Wealth creation through acquisitions

N. M. Leepsa & Chandra Sekhar Mishra

DECISION

ISSN 0304-0941
Volume 40
Number 3

Decision (2014) 40:197-211

DOI 10.1007/s40622-013-0023-z

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 Author's personal copy
Decision (December 2013) 40(3):197–211
DOI 10.1007/s40622-013-0023-z
RESEARCH ARTICLE
Wealth creation through acquisitions
N. M. Leepsa • Chandra Sekhar Mishra
Published online: 19 January 2014
 Indian Institute of Management Calcutta 2014
Abstract Mergers and Acquisitions (M&A) are con-
sidered as the engines for accelerated and consistent
growth for companies. M&A is more significant in
today’s corporate world due to globalization, liberaliza-
tion and intensely competitive business environment. The
present study is an attempt to examine post M&A
performance in manufacturing companies in India.
‘Economic value added’ (EVA), a registered trademark
of Stern Stewart & Co and a measure of economic profit,
is considered in evaluating the industry adjusted returns
for the companies that have gone for acquisitions. The
scope of the study is limited to manufacturing companies
in India that have gone for acquisitions.
Keywords Merger and acquisition  Economic
value added  Financial performance 
Manufacturing companies
Introduction
As the Indian industry opens up to the worldwide
competition, there is a wave of mergers and acquisi-
tions for corporate restructuring and renewal. Daga
N. M. Leepsa (&)  C. S. Mishra
Vinod Gupta School of Management, Indian Institute of
Technology Kharagpur, Kharagpur 721302, India
e-mail: leepsa@vgsom.iitkgp.ernet.in;
n.m.leepsa@gmail.com
C. S. Mishra
e-mail: csmishra@vgsom.iitkgp.ernet.in
(2007, 10) defines merger as a combination of the
interest of two companies to create a new enterprise
with the approval of the merger both sets of share-
holders. Daga (2007, 10) defines acquisition1 as
acquiring of a company by acquirer by taking a
significant portion of the assets or securities of target
company generally to restructure the operations of the
target company. It might be done by taking a large part
of the voting shares or of a division of the target firm.
The justification for such mergers and acquisitions
strategy is the synergistic effect where the two
companies combined together are likely to be more
valuable and profitable than individual companies. It
also leads to the creation of shareholder value over and
above the sum of the two companies. Nevertheless,
one has to check if these mergers and acquisitions
really lead to better corporate performance.
M&A deals have gone up manifold in India in recent
years. Earlier studies were based on a limited number
of M&A deals. Hence, there is a need to re-look at the
post M&A scenario in India. The present paper is an
attempt to show whether corporate performance in
terms of EVA, a measure of economic profit, which is
considered as the real profit for shareholders, improves
or not after companies go for acquisition deals.
1
For the purpose of this study, the acquisition is defined as per
the CMIE Prowess database. Acquisition are the takeover
transactions where a company takes over substantial part of
shares of another company.
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198
Past research
As surveyed through literature, the performance of
merger and acquisition is examined in four different
ways viz. Market based returns to shareholders using
Event studies; Accounting based return using reported
financial statements; Survey of Managers/Executives;
Clinical Research or Case Studies (Bruner 2004).
Many studies have been made using the different
approach on the effects of M&As on post-M&A
operating and financial performance of the target and
acquirer companies. The literature has not been able to
provide convincing support to find out whether
companies’ performance improves or declines as a
result of M&A. Most of the studies have used
traditional performance measures. As far as literature
review is concerned, studies with respect to post-
M&A performance in terms of economic profit that is
supposed to be the true profit for shareholders are few,
particularly in the Indian context. The literature
review is divided into ‘Studies relating to Acquisition
Performance’ and ‘Studies relating to EVA as Perfor-
mance Measure’.
Studies relating to acquisition performance
Using accounting measures of performance of com-
panies that have gone for M&A, different studies show
different results. Ghosh (2001) and Ramaswamy and
Waegelein (2003) found that there is a significant
improvement in operating performance of target
companies while Vanitha and Selvam (2007) state
that there is a significant improvement in the financial
performance of target companies. Kumar and Rajib
(2007) studied the impact of merger on the shareholder
wealth subsequent to merger and found that corporate
performance improves after merger. Dickerson et al.
(1997) observed that acquisition growth does not go
beyond the internal growth and profitability declines
following acquisition. Ooghe et al. (2006) found that
the profitability, liquidity and solvency position of the
combined company declines after M&A event. How-
ever, such decline in performance is not different from
companies that have not gone for M&A. Pazarskis
et al. (2006) found that the profitability of a company
declines after M&A event. Leepsa and Mishra (2012a,
b) studied the post acquisition and merger perfor-
mance of Indian manufacturing companies respec-
tively using the traditional performance measure like
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liquidity, solvency and profitability and found mixed
results for different ratios.
A number of studies have used multiple performance
measures to judge performance instead of using only
accounting measures or only event studies approach.
Shick and Jen (1974) put forward that all significant
positive merger benefits occur during the first year.
Katsuhiko and Noriyuki (1983) found that the financial
performance of firms improves when return on equity is
taken into account. Goyal (2002) affirms that there is a
significant, increase in wealth through vertical mergers.
Carline, Linn and Yadav (2001) found that the perfor-
mance of merged companies improves significantly
following their combination. The acquirer, targets and
combined firms do not do well compared to industry
counterparts before the merger, but they do better than
their competitors after merger. Becker et al. (2008)
using event study and accounting approach found that
