1. sajm_2013_ do mergers & acquisitions pay off evidence from m&a in india (2)

Do Mergers & Acquisitions Pay OffImmediately? Evidence from

Mergers & Acquisitions in India

N M Leepsa* andCS Mishra**

Mergers and Acquisitions (M&LAS) are the vital growth stratèges ofcorparates in the scenario of

¿iobalizatkm. arú liberalisation to/ace competition and move ahead. M&A have grown not oriy

in volume hut also in value. It is often stated that the companies go for iruyrgank g;rowth strate^s

like M&A to improve performance. There is rw ckar-cut support from the literature about the effect

of M&A on corporate perforrTuiru:e. As per various studks, companies perform either better or

worse after M&As. But the question arises how long the effect of mergers and acquisitions remain

on the companks. The present study is an attempt to find out the time frame for knowing the effects

on perforrruince of manufacturing companks from M&A. The results suggest that the impact of

M&A on companks are refkcted in the immediate years specifkally the event year and the post

M &A one year.

INTRODUCTIONMergers and Acquisitions (M&As) are considered as the important growth strategy-for companies to satisfy the increasing demands of various stakeholders Krishnamurriand Vishwanath (2010). Literature on theories of M&A shows that the motives ofcompanies behind going for M&A are gaining operating and financial synergy,diversification, achieving economies of scale and scope leading to cost and profitefficiency, acquiring mariagement skills, increase market power, get tax benefits,(Weston et al, 2010; DePamphilis, 2010; Vijgen, 2007; Jensen, 1986; and Jayadev andSensarma, 2007).

A number of studies have been done in M&LA and post M&A firm performance(George, 2007). Most of the studies are done using accounting measures (Kumar andRajib, 2Ö07); Pazarskis et al, 2006; Ooghe et al., 2006; and Vanitha and Selvam, 2007)and event study (Aggàrwal arid Jaffe, 1996) methods to find out the shareholder

**

Lecturer, L M Thapar School of Management (LMTSOM), Thapar University, P O Box 32, Patiala, Pin 147004,Punjab, India. E-mail: [email protected], [email protected]

Assitant Professor, Vinod Gupta School of Management, IIT Kharagpur, Kharagpur, India 721302,E-mail: [email protected]

SOUTH ASIAN JOURNAL OF MANAGEMENT

returns through M&A. The studies also focused on the economic and financialcondition of the companies in the post M&A period. But as far as litei-ature reviewedthere is insufficiejit evidence regarding the period for which the impact of M&A canbe seen (George, 2007). • - ' . ' ' ' ' •

The present study is an attempt to find out'the time frame for observing theperformance of companies after M&A. With the increase in the Volume, value andfiequency of M&A deals in India, there is also a need for constructive and realisticframework for analysis of company performance after they went for M&A transactions(Krishnamurti and Vishwanath, 2010). Hence, the study has attempted to look intothe performance of M&A transactions in recent times. This study examines theacquisition performance by exphcitly analyzing the mobile average returns' which areignored by many of the earlier studies in this M&A research. In a nutshell, this, papertry to bring together two sets of literature with empirical evidence fiom Indianmanufacturing companies: orie examining'the post-acquisition performance; and thesecond examining the timing of returns in the post-acquisition period.

REASSESSMENT OE PRIOR RESEARCH STUDIES

Review of Indian and IntemationaLempirical studies has been made in the areasfocusirig on the research problem. This section reviews the relevant literature basedon two aspects:

a. The timing of accrual of returns from M&A—Does M&A effects reflectsimmediately after the merger?

b. Returns based on performance parameters, viz., liquidity, solvency, andprofitability—Does companies improves the its hquidity, sblvency, profitabilityafter merger, then when?

