Mergers and Amagamations on the Performance of Indian Companies-Meghana A Patil-0489

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					Impact of mergers and amalgamations


“Impact of mergers and Amalgamations on the performance of Indian companies”
Submitted in partial fulfillment of the requirement for MBA Degree of Bangalore University

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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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


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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 Date:


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Impact of mergers and amalgamations


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 Date:

Dr. N S MALLVALLI Research Guide MPBIM, Bangalore

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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.


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INTRODUCTION 1.1 Introduction 1.2 Objectives of the study 1.3 Problem statement 1.4 limitations 2 14 15 15 16

2. 3.

REVIEW OF LITERATURE RESEARCH METHODOLOGY 3.1 Data sampling details 3.2 Statistical tools 3.3 Data Analysis and Interpretation

21 21 23 37 38 39

4. 5. 6.



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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.

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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.

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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

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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.

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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..


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,

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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
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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.

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Value –Strategy Framework M & A Type of synergy Some of the managerial skills are Horizontal and Total Revenue Managerial transferable. So a company with Vertical Gain by will strong managerial skill will be able increase in to takeover a company with Market Share inefficient or bad management and improve efficiency by replacing existing management. The Company tries to turn itself Conglomerate Improving Financial into a miniature of capital market ROI by allocating cash from low growth increase in area to fields of higher return. revenue per unit Company tries to make some tax Conglomerate Improving Financial savings as the tax law ROI by distinguishes between internally increase in and.externally generated funds. revenue per unit Better planning and coordination, Vertical Increase in operating Reduction in bargaining time and gross margin transaction cost. by reduction in total cost and market inefficiency Declining the marginal cost by Horizontal and Increase in operating increasing the quantity of product Vertical gross margin or improving the operating by reduction efficiency through economies of in marginal scale cost Reducing cost of capital through Conglomerate Reducing Financial reduction of risk unsystematic risk by portfolio management. Improving the imperfect market Vertical Improving Financial valuation by paying lower price for Or Horizontal P/E Ratio the target company as compared to or its true value Conglomerate Management Strategy Type of M&A Value Driver

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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

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"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

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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 regard, this

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:

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.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.

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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 longrange perspective, may amount to not perceiving the problem itself. Such unnoticed problems can derail the businesses over a period of time.

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.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 companies in Indian context. the impact of M&A on the performance of the

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.

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”Mergers and amalgamations does not always improve the performance of the company.”


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.

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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
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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.

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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
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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
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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 shortterm 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.

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Impact of mergers and amalgamations


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 19992000 as pre merger years and FY 2001-02 and 2002-03 as Post-merger years.

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Impact of mergers and amalgamations

Company 1. 2. 3. 4. 5. 6.

Target Company Mulbery Investments &Trading Company J D Properties Ltd. Alstom Power Builders Ltd. Futura Polymers Ltd. Hitech Drilling Services India Ltd. Motherson Automotives Technolgies &Engineeing Ltd. + Motherson Sumi Electric Wires Ltd. Gujarat Propack Ltd. Cescon Ltd. Annapurna Foils Ltd. Croydon Chemicals Works Ltd. Alchemic OrganicsLtd. Karnataka Petro Synthese Ltd. Kanthal India Ltd. Idea Space Financial Teechnologies Pvt. Ltd. Wartsilla Operrations & Maintenance India Ltd. Sandeep Traders & Investments Ltd. + Stanrose Holdings Ltd. Shrinivas Fertilizers Ltd. Varinder Argo Chemicals Ltd. Zuari Leasing & Finance Corp. Ltd.

Merged Company Camphor & Allied Projects Ltd. B L B Ltd. Astom Projects India Ltd. Futura Polysters Ltd. Aban Lyod Chiles Offshore Ltd. Motherson Sumi Systems Ltd.

7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Cosmo Films Ltd. C E S C Ltd. Indian Alluminium Company Ltd. Glaxo Smith Kline Pharmaceuticals Ltd. Aarti Industries Ltd. Gujarat Petrosyntheses Ltd. Sandvik Asia Ltd. Idea Space Solutions Ltd. Wartsilla India Ltd. Stanrose Mafatlal Lubecham Ltd.

17. 18. 19.

Khaitan Chemicals & Fertilizers Ltd. Abhishek Industries Ltd. Zuari Industries Ltd.

