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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Impact of mergers and amalgamations
M.P.Birla institute of management. 2
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 3
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 4
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 5
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 6
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 amalgamations
M.P.Birla institute of management. 7
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 8
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 9
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 10
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 11
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,
Impact of mergers and amalgamations
M.P.Birla institute of management. 12
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 13
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 14
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 15
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 16
"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
Impact of mergers and amalgamations
M.P.Birla institute of management. 17
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:
Impact of mergers and amalgamations
M.P.Birla institute of management. 18
.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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 19
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 20
.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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 21
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 22
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 23
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 24
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 25
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 26
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 27
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 28
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 29
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 30
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 31
PrePost
-40
-20
0
20
40
60
80
100
Pre Post
Impact of mergers and amalgamations
M.P.Birla institute of management. 32
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 33
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
Paired Samples Statistics Mean N Std.
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 34
Paired Samples Test Paired
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 35
PrePost
-30
-20
-10
0
10
20
30
40
50
Pre Post
Impact of mergers and amalgamations
M.P.Birla institute of management. 36
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 37
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
Paired Samples Test Paired
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 38
-60
-40
-20
0
20
40
60
Pre Post
Pre
Post
Impact of mergers and amalgamations
M.P.Birla institute of management. 39
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 40
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
Paired Samples Statistics Mean N Std.
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 41
Paired Samples Test Paired
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
Impact of mergers and amalgamations
M.P.Birla institute of management. 42
Pre
Post1
0
0.2
0.4
0.6
0.8
1
1.2
Pre Post1
Impact of mergers and amalgamations
M.P.Birla institute of management. 43
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 44
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.
Impact of mergers and amalgamations
M.P.Birla institute of management. 45
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.