Mergers and ions on the Performance of Indian Companies-Meghana a Patil-0489

Impact of mergers and amalgamations

M.P.Birla institute of management. 1

RESEARCH PROJECT

On

�Impact of mergers and Amalgamations on the

performance of Indian companies� Submitted in partial fulfillment of the requirement for MBA

Degree of Bangalore University

BY

Meghana.A.Patil Registration Number

04XQCM6055

Under the guidance of

Dr. N.S.Mallvalli

M.P.Birla Institute of Management

Associate Bharatiya Vidya Bhavan

Bangalore-560001

2004-2006

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DECLARATION

I hereby declare that the research project titled �Impact of mergers and

Amalgamations on the performance of Indian companies� is prepared under

the guidance of Dr.N.S. Mallavalli in partial fulfillment of MBA degree of

Bangalore University, and is my original work.

This project does not form a part of any report submitted for degree or diploma

under Bangalore University or any other university.

Place: Bangalore Meghana.A.Patil



PRINCIPAL�S CERTIFICATE

This is to certify that Ms.Meghana.A.Patil, bearing Registration No:

04XQCM6055 has done a research project on �Impact of mergers and

Amalgamations on the performance of Indian companies� under the

guidance of Dr. N.S.Mallavalli, M P Birla Institute of Management, Bangalore.

This has not formed a basis for the award of any degree/diploma for any other

university.

Place: Bangalore Dr.N.S.MALLAVALLI

Date: PRINCIPAL

MPBIM, Bangalore



GUIDE�S CERTIFICATE

I hereby declare that the research work embodied in this dissertation entitled

�Impact of mergers and Amalgamations on the performance of Indian

companies� has been undertaken and completed by Miss. Meghana.A.Patil

under my guidance and supervision.

I also certify that she has fulfilled all the requirements under the covenant

governing the submission of dissertation to the Bangalore University for the

award of MBA Degree.

Place: Bangalore Dr. N S MALLVALLI

Date: Research Guide

MPBIM, Bangalore



ACKNOWLEDGEMENT

I am thankful to Dr.N.S.Malavalli, Principal, M.P.Birla institute of

management, Bangalore, who has given his valuable support during my project.

I am extremely thankful to Prof. Dr.N.S.Malavalli , M.P.Birla institute of

Management, Bangalore, who has guided me to do this project by giving

valuable suggestions and advice.

My special thanks to Prof. Santanam, who provided me the timely advice and

and has helped remarkably to complete the project.

Finally, I express my sincere gratitude to all my friends and well wishers who

helped me to do this project.

Meghana.A.Patil



TABLE OF CONTENTS

CHAPTERS PARTICULARS PAGE NO.

ABSTRACT 1

1. INTRODUCTION

1.1 Introduction 2

1.2 Objectives of the study 14

1.3 Problem statement 15

1.4 limitations 15

2. REVIEW OF LITERATURE 16

3. RESEARCH METHODOLOGY

3.1 Data sampling details 21

3.2 Statistical tools 21

3.3 Data Analysis and Interpretation 23

4. RESEARCH FINDINGS 37

5. CONCLUSION 38

6. BIBLIOGRAPHY 39



IMPACT OF MERGERS AND AMALGAMATION ON THE

PERFORMANCE OF INDIAN COMPANIES

ABSTRACT:

This paper is an attempt to evaluate the impact of Mergers on the performance of the

companies. Theoretically it is assumed that Mergers improves the performance of the

company due to increased market power, Synergy impact and various other

qualitative and quantitative factors. Although the various studies done in the past

showed totally opposite results. These studies were done mostly in the US and other

European countries.

So this is an attempt to evaluate the impact of Mergers on Indian companies through

a database of 40 Companies selected from CMIE�s PROWESS, using paired t-test for

mean difference for four parameters;

Total performance improvement,

Economies of scale,

Operating Synergy and

Financial Synergy.

My study shows that Indian companies are no different than the companies in other

part of the world and mergers were failed to contribute positively in the performance

improvement in most of the cases.



1. INTRODUCTION:-

The marriage of two corporations without question is the most dramatic event to

transpire on the industrial landscape and has been so for the last few decades. Mergers

and acquisitions count among the most spectacular and most obvious strategic

demonstrations on the scale of the company. Globalization is a key feature of the new

competitive landscape within which the mergers and acquisitions frenzy is taking

place. It is associated with a growing convergence in economic systems, culture and

management practices. Research on M&A has received increased attention and grown

in popularity during the last two decades of the 20th century.

M&A are very important tools of corporate growth. A firm can achieve growth in

several ways. It can grow internally or externally Internal growth can be achieved if a

firm expands its existing activities by up scaling capacities or establishing new firm

with fresh investments in existing product markets. It can grow internally by setting

its own units in to new market or new product. But if a firm wants to grow internally

it can face certain problems like the size of the existing market may be limited or the

existing product may not have growth potential in future or there may be government

restriction on capacity enhancement. Also firm may not have specialized knowledge

to enter in to new product/ market and above all it takes a longer period to establish

own units and yield positive return. One alternative way to achieve growth is resort to

external arrangements like Mergers and Acquisitions, Takeover or Joint Ventures.

External alternatives of corporate growth have certain advantages.



Why do mergers occur?