POST M&A LIQUIDITY PERFORMANCE OF COMPANIES

Liquidity refers ,to short-term availability of funds in the company to meet its currentliabilities. It is one of the important parameters to judge the firm performance to meetits current obligations. Kumar and Rajib (2007) used the liquidity measures in termsof current ratio and quick ratio; solvency measures in terms of interest coverage ratiosand total debt ratios and the profitability measures in terms of return on net worth andretum on capital employed. The authors found that companies that have lesser liquidityposition becomes a target.

Pazarskis et al (2006) using Current Ratio (GR) and Quick Ratio (QR) found thatthe decrease in liquidity ratios in the post-M&A event is insignificant. Ooghe et al(2006) suggests that the acquisition deals negative affect to the liquidity position of

' The mobile average generally is a trend line that smoothes the recurrences of the days and provides you witha quick overview of the period trend. For example Formula for say 7 year would be : Yn = (Xn-3 + Xn-2 + Xn-1 + Xn + Xn+1 + Xn+2 + Xn+3) /7 (Source: http://www.shinystat.cqm/erVglossary-detail_mobile-average.html)

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DO MERGERS & ACQUISITIONS PAY OFF IMMEDIATELY?EVIDENCE FROM MERGERS & ACQUISITIONS IN INDIA

the acquiring firm. Vanitha and Selvam (2007) found that the quick ratio of thetarget company remains as per the traditional benchmark ratio of 1:1. before and afterthe merger period. There is a boost in the average net working capital after merger.The reason behind the rise in the networking capital might be the accumulation ofthe assets of the target company.

POST M&A SOLVENCY PERFORMANCE OF COMPANIES

Solvency refers to the ability and capability of a firm to meet its long term obligationsso as to achieve continuing expansion and growth. It is one of the key financialparameters to judge the financial soundness of the firm. Pazarskis et al (2006) usingtotal debt ratio found that the solvency ratios in terms of net worth/total assets, andtotal debt/net worth decreased slightly in values in post M&A period. Ooghe et al(2006) found that in the inirial two years after the acquisition, there is progress in thesolvency position of the company. The authors also observed that from the second yearthe financial independence and the cash flow coverage of debt reduces. The result isinconsistent with the solvency posirion of the acquirer during the pre-acquisitionperiod. Thus, the acquirers depend more on debt during the post-acquisition periodin contrast to the pre-acquisition period. Kumar (2009) observed that post-mergersolvency position of the acquiring companies do not show any improvement whencompared with pre-merger solvency position.

POST M&A PROFITABILITY PERFORMANCE OF COMPANIESProfitability refers to the ability of a firm to generate revenues after covering its expensesor any types of cost involved in the business. Dickerson et al (1997) found thatacquisition gives no benefit compared to intemal growth in terms of profitability. Thereis negative long-term effect on profitability of companies. Tambi (2005) using Returnon Capital Employed Ratio found merger bas not improved performance of companies.Pazarskis et al (2006) found that ratios that evaluate the profitability decreased slightlyin the post-M&A period.

Kukalis (2007) found that the acquiring company outperformed the target companyin pre-merger performance only in the first and second year in terms of Return onAssets (ROA), and only in first year in terms of Return on Sales (ROS) and Earningsbefore Interest Tax Depreciation Amortisation (EBITDA). There are no statisticallydifferent results between pre- and post-merger operating performance of the targetcompany. Interestingly, it is also found that the pre-merger performance of acquirer issignificantly better than the post-merger performance of the target company. However,the results are not same in all years or in operating measures that are used.

Mantravadi and Reddy (2008) suggest that the influence of mergers on theoperational activities of companies is dissimilar across different industries in India.Companies in the banking and finance industry enjoy positive rètums in terms ofprofitability after merger. Performance, if evaluated in terms of profitability and retum

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on investment, merger has. a negative influence of companies in the pharmaceutical,textiles and electrical equipme:nt sectors. Companies, in chemicals and agri-productssectors suffer fiom substantive negative retums, both in terms of profitability, retumson investment and return ori assets. Ooghe et al (2006) advocate that acquisitionsprovide negative retums in terms of profitability to the acquiring company, althoughthe result is statistically insignificant. The profit .margin of the combined firm (acquirerand target) achieves its maximum profit margin in one year before the acquisition. Inthe first year after acquisition, there is a sharp fall in level of profits. Pre-acquisition(one year before the acquisition) return on assets of the acquirer is better than post-acquisition retum on assets. Kumar (2009) observed that post-merger profitability ratiosof the acquiritig companies do not improve when compared with pre-merger values.