there is a decline in share price as well as operating
performance of companies that have gone for M&A
deals. Adavikolanu and Korrapati (2009) states that the
firms that have acquirer technology firms bear negative
returns. Ismail et al. (2011) shows that past studies have
mixed opinion on industry relatedness and the M&A
performance. There is no consensus view in the
literature regarding the effects of firm size on Post-
M&A performance.
Family-owned is also an important criterion for
evaluating performance. Literature has defined it as
those where management has ultimate control over
company along with some of the company’s shares.
Lin and Wu (2010) define family ownership as the
family ownership falling between 0 and 10 %. Basu
et al. (2009) found that acquisitions of target compa-
nies with less percentage of family ownership generate
a high percentage of value creation. Ben-Amar and
Andre (2005) observe that family ownership is not a
negative factor but it is a positive factor in value
creation. Firm with family ownership perform better
than non family owned business after M&A.
Flanagan (1996) views that related deals are more
advantageous compared to unrelated merger deals
since they create synergies due to the strategic fit that
improve the performance of the combined firms.
(Morck et al. (1990); Agrawal et al. (1992, 1614);
Daga (2007, 33) also agreed acquirer returns are poor
in which the target company is unrelated. Conglom-
erate or unrelated deals lead to failure because
managers of acquirer firm are not accustomed to the
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Decision (December 2013) 40(3):197–211
industry to which target belongs. Sometimes they go
for wrong deals just to use free cash flow, thus leading
to failed acquisitions. Related acquisitions signifi-
cantly outperform compared to conglomerate or
unrelated acquisitions.
Depamphilis (2010) cited that acquirer’s return to
public firms in the USA is less for equity financed
acquisitions deals compared to cash financed deals.
While in European countries acquirer’s return (either
of the public or private firms) is more for equity-
financed acquisitions compared to cash financed deals.
Charlie et al. (2004) taking into consideration the
acquisition experience, found that those who are
successful in first merger show declining performance
later.
Authors like Asquith et al. (1983); Kumar (2009);
Depamphilis (2010) discussed regarding the M&A
performance taking size as an important factor influ-
encing corporate performance. The size may be
(a) size of the acquirer among all acquirers or
(b) size of the target compared to the size of the
acquirer. The authors found that the smaller acquirers
get better returns compared to larger acquirers. Small
deals create higher returns compared to larger deals.
The size of the target company is positively related to
the abnormal return of the acquirer such that larger the
target larger the abnormal return. The merger of
relatively larger target companies shows improved
profitability in post-merger period, while the mergers
of relatively smaller target firms do not. The return to
acquirer is superior when acquisition is a large for the
target firm but small to the acquiring firm.
Studies on economic value added as measure
of performance
Traditional accounting measures are criticized as
unsatisfactory performance measure as they lack in
directing towards the goal of shareholder wealth
maximization. Performance measures relating to
profitability ignores the cost of capital which is
essential for determining value creation for share-
holders. Sometimes in certain situations, even if a
company gets positive net income as well as higher
accounting rate of return, there might be a decline in
the shareholder wealth. Earnings might be lesser than
the required rate of return that shareholders could have
earned by investing in other investment opportunities
of similar risk. In the backdrop of limitations of old
199
measures of performance, Economic Value Added
(EVA) is considered as a better performance metric.
EVA is essentially the difference between profit
earned by the company and the cost of capital.
Ghani et al. (2005) view that, EVA is the actually
based on earlier economic theories which states that the
real profit of a company is calculated by deducting all
expenses or losses from all revenues or gains including
the opportunity cost of capital. The author agrees to
Drucker (1995) who states that if business brings
profits more than the cost of capital then wealth is
created or else wealth is destroyed. Alfred Marshall
(1890) who also considers that the economic or real
profit should be calculated by deducting from net
profits all interest expenses on capital invested. The
author stated Bidle and Bowne (1999) definition of
EVA as the difference between the profit obtained by
the entity and the costs of capital implied for producing
or obtaining this profit. The author also reported Stern
Stewart (1993)’s definition of EVA, which is the
difference between the companies’s Net Operating
Income after Taxes (NOPAT) and the cost of both the
debt and equity capital employed by the company to
generate NOPAT. (Pandey 2005) also view that the
concept of economic profitability is equivalent to the
concept of economic value added (EVA).
Roztocki and Needy (2010, 1) considers EVA as a
single and simple measure that gives a real picture of
stockholder wealth creation. Yao et al. (2009, 42)
argues that EVA has gained importance in the
corporate and investment world as the more current
yardstick for company performance. Xiao and Tan
(2009) conclude that EVA and rates of EVA are the
new measures of performance that correct any bias-
esness due to differences or in accounting policies.
EVA has 40 % explanatory ability compared to a
maximum of 13 % from traditional methods. EVA is a
more effective measure of M&A performance com-
pared to other traditional methods.
Xiao and Tan (2009) found that companies perform
better than the industry in terms of improved efficiency
in the year of M&A. The performance of companies
declines in the first year and the starting of the second
year after M&A. It indicates that a M&A to be
successful needs some time to adjust to the new
environment. In the long run, M&A improves the
operating ability of the company due to different factors
such as pressure from government policies, demand of
the market and also the efforts taken by the companies
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200
