ANALYSIS OF MERGER ACQUISITION IN INDIA

GJBM ISSN: 0973-8533 Vol. 6 No. 1, June 2012 ANALYSIS OF MERGER ACQUISITION IN INDIA Julius Miroga Bichanga* and Robert Omundi Obuba** ABSTRACT Mergers, acquisitions and corporate control represent a major force in the modern financial and economic environment. These have become corporate policy issues. The general rubric of corporate synergy signifies that value created by the Combination of firms may results in a number of value creating mechanisms such as, more efficient management, economies of scale, improved production technique combination of complimentary resources, redeployment of profitable uses, exploitation of market power etc. For a firm characterised by an objective of stockholder wealth maximization the appropriate test of a merger s success is the merger s effect on stock prices. In an efficient capital market, investor s expectations of the merger s future benefit should be fully reflected in stock prices by the merger date. Formally if the capital markets are semi-strong efficient, then the value of future benefits should be fully reflected by the first public announcement of the merger and should certainly be fully reflected by somewhat later merger date. The increase in the equity value of the acquiring firm in the wake of a successful merger is a compelling evidence for the synergy theory of mergers. This study examines acquisition in India. The study examines the effect of merger/acquisition techniques on merger corporate performance. Keywords: Merger acquisition, Corporate performance, Efficient management, Merger s success and synergy INTRODUCTION Mergers and Acquisitions (M&As) have been, for years, the principal tools of corporate restructuring, and one is to witness a sharp increase in both the number and size of the M&A transactions at the global level. Financial restructuring through mergers and acquisitions evokes a great deal of public interest and perhaps represent the most dynamic facet of corporate finance. Restructuring through M&As has happened in history in the last 100 years or more in waves. In the most recent wave of the 1990s, the value of M&A deals in the US rose from a mere US$ 200 billion in 1992 to US$ 1.75 trillion in 1999 before the market crashed. Some of the * Senior Faculty, Mt. Kenya University, Kenya. ** Research Scholar UCCMS,MLSU, Udaipur.robertomundi2000@yahoo.com

48 Julius Miroga Bichanga and Robert Omundi Obuba largest deals in history were done during that period. For example, American Online (AOL) acquired Time Warner (TW) for about US$ 165 billion in early 2000. The Vodafone Group, a British Company, acquired Air Touch Communications, an American Company (a cross-border transaction). The increased M&A activity in Europe is illustrated by the total Final acquisition of Elf Aquitaine, both French companies. Alex Mandl, chairman and chief executive of Teligent, and American provider of voice, data and internet services to small medium sized businesses, aptly commented: Growth through acquisition has been a critical part of the success of many companies operating in the new economy. The plain fact is that acquiring is much faster than building. And speed speed to market, speed to positioning, and speed to become a viable company is absolutely essential in the new economy. Deal euphoria continued to sweep business globally till 2005. In the US alone, the value of M&As crossed 1 trillion in 2005. Globally, led by the increased pace of M&As in Europe, the value crossed 2.5 trillion US dollars in 2005, a growth of 31 per cent over the previous year, according to the US-based Securities Industry Association (SIA). European companies have kicked off 2006 with more M&As than in any other first quarter on record, as cash rich companies race for growth in around of frenzied takeover activity that is still gathering steam. Review of Literature The existing evidences on the effects of M&As on the firms operating performance (profitability) come from the performance studies, which attempt to measure the long term implications of mergers. Majority of these studies concentrate on efficiency aspects by comparing profits, sales employment and other indicators in Pre- and Post-Merger periods. There have been numerous studies on mergers and acquisitions, in the last four decades, and several theories have been proposed and tested for empirical validation. Researchers have studied the economic impact of mergers and acquisitions on industry consolidation, returns to shareholders following M&As, and the post-merger performance of companies. Whether or not a merged company achieves the expected performance is the critical question that has been examined by most researchers. Several measures have been postulated for analysing the success of mergers. Such measures have included both short-term and long-term impacts of merger announcements, effects on shareholder returns of aborted mergers hostile takeover attempts and open offers, etc. Weston and Mansingka (1971) studied the pre and post-merger performance of conglomerate firms, and found that their earnings rates significantly underperformed those in the control sample group, but after 10 years, there were no significant differences observed in performance between the two groups. The improvement in earnings performance of the conglomerate firms was explained as evidence for successful achievement of defensive diversification. Lubatkin (1983) reviewed the findings of studies that have investigated either directly or indirectly the question, Do mergers provide real benefits to the acquiring firm? The review suggested that acquiring firms might benefit from merging because of technical, pecuniary and diversification synergies. Vol. 6, No. 1, June 2012