RETURN FROM M&A: WHEN DOES THE COMPANY GAIN FROM M&A?

Loderer and Martin (1992) found that, the acquirer company neither perform betternor worse than the control firms or industry during the first five years following theacquisition. The acquirer get their share of the break-even required rate of return. Iftiming of getting the return is considered then, the acquirer show poor performancein the first three years. Above all, their performance deteriorates during the secondand third years after the acquisition year. Aggarwal and Jaffe (1996) found that theabnormal retum in the pre-acquisition period of four years is.statistically insignificantbut abnormal retums are' significantly negative when the time frame is long (morethan four years) in the pre-acquisition period. Jakobsen and Voetmann (2003) foundthat the market performs better than the acquiring companies by 10.4% after threeyears, or industry adjusted returns of the acquiring company remain poor by 9.3% afterthree years. The long-run abnormal retum in post M&A period is poor but in the shortruh, the stock price shift in an upward direction during acquisitiori announcements.The acquiring company shareholders get an abhormal retum of +0.71% aroundannouncement period.

Xiao and Tan (2009) using mobile average method found that companies enhancedcompetence in the form of efficiency after adopting M&A strategy. In the year whenM&A took place, the companies showed superior performance compared to the industryaverage. In the initial year and the beginning of the second year following M&A, therewas poor performance of many companies. It indicates that companies involved inM&A require a definite time period to fine tune itself to the new environment.Companies need time to familiarize itself as a new enterprise and hence, M&A effectsare not seen in immediate years. In the long run, the operating performance of thelisted companies improve as in the process they remain under the environmental forceslike changing government policies, pressure fi:om the market and the efforts of thecompanies themselves. As suggested by Singh (2009) there is no negative performancein terms of cost and profit efficiency and if it is found in the initial years, then it isrecovered quickly.

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DO MERGERS & ACQUISITIONS PAY OFF IMMEDIATELY?EVIDENCE FROM MERGERS & ACQUISITIQNS IN INDIA

From all the above studies, it is observed that, there is no convincing facts thatwhether the inconsistency in the results fi:om M&A studies is because of the. differenttime fir.ame used in the studies or the parameters they have chosen or the difference inthe country of acquirer, target. Specifically if these results are same in Indiaii context.So, an attempt has beeri made to look at this knpvyledge gap in academic literature.The research gaps fi:om, the literature are discusse.d below in detail: • ...

RESEARCH GAPS

As per the. past studies, companies either enhance their performance or make poorperformance after M&As. But the question still remains unexplored specially in Indiancontext about the duration of the effect of M&As on the companies. There is limitedliterature that shows about the timing of receiving the retums firom the M&A deals.The present study is an attempt to find out the time firame for return of M&A fromM&A in case of value creation of manufacturing companies firom M&A.

Literature using different financial ratios has shown whether M&A improve

performance of companies or not. But a limited number of studies show during which

year the effect of M&A is reflected. Studies in the Indian manufacturing companies

are limited in the recent years where M&A have, gone up manifold. The present study

is an attempt to fill such research gaps in the area of corporate retums firom Indian

acquisition cases. •

Based on the research gap areas firom the literature survey the objective of the

study is as follows:

a. To analyze the liquidity, solvency, profitability performance of companies inthe mahufacturing sector before and after acquisition period.

b. To find out the time frame of value creation or to know in which year .

companies have M&A effect.