Economic theory generally offers two competing thoughts about the efficacy of

mergers as the means of corporate restructuring. The neoclassical theory otherwise

known as value-maximizing theory postulates merger consequences as the moving

cause behind the mergers and views corporate, mergers as value-enhancing activities

in which managers work to achieve shareholders' wealth maximization goal of the

firm (Franks and Harris, 1989). In contrast, managerial theory or non-value

maximizing theory views mergers as the extension managers' own potential interests,

undertaken for the purpose of increasing their own wealth or prestige by managing a

larger post-merger entity (Roll, 1986). The theories of merger motives can be

classified into seven groups, which are presented in the table. The valuation, empire

building and process theory of mergers have the highest degree of plausibility. In case

of efficiency and monopoly theories, dominate the field of corporate strategy as well

as research on merger motives though provide unfavorable evidence. Finally, the

raider and the disturbance theories are unsupported by evidence (Trautwein, 1990).

Valuation Theory

Efficiency Theory

Monopoly Theory

Valuation theory

Empire-building Theory

Process Theory

Disturbance Theory



In case of diversified mergers firm can use resources and infrastructure that are

already there in place. While in case of congeneric mergers it can avoid duplication of

various activities and thus can achieve operating and financial efficiency. In addition,

economic circumstances of industries may also favour M&As.

Horizontal mergers in industries with excess capacity may be used to close the plants

to bring capacities and sales into better balance. Firms in fragmented industries may

become more effective when joined together. (Weston, pp123)

Mergers and amalgamations can be further classified based upon the objective profile

of such arrangements as Horizontal, Vertical, Circular and Conglomerate mergers. A

horizontal merger is the combinations of two competing firms belongs to the same

industry and are at the same stage of business cycle. These mergers are aimed at

achieving Economies of Scale in production by eliminating duplication of facilities

and operations and broadening the product line, reducing investment in working

capital, eliminating competition through product concentration, reducing advertising

costs, increasing market segments and exercising better control over the market. It is

also an indirect route to achieving technical economies of large scale. For example

merger of Tata Industrial Finance Ltd. With Tata Finance Ltd., GEC with EEC and

TOMCO with HLL.

A vertical merger is one where companies at different product or business life cycle

combines. It can be Backward Integration where company merges its suppliers or

Forward Integration where it merges its customers. The basic motive of these sorts of

merges is to reduce cost and dependence. Merge of Reliance Petrochemicals Ltd.

With Reliance Industries Ltd. can be placed in this category.



In circular combination, companies producing distinct products in the same industry

seek amalgamation to share common distribution and research facilities in order to

obtain economies by eliminating costs of duplication and promoting market

enlargement. The acquiring company obtains benefits in the form of economies of

resource sharing and diversification (Ansoff and Weston, 1962).

Here we can cite the merger of BBLIL with HLL. Conglomerate merger are the one

where companies belongs to different or unrelated lines of business. The basic motive

of these mergers are to reduce risk through diversification. It also enhances the

overall stability of the acquirer and improves the balances in the company�s total

portfolio of diverse products and production processes. It also encourages firms to

grow by diversifying into other markets. Diversification is a vital strategy for the firm

when present market does not have much additional opportunities for growth. Here

we can cite the example of Torrent group, which identified power as one of the

growing field, acquired Ahmedabad Electric Company and Surat Electric Company in

order to diversify the risk of its existing line of Pharmaceuticals business. In the last

two decade Merger activities in the world rose to unprecedented level. This reflects

the powerful change force in the world economy. In fact this respond to the changes,

which took place due to high level of technology changes, reduction in cost of

communication and transportation that created international market, Increased

competition, emergence of new industries, favorable economic and financial

environment and deregulation of most of the economies also motivate Mergers..

Second set of factors that gave rise to these activities, relates to efficiency of

operations. Economies of scale that reflects in cost reduction by avoiding duplicating

works and operating efficiency, which is the result of combining complementary

strength, are the other reasons. Different growth opportunity among different

products, birth of new industries, and concept of value creation through specialization,



under capacity utilization are the other forces. (J.Fred Weston and Samual C. Weaver,

Page 3).

Mergers and takeovers are prevalent in India right from the post independence period.

But Government policies of balanced economic development and to curb the

concentration of economic power through introduction of Industrial Development and

Regulation Act-1951,4 MRTP Act, FERA Act etc. made these activities almost

impossible and only a very few M&A and Takeovers took place in India prior to 90s.

But policy of decontrol and liberalization coupled with globalization of the economy

after 1980s, especially after liberalization in 1991 had exposed the corporate sector to

severe domestic and global competition. This had been further accentuated by the

reversionary trends resulted in falling demand, which in turn resulted in overcapacity

in several sectors of the economy. Companies started to consolidate themselves in

areas of their core competence and divest those businesses where they do not have

any competitive advantage. It led to an era of corporate restructuring through Mergers

and Acquisitions in India.

The structural adjustment program and the new industrial policy adopted by the

Government of India allowed business houses to undertake without restriction any

program of expansion either by entering into a new market or through expansion in an

existing market. In that context, it also appears that Indian business houses are

increasingly resorting to mergers and acquisitions as a means to growth.