after M&A deal is completed. York (2004) using EVA
as performance measure found that the operating
performance declines after the acquisition similar to
the performance of other companies in the industry.
Research objectives
Based on the research gap found in the literature
survey, the following objective is framed in the study:
• To find out the long term post-acquisition perfor-
mance in terms of EVA with respect to in
manufacturing companies in India
Besides overall manufacturing companies, the
study also classifies the sample into different catego-
ries viz, family verses non family owned, small verses
large target, smaller and larger acquiring company,
cash payment verses stock payment and related verses
unrelated acquisitions. Subsequently, comparative
analysis is made for each such classification.
Methodology
Hypotheses
Based on the research objectives the following
research hypotheses are tested:
Ho There is no difference between the pre and post-
acquisition performance (in terms of rate of EVA or
economic profit) in manufacturing companies in India.
As discussed in previous sections, the comparison
of pre and post acquisition performance is done for the
companies grouped as per different classifications.
Tools and techniques
The performance is evaluated using ‘‘paired two
sample t tests’’2
x  l0
t¼
psffiffiffi
n of Return on Market Index; Ke is the cost of equity
where, s is the standard deviation of the sample and n
is the sample size.
The degrees of freedom used in this test is n - 1.
2
Source: http://www.en.wikipedia.org/wiki/Student%27s_t-test.
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x1 (Pre-M&A) and x2 (Post-M&A) are sample
statistics.
l1 and l2 are the population parameters.
The study is carried out over various years under
consideration for the pre and post-acquisition perfor-
mance that are compared using the economic value
added (economic profit) as the measure of performance
to observe whether M&A performance shows any
different results compared to past studies. All the
financial performance parameters are adjusted for the
industry average. Industry average represents the
performance of companies that have not gone through
merger and acquisition during the period under refer-
ence. The pre and post-M&A performance is compared
using the economic value added (EVA) (a metric of
economic profit) as the measure of performance to
observe whether M&A performance shows any differ-
ent results compared to past studies.
The formula for the EVA is as follows:
EVA ¼ Net operating profit before interest and after
tax ðNOPATÞ  ðWACC  invested capitalÞ
where, WACC stands for weighted average cost of
capital.
Several accounting adjustments are suggested by
Stern and Stewart for finding NOPAT and invested
capital. These accounting adjustments are beyond the
scope of this study since such information and data are
not easily available. Pandey (2005) also views that the
concept of economic profitability is equivalent to the
concept of economic value added (EVA). This study
basically takes EVA, a measure of economic profit
which is defined as the spread between return on equity
and cost of equity. Hence, from equity-holders’ point
of view, economic value added can be found as below:
Economic value added ¼ Net profit  cost of equity
 average net worth
Ke ¼ Rf þ bi ðRm  Rf Þ
where Rf is the Risk free rate of return; Rm is the Rate
(calculated below); bi is the Beta.
Basic specifications for the study
• For the purpose of risk free rate of return, the
average yield on the 10 year government bond
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Table 1 Interest rates in Central Government dated Securities • The median of the total assets of the acquirer
Year Central Government
company in the acquisition year is taken into
Securities (Per cent consideration for segregating the acquirer into
per annum) large and small companies.
• For the relative size of the companies (size of the
2001–2002 9.44
acquirer to the size of the target) the total assets of
2002–2003 7.34
the acquirer are compared with the total assets of
2003–2004 5.71
the target companies in the acquisition year.
2004–2005 6.11
• Companies with acquisition experience are those
2005–2006 7.34
acquirers who have gone for any merger or
2006–2007 7.89
acquisition before the event year.
2007–2008 8.12
• Method of payment is categorized into two viz.
2008–2009 7.69 Stock and cash.
2009–2010 7.23
2010–2011 7.92
2011–2012 8.52 Period of study
The risk free rate is the average of Central Government
Securities for the sample period of study = 7.5
The period of study is from 2000–2001 to 2009–2010.
This period is selected so as to evaluate the perfor-
Source Reserve Bank of India records
mance of the acquisition deals during 2003–2004 to
2006–2007. The data for these years are available.
Table 2 Compound annual growth rate
Sources of data
Annual averages of share price indices and market
capitalisation
The sources for collecting the acquisition deals and
Year BSE Sensex (base: company annual reports for financial data are Centre
1978–1979 = 100)
for Monitoring Indian Economy (CMIE) Business
1990–1991 1,049.53 Beacon Database and CMIE Prowess Database.
2010–2011 186,05.18
Compound annual growth rate: 15.46 %
Scope of study
Source RBI website
• The study is confined to post-acquisition perfor-
mance of manufacturing companies in India.
from 2001 to 2002 till 2010–2011 is considered as
shown in Table 1. As a result the risk free rate of
return is 7.5 %. For calculating Risk Free Rate, the Sample selection
reference of Table 1 is taken
• For market return rate, the compounded annual
• The sample consists of listed manufacturing com-
growth rate (CAGR) in BSE Sensex has gone up
panies in India.
from 1,049.53 in 1990–1991 to 18,605.18 in
• The study is carried out for the pre and post
2010–2011. The CAGR is calculated as 15.5 %
acquisition period of 3 years due to availability of
as shown in Table 2.
data up to that period. The sample is further filtered
• For the study the rate of EVA (EVA/Average Net
so that 3 years pre and 3 years post-acquisition
worth) is taken so that it would adjust for the size
data for both acquired and target companies are
of the companies.
available.
• The M&A cases are classified into large and small
acquirers and also on the basis of relatedness. Indian chemical industry constitutes 13 % of the total
• Total assets are taken as the proxy for the size of export, 13 % of the total industrial output and seven
the companies. percent of the GDP. There is around 10–12 % growth