RESEARCH METHODOLOGY

HYPOTHESES -

Based oh the research objectives, the following research hypotheses are tested:

I H : There is no difference in the liquidity position in mcinufacturirig companies in

India before and after the first year, second year, third year of acquisition.

2 H : There is no difference in the solvency position in.mamfacturing companies in

India before and after the first year, second year, third year of acquisition.

• 3 H : There is no difference in the profitability position in manufacturing companies

in India before and after the first year, second year, third year of acquisition.

Voliine20 A l No.3 ..43


SOURCES OF DATA, PERIOD AND SCOPE OF STUDY, TOOLS ANDTECHNIQUES USED IN THE STUDY . • . . ':

Data have been collected fi-om secondary sources. The sources for collecting theacquisition deals and company annual reports for financial data are Centre forMonitoring Indian Economy (CMIE) Business Beacon Database ahd CMIE ProwessDatabase. The period of study is fi-om 2000-01 to 2009-2010. This period is selected soas to evaluate the performance of the acquisition deals during 2003-04 tp 20Q6-07.The data for these years are available. The study is confined to performance evaluationof manufacturing companies in India before and after acquisition. Following Leepsaand Mishra (2012a) and (2012b) the performance is evaluated using "paired two samplet-tests"

where, . .

s is the standard deviation of the sample and n is the sample size. ' ;

The degrees of fireedom used in this test is n-1.

Xi is (Pre-M&A) and X2 is (Post-M&A) are sample statistics.

ju^ and /ij are the population parameters. •

Source: http://en.wikipedia.org/wiki/T_test.

All the financial performance parameters are adjusted for the industry average.Industry average represents the performance of companies that have not gone throughM&A during the period under reference. ' '

SAMPLE DESCRIPTION

The sample belongs to companies in the manufacturing sector in ïndia. Acquisitionsof companies in Banking, Financial, insurance Services Industries (BFSI) aré excluded.Financial performance, rneasures as mentioned earlier are not appropriate for firnis inthe BFSI sector. The sample is further filtered so that three year pre- and a three yearpost-acquisition data for both acquired and target companies are' continuously available.The total number of sample firms has been taken based on ratios considering theavailability of data for each acquirer and target and for all continuous year. For example,since some companies might not have debt, so for them debt ratio is not applicable.

Table 1 shows the sample of M&A companies as per different ratios of manufacturingcompanies.' .. . . •- • •

Volume 20 A A N a 344


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The acquirer company's performance hasbeerí adjusted by non acquirer companiesor control firm performance. Gontrol firmis selected based companies in each industrywhich has not gone for any M&A deals inthe sample period. Ratios are calculated andrnedian values are taken to adjust the samefrom the companies that have gone foracquisition deals.

The flow chart (Figure 1) describes at aglance the entire methodology forconducting the research: ' ;

EINDINGS AND DISCUSSIONS OFRESULTS •

The.results of the study are discussed belbwiri the following categories^:

• PaiTed-Sample t-test on liquidityRatios.- GR of the

Companies. .- QR of the

" • Gomipániés."•" - Net Working Gapital/Sales Ratio

;(NWGS) of the Manufacturing'. ". " Companies. - .. . . '

• Paired-Sample t-test on Solvencyratibs. . <- Total Debt Ratio (TDI|.) of the

Manufacturing Gompanies.- Interest Coverage Ratio (IGR) of

the Manufacturing Gompanies

• Paired-Sample t-test on ProfitabilityRatios. • !

Manufacturing

Manufacturing

In the paired t test results, values are in the form aret-values of paired samples where * means thesignificance level is.0.1, ** means the significance

.level of 0.05, *** means the significance level of O.OI.TO refers to acquisition event year; (T + 1) (T+2)(T+3) refers to post acquisition first, second, thirdyear ; similarly (T-1) (T-2) (T-3) refers to first,second, third year prior to acqusition year;. •

Volume 20 45 No.3

SOUTH ASIAN JOURNAL OF MANAGEMENT.

