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Do Mergers & Acquisitions Pay Off

Immediately? 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.

INTRODUCTION
Mergers and Acquisitions (M&As) are considered as the important growth strategy-
for companies to satisfy the increasing demands of various stakeholders Krishnamurri
and Vishwanath (2010). Literature on theories of M&A shows that the motives of
companies behind going for M&A are gaining operating and financial synergy,
diversification, achieving economies of scale and scope leading to cost and profit
efficiency, acquiring mariagement skills, increase market power, get tax benefits,
(Weston et al, 2010; DePamphilis, 2010; Vijgen, 2007; Jensen, 1986; and Jayadev and
Sensarma, 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 and
Rajib, 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: leepsa@thapar.edu, n.m.leepsa@gmail.com
Assitant Professor, Vinod Gupta School of Management, IIT Kharagpur, Kharagpur, India 721302,
**
E-mail: csmishra@vgsom.iitkgp.emet.in
SOUTH ASIAN JOURNAL OF MANAGEMENT

returns through M&A. The studies also focused on the economic and financial
condition of the companies in the post M&A period. But as far as litei-ature reviewed
there is insufficiejit evidence regarding the period for which the impact of M&A can
be seen (George, 2007). •- ' . ' ' ' ' •
The present study is an attempt to find out'the time frame for observing the
performance of companies after M&A. With the increase in the Volume, value and
fiequency of M&A deals in India, there is also a need for constructive and realistic
framework for analysis of company performance after they went for M&A transactions
(Krishnamurti and Vishwanath, 2010). Hence, the study has attempted to look into
the performance of M&A transactions in recent times. This study examines the
acquisition performance by exphcitly analyzing the mobile average returns' which are
ignored by many of the earlier studies in this M&A research. In a nutshell, this, paper
try to bring together two sets of literature with empirical evidence fiom Indian
manufacturing companies: orie examining'the post-acquisition performance; and the
second 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 areas
focusirig on the research problem. This section reviews the relevant literature based
on two aspects:
a. The timing of accrual of returns from M&A—Does M&A effects reflects
immediately after the merger?
b. Returns based on performance parameters, viz., liquidity, solvency, and
profitability—Does companies improves the its hquidity, sblvency, profitability
after merger, then when?
POST M&A LIQUIDITY PERFORMANCE OF COMPANIES
Liquidity refers ,to short-term availability of funds in the company to meet its current
liabilities. It is one of the important parameters to judge the firm performance to meet
its current obligations. Kumar and Rajib (2007) used the liquidity measures in terms
of current ratio and quick ratio; solvency measures in terms of interest coverage ratios
and total debt ratios and the profitability measures in terms of return on net worth and
retum on capital employed. The authors found that companies that have lesser liquidity
position becomes a target.
Pazarskis et al (2006) using Current Ratio (GR) and Quick Ratio (QR) found that
the 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 with
a 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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the acquiring firm. Vanitha and Selvam (2007) found that the quick ratio of the
target company remains as per the traditional benchmark ratio of 1:1. before and after
the 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 of
the 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 obligations
so as to achieve continuing expansion and growth. It is one of the key financial
parameters to judge the financial soundness of the firm. Pazarskis et al (2006) using
total debt ratio found that the solvency ratios in terms of net worth/total assets, and
total 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 the
solvency position of the company. The authors also observed that from the second year
the financial independence and the cash flow coverage of debt reduces. The result is
inconsistent with the solvency posirion of the acquirer during the pre-acquisition
period. Thus, the acquirers depend more on debt during the post-acquisition period
in contrast to the pre-acquisition period. Kumar (2009) observed that post-merger
solvency position of the acquiring companies do not show any improvement when
compared with pre-merger solvency position.
POST M&A PROFITABILITY PERFORMANCE OF COMPANIES
Profitability refers to the ability of afirmto generate revenues after covering its expenses
or any types of cost involved in the business. Dickerson et al (1997) found that
acquisition gives no benefit compared to intemal growth in terms of profitability. There
is negative long-term effect on profitability of companies. Tambi (2005) using Return
on Capital Employed Ratio found merger bas not improved performance of companies.
Pazarskis et al (2006) found that ratios that evaluate the profitability decreased slightly
in the post-M&A period.
Kukalis (2007) found that the acquiring company outperformed the target company
in pre-merger performance only in the first and second year in terms of Return on
Assets (ROA), and only in first year in terms of Return on Sales (ROS) and Earnings
before Interest Tax Depreciation Amortisation (EBITDA). There are no statistically
different results between pre- and post-merger operating performance of the target
company. Interestingly, it is also found that the pre-merger performance of acquirer is
significantly 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 the
operational activities of companies is dissimilar across different industries in India.
Companies in the banking and finance industry enjoy positive rètums in terms of
profitability 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-products
sectors suffer fiom substantive negative retums, both in terms of profitability, retums
on investment and return ori assets. Ooghe et al (2006) advocate that acquisitions
provide negative retums in terms of profitability to the acquiring company, although
the result is statistically insignificant. The profit .margin of the combined firm (acquirer
and target) achieves its maximum profit margin in one year before the acquisition. In
the 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 ratios
of 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 better
nor worse than the control firms or industry during the first five years following the
acquisition. The acquirer get their share of the break-even required rate of return. If
timing of getting the return is considered then, the acquirer show poor performance
in the first three years. Above all, their performance deteriorates during the second
and third years after the acquisition year. Aggarwal and Jaffe (1996) found that the
abnormal retum in the pre-acquisition period of four years is.statistically insignificant
but abnormal retums are' significantly negative when the time frame is long (more
than four years) in the pre-acquisition period. Jakobsen and Voetmann (2003) found
that the market performs better than the acquiring companies by 10.4% after three
years, or industry adjusted returns of the acquiring company remain poor by 9.3% after
three years. The long-run abnormal retum in post M&A period is poor but in the short
ruh, the stock price shift in an upward direction during acquisitiori announcements.
The acquiring company shareholders get an abhormal retum of +0.71% around
announcement period.
Xiao and Tan (2009) using mobile average method found that companies enhanced
competence in the form of efficiency after adopting M&A strategy. In the year when
M&A took place, the companies showed superior performance compared to the industry
average. In the initial year and the beginning of the second year following M&A, there
was poor performance of many companies. It indicates that companies involved in
M&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 effects
are not seen in immediate years. In the long run, the operating performance of the
listed companies improve as in the process they remain under the environmental forces
like changing government policies, pressure fi:om the market and the efforts of the
companies themselves. As suggested by Singh (2009) there is no negative performance
in terms of cost and profit efficiency and if it is found in the initial years, then it is
recovered quickly.