Analysis of Merger Acquisition in India 49 Importance of the Study Events like mergers, takeovers, restructuring and corporate control occupy the business newspapers almost daily and have become a central focus of public and corporate policy issues. Some assert that the activities of mergers and acquisitions represent a new force in creativity and productivity. Some others view it has a blight to the economy. Regardless of these views, they do represent a major trend in the contemporary and economic environment. This is an area of potential good as well as potential harm in corporate strategy including various industries in India Objectives 1. To examine the effects of mergers and acquisitions on the operating performance of the acquiring firms 2. To draw conclusion and offer recommendations HYPOTHESES H1: The study will assume that there is no impact of mergers and acquisition on the operating performance of the acquiring firm and there won t be any significant association between enhancement of profits and M&A activities. H2: The study assumes that shareholders value is captured at the beginning of merger programs. Operating Performance of Merging and Acquiring Firms in Different Industries The research on post-merger operating performance following mergers and acquisitions in India so far has been limited (Surjit Kaur 2002 and Beena 2004). Table 1 Mean Pre-Merger and Post-Merger Profitability Ratios for Acquiring Firms in Pharmaceutical Sector Net Operating Profit After Tax 9.351 4.909 19.538 5.454 2.777 S Gross Profit 8.065 3.730 18.572 5.688 3.089 S Net Profit 5.463 1.998 12.102 6.812 1.871 NS Return On Capital Employed 20.718 7.946 12.353 3.913-1.889 NS Return On Net Worth 8.980 2.651 15.035 10.335 1.135 NS Return On Asset 157.231 61.652 150.966 91.551-0.114 NS Earnings Per Share 5.973 2.776 17.437 6.125 3.409 S The result indicates that the mean net operating profit after tax margin had increased following merger (9.351% to 19.538%), and the increase was statistically significant ( t - value of 2.777). Similarly, the mean gross profit margin (8.065% to 18.572%) and earnings per share Global Journal of Business Management

50 Julius Miroga Bichanga and Robert Omundi Obuba (5.973% to 17.437%) also increased during the post merger period and both the increases were statistically significant ( t - values of 3.089 and 3.409 respectively). The mean return on the net profit margin (5.463% to 12.102%) and the mean return on net worth (8.980% to 15.035%) both showed a statistically insignificant increase during the post period ( t - values of 1.871 and 1.135 respectively). The mean return on capital employed (20.718% to 12.353%) and the mean return on assets 157.231% to 150.966%) had marginally declined after merger but the changes were not statistically significant ( t - values -1.889 and 0.114 respectively). The results suggest that for the pharmaceutical sector mergers increased the overall profitability but caused a decline in returns on investments and capital deployed in the businesses. Table 2 Mean Pre-Merger and Post-Merger Liquidity and Solvency Ratios for Acquiring Firms in Pharmaceutical Sector Current ratio 1.459 0.848 1.960 0.945 0.789 NS Quick ratio 4.328 2.329 2.610 0.214-1.469 NS Debt equity ratio 0.547 0.316 0.852 0.443 1.120 NS Long term debt ratio 4.052 1.918 0.631 0.456-3.471 S It can be noted from table 2 that the mean ratio, current ratio (1.459% to 1.960) and the debt equity ratio (0.547% to 0.852%) of the acquiring firms in pharmaceutical sector slightly showed statistically insignificant increase in the post merger period ( t - values of 0.789 and 1.120 respectively) The mean quick ratio showed a decline the post merger period (4.328% to 2.610%) but the decline was not statistically validated as confirmed by low t- value of -1.469. similarly there was a significant decline in the long term debt ratio 4.052% in pre- period to 0.456% in post-period as confirmed by high t- value of -3.47. Table 3 Pre-Merger and Post-Merger Management efficiency Ratios for Acquiring Firms in Pharmaceutical Sector Inventory turnover ratio 2.669 0.218 6.537 2.138 3.599 S Debtors turnover ratio 3.346 0.952 3.735 1.362 0.468 NS Fixed assets turnover ratio 1.313 0.694 2.465 0.520 2.657 NS Vol. 6, No. 1, June 2012