Figure 1: Flow Chart of Research Methodology

Flowchart of Research Methodology

Review of Past Studies on M&A

Identificatian of Problem

Framing of Objectives

Objective 1 Objective 2

To analyse the liquidity, solvency, profitability performanceof companies in manufacturing sector before and after

acquisiton period.

To find out the time frame of value creation or to knowin which year companies have M&A effect

Application of Statistical Tool

On Accounting Performance Measures

Liquidity

' Current Ratio: CurrentAssets/Current LiabilitiesQuick Ratio: Quick Assets/Quick LiabilitiesNetworking Capital/Sales:.(Current Assets minus currentliabilities) by Sales

Profitability

Return on CapitalEmployed (ROCE):EBIT/Capital EmployedReturn on Net Worth(RONW): Profit after Tax/Net Worth

Solvency

Total Debt Ratio: TotalDebt to Total Assets

Interest Coverage Ratio:EBIT/lnterest

L Evaluation of Mobile Average Returns in post acquisition period

I Analysis ofresults and set knowledge for practical applictions |

^ Return on Capital Fmployed Ratio (ROCE) of the Manufacturing Companies.

, - Return on Net worth Ratio (RONW) of the Manufacturing/Companies

The current ratio is considered in various studies as a financial ratio to measurethe firm's ability to meet its expenses or financial commitments in the short run. The

Volume 20 46 No.3


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current ratio has improvedsignificantly in the post-acquisitionperiod (Average of TO, (T+1))compared to a year ( T - l ) ,(T-2), Average of (T- l ) and(T-2).

. Table 2 shows the paired t-testresults on current ratio ofmanufacturing companies.

Table 3 shows the paired t-testresults on Quick Ratio (QR) ofmanufacturing companies.

It has declined compared to pre-acquisition third year but the resultis insignificant. In the average yearof Tg, (T+1) the sample companieshave current ratio more than 2:1which indicates that due to M&Athe liquidity of the company hasimproved.

Around 14 companies in theevent year, 11 companies, in the firstyear, 13 companies in the second year,16 companies in the third year havea current ratio greater than 2:1 whichis considered as acceptable limit. Inthe year following the acquisition,even if some companies facedproblem inefficiently utilizing thecurrent assets, as the time passed,those companies improved theircapability to meet their currentliabilities.

Some acquirers like AlchemistLtd., Indoco Remedies Ltd., G T NIndustries Ltd., AndhraPetrochemicals Ltd., R S W M Ltd.had a current ratio more than threein T+1 year which means their they

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have so much cash on hand andmanagement is not properly investingcash and thus actions must be takenregarding this.

Alchemist Ltd., Golden TobaccoLtd., Tata Global Beverages .Ltd., TataMotors Ltd. had a current ratio of lessthan two before the acquisition event.After the acquisition liquidity hasimproved.

QR is a suitable measure ofperformance; to access liquidity forindustries that engage in long productproduction cycles, just as inmanufacturing. The QR has improvedsignificantly in the post-acquisitionperiod (Average of T^, (T+1))compared to a year (T-1),(T-2), Average of (T-1) and (T-2).It has declined compared to third yearprior to acquisition but the result isinsignificant, t he ' average QR inevent year was 1.66 comparativelybetter than one year prior to theacquisition that was a QR of 1.64;which increased to 1.90 in the firstyear after acquisition year andgradually decreased to 1.84 and 1.79in second and third year, respectively.

Some of the companies in the firstyear after acquisition have a quickratio around 5:1 which may not be alsoa good sign as the. liquid assets arekept idle, but most of the companiesapproximately 15 companies in the firstyear have a QR of 1:1. If comparedwith average of pre-three years withan average of the past thre^ years, theQR has declined eveii thoughinsignificant. It shows the liquidity

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QR came when compared with oneyear prior acquisition with one yearafter acquisition. It means theliquidity position of the companies(QR) is influenced by acquisitionevent which is immediately seen inthe post-acquisition year. . Theliquidity performance improves justafter the event year.