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Table 3 Sample of industry-wise acquisitions

Industry Acquirer Target
2004 2005 2006 2007 Total (%) 2004 2005 2006 2007 Total (%)

Chemical 3 1 4 2 10 34 4 2 3 2 11 38
Food and beverage 2 2 0 2 6 21 0 1 1 2 4 14
Textiles 0 3 2 1 4 14 0 0 3 1 4 14
Transport equipment 0 0 1 3 4 14 0 0 1 1 2 7
Diversified 0 0 2 1 3 10 0 0 0 1 1 3
Metals and metal products 1 0 0 0 1 3 0 0 0 1 1 3
Miscellaneous 0 0 0 0 1 3 0 1 0 0 1 3
Machinery 0 0 0 0 0 0 2 0 1 1 4 0
Non metallic 0 0 0 0 0 0 1 0 0 1 3
Total 6 6 9 9 29 100 7 4 9 9 29 100
Source compiled from CMIE prowess database

per annum in this industry. The Indian pharmaceutical
industry ranks fourth in volume and thirteenth in term
of value in the world. India is a strong player in the
generic pharmaceutical market. India is the second
largest producer of Agrochemicals in Asia.3 The
highest number of deals found in doing in chemical
industry followed by food and beverage and textile
companies. Chemical Industry is growing in India. So
it may be their strategy to go for M&A for growth and
development.
There were more of related acquisitions (55 %)
compared to unrelated acquisitions (45 %) over the
sample period. The companies go for unrelated
(conglomerate) deals may be because of the diversi-
fication and expansion motive.
Ownership is considered for the target company on
the basis of promoter holdings. The family ownership
is considered as those companies whose promoter
holding is more than 10 % and Non-family owned
business are those whose promoter holding is between
0 and 10 percent. Srivastava (2011) has shown that in
India there is more of family owned business com-
pared to non-family owned business and Indian
companies are dominated by promoter holdings. The
sample has around 93 % target firms have family
owned business. So the comparative analysis is not
done for such classification.
Around 79 % of the acquired firms have previously
acquired experience. They have made other merger
3
Source: Chemical industry in India: interesting facts, http://
www.cacci.org.tw/ACC%20Newsletter/May05/Katiyar2.pdf.
and acquisition deals prior to the event date. It shows
companies are continuously adopting the M&A strat-
egy for their growth.
More number of cash deals are made compared to
stock deals because of the benefits associated with it.
Around 62 % of deals are done through cash while
38 % through stock. Cash deals do not dilute the
ownership of the company. There are lesser chances of
EPS dilution from the acquiring company. Cash may
have been invested so that they won’t remain idle.
In 76 % of cases, the target firms are found to be
smaller than the acquirer. It shows the companies
prefer to go for M&A deals more in the cases where
the size of the target company is less than the size of
the acquired firm (Tables 3, 4).
The description for control firms is given in the
Table 5. Control firms are those companies which
have not gone for any M&A deals during the sample
period. Control firms are selected based on the type of
Industry. Industry medians are taken for the EVA or
rate of EVA.
Results and discussions
The performances of studies are evaluated by different
categories:
• Acquirers, target, combined firms
• Relative size of target (relative small size of target
& relative large size of target)
• Size of acquirer (small acquirer & large acquirer)

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Table 4 Sample of
Category Year 2004 2005 2006 2007 Total
acquisitions by different
categories Volume Total deals 7 4 9 9 29
Type of deal Related 3 2 4 5 14
Unrelated 4 2 5 4 15
Ownership of target Family 7 4 8 8 27
Non Family 0 0 1 1 2
Acquisition Firms with acquisition 5 2 8 8 23
experience experience
Firms without acquisition 2 2 1 1 6
experience
Method of payment Cash 3 4 7 4 18
Stock 4 0 2 5 11
Relative size of target Large target 1 2 2 2 7
Source Compiled from Small target 6 2 7 7 22
CMIE prowess database