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From all the above studies, it is observed that, there is no convincing facts that
whether the inconsistency in the resultsfi:omM&A studies is because of the. different
timefir.ameused in the studies or the parameters they have chosen or the difference in
the 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 gapsfi:om,the literature are discusse.d below in detail: • ...

RESEARCH GAPS
As per the. past studies, companies either enhance their performance or make poor
performance after M&As. But the question still remains unexplored specially in Indian
context about the duration of the effect of M&As on the companies. There is limited
literature 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 from
M&A in case of value creation of manufacturing companiesfiromM&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 in
the 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.

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SOURCES OF DATA, PERIOD AND SCOPE OF STUDY, TOOLS AND


TECHNIQUES USED IN THE STUDY . • . . ':
Data have been collected fi-om secondary sources. The sources for collecting the
acquisition deals and company annual reports for financial data are Centre for
Monitoring Indian Economy (CMIE) Business Beacon Database ahd CMIE Prowess
Database. The period of study isfi-om2000-01 to 2009-2010. This period is selected so
as 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 evaluation
of manufacturing companies in India before and after acquisition. Following Leepsa
and Mishra (2012a) and (2012b) the performance is evaluated using "paired two sample
t-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 through
M&A during the period under reference. ' '
SAMPLE DESCRIPTION
The sample belongs to companies in the manufacturing sector in ïndia. Acquisitions
of companies in Banking, Financial, insurance Services Industries (BFSI) aré excluded.
Financial performance, rneasures as mentioned earlier are not appropriate forfirnisin
the BFSI sector. The sample is further filtered so that three year pre- and a three year
post-acquisition data for both acquired and target companies are' continuously available.
The total number of sample firms has been taken based on ratios considering the
availability 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 manufacturing
companies.' .. . . •- • •

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The acquirer company's performance has


2-a. beerí adjusted by non acquirer companies
or control firm performance. Gontrol firm
s P is selected based companies in each industry
2 ^ which has not gone for any M&A deals in
I the sample period. Ratios are calculated and
rnedian values are taken to adjust the same
¡•al from the companies that have gone for
acquisition deals.

•a The flow chart (Figure 1) describes at a


2 glance the entire methodology for
conducting the research: ';
3
'G EINDINGS AND DISCUSSIONS OF
I.
1
U
RESULTS •
The.results of the study are discussed belbw
.5 iri the following categories^:
5 • PaiTed-Sample t-test on liquidity
2 Ratios.
U)

- GR of the Manufacturing
! Companies. .
I - QR of the Manufacturing
" • Gomipániés."
•" - Net Working Gapital/Sales Ratio
z u- ;(NWGS) of the Manufacturing
'. ". " Companies. - .. . . '
• Paired-Sample t-test on Solvency
CO
ratibs. . <
¡r
- Total Debt Ratio (TDI|.) of the
Manufacturing Gompanies.
- Interest Coverage Ratio (IGR) of
the Manufacturing Gompanies
• Paired-Sample t-test on Profitability
Ratios. • !
o In the paired t test results, values are in the form are
t-values of paired samples where * means the
significance 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, third
year ; similarly (T-1) (T-2) (T-3) refers t o first,
second, third year prior to acqusition year;. •

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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 performance


of companies in manufacturing sector before and after To find out the time frame of value creation or to know
acquisiton period. in which year companies have M&A effect

Application of Statistical Tool

On Accounting Performance Measures

Liquidity Profitability Solvency

' Current Ratio: Current Return on Capital Total Debt Ratio: Total
Assets/Current Liabilities Employed (ROCE): Debt to Total Assets
Quick Ratio: Quick Assets/ EBIT/Capital Employed Interest Coverage Ratio:
Quick Liabilities Return on Net Worth EBIT/lnterest
Networking Capital/Sales:. (RONW): Profit after Tax
(Current Assets minus current /Net Worth
liabilities) by Sales

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 measure
the firm's ability to meet its expenses or financial commitments in the short run. The

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1. current ratio has improved


significantly in the post-acquisition

540
Os period (Average of TO, (T+1))
d
compared to a year ( T - l ) ,
(T-2), Average of ( T - l ) and
(T-2).
o Si
d
Os . Table 2 shows the paired t-test
S . " d
ies

results on current ratio of


manufacturing companies.
I O ^
338*

o SI •'" Table 3 shows the paired t-test


o« 2b results on Quick Ratio (QR) of
manufacturing companies.
It has declined compared to pre-
IT) acquisition third year but the result
SH +! d
is insignificant. In the average year
of Tg, (T+1) the sample companies
have current ratio more than 2:1
o
"o which indicates that due to M&A
+b the liquidity of the company has
improved.