Table 4 shows the paired t testresults on.Net working capital by salesratio of manufacturing companies.

The liquidity performance ofUnited Breweries Ltd. is poor. TheQR in the two years before acquisitionis below, one while the QR above twoafter two years of acquisition; Theliquidity performance hascontinuously declined three yearsbefore the merger of companies likeEl'Parry (India) Ltd., GoldenTobacco Ltd., Tata Global BeveragesLtd. which means that thesecompanies must be finding difficultyin taking care of short termcommitments. But after theacquisition these companies.haveimproved the quick ratio whichmeans acquisition has helped thecompanies in speeding the process ofconversion of receivables into cash,and helping in c'overing the financialobligations. EID-Parry (India) Ltd.and Ranbaxy Laboratories Ltd.performed well in terms of QR in pre-three years. But in the acquisition

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In the average of acquisition yearand the subseiquent first year thenetworking capital/sales ratio hasimproved significantly compared toone year prior to the acquisition. Inthe third year also the ratio hasimproved compared to one year priorto the acquisition. - • . '

Table 5 shows the paired t testresults on debt ratio of manufacturingcompanies.

The debt ratio is a measuring toolto know the percentage of total assetsfunded by the creditors of thecompany. Superior debt ratio indicatesthat creditors have .the largest shareof money, which is being utilized tomake more profits. Acquisition hassignificant influence on total debtratio which is reflected fiom the mostof the significant results that came forthis ratio compared to other ratios.The long term solvency is influencedby this ratio specifically afteracquisition which can show whetherthe company will be solvent orbankrupt after the acquisition event.The debt burden has increasedsignificantly in the acquisition yearand all the three years afteracquisition when compared to thethree years before acquisition period.The companies might have borrowedmore to finance the growth. It is

Volume 20 50 N a 3

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observed that acquisitions increasethe debt/equity ratio specifically forthe first two years. This implies thatthe company's margins could beaffected due to irregularity in certainsupply contracts of the target firms.The increase of debt by acquirers tofinance the acquisition may putpressure on the target firmperformance in post-MSiA first andsecond year. But gradually when thecompany pays off its debt theacquisition can contribute positivelyto long-term.

In comparison of pre- and post-twoyears average, the debt burden of thecombined firms decreased for thedeals done by Indoco Remedies Ltd.,Seshasayee Paper & Boards Ltd.,Ranbaxy Laboratories Ltd. Around11 companies have shown ihcreaseddebt burden after the acquisition.Nine companies have shown nochange in debt burden after theacquisition. When compared wqthone year before and after theacquisition the debt burden of thecombined firm has increased in theacquisition year as well as in the post-acquisition year, for deals done withEID-Parry (India) Ltd., EngUshIndian Clays Ltd., Bajaj HindustanLtd. , . : •

Table 6 shows the paired t testresults on interest coverage ratio ofmanufacturing companies.

The interest coverage ratio hasimproved significantly in the post-acquisition period. When the averageof interest coverage ratio ofacquisition year and first year after


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acquisition is compared to first,second, third year prior to acquisitionsthe results show significant change.It has also increased in acquisitionyear and first and second year afteracquisition compared to third yearhefore acquisition. The ratio alsoshows improvement in acquisitionyear compared to first and second yearafter acquisition. The firm's ability tomeet its payment of interest for dehtpreviously borrowed has. increased onaverage in the post-acquisition secondand third years compared to pre-acquisition second and third years,respectively. The interest coverageratio has substantially increased forthe deal between Cadila HealthcareLtd. and Zydus Wellness Ltd. in post-acquisition first year then declinedand then again increasedexceptionally in the post acquisitionthird year . The median interestcoverage ratio in the three yearsbefore acquisition along withacquisition year and three years afterthe acquisition is 3.17, 4.64, 5.02which indicates that the companies .have improved their debt payingcapacity by generating sufficientrevenues to meet its fixed obligationor interest expenses.