Table 5 Sample of control firms

increased from 2001 at a higher rate and then
Industry 2004 2005 2006 2007
declined in 2005–2006 and again revived in
Transport equipment 27 26 27 25 2007–2008 but then declined in 2007–2008 with a
Textiles 86 90 96 83 sudden fall in 2008–2009. In 2005–2006 the profit
Non metallic 23 22 22 22 after tax (PAT) of the companies declined by
Miscellaneous 36 37 37 41 17.24 %, so it has affected the EVA returns to
Metals and metal products 36 39 38 38 companies. However, both absolute EVA and Rate of
Machinery 53 58 60 55 EVA have gone up in 2009–2010.
Food and beverage 54 56 60 63 There are a number of positive EVA companies
Diversified 4 5 4 4 than negative EVA companies. There was the highest
Chemicals 143 144 146 145 number of negative EVA companies in the year
2001–2002. This is because of the fact that, in
Source Compiled from CMIE prowess database
2001–2002 PAT decline 0.45 % in 2001–2002 and
average net worth declined by 6.60 % compared to
2000–2001. There was the highest number of positive
• Method of payment (Stock & Cash)
EVA companies in 2006–2007 (Table 6).
• Acquisition experience (without acquirer experi-
Table 7 shows the results of the paired sample t test
ence and with acquirer experience)
without adjusting for industry.
• Type of deal (unrelated and related deals)
The performance of the acquiring firms has
The results of the study are discussed using both improved while the target firms have declined in the
paired t test and Wilcoxon Sum of Rank Test as below. post acquisition period. When firms are combined
Figure 1 shows the trend of EVA of manufacturing together, there is decline in performance in the post
companies that are part of BSE 500 index and also for acquisition period.
which continuous data are available from 1999 to 2000 The acquirers who have taken relatively small
till 2009–2010. The number of companies satisfied for target firms have performed better compared to the
the criteria is 190. firms who have taken larger target companies. Poor
Initially during 1999–2000 to 2001–2002, the performance for the relatively large target firm may be
aggregate EVA was negative, and then EVA value because of the inability of the acquirer to control (both
rose up to its highest level in the year 2007–2008 financial and human resources) a large size target firm.
while again it fell down in 2008–2009 possibly There may have occurred more of integration and
because of recession then. The rate of EVA has coordination problem.

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204 Decision (December 2013) 40(3):197–211

Fig. 1 EVA of
Manufacturing Companies
from 2000 to 2010. The
primary axis (Line Chart)
shows the EVA in absolute
terms in Rs. Crore. The
Secondary axis (Bar Chart)
shows the Rate of EVA in
percentage. Source
Calculated with data from
the CMIE prowess database

Table 6 Volume of EVA in manufacturing companies

Companies For the year ending March

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

?ve EVA 84 (44) 78 (41) 76 (40) 91 (48) 122 (64) 128 (67) 136 (72) 154 (81) 151 (79) 117 (62) 128 (67)
-ve EVA 106 (56) 112 (59) 114 (60) 99 (52) 68 (36) 62 (33) 54 (28) 36 (19) 39 (21) 73 (38) 62 (33)
PAT 74.41 92.20 91.79 146.98 224.65 284.73 311.78 474.46 574.40 453.82 601.47
Average net worth 670.10 723.44 771.20 829.53 945.87 1,135.97 1,390.18 1,741.05 2,262.96 2,863.51 3,415.98

Source compiled from CMIE prowess database

Figures in bracket represent percentages

Table 8 shows the paired sample t test results to
show the industry adjusted post acquisition perfor-
mance of manufacturing companies in India.
Similar to the performance of companies without
control firms, there are negative returns to the target
firm and combined firm. There is a decrease in the
EVA returns to the shareholders of large and small
acquirer companies in the post acquisition event. Both
in related as well as unrelated acquisitions there is no
improvement in the industry adjusted EVA returns.
The decline of performance in case of related acqui-
sition deals is statistically significant.
Since the sample of companies is small (\30), so
the performance is also evaluated using Wilcoxon
Sum of Rank Test. The results of the Wilcoxon Rank
Test are summarized in Table 9.
There is improvement in the performance of
acquirers after the acquisition in 11 companies while
in 18 companies the performance has declined. Based
on the positive ranks, the performance is statistically
insignificant (P C 0.05). Based on the positive ranks,
the performance of companies in unrelated acquisition
deals declined. The results show that there is no
statistically significant difference between pre and
post acquisition period performance (P [ 0.05)
(Table 10).
Successful acquisition deals are those post acqui-
sition performance is greater than the pre acquisition
period. Among these 33 companies, there are around
11 the acquisition deals those have a positive EVA
rate in the post acquisition period. The positive
performance is basically in the chemical and food
and beverage industry. Among these 11 deals, four
are in related deals. Among these 33 companies,
there are 19 acquisition deals those have a negative
EVA rate in the post acquisition period. Among
these 19 acquisition deals, seven are from unrelated
deals.

