger and showed improvement from the third year of post-merger period.
The effect of merger and acquisition on the profitability and operational cost of
merged banks is not significant during the initial phase of merger.

Partha sarathi and Bivraj Bhushan (2014)29in his study of evaluation of

customer expectations and perceptions on service quality in Life Insurance
Corporation of India indicated that dimensional structure of service quality for the
customers expectation used by Bexley‟s customer retention indicator grid to
evaluate the customers‟ expectation and perception score against each dimension.

Karam pal Narwak and Shweta Pathneja (2015)30focused on productivity and

Profitability of Indian banking sector. It is being assessed in two different time
periods 2003-04 to 2008-09 and 2009-10 to 2013-14. To measure the total
productivity of the banks, DEA and Regression model applied. The study found
that the private sector banks are more productive than public sector banks over the
period. The reason was better utilization of technology.

Deitiana, Lionel Greg Habibuw (2015)31 in their study examines the company
performance to describehow individuals in the company try to achieve a goal.
Company performance illustrates the magnitude of the results in a process that has
been achieved compared with the company‟s goal. The study is to find out factors
determining financial performance. The objects of this study are property and real
estate companies listed on the Indonesia Stock Exchange during the period of 2007
– 2012. Data for this study stems from secondary data gathered by analyzing
financial statement of the sample companies. The data is then analyzed with
regression Analysis. The research concluded that Variable leverage and Firm age
has an effect on financial performance. Other variables like liquidity, Firm Size,
Managerial Ownership and Block holder Ownership have no effect on financial
performance.

Murugesan C, Dr. R. Perumalsamy (2015)32 in his study on customers‟ service

quality gap of Air India using servqual model assess the service quality of Air

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 Review of Literature

India to determine what establishes the service variables, how the passengers
satisfied with services and how to improve the satisfaction level of customers. The
result shows Air India displayed a good service quality in the assurance,
responsiveness, reliability and technical dimension of the services but the tangible,
empathy dimensions needs a lot of enhancement.

Usman Ahmad qadri (2015)33in Measuring service quality expectation and

perception using servqual- a gap analysis carried with the objective of
understanding the level of gap exist between expectation and perception among the
banking customers. This study measures service quality examining five dimensions
of service quality. A negative gap indicates that actual service is less than what was
expected and the gap is highlighted area for improvement. Convenience sample of
two fifty public and private bank‟s account holders is used to collect the data. The
study shows there is a huge gap exists between excellent bank (expectation) and
account holder experience (perception) bank in Pakistan with the regards of service
quality. This helps to minimize the gap that was exist between excellent bank and
account holder experience bank in Pakistan.

Shah, Bisma Afzal (2016)34 was carried out the study with the aim of assessing
the impact of mergers and acquisitions on the value of listed firms in India. The
study explains the motives behind deals and to determine whether organizations
undertaking the inorganic mode of expansion to achieve the real benefits. The
study examines the impact of merger and acquisition deals have on the operating
performance, financial performance and the shareholders wealth of the sample
firms by comparing the performance before and after deals. It also explains the
extent to which merger and acquisition deals are successful in improving operating
and financial performance and creating shareholders wealth. The research assesses
the success or failure of Indian forms involved in merger deal. It examines the
aggregate performance and firm specific level performance. The study restricted to
Indian domestic firms only.

Celile O, Adana Bilim (2016)35 in measurement of service quality in air

transportation, Dolekoglu studied the service quality dimensions. It was conducted
with 300 passengers over the age of 18 travelling through Adana, sakirpasa airport,

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 Review of Literature

which is the sixth biggest airport in Turkey. Servqual scale was used to analyses
customer perception and service quality.

Meysam Jafari & Ghasemali Bazaee (2016)36 studied the effect of customer
service quality in international airlines (Mahan airline international). The research
carried out to evaluate the effects of service quality on customers‟ satisfaction in
international airlines. The population comprises of Mahan international flight
passengers. The sample size is estimated 371 using Cochran formula and the
questionnaire reliability has shown to be 0.85 using Cronbach's alpha. The results
indicate that aircraft concrete features have significant effects on customers‟
satisfaction but the significant effect of airport observable features, empathy and
airline image on customers‟ satisfaction was rejected. Multiple Correlation square
coefficient analysis indicated that 83.1% of dependent variable variance (customer
satisfaction) is explained by the model that is indicative of the high capability of
independent variable prediction.

Jia Yan, Xiaowen Fu, Tae Hoon Oum, Kun wang (2016)37 studied the effects of
mergers on airline performance and social welfare found that the effect on airfares
is dependent on the network configurations of merging airlines. Fare increases are
frequently observed on overlapped routes. However, if the networks of two
merging airlines are complementary, the expanded network after the merger leads
to cost savings, increase in travel options, and improvement in service quality.
Therefore, in a deregulated market, with few entry barriers, relaxing merger
regulations is likely to improve welfare. However, most welfare evaluations do not
incorporate quality changes or dynamic competition effects. Empirical
investigations are primarily ex post analysis of mergers that have already passed
antitrust reviews. The relationship between market concentration and welfare
might be nonlinear and market specific. Therefore, airline mergers and alliances
should be reviewed case by case.