¡ Around 14 companies in the


0.543

S event year, 11 companies, in the first


year, 13 companies in the second year,
o
16 companies in the third year have
a current ratio greater than 2:1 which
.079

Os
d is considered as acceptable limit. In
t
(O
the year following the acquisition,
en even if some companies faced
problem inefficiently utilizing the
a
984
042

+ Os current assets, as the time passed,


H d
those companies improved their
capability to meet their current
liabilities.
d Some acquirers like Alchemist
Ltd., Indoco Remedies Ltd., G T N
Industries Ltd., Andhra
4) 3 Petrochemicals Ltd., R S W M Ltd.
3 -C had a current ratio more than three
Ave;

Pu h^
(T-

in T + 1 year which means their they

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have so much cash on hand and


'o P .
management is not properly investing
oo
o
cash and thus actions must be taken
regarding this.
Alchemist Ltd., Golden Tobacco
Ltd., Tata Global Beverages .Ltd., Tata
oq
d Motors Ltd. had a current ratio of less
than two before the acquisition event.

I o CH"
(U +
After the acquisition liquidity has
improved.
QR is a suitable measure of
I performance; to access liquidity for
s r—
industries that engage in long product
u Os
r-) 5 production cycles, just as in

I
•i
+H oo
d manufacturing. The QR has improved
significantly in the post-acquisition
period (Average of T^, (T+1))
o
compared to a year (T-1),
•a (T-2), Average of (T-1) and (T-2).
2 It has declined compared to third year
.a prior to acquisition but the result is
a insignificant, t h e ' average QR in
event year was 1.66 comparatively
g better than one year prior to the
acquisition that was a QR of 1.64;
ri which increased to 1.90 in the first
+
H year after acquisition year and
gradually decreased to 1.84 and 1.79
in second and third year, respectively.

+ Some of the companies in the first


H
year after acquisition have a quick
ratio around 5:1 which may not be also
a good sign as the. liquid assets are
kept idle, but most of the companies
approximately 15 companies in the first
year have a QR of 1:1. If compared
¿ with average of pre-three years with
an average of the past thre^ years, the
QR has declined eveii though
insignificant. It shows the liquidity
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positions of the companies have been

.
improved immediately after

0.844
0.862
-1.708

0.831
0.911
2b + i acquisitioh but in the long run it has
(A
1< °H ^ ^ educed. The significant results of the
ti QR came when compared with one
•tí
.« year prior acquisition with one year
1 lÈ +
,900
891
328
938
528

after acquisition. It means the


o o o o
ß J ^°^ liquidity position of the companies
tí (QR) is influenced by acquisition
•c L
225*'
age c

event which is immediately seen in


(T+1

B
249
328
605

u •VI the post-acquisition year. . The


1 o o o d
liquidity performance improves just
after the event year.
0) "o "^
•s r-l
NO
in 2
NO
ro
OO
ON
ON
oc
Table 4 shows the paired t test
S H +H .—c d d d d results on.Net working capital by sales
o 1
•c ratio of manufacturing companies.
«
ital/Sales R

(T+1) and
Average of

The liquidity performance of


(T+2)

issed Data
0.893
-1.298

0.882
0.936
0.908

United Breweries Ltd. is poor. The


QR in the two years before acquisition
o. is below, one while the QR above two
O after two years of acquisition; The
0.671
0.606

0.631

1
0.822
rking

T+3)

liquidity performance has


1
1 continuously declined three years
1 -M
before the merger of companies like
El'Parry (India) Ltd., Golden
^-, o. o
z
ON

jî p o- O oo ON Tobacco Ltd., Tata Global Beverages


o H d O d d
Ltd. which means that these
Test

companies must be finding difficulty


in taking care of short term
Ji
ON commitments. But after the
H o OO oo oo
+ NC
acquisition these companies.have
-0.

H o O d d
co
improved the quick ratio which
means acquisition has helped the
•1 in ON r-i ON
companies in speeding the process of
o O
•u •
ON ON

o d d conversion of receivables into cash,


and helping in c'overing the financial

"o -^
¿ obligations. EID-Parry (India) Ltd.
'S -^ and Ranbaxy Laboratories Ltd.
.s "« 00 . .- H
H H H re -—• performed well in terms of QR in pre-
Avei
(T-:

Ö 1 -T3
<^bg three years. But in the acquisition

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49
SOUTH ASIAN JOURNAL OF MANAGEMENT

* year when they combined with


Coromandel Intemational Ltd. and

,098^'

488,
382
Os
2'b + •*" T17 Zenotech Laboratories Ltd.,
r-i
1 1 1 1 respectively their pei-formance
deteriorated, but again in the event
*
hfl ^ ^ 0
*
Os
year in the post-acquisition three years
W h^ "1" 0 ro 00
S3 ^ H the combined firrn did well.
rJ rQ
1 1 1

1a 'S ' - * * *
#
In the average of acquisition year
and the subseiquent first year the
144,.014*
rage <

97**
(T+]

networking capital/sales ratio has


ô r—
r^
r-1
00
oc *
improved significantly compared to
125.

Oß iri
J ° °\ Î one year prior to the acquisition. In
tu:

1 1 1 ' ! •

u the third year also the ratio has


*
3 # *
00
» #

ro
improved compared to one year prior
tí M '^ [^ + •*• (-^
2 ¿ ¿T H 00 VO Os to the acquisition. - • . '
s¿ b ^ 2^ 1 1 "7
(U Table 5 shows the paired t test
•B
VlM results on debt ratio of manufacturing
O »
companies.
.209*

«
atío

a
456

00
Os

PC r-) The debt ratio is a measuring tool


J b"" n* T T
s to know the percentage of total assets
. funded by the creditors of the
Q
GO
0
T—(
0
Os
Os
1 company. Superior debt ratio indicates
0 00 ro 0
+ r-i that creditors have .the largest share
c
1 1
i 1
of money, which is being utilized to
p
make more profits. Acquisition has
est

§8 0 ro t— significant influence on total debt


• ^
Os Os
ratio which is reflected fiom the most
H 1" T•
of the significant results that came for
this ratio compared to other ratios.
n3
iU
•H-
r-H
*

00 fO Os The long term solvency is influenced


1^ ^O rO r—
•J-J
+
• ^ 1-H
r-- Os by this ratio specifically after
-0.