Apart from above mentioned motives like Synergy effect, Economy of scale,

Improved profitability, Market power etc. there are numerous other qualitative and



quantitative factors also that inspires firms to resorts to this route of corporate growth

like to limit competition, utilization of under utilized capacity/ resources/ managerial

skills, improved assets turnover, inventory turnover, reduction in consumer surplus,

overcome the problem of slow growth and profitability in one�s own industry, To

establish a transnational bridgehead without excessive startup cost to gain excess to a

foreign market, to circumvent Govt. regulations,empire building, to change P/E ratio

favourbly.

P/E ratio: is an important motive in this exercise, when P/E ratios of two companies

are different. When a firm with high P/E ratio acquires another firm with low P/E

ratio, the EPS of the buyer will increase. At the same time return to the target�s

shareholder also increases. Here it is assumed that the P/E ratio of the buyer will carry

over to the combined firm. But, in real life P/E magic works in the short run only. In

the longer run, the lower growth of the5 seller (which was reflected by its low P/E

ratio) will depress the earning growth of the

buyer. (Weston, pp88/90)

PEG Ratio: Price earnings ratio/Exprcted growth rate in earnings.this ratio is very

useful for the shareholders of the acquirers company to know the value of the

deal.This ratio casts the value on the basis of growth rate prevalent in the

industry.Though there are many methods in use, the worth of the target firm will

depend on the way in which the acquirer utilizes the resources of the target company

for achieving the expected synergies.



Value �Strategy Framework M & A

Management Strategy Type of M&A Value Driver Type of synergy

Some of the managerial skills are transferable. So a company with strong managerial skill will be able to takeover a company with inefficient or bad management and improve efficiency by replacing existing management.

Horizontal and Vertical

Total Revenue Gain by will increase in Market Share

Managerial

The Company tries to turn itself into a miniature of capital market allocating cash from low growth area to fields of higher return.

Conglomerate Improving ROI by increase in revenue per unit

Financial

Company tries to make some tax savings as the tax law distinguishes between internally and.externally generated funds.

Conglomerate Improving ROI by increase in revenue per unit

Financial

Better planning and coordination, Reduction in bargaining time and transaction cost.

Vertical Increase in gross margin by reduction in total cost and market inefficiency

operating

Declining the marginal cost by increasing the quantity of product or improving the operating efficiency through economies of scale

Horizontal and Vertical

Increase in gross margin by reduction in marginal cost

operating

Reducing cost of capital through reduction of risk

Conglomerate Reducing unsystematic risk by portfolio management.

Financial

Improving the imperfect market valuation by paying lower price for the target company as compared to its true value

Vertical Or Horizontal or Conglomerate

Improving P/E Ratio

Financial



Efficiency theories under mergers suggest that mergers provide a mechanism by

which capital can be used with more efficiency and the productivity of the firm can be

increased through "economies of scale". The "theory of differential efficiency" states

that if the management of the firm" A" is more efficient than the management of the

firm "B", and if" A" acquires "B", thej efficiency of firm "B" is likely to be brought

up to the level of" A". According to this theory, the! increased efficiency of firm "B"

is considered the outcome of "merger". Another important, theory of mergers is the

"synergy theory", which states that when two firms combine, they should be able to

produce a greater effect together than what the two operating independently could. It

refers to the phenomenon of two plus two becoming five. This synergy could be

"financial synergy" or "operating synergy".

V (A+B) > V (A) + V (B)

Where: V (A+B) : Value of the combined firm

V (A) : Value of firm A

V (B): Value of firm B

A merger of two firms should invariably result in a "positive," i.e., it should result

in increased volume of revenue from the combined sales or decreased operating cost

or decreased investment requirements (Ansoff, 19881). If the effect is neutral, i.e., no

change is effected over the standalone positions, the whole labor of merger exercise

would go waste. On the other hand, if the combined effect is "negative," the merger

may even prove fatal later.

The increased outflows from the merged entity over that of the total output of the

units when they were operating individually is more due to operation of either



"economies of scale" or "economies of scope". The nature of" economies of scale"

could vary: Some mergers look for cost-based economies of scale, some may look for

revenue based economies of scale, safety net-based economies of scale, defense-based

scale of economies, etc. Similarly, "economies of scope" is also varied in nature:

Cost-based economies of scope,

As a natural corollary to the underlying logic of mergers, the stakeholders of business

firms do expect positive outflows from mergers and acquisitions. They are indeed

resorted to with a hope: that mergers result in:

Reduction in Expenses - A merger must result in adoption of new technologies,

goals, strategies, and operational approaches in such a way that they cumulatively

lead to cost reduction in delivering the services and thereby make the merged-entity

more competitive in garnering increased sales and net margins.

Enhanced Market Power and Reduced Earnings Volatility - It is obvious that the

acquired business should either add to the market share of the company or create a

fresh niche market of its own, so that volatility in earnings can be minimized and

profitability is sustained. Earnings are sustained only when sales performance

constantly improves and that is where mergers come handy ii1 creating that extra"

edge" over the competitors with the least loss of time.

Extra Capital- The need for capital is another motive which leads to mergers and

acquisitions. This could be best appreciated from the recent merger proposition

announced by the Aditya Birla group that includes merger of diversified group

companies such as Indo Gulf Fertilizers, Birla Sunlife, Birla Financial Services with

Indian Rayon-all with an objective to make the surplus cash of Indo Gulf Fertilizers

available to businesses engaged in offering financial services for expansion. The need



for such mergers is all the more essential in the banking sector, where mandatory

capital requirements are on the rise with the proposed Basel II.