Wilfred, Tamilla, Dawna (2016)38 in the study US airways group: A post merger
analysis analyses the post merger performance of the US airways group using
airline operating metrics and financial ratios for the period of 2005-2013. . While
the airline has still a long way to go to improve its leverage and liquidity ratios, its

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 Review of Literature

capital structure and ability to pay its obligations have improved since 2005.
Moreover, although the airline is still inefficient in utilizing its assets, the
efficiency improvements achieved since the merger have resulted in profits and
positive returns to investors. Its share prices have also largely outperformed the
S&P, an indication that investors are pleased with how the merger is developing
over time. In view of the US Airways Group's improving financial and operating
performance, the merger is, essentially, a success.

Rosini and Juniati Gunawan (2016)39 have researched on twenty aviation

industry in Indonesia for financial report which ended in 2016. In this research,
they use DEA data analysis technique and TOPSIS method, along with correlation
analysis to see how big correlation among variables in doing research. The
research expects the proposed model for the company's financial analysis in
assessing the level of efficiency and ranking can be used by using a combination of
DEA and TOPSIS method.

Tian Luo Thayer (2016)40, provide a detailed assessment of the overall effects of
each of the five major mergers on the passengers‟ welfare as evaluated through
consumer surplus changes, starting with the US airways and West Airlines merger
in 2005 and ending with the American Airlines and US Airways merger in 2013.
They develop discrete choice models with fare, nonstop and one-stop service
frequency, travel time, and other carrier and route attributes as parameters. The
consumer surplus, as a function of these parameters, is calculated for each market
as the measure of passengers‟ welfare. By using the markets not affected by the
mergers as a control group, they are able to separate out the welfare effects of
mergers from those of other extrinsic factors such as oil price changes, changes in
economic conditions. The findings that mergers of legacy network carriers with
significant proportion of overlapping markets are generally accompanied by flight
reallocation and network reorganization, which in turn, contribute to an increase in
passenger welfare. The overall passenger welfare for very small communities
declined after the mergers. Also, overall passenger welfare in markets with many
competitors declined, consistent with the classic economic theory of consolidation-
induced welfare losses. The welfare gain from mergers of legacy network carriers

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 Review of Literature

with significant proportion of overlapping markets progressively decreased as the

number of existing major domestic iii carriers decreased, and that after the most
recent mergers, any further potential mergers of legacy network carriers are likely
to result in welfare losses.

Parimalendu Banerjee, Bijoy Gupta (2017)41 studied three years pre and post
merger financial performance of the companies taking sample size of seven
different industries undergone merger and acquisitions during 2016-2012. Various
financial ratios applied to assess the profitability and liquidity position. The
analysis is conducted with the help of t test and the findings shows that there is no
improvement in financial performance of acquirer companies after merger. Post
merger profitability and liquidity indicators of sample deteriorate.

Andrea Cira, Paolo Coccorese, (2018)42 Measuring and Explaining Airport

Efficiency and Sustainability by means of the DEA (Data Envelopment Analysis)
analyses overall technical, pure technical, and scale efficiency of 34 Italian airports
in the period 2006–2016 in order to investigate how a number of factors impact on
the efficiency and economic sustainability of regional airports. The findings reveal
that airport size, presence of low-cost carriers and cargo traffic has a significant
influence on the technical and scale efficiency of Italian airports. The air transport
privatization and deregulation can positively affect regional airport efficiency and
sustainability.

Micheal, R K Tailor (2018)43 studied the process of measuring the results of a

firm's policies and operations in monetary terms. In other words, financial
performance is a subjective measure of how well a firm can use assets from its
primary mode of business and generate revenues. The term is used as a general
measure of a firm's overall financial health over a given period of time, and can be
used to compare similar firms across the same industry or to compare industries or
sectors in aggregation. The financial performance refers to the degree to which
financial objectives being or has been accomplished. It is the process of measuring
the results of a firm's policies and operations in monetary terms. It is used to
measure firm's overall financial health over a given period of time and can also be

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 Review of Literature

used to compare similar firms across the same industry or to compare industries or
sectors in aggregation.

2.2 Research Gap

The Researcher came across various studies related to Airline Mergers and
Acquisitions in global and Indian economy. All studies based on financial aspects
or combination of financial and operational aspects. Moreover the studies focus on
the shareholders wealth maximization principle.
The literature review states the following limitations of the various studies.
 Number of merger cases analyzed is much less and have taken only
merger aspect and leaving acquisition.
 The most of the studies are conducted in Bank mergers.
 The studies are mainly focused on financial part only. The
efficiency gains and service quality are the two important motives
for M&A in service sector.
 Apart from the measuring post merger profitability and liquidity of
the merged entity,there have been no reported works on the
operational efficiency of airlines in Indian context.
 It is noticed that no reports dealt comprehensively on M&A
performance on Industry wise analysis.
 The studies showed one or two or more companies for several
sectors but there was no research related to assess the impact of
total merger population on industry wise data.
With this backdrop, the researcher attempts to address some of the above issues on
the Indian Airline Industry after merger.The current research endeavors to study
the mergers and acquisitions from synergy aspect based on financial, operational
and service quality aspects.The present paper has taken both M&A in airline
industry. In order to carry out analysis of M&A in Airline Industry in India using
financial, operational and service quality aspects has been taken to investigate the
impact of M&A on the performance of Indian Airline Sector.

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FIGURE 2.1
Airline Merger-Research gap

Operational
Performance

Financial Service Quality

Performance Performance

Merger
Performance
in Airline
Industry

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