1
' ^ acquisition which can show whether
the company will be solvent or
Tab

bankrupt after the acquisition event.


.866

.679
064
,722

125

0 0 The debt burden has increased


T
"^ significantly in the acquisition year
and all the three years after
(A
acquisition when compared to the
fO
'o h^ ^ three years before acquisition period.
(U "^"^ 1
dû «
(J, CO """^
Ul •—1
CO >-C C - The companies might have borrowed
Ave;

and
(T-

. • more to finance the growth. It is

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observed that acquisitions increase


r«T ON the debt/equity ratio specifically for
UT O UT
S H. + + u-j UT
the first two years. This implies that
1 '7 the company's margins could be
affected due to irregularity in certain
^á ' supply contracts of the target firms.
íes

k
ä+^ 30 S The increase of debt by acquirers to
U-;
E p
ra
> o T T T T finance the acquisition may put
a
S •^ H
pressure on the target firm
Uo " o ;:;• * * ^j
performance in post-MSiA first and
,g, u' + o * *

UT
',
NO
second year. But gradually when the
•C Î5 G-' oq o oq
3 't .—c
1 1 , 'T company pays off its debt the
u
42 < H acquisition can contribute positively
i ON ÚT
OO
to long-term.

rt + Î^ +
U-;
In comparison of pre- and post-two
ÖH + b 1 T T 1* years average, the debt burden of the
• 'o combined firms decreased for the
o
•tí O Q' deals done by Indoco Remedies Ltd.,
OO
O
S oo g
UT
ON UT r^ Seshasayee Paper & Boards Ltd.,
u (^ LH .-H Q
s« • ^ ' ^ ^ •,
1' 1 i • 1 . Ranbaxy Laboratories Ltd. Around
n
u
•1»
S
11 companies have shown ihcreased
debt burden after the acquisition.
ó UT
g. Î Nine companies have shown no
st on ]Interest

.—1
p p
b T
.—1
1 Í change in debt burden after the
acquisition. When compared wqth
one year before and after the
.882
-0, .768
,858
,097

NC
acquisition the debt burden of the
• ' b "? T ^ ; combined firm has increased in the
acquisition year as well as in the post-
acquisition year, for deals done with
UT

,1 EID-Parry (India) Ltd., EngUsh


ON
• • • 1—(
r— UT ' »—1
• ^ NO NO U-) NO
H '7 Indian Clays Ltd., Bajaj Hindustan
n*
Ltd. , . : •
PH *
, • • ( . •

OO
*
O Table 6 shows the paired t test
'' O p. ON , ' • * •
p^
(U ir oc [-~
results on interest coverage ratio of
Tabl

, .—1

r manufacturing companies.

• - 1
The interest coverage ratio has
improved significantly in the post-
•' 2 - S '"o'TbC
' • ' •

.r , (U
Ctf) CQ oii"~I (-!< acquisition period. When the average
! and ('
[Avéra]

Avéra

(U J« H H of interest coverage ratio of


(T-1)
(T-1)

. ! •

acquisition year and first year after


SOUTH ASIAN JOURNAL OF MANAGEMENT

acquisition is compared to first,


ON second, third year prior to acquisitions
the results show significant change.
It has also increased in acquisition
i year and first and second year after
acquisition compared to third year

247

.233
J H
?
hefore acquisition. The ratio also
shows improvement in acquisition
IB year compared to first and second year
after acquisition. The firm's ability to
u 4» + Os
2b oq meet its payment of interest for deht
II o Ö
previously borrowed has. increased on
average in the post-acquisition second
tu
and third years compared to pre-
•5
365

acquisition second and third years,


2 + r-) "•"
respectively. The interest coverage
atio

SH + H
ratio has substantially increased for
the deal between Cadila Healthcare
'S Ltd. and Zydus Wellness Ltd. in post-
sîi acquisition first year then declined
Em]

and then again increased


exceptionally in the post acquisition
third year . The median interest
Os
coverage ratio in the three years
§ before acquisition along with
B acquisition year and three years after
B the acquisition is 3.17, 4.64, 5.02
<u ?5
Pi which indicates that the companies .

o have improved their debt paying
capacity by generating sufficient
revenues to meet its fixed obligation
o. or interest expenses.

CO The interest coverage ratio is


1 sb
r)
significantly higher for the acquirers
like Alchemist Ltd., Ranbaxy
Laboratories Ltd., IPCA Laboratories
Ltd. over the years compared to other
companies but after the acquisition
their debt paying capacity has
reduced which is refiected from the
II co ' • ^ w
decrease in the interest coverage ratio
l•§2 léi in the post-acquisition years.
Volume 20
52 N a 3
DO MERGERS & ACQUISITIONS PAY OFF IMMEDIATELY?
EVIDENCE FROM MERGERS & ACQUISITIONS IN INDIA

In one-year prior to acquisition 11


acquirers have a higher interest

062
043
146

977
TOT
2b + i coverage ratio than the target and
> «bb d
eight targets have a better ratio than
acquirer. Among them the interest
o
coverage ratio of five deals or the
^_
•<-i

tí n
CQ
O. ^ t^ + m
d Ö d d
combined firm has increased in the
1
6 acquisition year for those acquirer
c3 -< H
who had better performance than
*
target and six deals where the target
:.oio*
(T+;

L379*
:turii

.599
rage

.243
1.737

had a better interest coverage ratio


\^ > o 1 1 - than the acquirer. Two target firms
<: H
Ö who had done well as staridalone
he Mai

firms compared to acquirer when


032
127
164
081

^ + ;J + g their combined performance


<*- | b +b '-' 1—«
^^
decreased while six acquirers who
o < ^ performed well when the performance
•C
of standalone firms decreased as they
Data
.985
.100
,910

,407

NO combined with the target.