Analysis of Merger Acquisition in India 51 Mergers caused a statistically significant increase in inventory turnover ratios in pharmaceutical sector. Table-3, from 2.669% in the pre-period to 6.537% as indicated by high t value of 3.599. While both the debtors turnover ratios (3.346% to 3.735%) and the mean fixed assets ratios (1.313% to 2.465%) marginally increased following the mergers but both the increases were not statistically significant ( t - values of 0.468 and 2.465 respectively). The results suggest that mergers in pharmaceutical sector increased management efficiency in all aspects as revealed by increases in management efficiency parameters. Table-4 Mean Pre-Merger and Post-Merger Management efficiency Ratios for Acquiring Firms in Banking and Finance Sector Inventory turnover ratio 0.000 0.000 6.449 4.304 2.997 S Debtors turnover ratio 233.250 466.50 22.022 39.683-0.902 NS Fixed assets turnover ratio 1.874 1.292 24.369 41.528 1.083 NS The result shows that during the pre merger period the inventory turnover ratios for the entire acquiring firms in banking and finance sector increased from 0.000% in pre-period to 6.449% in post-period and the increase was statistically significant ( t - value of 2.997). The mean debtors turnover ratio showed a wide difference between the two periods (233.250% to 22.022%) but the decline was not statistically validated as indicated by a low negative t value of -0.902. However, the mean fixed assets ratio increased following the merger (1.874% to 24.369%) but the increase was statistically insignificant ( t - value of 1.083). The above results indicates that the management efficiently managed credit or there was excessive conservatism in granting credit however this may result in the acquiring firm losing some desirable sales. FINDINGS OF THE STUDY The present study has attempted to assess the Role of mergers and acquisition in an open economy. The findings of the study are discussed below. 1. Post liberalisation, most Indian business houses are undergoing major structural changes, the level of M&As activities are increasing rapidly and the consolidations through M&As have reached every corporate boardroom. 2. Most of the mergers that took place in India during the last decade seemed to have followed the consequences of mergers of US during the same period. The results of mergers in India corroborate the conclusions of research work in US with most of the M&As not being value creating. However, most of the M&As are taking place in India to improve profitability to withstand international competition which they have been exposed to in post liberalisation era. Global Journal of Business Management

52 Julius Miroga Bichanga and Robert Omundi Obuba CONCLUSIONS Restructuring a normal and necessary facet of corporate evolution helps companies to adapt to changing business environment and redefine corporate priorities. In the process, it helps channelise a company s resources into value maximising avenues. The pace of business restructuring activity has seen a significant jump especially after the liberalisation of the Indian economy. This acceleration is attributed to changing ownership structures and business patterns. To attune businesses to new business environment and the increasing level of global competitiveness, it has become almost essential for businesses to come up to international standards. Companies have therefore, started restructuring their operations around their core business activities through mergers, acquisition, tender offers or any other techniques found to be suitable. Due to globalisation and emergence of concepts like world as a global village and global consumer, products and their quality, expectations from consumers, etc. have become identical all over the world. Further, due to WTO, barrier to movement of goods and services between countries have been largely removed. There are new technologies, capital mobility and policy liberalisation, particularly with FDI, deregulation and privatisation and changes in the capital market. The production is now globally integrated mostly due to information and communication technologies. In this fast changing scenario, M&A is perhaps the only way for the corporate to survive and grow. REFERENCES Agrawal, A. and Jaffe, J.F. (2003). Do takeover targets under-perform? Evidence from operating and stock returns. Journal of Financial and Quantitative Analysis, 38(4), pp. 721-746. Ansoff, H.I. (1988). Corporate Strategy. Penguin Books, London. Bryman, A. and E. Bell (2003). Business Research Methods. Oxford: Oxford University Press. Burkart, M. and Panunzi, F. (2006). Takeovers. in Ph. Hartmann X. Freicas, and C. Mayer, ed.: Financial Markets and Institutions: European Perspective, forthcoming, Oxford University Press. Cantwell, J and Santangelo G.D (2002). M&As and the Global Strategies of TNCs. The Developing Economies, Vol. XL, No. 4. Caves, R.E (1991). Corporate Mergers in International Economic Integration. In A Giovanni and C. Mayer (eds), European Financial Integration, pp.136-160, Cambridge, Cambridge University Press. Cosh, A., Hughes A, Lee K and Singh A (1998). Takeovers, institutional investments and the persistence of profits, Cambridge University press, pp. 107-144. Danbolt, J. (2002). Target company cross-border effects in acquisitions into the UK, Mimeo, University of Glasgow. Franks, J. R., Robert S. H., and Colin M. (1988). Means of Payment in Takeovers: Results for the United Kingdom and the United States. Alan J. Auerbach, editor, Corporate Takeovers: Causes and Consequences, Chicago: University of Chicago Press. Harvard Business Review in (2000), Vol. 26, No.1, January-March, pp 19-32. Lubatkin, M. (1983). Mergers and Performance of the Acquiring Firm. Academy of Management Review, Vol. 8, No. 2, April, pp 218-225 Weston, J.F., and S.K. Mansinghka, (1971). Tests of the Efficiency Performance of Conglomerate Firms. Journal of Finance, September, pp 919-936 Vol. 6, No. 1, June 2012