The interest coverage ratio issignificantly higher for the acquirerslike Alchemist Ltd., RanbaxyLaboratories Ltd., IPCA LaboratoriesLtd. over the years compared to othercompanies but after the acquisitiontheir debt paying capacity hasreduced which is refiected from thedecrease in the interest coverage ratioin the post-acquisition years.

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In one-year prior to acquisition 11acquirers have a higher interestcoverage ratio than the target andeight targets have a better ratio thanacquirer. Among them the interestcoverage ratio of five deals or thecombined firm has increased in theacquisition year for those acquirerwho had better performance thantarget and six deals where the targethad a better interest coverage ratiothan the acquirer. Two target firmswho had done well as staridalonefirms compared to acquirer whentheir combined performancedecreased while six acquirers whoperformed well when the performanceof standalone firms decreased as theycombined with the target.

Table 7 shows the paired t testresults on the return on capitalemployed ratio of manufacturingcompanies.

There is no considerable changein return on capital employed of thecompanies in the post-acquisitionperiod. The acquirer companies donot earn positive significant returnsafter acquisitions may be because thecompany's performance may beaffected by the target company profitearning capacity, the geographiclocation of the target company,payment methods which would haveincreased the cost compared torevenue earned. The poor-ROCEmay be due to poor profit margin.

Table 8 shows the paired t-testresults on Return on Net Worth Ratioof the manufacturing companies.

Volume 2Ö 53 N a 3


The profitability of the companies has improved in the acquisition year and oneyeai: after the acquisition when compared to the pre-acquisition period. However,there is significant improvement in the ratio when the post-acquisition period, i.e..Average of T^, (T+1) as compared to (T-2), (T-3) years before acquisition. Theresults suggest that the impact of M&A on companies are refiected in the immediateyears specifically the event year and the post M&A one.year. • •

RECOMMENDATIONS FROM THE FINDINGS

For the acquirer which have poor current and quick ratio need to look, into theirassets or any equipments that are not frequently used by the firm. It would be better tosell them and bring cash to invest in some profitable opportunities. There may be suchassets held by target firm, so it needs to be looked into. For improving the profitabilitythe acquirer should update its customers by reaching its customers of the target firmor selecting a target that have a different location which would extend its market andgive them a new source of revenue. If the post M&A solvency is poor, then the acquirershould utilize the source of cheap suppliers of the target company to meet long-termobligations. The main thing that to be noted is that the acquiring firm should be alertin the initial years, since the poor performance is in the initial years and then itimproves. It is recommended therefore to make M&A efforts to. fully integrate theactivities of both acquirer and target as soon as possible to reap the M&A benefits.

LIMITATION OF STUDY

Like no other studies, this study has some inherent limitations. To begin with, thestudy is limited to the period of study that has taken only three years pre- and post-acquisition. Future studies can extend the number of years to five years to know theimpact on long-term period and M&A effects on a longer time frame. The study isconfined,to the manufacturing sector. There is ample scope for performance evaluationin other sectors like service or financial sector. Since the study is conduced takinginto account M&A deals from different years and frorh different companies fromdifferent industries, there might be variation in results if M&A fi:om different industriesare studied separately. . , • '

SUMMARY OF CONCLUSION; ACADEMIC AND MANAGERIALIMPLICATIONS ;

A number of studies, hay.e been made to find out the impact of M&A on the company'sperformance. Different studies found different results, while some authors found thenegatiye return after M&A eyent; other.studies found positive gains after going forM&A deal. But limited studies, as far as.a review of literature has been, rnade, haveworked for thé duration during which the impact of the M (StA is refiected based ondiffererit financial ratios. Etripirical evidence fi-om the "literature suggest that in thelong run the realimpact of M&À on the company's performance cannot be refiected