•i
o o d '-' o
J H "" Table 7 shows the paired t test
P results on the return on capital
r— ON employed ratio of manufacturing
§ r-
1
1.02
1.02

in
1.04
(T+

p p companies.
1—1

B There is no considerable change


(U
in return on capital employed of the
NO
g NC
oo
ON companies in the post-acquisition
o
1—1

b ^ ^
d i - H

period. The acquirer companies do


-Tes

not earn positive significant returns


after acquisitions may be because the
.736
669'

,653
,686

+ company's performance may be


b o o ? o
affected by the target company profit
Tabl 8:Pa ired-

earning capacity, the geographic


location of the target company,
-1.194
•O.404
-1.319
O.095
006'O

payment methods which would have


1 1 1 1 1
(U increased the cost compared to
revenue earned. The poor-ROCE
fi, may be due to poor profit margin.
t. . 1
(U ^
^ H ^ Table 8 shows the paired t-test
1) ai

1). (
T-1
T-2

rage
rage

(T-

•a -S H results on Return on Net Worth Ratio


«^bi of the manufacturing companies.

Na3
Volume 2Ö
53
SOUTH ASIAN JOURNAL OF MANAGEMENT

The profitability of the companies has improved in the acquisition year and one
yeai: 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. The
results suggest that the impact of M&A on companies are refiected in the immediate
years 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 their
assets or any equipments that are not frequently used by the firm. It would be better to
sell them and bring cash to invest in some profitable opportunities. There may be such
assets held by target firm, so it needs to be looked into. For improving the profitability
the acquirer should update its customers by reaching its customers of the target firm
or selecting a target that have a different location which would extend its market and
give them a new source of revenue. If the post M&A solvency is poor, then the acquirer
should utilize the source of cheap suppliers of the target company to meet long-term
obligations. The main thing that to be noted is that the acquiring firm should be alert
in the initial years, since the poor performance is in the initial years and then it
improves. It is recommended therefore to make M&A efforts to. fully integrate the
activities 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, the
study 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 the
impact on long-term period and M&A effects on a longer time frame. The study is
confined,to the manufacturing sector. There is ample scope for performance evaluation
in other sectors like service or financial sector. Since the study is conduced taking
into account M&A deals from different years and frorh different companies from
different industries, there might be variation in results if M&Afi:omdifferent industries
are studied separately. . , • '

SUMMARY OF CONCLUSION; ACADEMIC AND MANAGERIAL


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

Volume20 C/l Na3


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

because there may be some external factors that have influenced the perforinance of
companies. The present study made an attempt to find out up to which year after
M&À the results are significant and found that the impact of M&A is mostly reflected
in year of M&A event and one year post-M&A. Each and every acquisition is done
with different motives. Some deals may be done for short run benefits while some are
done for long run benefits. Generally companies acquire another firm for the long run
benefits like economies of scale keeping costs low. This indicates that even if the
cömpaiiies do not gain in a short period of time, thé acquisition will benefit in the long
run. This may riot be reflected in acquisition year or first year after acquisition. The
results of the present study confirm with Andre et al (2004) which found that mergers
perform poorly in the long run (three years). . .
The finding of the study has various implications for different users which are
discussed 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 year
would also have some effect since M&A would be perceived by investors as a chance
of increasing future values. In this study of effect of M&A event year is therefore
considered 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 academic
literature on ari area of the M&A methodology of the comparative small riumber of
studies that have examined the M&A iri a rising market like India.
ACADEMIC IMPLICATIONS '
Competition firom foreign firms, arrival of new technology, demanding attitude of
customers create an uncertain environment at the market place. Managers look for
strategies like M&A to cope with changing environments for survival and growth. In
such situation, the managers must be aware of the period in which they would gain
from strategies like M&A so that they wpuld.revise their strategies accordingly. Hence,
in this direction this research has greater managerial implication and contributes to
managerial practise in choosing between enhancing core competencies through internal
growth 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, IIT
Kharagpuf Source: Leepsa and Mishra (2012b). ' - - -' ' '

REFERENCES
1. Agrawal A and Jaffe J F (1996, May), "The Pre-Acquisition Performance of Target
Firms: A Re-Examination of the .Inefficient Mariagement Hypothesis". Retrieved
fiom http://finance.wharton.upe'nn.'edu/--rlwctr/papers/9606.pdf -