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Table 7 Post acquisition performance without adjusted for the post acquisition period. Companies are success-
industry ful both in related and unrelated deals.
Paired sample t test without industry adjusted returns
• The deal of 2004 Supreme Industries Ltd. (Chem-
Particulars Mean difference Sig. ical) vs. Supreme Petrochem Ltd. (Chemical)
in performance (2-tailed) • The deal of 2006 English Indian Clays Ltd.
Acquirers -0.01 0.79 (Diversified) versus Greaves Cotton Ltd.
Target 0.07 0.32 (Machinery)
Combined firms 0.02 0.43 The following shows those acquisition deals where
Non family 0.02 0.73 companies had a positive EVA rate in the pre
Family 0.02 0.46 acquisition period but negative EVA rate in the post
Relative small size of target -0.01 0.72 acquisition period. Most of the deals were done in
Relative large size of target 0.04 0.36 2007.
Small acquirer 0.01 0.88
• 2006 Deal GTN Industries Ltd.(Textiles) versus
Large acquirer 0.04 0.30
Patspin India Ltd. (Textiles)
Stock 0.02 0.49
• 2007 Deal Andhra Sugars Ltd. (Diversified) versus
Cash 0.03 0.57
Andhra Petrochemicals Ltd. (Chemicals)
Without acquirer experience 0.01 0.88
• 2007 Deal Ashok Leyland Ltd. (Transport) versus
With acquirer experience 0.03 0.44
Punjab Tractors Ltd. (Machinery)
Unrelated -0.01 0.75
• 2007 Deal Bajaj Hindusthan Ltd. (Food and
Related 0.07 0.17
Beverages) versus Bajaj Hindusthan Sugar and
Source processed data Industries. Ltd. (Food and Beverages)
• 2007 Deal RSWM Ltd. (Textiles) versus Cheslind
Table 8 Industry adjusted post acquisition performance Textiles Ltd. (Textiles)
Paired sample t test with industry adjusted returns Table 11 shows the performance of companies in
different industries. Performance of companies in the
Particulars Mean t Sig.
(2-tailed) diversified and miscellaneous industry has improved
after acquisition while in other industry the perfor-
Acquirer 0.01 0.26 0.80 mance has deteriorated in the post acquisition period
Target 0.10 1.56 0.13 compared to the pre acquisition period.
Combined firms 0.05 1.59 0.12 There are around ten deals that are made in the
Non family 0.02 0.64 0.64 chemical industry. Out of the 10 deals, seven deals
Family 0.05 1.55 0.13 were done in the same industry of the target firm.
Relative small size of target 0.02 0.79 0.45 Eight deals have positive EVA and one deal has a
Relative large size of target 0.06 1.42 0.17 negative EVA both before and after acquisition.
Small acquirer 0.04 0.91 0.38 Only one has changed from negative EVA to
Large acquirer 0.05 1.34 0.20 positive EVA.
Stock 0.03 1.20 0.26 There are three deals done in diversified industry
Cash 0.06 1.24 0.23 where the target companies are from textile, chem-
Without acquirer experience 0.04 0.68 0.53 ical and machinery. From the three deals, one deal
With acquirer experience 0.05 1.41 0.17 had a negative EVA before and after acquisition,
Unrelated 0.02 0.40 0.70 one deal has a negative EVA before acquisition but
Related 0.08 1.82 0.09 positive EVA after acquisition, one deal has a
positive EVA before acquisition but negative EVA
Source processed data
after acquisition. The 2006 deal between English
The following deals are those acquisition deals Indian Clays Ltd and Greaves Cotton Ltd has
where the companies had a negative return in the improved performance after acquisition in diversi-
pre acquisition period while positive EVA rates in fied industry.

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206 Decision (December 2013) 40(3):197–211

Table 9 Wilcoxon Rank

Category Post EVA–pre EVA Z Asymp. sig.
test for performance of
(2-tailed)
companies
Overall performance Combined firm -1.68 0.09
Relative Size of target Small -0.8 0.42
Large -1.42 0.16
Size of company Small -1.14 0.26
Large -1.1 0.27
Method of payment Stock -0.98 0.33
Cash -1.33 0.18
Previous acquisition experience Without acquirer experience -0.31 0.75
With acquirer experience -1.64 0.1
Type of deal Unrelated -1.96 0.05
Related -0.69 0.49
Source processed data

There were a total of six deals that are done in
this industry. Five deals have positive EVA both in
pre and post acquisition period. The deal between
Bajaj Hindustan Ltd and Bajaj Hindustan Sugar and
Industries Ltd has turned the positive EVA in pre
acquisition period to negative EVA in the post
acquisition period. Three deals made deals with
target company in food and beverage industry while
three deals with target company in the chemical
industry.
There was one deal in the sample, which was done
in the metal and metal products industry. The deal has
a positive EVA before and after acquisitions. Simi-
larly, there was one deal in the sample, which was
done in the miscellaneous industry. The deal has a
positive EVA before and after acquisitions.
One deal had negative EVA before and after
acquisition, one deal has deal positive EVA before
and after the acquisition, two deals turned from
negative EVA to positive EVA. Two deals in the
transport industry had positive EVA in the pre and post
acquisition period, while one deal has a negative EVA
both pre and post acquisition period.
Limitations of the study
• The period of study is up to 2004–2007, since
3 years post acquisition performance data are
required for the study.
• Only long term performance measures are consid-
ered. Short term returns as a result of announce-
ments of M&A (event studies) are not considered.
Long year is defined as 3 years only.
• Multiple M&A (same company making more than
one M&A deals within the sample period) are not
excluded from sample keeping in view the sample
size.
Summary and concluding remarks
This study attempted to evaluate the post acquisition
performance of manufacturing companies in India
new measures of corporate performance, i.e. Eco-
nomic profit. Although the results are subject to the
limitations noted above, this is an important finding in
academic literature in Indian M&A context given the
use of EVA to evaluate M&A performance. The poor
performance companies in post acquisition period
using the new EVA performance measure are not
different from the traditional performance parameters
from studies like Dickerson et al. (1997); Ooghe et al.
(2006); Pazarskis et al. (2006).
In the pre-acquisition period there are six negative
EVA companies and 23 positive EVA companies
while in post-acquisition period there are nine nega-
tive EVA companies and 20 positive companies. It
shows in the post acquisition period many companies
have failed to perform better compared to the pre—
acquisition period. There are 18 companies who have