. Smooth Privatization - The ongoing sovereigns' love for deregulation and

privatization resulted in cross-border movement of capital-mostly into developing

economies for acquiring controlling interests in companies being privatized. Indeed,

many developing countries could attract fresh capital and modern technology into

their otherwise obsolete public sector businesses and make them competitive through

cross-border mergers/ acquisitions.

Competency Buildup - In today's deregulated markets, "competency" of domestic

businesses has become a must, to face the onslaught from multinationals. In this

regard, mergers have come handy for consolidation and buildup of requisite" scale

of economies" and" scale of scope", to maintain the revenue stream with least

volatility.

Mergers: Why they Fail?

All the hype that usually surrounds the pre-merger phase suddenly dissipates once the

merged entity becomes a reality and problems surface. It perhaps ever remains an

enigma as to why and how the much sought after merger suddenly threatens the very

proponents of merger with unforeseen challenges. The empirical studies/findings of

Kavita Pathak and JV Vaishampayan (20052) carried out on companies such as Sun

Pharmaceuticals, Wockhardt, Nicholas Piramal, Ranbaxy, etc., reveal that the synergy

theory does not hold good in the merger and acquisition scenario of India. It is,

however, very difficult to precisely define what makes a merger to fail since its

complex nature makes it impossible to fix a single answer fitting all situations. But

one can certainly trace the road map that led to failures of a merger on the following

lines:



.Failure to Anticipate a Problem before the Problem Actually Arises - Managements

may unwittingly administer a merger process hoping to reap synergy or they may

initiate a disastrous step hoping to bring cultural fusion between the acquired and the

acquirer. One common underlying reason behind these acts could be that the acquirer

firm may have no experience of such problems and thus are not sensitized to such

probabilities.

For instance, a couple of years ago, the Aditya Birla group merged the copper division

of Indo Gulf with Hindalco. At the time of merger, everybody thought that hiving off

of the copper division from Indo Gulf Fertilizers and its merger with Hindalco-India's

biggest aluminum producer-would result in the emergence of a giant commodity

based producer leading to core competency. People also thought that resultantly it

could become a leading metal producer in the country, throwing more opportunities to

build market. monopoly with the support of a big balance sheet in both the

commodities in the days to come. As against this expectation, the financial results for

Q2 of Hindalco revealed that the copper division has pulled down its financial results.

One of the causes for the lackluster performance of the copper division was said to be

the company's dependence on import of copper concentrate. The high tariff barriers

prevailing prior to reforms might have made domestic production of copper look

profitable but the lower tariff rates prevailing today are making domestic production

of copper less viable. It is also feared that the margins on copper production are likely

to remain subdued even in the future. The net result is: Hindalco investors are getting

hit, for no fault of their core business-aluminum.



It is only in the hindsight that the analyst could say today that merger of copper

business with Hindalco was a mistake, unless Hindalco increased its production

capacities, to enjoy operating leverage. There are umpteen reasons as to why

companies may fail to anticipate problems: One, experiences are forgotten as they are

pretty old, reasoning by false analogy, etc.

Failure to Perceive the Problem, When the Problem does Arrive Once a merged unit

faces unanticipated problems, the immediate requirement is to address the issues that

became a hurdle for realization of anticipated benefits. But in reality, managements

seldom perceive the problem that has actually face and reasons for the same could be

many: One, the origin of the problem is perhaps hardly visible; two, the management

of the merged unit sitting distantly from the acquired unit is more prone not to see the

problem in its real perspective; three, managements could fail to perceive the problem

because of its creeping nature".

For instance, in our example of Hindalco, the copper division is adversely impacting

the financial performance of Hindalco as a whole, despite the fact that aluminum

business is doing exceeding well. And it is also reported that the problem is likely to

continue as India is not endowed with abundant copper ore and it needs to be

imported. As the import tariff continues to fall, the margins on copper business may

take a beating. In such circumstances, the company may have to necessarily leverage

on its balance sheet strength and create increased capacities to process copper and it

may not be able to come out of the predicament. If this is not perceived immediately

as a threat to the profitability of the company for whatever reason-say, such as

treating it as a short-term problem but a potential opportunity to make money on long-

range perspective, may amount to not perceiving the problem itself. Such unnoticed

problems can derail the businesses over a period of time.



.Once a merged unit faces unanticipated problems, the immediate requirement is to

address the issues that became a hurdle for realization of anticipated benefits.

Fail to Attempt to Solve the Problem after perceiving it - Many firms fail even to

attempt to solve the problems despite perceiving them well in time. The reasons for

such indifferent.

OBJECTIVE:-

Theoretically it is assumed that Mergers and Amalgamations improve the

performance of the company. Because of Synergy effect, increased market power,

Operational economy, Financial Economy, Economy of Scales etc. But does it really

improve the performance in short run as well as long run. Various studies have

already been done on this matter. Most of these studies are related to European

countries or US market. we can find hardly few studies of these kind in Indian

context.

So I made an attempt to analyse the impact of M&A on the performance of the

companies in Indian context.