• - Volume2Ö ^ ^ Na3
SOUTH ASIAN JOURNAL OF MANAGEMENT

2. Andre P, Kooli M and LHer J F (2004), "The Long-Run Performance of Mergers


and Acquisitions: Evidence from the Canadian Stock Market", Financial
Management online Retrieved from http://findarticles.com/p/articles/mi_m4130/
. is_4_33/ai_n8689969/pg_8/?tag=content;coll accessed on April 5, 2011
3. DePamphilis D M (2010), Mergers, Acquisitions, and Restructuring Activities, Fifth
Edition, Academic Press. •
4. Dickerson A P, Gibson H D and Tsakalotos E (1997), "The Impact of Acquisitions
on Company Performance: Evidence from a Large Panel of UK Firms", Oxford
Economic Papers, New Series, Vol. 49, No. 3, pp. 344-361.
5. George R (2007), "Diversification and Firm Performance: The Moderating
Influence of .Ownership Structure arid Business Group-Affiliation", South Asian
Joumai of Management, Vol. 14, No. 3, pp. 66-94.
6. Jakobsen J B and Voetmann T B (2003), "Post-Acquisition Performance in the
Short and Long Run: Evidencefiromthe Copenhagen Stock Exchange 1993-1997",
The European Joumai of Finance, Vol. 9, pp. 323-342.
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.
8. Jensen M C (1986), "Agency Costs of Free Cash Flow, Corporate Finance and
Takeovers", American Economic Review, Vol. 76, pp. 323-329.
9. Krishnamurti C and Vishwanath S R (2010), "Mergers, Acquisitions and Corporate
Restructuring", South Asian Joumai of Management, Vol. 17, No. 2, pp. 169-171.
10. Kukalis S (2007), "Corporate Strategy and Company Performance: The Case of
Post-Merger Performance", The Intemational Jourrml of Finance, Vol. 19, No. 3,
pp.4475-4489^ .
11. Kumar B R and Rajib P (2007), "Characteristics of Merging Firms in India: An
Empirical Examination", Vikalpa, Vol. 32, No. 1, pp. 27-44
12. Kumar R (2009), "Post-Merger Corporate Performance: An Indian Perspective",
Marmgement Research News, Vol. 32, No. 2, pp. 45-157.
13. Leepsa N M and Mishra C S (2012a), "Post Acquisition Performance of Indian
Manufacturing Companies: An Empirical Analysis", Asia Pacific Financial Review,
Vol. 1, No. 1, pp. 17-33.
14. Leepsa N M and Mishra C S (2012b), "Post Merger Financial Performance: A
Study with Reference to Select Manufacturing Companies in India", Interruitional
Research Journal of Finance and Economics, Vol. 83, pp. 6-15.
15. Loderer C and Martin K (1992), "Post Acquisition Performance of Acquiring
Firms", Financial Management, Vol. 21, pp. 69-79.

Volume20
DO MERGERS & ACQUISITIONS PAY OFF IMMEDIATELY?
EVIDENCE FROM MERGERS & ACQUISITIONS IN INDIA

16. Mantravadi P and Reddy A V (2008), "Post-Merger Performance of Acquiring


Firms firom Different Industries in India", Intemational Research joumai of Finance
and Economics, Vol. 22, pp. 192-204. •
17. Ooghe H, Laere E V and Langhe T D (2006), "Are Acquisitions Worthwhile? An
Empirical Study of the Post-Acquisition Performance of Priva'tely Held Belgian
Companies", Small Business Economics, Vol. 27, Nos. 2/3, pp. 223-243.
18. Pazarskis et al (2006), "Exploring the Improvement of Corporate Performance after
Mergers-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.
20. Student's t-test, online Retrieved fiom http://en.wikipedia.org/wiki/T_test accessed
on November 24, 2012.
21. Tambi.M K (2005), "Impact of Mergers and Amalgamation on the Performance of
Indian Companies", The Economics Working Paper Archive Finance, pp. 1-14
22. Vanitha S and Selvam M (2007), "Financial Performance of Indian Manufacturing
Companies during Pre and Post Merger", Intemational Research joumai of Finance
and Economics, Vol. 12, pp. 7-35.
23. Vijgen D (2007, June 6), Shareholder Wealth Effects ofM&As in the Westem part of
Continental Europe. Retrieved November 23, 2012, fiom http://arno.unimaas.nl/
show.cgi?fid= 11292
24. Weston J, Chung K S and Hoag S E (2010), "Theories of Mergers and Divestures",
in Ghosh A K (Ed.), Mergers, Restructuring, and Corporate Control (190-222). New
Delhi: PHI Leaming Private Limited.
25. XiaoXandTanL (2009), "Research on M&A Performance ofListed Companies in
China based on EVA", paper presented at International Conference on Electronic
Comvnerce and Business Intelligence.

Volume 20 C7 N a 3
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CROMPTON GREAVES: A CASE STUDY ON WHAT MAKES A MERGER SUCCESSFUL


N. M. Leepsa
Research Scholar of VGSOM
IIT Kharagpur
n.m.leepsa@gmail.com

Chandra Sekhar Mishra


Faculty of VGSOM
IIT Kharagpur
csmishra@vgsom.iitkgp.ernet.in

ABSTRACT

Mergers and acquisitions (M&A) are the corporate strategies that help in achieving various financial,
operational and revenue synergies that not only strengthen but also accelerate the growth of corporate
firms. Like many other Indian companies Crompton Greaves, an Avantha Group company, has adopted
M&A as a strategy and has possibly improved the corporate performance on all the fronts. In this case
study an attempt is made to analyze the M&A strategy of Crompton Greaves and post M&A
performance by applying different financial metrics.

Field of Research: Crompton Greaves, Merger, Acquisition, Synergies, Economic Value Added (EVA)

----------------------------------------------------------------------------------------------------------------------------------

1. INTRODUCTION

Mergers and Acquisitions (M&As) are the corporate strategy that helps in achieving various financial,
operational and revenue synergies that not only strengthen and but also accelerate the growth of
corporate firms. M&As are not new phenomena in Indian corporate world. From 2000 to 2011, there
have been 3692 merger deals, 9713 acquisition deals that are announced in India with the acquisition
consideration of more than Rs.10, 000 billion (Source: Business Beacon CMIE database).History of M&As
witnessed various drivers of M&A growth like economic boom period, technological developments,
development of railroads and transportation, government policy, pivotal role of investment banks,
globalisation, stock market boom and deregulation. During 1990s, economic liberalisation was initiated
in India and corporate faced competition from foreign companies. Crompton Greaves made its first
merger deal in 1990 with Kerala Electric Lamp Works Ltd and rest is history. Now Crompton Greaves is in
acquisition spree from 2005 with nine overseas deals in last six years to acquire technological
competence, expand product portfolio, and make international presence especially in Europe and US.
Acquisition has always been part of Crompton Greaves growth strategy story. Thus, it is though
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provoking to evaluate the M&A performance of Crompton Greaves with focus on motives, anticipated
synergies and how it has achieved success through M&A.

2. RESEARCH OBJECTIVES

Keeping in view the above background the present study has been conducted with the objective of
finding out various strategic motives, impact, role of human resources, challenges behind the M&A deals
by Crompton Greaves.