Volume20 C/l Na3


because there may be some external factors that have influenced the perforinance ofcompanies. The present study made an attempt to find out up to which year afterM&À the results are significant and found that the impact of M&A is mostly reflectedin year of M&A event and one year post-M&A. Each and every acquisition is donewith different motives. Some deals may be done for short run benefits while some aredone for long run benefits. Generally companies acquire another firm for the long runbenefits like economies of scale keeping costs low. This indicates that even if thecömpaiiies do not gain in a short period of time, thé acquisition will benefit in the longrun. This may riot be reflected in acquisition year or first year after acquisition. Theresults of the present study confirm with Andre et al (2004) which found that mergersperform poorly in the long run (three years). . .

The finding of the study has various implications for different users which arediscussed below:

MANAGERIAL IMPLICATIONS ^

As far as knowledge of literature is concerned, most of the studies have taken the pre-and post-M&A period into consideration ignoring the M&A event year. But this yearwould also have some effect since M&A would be perceived by investors as a chanceof increasing future values. In this study of effect of M&A event year is thereforeconsidered in apart from post M&A years. Another contribution of the study is that,mobile average returns in M&A performance studies are studied by Xiao and Tan(2007) and this paper deal with this matter and make a contribution to the academicliterature on ari area of the M&A methodology of the comparative small riumber ofstudies that have examined the M&A iri a rising market like India.

ACADEMIC IMPLICATIONS '

Competition firom foreign firms, arrival of new technology, demanding attitude ofcustomers create an uncertain environment at the market place. Managers look forstrategies like M&A to cope with changing environments for survival and growth. Insuch situation, the managers must be aware of the period in which they would gainfrom strategies like M&A so that they wpuld.revise their strategies accordingly. Hence,in this direction this research has greater managerial implication and contributes tomanagerial practise in choosing between enhancing core competencies through internalgrowth or through inorganic growth.

Acknowiedgment: The paper is presented at COSMAR, School of Management IISC

Bangalore. The variables used in the study are part of my research work at VGSOM, IITKharagpuf Source: Leepsa and Mishra (2012b). ' - - -' ' '

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• - Volume2Ö ^ ^ N a 3


2. Andre P, Kooli M and LHer J F (2004), "The Long-Run Performance of Mergersand Acquisitions: Evidence from the Canadian Stock Market", FinancialManagement online Retrieved from http://findarticles.com/p/articles/mi_m4130/

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7. Jayadev M M and Sensarma R (2007), "Mergers in Indian Banking: An Analysis",South Asian Joumai of Management, Vol. 14, No. 4, pp. 20-49.

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9. Krishnamurti C and Vishwanath S R (2010), "Mergers, Acquisitions and CorporateRestructuring", South Asian Joumai of Management, Vol. 17, No. 2, pp. 169-171.

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16. Mantravadi P and Reddy A V (2008), "Post-Merger Performance of AcquiringFirms firom Different Industries in India", Intemational Research joumai of Financeand Economics, Vol. 22, pp. 192-204. •

17. Ooghe H, Laere E V and Langhe T D (2006), "Are Acquisitions Worthwhile? AnEmpirical Study of the Post-Acquisition Performance of Priva'tely Held BelgianCompanies", Small Business Economics, Vol. 27, Nos. 2/3, pp. 223-243.

18. Pazarskis et al (2006), "Exploring the Improvement of Corporate Performance afterMergers-The Case of Greece", Intemational Research joumai of Finance and Economics,Vol. 6, pp. 184-192.

19. Singh P (2009), "Mergers in Indian Banking: Impact Study using DEA Analysis",South Asian joumai ofMarmgement, Vol. 16, No. 2, pp. 7-27.

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23. Vijgen D (2007, June 6), Shareholder Wealth Effects ofM&As in the Westem part ofContinental Europe. Retrieved November 23, 2012, fiom http://arno.unimaas.nl/show.cgi?fid= 11292

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