SCOPE:-

The scope of the study is limited to the 40 Indian companies which are merged

during the year 2000-2001.And the statistical measure used is T-test.: paired two

samples for means.



HYPOTHESIS:

�Mergers and amalgamations does not always improve the performance of the

company.�

. LIMITATIONS

Although the results obtained through this study are acceptable in light of the previous

study, yet there are few limitations of this study. And my discussion would not be

complete if I do not list them here. These limitations includes;

First, my study included results of only two years which may not provide the true

picture, especially in case of post merger results, because generally a merger activity

takes around 6months to 2years to deliver results.

Second, there are various other variable that should have been included in my study

like: Assets turnover, Inventory turnover, Market power/Market Share, Cost of

Capital, EPS, Rate of increase in capital stock etc., but due to the time constraint and

non-availability of

data I could not include them in my study.

Third, Sample size should have been wider.



2. LITERATURE SURVEY:-

The literature in the area of mergers and acquisition is rich in terms of data an of

techniques employed. But, the results are disappointing since there is no convergence

as expected but only divergence in the prior research works witn regard to the reason

to which the Corporates opt for their marriage. Most academic studies follow one of

the two approaches to estimate and evaluate the significance of merger-related gains.

The first compares the pre-merger and post-merger performance of institutions using

accounting data to determine whether consolidation leads to changes in reported

costs, revenue or profit figures. They suggest that mergers may alter the level of

profits of a firm either because it alters the monopoly power (the market power) or

alters the efficiency or both. However, these two changes affect consumers' surplus

differently; while the decrease in cost raises consumers' surplus, the increase in

market power lowers it. As market power hardly falls after M&A, the consumers are

most likely to lose from merger if it is not cost reducing. Therefore, if a merger does

not increase profit, it most likely does not increase consumers' surplus. Hence, the

necessary condition for merger to be socially desirable is that it increases profitability.

Hence a firm's post-merger operating performance is one indicator of the synergy gain

that is generated by a merger or an acquisition.

A second research stream based on event study methodology has used market-based

measures to compare the performance characteristics of acquisitions under different

diversification strategies (Mandelker, 1974; Jensen, 1984; Ravenscraft and Scherer,

1987).

According to this group of researchers, the concept of economic value is consistent

with that of financial economists, so the value in the context of merger should be



reflected in the stock price of the firms (Singh and Montgomery, 1987). Fundamental

to this belief is the basic assumption of the efficient market hypothesis, namely the

share price which I would react in a timely and unbiased manner, to any new

information. In an efficient market, all future benefits of a merger are ful1y

anticipated and they are incorporated instantaneously into the acquiring firm's stock

price at the time the merger is consummated (Lubatkin, 1983). The share price

reactions do seem to reflect the rational behavior (Roll, 1986) and can identify the

expected present value of the cash flows resulting from the restructuring activity

(Seth, 1990). Hence a firm's post-merger share price performance is one indicator of

the synergy gain that is generated by a merger or an acquisition and the merger as a

corporate strategy can be evaluated when the long-term effect of mergers on the firm's

share price performance is considered.

The conclusion that can be drawn from the earlier studies is that, mergers harm

acquiring firm's shareholders becomes stronger, when the effect of mergers as the

change in performance of the acquiring firm's share price, upon and following the

merger announcements. Gains by many measures are either small or non-existent. The

results obtained are overwhelmingly unsupportive of the value effects. Both

accounting and event Studies offer no evidence of value gains. The average merger

has either no effect on total firm value or a slightly negative one. In all the previousus

research studies there is no convergence as expected, but only divergence thereby

meaning either defects in conceptual framework or methodlogical framework, or

proper codification of empirical findings. Since the conceptual framework sounds

logical, an attempt is made here to have a close examination of the methodology

.adopted in all the three types of empirical research.



All the theories of mergers can be summarized into three categories. First category is

the category of Synergy; it says that total value from the combination is greater than

the sum of the values of individual firms. The second category (Hubris) says that total

value from the merger is zero. This happens because of the mistake of the bidder to

overpay for merger. Third category of merger theories says that total value from

merger is negative. This is the result of the mistakes of the manager who put their

own preferences above the well being of the firm.

Several studies have been done on the relationship between M&As and performance

of the company. Using a variety of financial measures (e.g. Profit, Stock price) and

non-financial measures (e.g. firm�s reputation) and time frame (e.g. pre-measurement

and postmeasurement, initial market reaction etc.). These studies show that on

average, M&As consistently benefits the target�s shareholders, but not the acquirer�s

shareholders. In fact, there are varying result with respect to the buying firm�s

performance. (Schweiger, pp4) There are two types of empirical studies on M&A

performance. One is �Event Studies�, by comparing share prices before and after the

merger. Even though there are numerous studies but there results are consistent. The

target firm�s shareholders benefit, and the bidder firm�s shareholders generally break

even. The combined gain is mostly positive. Another type of empirical studies

includes those which compares individual firm�s profit few years before and after the

merger. Results from these studies are more complex due to difference in

methodology. For example, some studies concern absolute performance, while other

concern relative performance. However a general conclusion is that most mergers

reduce profitability.