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Decision (December 2013) 40(3):197–211 207

Table 10 List of successful and unsuccessful acquisition deals

Acquirer Acquirer industry Target Target industry

List of successful deals

E I D-Parry (India) Ltd. Food and beverage Coromandel International Ltd. Chemicals
Seshasayee Paper and Boards Ltd. Miscellaneous High Energy Batteries (India) Ltd. Machinery
Southern Petrochemical Inds. Corpn. Ltd. Chemical S P E L Semiconductor Ltd. Machinery
Supreme Industries Ltd. Chemical Supreme Petrochem Ltd. Chemical
Bajaj Hindusthan Ltd. Food and beverage Bajaj Hindusthan Sugar & Inds. Ltd. Food and Beverages
[Merged]
Golden Tobacco Ltd. Food and beverage G H C L Ltd. Chemicals
Cadila Healthcare Ltd. Chemical Zydus Wellness Ltd. Food and Beverages
English Indian Clays Ltd. Diversified Greaves Cotton Ltd. Machinery
Reliance Industries Ltd. Chemical Indian Petrochemicals Corpn. Ltd. Chemicals
A B G Shipyard Ltd. Transport equipment Western India Shipyard Ltd. Metals & Metal
Products
Coromandel International Ltd. Chemical Godavari Fertilisers & Chemicals Ltd. Chemical
List of unsuccessful deals
AIA Engineering Ltd. Metals and metal Welcast Steels Ltd. Non Metallic
products
Alchemist Ltd. Food and beverage Marksans Pharma Ltd. Chemicals
Indoco Remedies Ltd. Chemical Solvay Pharma India Ltd. Chemical
Maharaja Shree Umaid Mills Ltd. Textiles Andhra Pradesh Paper Mills Ltd. Miscellaneous
Ranbaxy Laboratories Ltd. Chemical Ind-Swift Ltd. Chemicals
Bombay Burmah Trdg. Corpn. Ltd. Diversified Bombay Dyeing & Mfg. Co. Ltd. Textiles
Federal-Mogul Goetze (India) Ltd. Transport equipment Federal-Mogul Goetze (India) Ltd. Transport Equipment
G T N Industries Ltd. Textiles Patspin India Ltd. Textiles
Ipca Laboratories Ltd. Chemical Mangalam Drugs & Organics Ltd. Chemicals
Ranbaxy Laboratories Ltd. Chemical Zenotech Laboratories Ltd. Chemicals
Spentex Industries Ltd. Textiles Indo Rama Textiles Ltd. [Merged] Textiles
Andhra Petrochemicals Ltd. Chemical Andhra Sugars Ltd. Diversified
Andhra Sugars Ltd. Diversified Andhra Petrochemicals Ltd. Chemicals
Ashok Leyland Ltd. Transport equipment Punjab Tractors Ltd. [Merged] Machinery
Bajaj Hindusthan Ltd. Food and beverage Bajaj Hindusthan Sugar & Inds. Ltd. Food & Beverages
[Merged]
R S W M Ltd. Textiles Cheslind Textiles Ltd. Textiles
Tata Global Beverages Ltd. (TATA TEA Food and beverage Mount Everest Mineral Water Ltd. Food & Beverages
LTD.)
Tata Motors Ltd. Transport equipment Automobile Corpn. of Goa Ltd. Transport Equipment

Table 11 EVA
Industry average values Pre M&A Post M&A Difference Change (%)
comparison across sample
EVA EVA
industries
Chemical 0.132 0.112 -0.021 -16
Diversified -0.094 -0.095 -0.001 1
Food and beverage 0.102 0.063 -0.042 -42
Metals and metals products 0.156 0.101 -0.055 -35
Miscellaneous 0.018 0.113 0.095 520
Textiles 0.023 -0.139 -0.161 -711
Transport equipment 0.037 -0.038 -0.075 -204

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208 Decision (December 2013) 40(3):197–211

experience
pre and post acquisition positive EVA and four

Acquirer
companies who have pre and post acquisition negative
EVA. It shows that there was no change in the

0
performance due to the acquisition event. Among

payment
Method
them two negative EVA companies turned positive
EVA companies while five positive EVA companies

of

0
turned negative EVA companies in the post acquisi-

acquirer
Size of
tion period. Seven percent has improved the com-
pany’s performance 17 % of sample companies who

0
have gone for acquisitions have failed to give positive

Relative
size of
return to their shareholders in terms of EVA compared

target
to the control firms. Around 76 % of the company’s

0
performances are indifferent to the acquisition event.

Ownership
It may be because of the fact that performance is

company
of target
evaluated on the economic profit or real profit rather
than the traditional measures.

1
The most interesting finding is that related deals

Type

deal
were more unsuccessful than unrelated deals. It may

of

0
be because of the fact that they are in diversified areas
which acted as putting eggs in different basket so as

2004

2004

2004

2004

2004
Year

deal
of
not to suffer from losses.
Adjusted for industry average, the performance
of companies had declined in the post acquisition
Non Metallic

Machinery
Chemicals

Chemicals
period. This is observed in case of all classifica-

Chemical
Industry

tions. However the decline is not statistically

Target

significant. The empirical findings indicate that

acquisitions are made for immediate profit rather

Solvay Pharma India

Welcast Steels Ltd.