3. METHODOLOGY AND DATABASE

For attaining various objectives cited above, the analysis has been conducted in different phases. In first
phase information has been collected from various online sources, newspapers, and magazines to find
out the objectives with which Crompton greaves have gone for particular deals. In this phase
information has been collected to find out the deal structure (method of payment, deal value) of specific
M&A deals made by the sample company. In the second phase, accounting and financial data are
collected for the standalone and consolidated firms, ratios are calculated and pre and post acquisition
performance are evaluated. In this phase the emphasis is on to know the financial synergies of the
company and to evaluate the impact of M&A deals on profitability, liquidity solvency, Economic Value
Added (EVATM) of the company. To draw proper inferences with minimum biasness, these ratios are
compared with peer group companies that have not adopted M&A as growth strategy. The time period
for the study of financial performance is 2000-01 to 2010-11.

4. COMPANY BACKGROUND: CROMPTON GREAVES LTD.

Incorporated in the year 1937, Crompton Greaves is engaged in designing, manufacturing and marketing
high technology electrical products and services related to power generation, transmission, distribution
and execution of turnkey projects. Crompton Greaves focus on three business groups, namely Power
Systems, Industrial Systems, and Consumer Products. The company manufactures a wide range of
products such as power & industrial transformers, HT circuit breakers, LT & HT motors, DC motors,
traction motors, alternators/ generators, railway signalling equipment, lighting products, fans, pumps
and public switching, transmission and access products. In addition the company also undertakes
turnkey projects from concept to commissioning. Its manufacturing plants are spread across Gujarat,
Maharashtra, Goa, Madhya Pradesh and Karnataka. Apart from the local markets Crompton Greaves has
spread business in the Southeast Asian and Latin American markets.

4.1. M&A deals made by the Company

Crompton Greaves have made several M&A deals since 1990 till date. It has adopted inorganic growth
strategy for survival and success. The following table shows the various M&A deals done by Crompton
Greaves as an acquirer.
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Table 1: Deals where Crompton Greaves is Acquirer

Deal Date Deal Type Target Company Swap Ratio/ Acquisition Value

31-Mar-90 Merger Kerala Electric Lamp Works Ltd. NA


31-Mar-97 Merger Kersons Manufacturing Co. Of India Ltd. 8:01
7-Aug-97 Merger Goa Electricals & Fans Ltd. 1:20
27-Sep-99 Merger Punjab Power Generation Machines Ltd. 1:20
23-May-00 Merger C G Polycrete Ltd. NA
3-Sep-04 Substantial Acquisition C G Energy Mgmt. Ltd. 3.7 crore
2-Jun-06 Substantial Acquisition Malanpur Captive Power Ltd. Rs. 16 Crore
26-Jul-06 Substantial Acquisition Ganz Transelektro Villamossagi Z R T NA
28-May-07 Substantial Acquisition Microsol Holdings Ltd. Rs.57.2 Crore
2-Jun-08 Substantial Acquisition Societe Nouvelle De Maintenance Transformateurs NA
15-Sep-08 Substantial Acquisition M S E Power Systems Inc. NA
24-Mar-09 Substantial Acquisition Avantha Power & Infrastructure Ltd.(APIL) Rs.2,27 Crore
4-Aug-09 Substantial Acquisition Brook Crompton Greaves Ltd. NA
28-Jan-10 Merger Brook Crompton Greaves Ltd. NA
30-Mar-10 Minority Acquisition Power Technology Solutions Ltd. Rs.2,04 Crore
28-Jan-11 Merger C G Capital & Investments Ltd. NA
19-May-11 Substantial Acquisition Emotron Ab Rs.3,70 Crore
27-May-11 Substantial Acquisition Q E I Inc. Rs.1,35 Crore
Source: CMIE Prowess Database

Crompton greaves have made seven merger deals and eleven acquisition deals as acquirer. Out of it in
ten deals it made substantial acquisition and one minority acquisition.

4.2. Possible motives behind M&A Strategy of Crompton Greaves

The motives for going for any inorganic growth strategy have changed over the years as per the
requirement of Crompton greaves in different years and in different situations.

Table 2: Crompton Greaves’s Motives Behind different M&A Deals

M&A Deals Crompton Greaves’s M&A Motives

Pauwels Group (Belgium, o To expand business globally through access to Belgium, Ireland, Canada, the US
2005) and Indonesia where market penetration by a foreign entity is difficult; to
increase turnover by 75 per cent in 2006 to position the company amongst
world's top ten power transformer manufacturers
Power Technology o To gain significant consolidation in the engineering, procurement &
Solutions (UK, 2010) maintenance (EPM) segment in the UK and get access to newer markets and
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expand product portfolio;


Sonomatra (France, 2008) o To enhance the company's capabilities in the services segment of its
transmission and distribution business;
Ganz (GTV) and o Hungary-based Ganz is a leading manufacturer of extra high voltage
Transverticum Kft (TV) transformers, gas insulated switchgear and other related components;
(Hungary, 2006)
Microsol Holdings (Ireland , o To become “full solutions provider” and to reinforce the power business’s
2007) ability to design, build and service world-class substations with state-of-the-art
automation;
Emotron Group o To bridge the gap in the automation solutions space for the firm's industrial
(Sweden,2011) business; to enable the company to offer integrated solutions along with its
profound application domain knowledge of motors in India; to build capability
for a global presence in offering comprehensive energy saving solutions with
latest power electronics technology;
MSE Power Systems (US, o To increase its strength as a systems integrator in the EPC international
2008) business arena, particularly in the renewable energy (wind) segment;
QEI Inc (US, 2011). o To exploit on the distribution automation market in North America, India and
Europe; and to access to customer references of large utilities in US and
electrified transit for railways;
Emerson (US, 2011). o To strengthen its position in US markets;
APIL (2009) o To expand its presence in power generation, transmission and distributing
business;
Source: Collected from various sources

4.3. Merger and Acquisition Benefits

Crompton greaves have benefited from various M&A strategies as follows:

• Acquisition has increased the company's brand value and is seen as a larger MNC.