One empirical study done on the basis of stock market prices in the US shows that

around the announcement date of the transaction average return to target firms

shareholders are about 30%. In contrast the shareholders of the acquiring firms



generally show returns that range from slightly negative to modestly positive around

the announcement date. M&A, however under perform their industry peers or

shareholder value over a longer time horizon. Another empirical studies that

concentrated on the efficiency measurement pre and post mergers revealed that

changes in ownership are associated with significant improvements in total factor

productivity. Evidences suggest that M&A activities tends to benefit society because it

results in an increase in shareholders value of both target and acquiring companies

without increasing concentration. The increase in related to improve operating

efficiency of the combined firms. (H.R. Machiraju, page 170).

A study done by J. Fred Weston and Samual C. Weaver shows that around 50%

mergers are successful in terms of creation of values for shareholders. Anslinger and

Copeland (1996) studied returns to shareholders in unrelated acquisition covering the

1985 to 1995 and they found that in two third cases companies were failed to earn

their cost of acquisition.

In 1993 Berkovitch and Narayanan conducted a study on the gain and concluded that

total gains from M&A are always positive and thus can say that synergy appears. Vin

(1996) and Schwert conducted an event study for a period of fourty days prior merger

to 40 days post merger and concluded that Merged firms were under performing than

their industry counterparts. Healy, Palepu and Ruback (1992) studied post merger

performance of 50 largest US merger between 1979-1984 for both operating and

investment characteristic using industry adjusted technique and concluded that as a

result of merger Assets turnover and Return on market value of assets improved but

investment in capital goods and R&D expenditures not improved significantly.

In 1992 agarwal, Jaffe and Mandelkar also studied post merger performance of the

companies with a different perspective. They adjusted data for size effect and beta

weighted market return and found that shareholders of the acquiring firms



experienced a wealth loss of about 10% over the period of five years following the

merger completion. According to a study done by Loughran and Vijh (1997) for a

period 1970 to 1989, five year buy and hold return for sample was 88.2% compared to

94.7% for their matching firms. This has a tstatistic of 0.96, which was not

significant.Berg, Duncan and Friedman (1982) conducted a comprehensive cross-firm

and crossindustry analysis to measure the effect of joint venture activities on the

performance of the companies and found ambiguous but positive short-term gains and

insignificant long-term impact on profitability. They further noted that even short-

term gains were negative for technological or knowledge-oriented acquisitions and

were positive for production and marketing oriented acquisitions, because of

increased market power leading to increased profit margins and efficiency gains. They

further found that while short term gains depend on industry to industry, no industry

(Out of 19 industries in their sample) show long-term significant gain.

Revenscraft and scherer (1986) found that on average Mergers and acquisitions made

by over 450 US companies during 60-70s did not lead to an increase of market shares

and profitability but instead they found declining performance for most companies.

They also found that mergers did slightly worse than their industry peers at the time

of acquisition, but results were clearly poorer after about 10 years from acquisitions.

Odagiri and Hase (1989) found a growing number of Japanese firms engaging in

mergers and acquisitions. However they found no evidence that in general

profitability or growth improved significantly. Porter (1987) attempted to study this

relationship in a slightly different way. He took rate of divestment of new acquisitions

by companies within a few years as an indicator of success or failure. He found that

about 75 percent of all unrelated acquisition in the sample was divested after few

years and 60 percent of acquisitions in entirely new industry.



3. METHODOLOGY

There are two different tests to measure merger gains-Product market test and Stock

market test. The former measures the effect of mergers directly on consumers and

indirectly on stockholders of merging firms. The later measures the effect of mergers

directly on stockholders of merging firms and indirectly on consumers. There is a

linkage between the two. Abnormal Stock returns are correlated with profit changes.

This signifies that the stock market anticipates profit changes and adjusts accordingly.

To test the impact of Mergers on performance, there are various alternative ways.

Like �Event Studies�, where we compare stock prices of the firms a certain days

before and after the mergers. Another way is �Regression Analysis�, where we can

take after tax rate of return as dependant variable and Size of the firm, rate of increase

in capital stock, R&D expenditures etc. as independent variables. Third way is �T-test:

Paired two samples for mean� which I am going to use in this paper. I am selecting

this test because so far we have studied this test and the data that will be required for

this test is available with me. In this paper I test impact of mergers on the

performance of the company in terms of four parameters. ROCE, Economies of scale,

Operating Synergy and Financial Synergy. I used Ttest: Paired two samples for

means�.

To test the impact I selected a sample of 40 companies (pre merger and resulting 19

companies after merger), which were merged during the financial year 2000-2001.

Source for all databases is CMIE�s PROWESS. Further, I take FY 1998-99 and 1999-

2000 as pre merger years and FY 2001-02 and 2002-03 as Post-merger years.



Company Target Company Merged Company 1. Mulbery Investments

&Trading Company Camphor & Allied Projects Ltd.

2. J D Properties Ltd. B L B Ltd. 3. Alstom Power Builders Ltd. Astom Projects India

Ltd. 4. Futura Polymers Ltd. Futura Polysters Ltd. 5. Hitech Drilling Services

India Ltd. Aban Lyod Chiles Offshore Ltd.

6. Motherson Automotives Technolgies &Engineeing Ltd. + Motherson Sumi Electric Wires Ltd.

Motherson Sumi Systems Ltd.