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Impact of mergers and amalgamations

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 Postmerger. 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 1 2. 3 4 5 6 7 8 9 10. 11 12 13. 14. 15. 16. 17. 18. 19.

Pre 10.5 28.78 -29.15 13.76 41.8 24.4 11.85 8.47 10.53 25.44 20 9.35 13.5 19.5 18.73 13.45 15.83 9.15 7.95

Post 9.75 7.4 27.75 8.13 12.32 21.5 23 15.4 13 14.25 22.4 2.14 16.91 22.35 22.6 19.54 6.1 11.49 8

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Impact of mergers and amalgamations


Paired Samples Statistics Mean Pair 1

Std. Deviation VAR00001 14.4126 19 13.5868 VAR00002 14.9489 19 7.1098


Std. Error Mean 3.1170 1.6311

Paired Samples Correlations Pair 1 VAR00001 & VAR00002 NCorrelation Sig. 19 -.259 .285

Paired Samples Test
Paired Differences

t Std. Std. Error Deviation Mean


Sig. (2-


95% Confidence Interval of the Difference Lower Upper -.5363 16.8858 3.8739 -8.6750 7.6024 Mean




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Impact of mergers and amalgamations

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M.P.Birla institute of management.


Impact of mergers and amalgamations


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 postmerger) 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.

M.P.Birla institute of management.


Impact of mergers and amalgamations

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

Paired Samples Statistics Mean Pair 1 VAR00001 .7358 VAR00002 .7247 Paired Samples Correlations

N 19 19

Std. Deviation .2208 .1506

Std. Error Mean 5.065E-02 3.454E-02

Pair 1

VAR00001 & VAR00002

NCorrelati Sig. on 19 .857 .00 0

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Impact of mergers and amalgamations

Paired Samples Test Paired Differences Mean

t df Sig. (2tailed) Std. Deviation 95% Confidence Interval of the Difference Lower Upper 2.756E-02-4.6850E-02 6.896E-02 .401 18 Std. Error Mean

Pair VAR000 1.105E-02 1 01 VAR000 02



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Impact of mergers and amalgamations

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Impact of mergers and amalgamations

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

Paired Samples Statistics
M.P.Birla institute of management. 36

Impact of mergers and amalgamations

Mean N Pair 1 VAR000 4.210 19 01 5 VAR000 4.894 19 02 7

Std. Deviation 14.7142 4.2018

Std. Error Mean 3.3757 .9640

Paired Samples Correlations NCorrelati on Pair 1 VAR000 19 .258 01 & VAR000 02

Sig. .286

Paired Samples Test Paired Differen ces Mean


df Sig. (2tailed)

Pair 1 VAR000 01 VAR000 02

Std. 95% Error Confide Mean nce Interval of the Differen ce Lower Upper -.6842 14.2207 3.2625 -7.5384 6.1699

Std. Deviatio n




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Impact of mergers and amalgamations

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Impact of mergers and amalgamations


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.

M.P.Birla institute of management.


Impact of mergers and amalgamations

Cost/ Sale Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Pre .8 .11 1.12 .87 .41 .79 .8 .82 .71 .73 .92 .72 .79 .39 .82 .69 .79 .84 .86

Post .86 .43 .84 .85 .49 .74 .72 .75 .85 .7 .81 .62 .79 .34 .77 .76 .82 .78 .85

Paired Samples Statistics Mean Pair 1 VAR00001 8.5263 VAR00002 10.8421

Std. Deviation 19 20.5869 19 10.3347


Std. Error Mean 4.7229 2.3710

Paired Samples Correlations N Pair 1 VAR00001 19 & VAR00002

Correlation .827

Sig. .000

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Impact of mergers and amalgamations

Paired Samples Test
Paired Differences Mean t Std. Std. Error 95% Deviation Mean Confidence Interval of the Difference Lower Upper 13.3710 3.0675 -8.7604 4.1288 -.755 df Sig.

Pair 1 VAR0000 1VAR0000 2




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Impact of mergers and amalgamations

1.2 1 0.8 0.6 0.4 0.2 0 Pre Post1

Pre Post1

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Impact of mergers and amalgamations

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.

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Impact of mergers and amalgamations


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.

M.P.Birla institute of management.


Impact of mergers and amalgamations

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

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