International Ltd.
such deals are made because of different other

Batteries (India)
Marksans Pharma

motives like empire building, market consolidation/

High Energy
Coromandel

achieving market power, acquiring bigger size,

hubris. Overall, acquisitions have not resulted in
Target

Ltd.

Ltd.

Ltd.
the additional wealth creation in case of manufac-
turing companies in India.
Miscellaneous
Metals and

beverage

beverage
Chemical
Food and

Food and
product
Acquirer

Scope of future study

Industry

metals

The study can be applied in the cases of merger. EVA

can be used to verify the strategic alternative between
merger and acquisition. This study can also be
Seshasayee Paper & Boards Ltd.
List of sample firms

extended to other sectors.

E I D-Parry (India) Ltd.
A I A Engineering Ltd.

Indoco Remedies Ltd.

Appendix
Alchemist Ltd.

See Table 12.

Table 12
Acquirer

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 Table 12 continued
Acquirer Acquirer Target Target Year Type Ownership Relative Size of Method Acquirer
Industry Industry of of of target size of acquirer of experience
deal deal company target payment

Southern Petrochemical Inds. Corpn. Chemical SPEL Machinery 2004 0 1 0 1 1 1

Ltd. Semiconductor
Ltd.
Supreme Industries Ltd. Chemical Supreme Petrochem Chemical 2004 1 1 0 0 1 1
Ltd.
Bajaj Hindusthan Ltd. Food and Bajaj Hindusthan Food and 2005 1 1 0 0 1 1
beverage Sugar & Inds. Ltd. Beverages
[Merged]
Decision (December 2013) 40(3):197–211

Golden Tobacco Ltd. Food and G H C L Ltd. Chemicals 2005 0 1 1 0 1 0

beverage
Maharaja Shree Umaid Mills Ltd. Textiles Andhra Pradesh Miscellaneous 2005 0 1 1 0 1 0
Paper Mills Ltd.
Ranbaxy Laboratories Ltd. Chemical Ind-Swift Ltd. Chemicals 2005 1 1 0 1 1 1
Bombay Burmah Trdg. Corpn. Ltd. Diversified Bombay Dyeing & Textiles 2006 0 1 1 0 1 0
Mfg. Co. Ltd.
Cadila Healthcare Ltd. Chemical Zydus Wellness Ltd. Food and 2006 0 0 0 1 1 1
Beverages
English Indian Clays Ltd. Diversified Greaves Cotton Ltd. Machinery 2006 0 1 1 0 1 1
Federal-Mogul Goetze (India) Ltd. Transport Federal-Mogul Transport 2006 1 1 0 0 1 1
Goetze (India) Ltd.
G T N Industries Ltd. Textiles Patspin India Ltd. Textiles 2006 0 1 0 0 0 1
Author's personal copy

Ipca Laboratories Ltd. Chemical Mangalam Drugs & Chemicals 2006 0 1 0 0 1 1

Organics Ltd.
Ranbaxy Laboratories Ltd. Chemical Zenotech Chemicals 2006 1 1 0 1 1 1
Laboratories Ltd.
Reliance Industries Ltd. Chemical Indian Chemicals 2006 1 1 0 1 0 1
Petrochemicals
Corpn. Ltd.
[Merged]
Spentex Industries Ltd. Textiles Indo Rama Textiles Textiles 2006 1 1 0 0 1 1
Ltd. [Merged]
A B G Shipyard Ltd. Transport Western India Metals and 2007 0 1 0 1 0 1
Shipyard Ltd. Metals Product
Andhra Petrochemicals Ltd. Chemical Andhra Sugars Ltd. Diversified 2007 0 1 1 0 0 0
209

123
 Table 12 continued
210

Acquirer Acquirer Target Target Year Type Ownership Relative Size of Method Acquirer
Industry Industry of of of target size of acquirer of experience

123
deal deal company target payment

Andhra Sugars Ltd. Diversified Andhra Chemicals 2007 0 1 1 1 0 1

Petrochemicals
Ltd.
Ashok Leyland Ltd. Transport Punjab Tractors Ltd. Machinery 2007 0 0 0 1 0 1
[Merged]
Bajaj Hindustan Ltd. Food and Bajaj Hindustan Food & 2007 1 1 0 1 1 1
beverage Sugar & Inds. Ltd. Beverages
[Merged]
Coromandel International Ltd. Chemical Godavari Fertilisers Chemicals 2007 1 1 0 1 1 1
& Chemicals Ltd.
[Merged]
R S W M Ltd. Textiles Cheslind Textiles Textiles 2007 1 1 0 1 1 1
Ltd.
Tata Global Beverages Ltd. Food & Mount Everest Food & 2007 1 1 0 1 1 1
Beverage Mineral Water Ltd. Beverages
Tata Motors Ltd. Transport Automobile Corpn. Transport 2007 1 1 0 1 0 1
Of Goa Ltd.
‘1’ for ‘‘with acquisition experience’’, ‘‘cash’’, ‘‘related’’, ‘‘large’’, ‘‘family’’
‘0’ for ‘‘without acquisition experience’’, ‘‘stock’’, ‘‘unrelated’’, ‘‘small’’, ‘‘Non-family’’
Author's personal copy
Decision (December 2013) 40(3):197–211
 Author's personal copy
Decision (December 2013) 40(3):197–211
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