7. Gujarat Propack Ltd. Cosmo Films Ltd. 8. Cescon Ltd. C E S C Ltd. 9. Annapurna Foils Ltd. Indian Alluminium

Company Ltd. 10. Croydon Chemicals Works

Ltd. Glaxo Smith Kline Pharmaceuticals Ltd.

11. Alchemic OrganicsLtd. Aarti Industries Ltd. 12. Karnataka Petro Synthese

Ltd. Gujarat Petrosyntheses Ltd.

13. Kanthal India Ltd. Sandvik Asia Ltd. 14. Idea Space Financial

Teechnologies Pvt. Ltd. Idea Space Solutions Ltd.

15. Wartsilla Operrations & Maintenance India Ltd.

Wartsilla India Ltd.

16. Sandeep Traders & Investments Ltd. + Stanrose Holdings Ltd.

Stanrose Mafatlal Lubecham Ltd.

17. Shrinivas Fertilizers Ltd. Khaitan Chemicals & Fertilizers Ltd.

18. Varinder Argo Chemicals Ltd.

Abhishek Industries Ltd.

19. Zuari Leasing & Finance Corp. Ltd.

Zuari Industries Ltd.



i. RETURN ON CAPITAL EMPLOYED

Here I test the overall impact of the mergers on the performance of the acquirer

company (or amalgamated Company). For, ROCE, I take PBIT (Profit Before Interest

and Tax) minus Tax. And to calculate pre merge ROCE, I used weighted Average. I

first calculated weighted average ROCE for each year than I take simple average of

two years Wt. Average ROCE. Similarly I obtained Wt. Average ROCE for post

merger. Thus I obtained two series of ROCE; one for Pre-merger and one for Post-

merger. When I run the �t-test� on this series I obtained following results. Mean (pre)

is 14.41263 against the Mean (Post) 14.94895. While variance are 184.6018(pre) and

50.54995(post). I obtained statistic t-value �0.13844 against the critical t-value

2.100924. That shows that we can accept null hypothesis at 5% confidence level. In

other words mergers did not improve the performance of the companies under study.

ROCE- Return on Capital Employed Company Pre Post 1 10.5 9.75 2. 28.78 7.4 3 -29.15 27.75 4 13.76 8.13 5 41.8 12.32 6 24.4 21.5 7 11.85 23 8 8.47 15.4 9 10.53 13 10. 25.44 14.25 11 20 22.4 12 9.35 2.14 13. 13.5 16.91 14. 19.5 22.35 15. 18.73 22.6 16. 13.45 19.54 17. 15.83 6.1 18. 9.15 11.49 19. 7.95 8



RESULTS

Paired Samples Statistics Mean N Std.

DeviationStd. Error

MeanPair 1 VAR00001 14.4126 19 13.5868 3.1170

VAR00002 14.9489 19 7.1098 1.6311

Paired Samples Correlations NCorrelation Sig.

Pair 1 VAR00001 & VAR00002

19 -.259 .285

Paired Samples Test Paired

Differences t df Sig. (2- tailed)

Mean Std. Deviation

Std. Error Mean

95% Confidence Interval of the

Difference

Lower Upper -.5363 16.8858 3.8739 -8.6750 7.6024 -.138 18 .891



PrePost

-40

-20

0

20

40

60

80

100

Pre Post



ii. TEST OF ECONOMIES OF SCALE HYPOTHESIS

Economy of scale refers to the cost reduction due to large number of units produced.

Because there are various fixed cost involved in the operation and per unit cost

component of such cost reduces when a firm produces more units. This economies of

scale also arises because merger increases the size of the firm, so now firm become

enable to get better terms and conditions on purchases i.e. ram material cost also

decrease. For all these reasons, � cost of production per unit� is taken as a measure of

economies of scale. But due to unavailability of number of units produced, I selected �

cost of production to produce per rupee sale� as a measure. When I run the t-test on

the series (Average cost of production/ sale for the companies pre-merger and post-

merger) I obtained t-statistic 0.40103 against the critical value of t 2.100924 at 5%

confidence level. That shows that companies under study did not achieved economies

of scale.



OPM- Operating Profit Margin Company Pre Post 1 7 4 2 81 42 3 -34 0 4 -2 -3 5 19 26 6 5 12 7 3 19 8 3 13 9 8 8 10 8 12 11 11 11 12 9 13 13 7 5 14 18 16 15 6 8 16 -2 5 17 8 2 18 5 12 19 2 1


DeviationStd. Error

Mean Pair 1 VAR00001 .7358 19 .2208 5.065E-02

VAR00002 .7247 19 .1506 3.454E-02

Paired Samples Correlations NCorrelati

onSig.

Pair 1 VAR00001 & VAR00002

19 .857 .000




Differencest df Sig. (2-

tailed)Mean Std.

DeviationStd. Error

Mean95% Confidence

Interval of the Difference

Lower UpperPair

1VAR000

01 -VAR000

02

1.105E-02 .1201 2.756E-02-4.6850E-02 6.896E-02 .401 18 .693



PrePost

-30

-20

-10

0

10

20

30

40

50

Pre Post



iii. TEST OF OPERATING SYNERGY

It is assumed that merger improves the performance of the company, because it helps

to avoid the duplication of tasks like duplicating Advertisement Expenses,

Duplicating sales and Distribution expenses etc. This should results in decreasing

operating expenses and increasing operating profit. To test this aspect I selected

Operating Profit Margin as a criterion and take weighted average of each year and

simple average of these wt. Average OPM to calculate pre and post OPM figures.

When I run the �t-test� on this series, I obtained t-statistic �0.75494 against the table

value 2.100924 at 5% confidence level. That proved that mergers do not even

contribute in the operating synergy, for the sample under consideration

NPM- Net Profit Margin

Company Pre Post 1 5 4 2 47 12 3 -36 7 4 6 -2 5 16 5 6 8 7 7 -3 13 8 -7 -2 9 7 9 10. 10 7 11 5 7 12 7 2 13 9 5 14 4 7 15 5 6 16 0 3 17 4 -1 18 -1 3 19 0 1

Paired Samples Statistics



Mean N Std. Deviation

Std. Error Mean

Pair 1 VAR00001

4.2105

19 14.7142 3.3757

VAR00002

4.8947

19 4.2018 .9640

Paired Samples Correlations NCorrelati

onSig.

Pair 1VAR00001 &

VAR00002

19 .258 .286


Differences

t df Sig. (2-tailed)

Mean Std. Deviatio

n

Std. Error Mean

95% Confide

nce Interval

of the Differen

ceLower Upper

Pair 1VAR00001 -

VAR00002

-.6842 14.2207 3.2625 -7.5384 6.1699 -.210 18 .836



-60

-40

-20

0

20

40

60

Pre Post

Pre

Post



iv. TEST OF FINANCIAL SYNERGY

Theoretically it is also assumed that mergers provide the financial synergy. According

to Lewellen (1971), Higgins and Schall (1975), Galai and Masulis (1976) and Kim

and McConnell (1977)- Mergers increases the debt capacity of the firm, especially in

case of diversified mergers, where cash flows of the two companies are not positively

correlated. This decreases lender�s risk and as a result cost of capital decreases.

Financial synergy can also be obtained by reducing Interest or taking benefits of Tax

shield and depreciation.

To test the financial synergy, I selected Net Profit Margin as a criteria and calculated

Pre and Post Net Profit Margin in the same way I calculated OPM.

When I run t-test on this series, our results were totally opposite to the theoretical

assumption. I obtained t-statistic �0.20972 against the critical t-value 2.100924 at 5%

confidence level. That proved that mergers even do not contribute in achieving

financial synergy.



Cost/ Sale Company Pre Post 1 .8 .86 2 .11 .43 3 1.12 .84 4 .87 .85 5 .41 .49 6 .79 .74 7 .8 .72 8 .82 .75 9 .71 .85 10 .73 .7 11 .92 .81 12 .72 .62 13 .79 .79 14 .39 .34 15 .82 .77 16 .69 .76 17 .79 .82 18 .84 .78 19 .86 .85


DeviationStd. Error

MeanPair 1 VAR00001 8.5263 19 20.5869 4.7229

VAR00002 10.8421 19 10.3347 2.3710

Paired Samples Correlations N Correlation Sig.

Pair 1 VAR00001 &

VAR00002

19 .827 .000




Differences t dfSig.

(2-tailed)

Mean Std. Deviation

Std. Error Mean

95% Confidence

Interval of the

DifferenceLower Upper

Pair 1 VAR00001 -

VAR00002

-2.3158 13.3710 3.0675 -8.7604 4.1288 -.755 18 .460



Pre

Post1

0

0.2

0.4

0.6

0.8

1

1.2

Pre Post1



FINDINGS Out of 19 set of companies:-

1. 1.more than 7 companies showed decline in return on capital employed.

2. more than 7 companies showed decline in operating profit margin.

3. more than 8 companies showed decline in net profit margin.

4. more than 7 companies showed increase in cost of production for per rupee

sale.

So over all outcome is that, mergers and amalgamations does not always increase the

performance of the companies. So we can accept our hypotheses.



5. CONCLUSION

This study proves that Merges have failed to contribute positively in the performance

of the company, especially for the sample under consideration. It neither provides

Economies of scale nor synergy effect. When I calculate overall impact (i.e. ROCE),

mergers were failed to provide any positive contribution here also. In fact, these

results are not surprising. They are in line with what was expected on the basis of

literature survey. But still here I would like to add one thing. There are numerous

motives that motivate a company to enter in to merger activities. Some times these

motives are qualitative and can not be interpreted in to quantitative figures. Again, a

merger may be effective or successful to deliver the immediate objective but may be

failed to deliver all the theoretically defined benefits. So, it will be fallacious to

assume, on the basis of this study, that overall mergers do not contribute any thing to

the companies and it is a useless exercise.



References

APPROACHES TO M&A - Jangaiah Paladi RIL AND RPL merger and Corporate performance: Rajesh Kumar Value creation through Mergers: The myth and Reality -Ashutosh Dash

Returns to shareholders from mergers: The case of RIL and RPL merger -A.K. Mishra and Rashmi Goel

IMPACT OF MERGERS AND AMALGAMATION -Mahesh Kumar Tambi1

Icfai publications www.Google.com.

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Documents

Mergers and ions on the Performance of Indian Companies-Meghana a Patil-0489