• Acquisitions have helped the company to become more competitive and grab domestic and
export orders against stiff competition from global majors. M&A deals have increased core
competence in the power systems business and have brought more export earnings than any
other segment.

• Acquisitions have enabled the company to gain technological competence by collaborating with
its Irish and Hungarian counterparts on protocol development for relays and GIS development
respectively. Again with the acquisition of Emotron in 2011, Crompton Greaves is now able to
offer energy saving solutions with latest power electronics technology.

• Acquisitions have helped in expansion of product range through the target companies. For
example, during 2007-08, there were several new products / services offered by Pauwels such as
transformers filled with FR3 cooling liquid (natural ester); the prototype of a 5.5 MVA converter
transformer for RATP, the French metro; and the prototype of a 6.2 MVA bioSLIM transformer
for an off shore wind park.

• Acquisitions have helped to increase net profits during 2002 to 2007.


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4.4. Factors that influenced the Crompton Greaves’ success in M&A:

There are various factors that influenced the path in M&A which are described below:

• Family owned and Group affiliated Business: Crompton Greaves is under Avantha Group whose
focus is on strategic acquisitions and financial structuring. Promoters Shares held is 41.69 per
cent and Non-promoters Shares held 58.06 per cent.

• Corporate Governance Characteristics: An independent board makes independent decisions


and hence safeguard the interest of all shareholders specifically the minority shareholders in
major decisions of company like the M&As decisions. The percentage of independent directors
and non executive director has been always higher than non-independent and executive
director from March 2007 to March 2011 of Crompton Greaves.

• Industry Relatedness: Crompton Greaves had made deals with the companies that belong to
same industry group namely generators, transformers & switchgears whose main product are
electricity energy products and electric motors. The related deals like those done with Avantha
Power & Infrastructure Ltd, Brook Crompton Greaves Ltd, Malanpur Captive Power Ltd.

• Acquisition Experience: Crompton Greaves have acquisition experience since 1990. The
acquisition experience helped the company to gain competence and expertise to evaluate the
right target firms and post acquisition integration plans.

• Size of Target Firms: Crompton Greaves have chosen target firms which are smaller in size than
it in the event year, event being M&A.

• People behind M&A: The team under the stewardship of Chairman and CEO of Avantha Group,
Mr. Gautam Thapar included Mr. B Hariharan, Mr. Manoj Malhotra and Mr. Laurent Demortier
among others had ability to manange firm and make right choice of deal.

5. FINDING AND DISCUSSION

The findings are discussed in light of revenue synergies, cost synergies and financial synergies as follows:

Economic Value Added (EVA)1 is claimed as a true measure of performance since it considers cost of
capital. The following table EVA and rate of EVA of Crompton Greaves over a period from 2000-01 to
2010-11. It also shows the average EVA rate of group of comparable companies.

_________________
1
EVA=PAT-(Rf + (Rf- Rm)*Company Beta))*Average net worth where Rf=7% and Rm=15%.
Rate of EVA=EVA/Average Net worth
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Table 3: EVA and Rate of EVA

EVA Rate of EVA


Year
CG CF CG CF
2000-01 -118.81 -1.22 -0.40 -0.02
2001-02 -34.20 -1.8 -0.12 -0.04
2002-03 -32.63 -2.42 -0.10 -0.10
2003-04 20.30 -1.33 0.06 -0.05
2004-05 59.15 -0.47 0.16 -0.07
2005-06 99.70 -0.48 0.22 -0.04
2006-07 111.92 -0.36 0.19 -0.03
2007-08 200.12 1.34 0.25 -0.01
2008-09 239.75 -0.15 0.22 -0.03
2009-10 400.80 0.62 0.27 -0.03
2010-11 432.69 -0.49 0.21 -0.04

From 2004 onwards both EVA and rate of EVA have been positive for Crompton Greaves thereby adding
value for shareholders compared the industry counterparts. The rate of EVA is far superior for Crompton
Greaves over the similar companies that have not opted M&A. Improved EVA shows the M&A strategies
adopted by Crompton Greaves have boosted the operating efficiencies by combining product expertise
and market power or have proper management skills that have earned profit margin over and above the
cost of capital.

Table 4:

Year CR QR NWCS ATR ROCE RONW TDR ICR


CG CF* CG CF CG CF CG CF CG CF CG CF CG CF CG CF
*
2000- 1.4 2.3 0.9 1.3 0.0 0.1 0.8 1.0 0.0 0.1 - 0.1 0.3 0.2 0.2 2.52
01 1 1 3 3 4 5 8 9 2 1 0.29 2 7 3
2001- 1.4 2.4 1.1 1.2 0.0 0.1 1.0 0.9 0.1 0.0 0.01 0.0 0.3 0.2 1.09 2.2
02 7 1 3 6 2 6 5 4 7 9 4 4
2002- 1.3 2.4 0.9 1.3 0.0 0.1 1.0 0.8 0.1 0.1 0.08 0.1 0.2 0.2 1.56 3.17
03 9 3 9 3 6 6 4 9 3 2 2 8
2003- 1.2 2.1 0.9 1.1 0.0 3.7 1.2 0.8 0.2 0.1 0.22 0.0 0.2 0.2 3.26 7.69
04 9 3 2 5 4 1 9 1 9 1 2
2004- 1.4 1.9 1.1 1.0 0.1 0.1 1.6 1 0.2 0.1 0.29 0.1 0.2 0.2 6.07 4.98
05 5 7 7 8 4 7 7 1 2 3 2
2005- 1.3 1.9 1.1 1.0 0.1 0.1 1.6 1.3 0.2 0.1 0.31 0.1 0.1 0.1 7.84 5.13
06 6 6 3 6 1 2 9 1 9 4 5 3
2006- 1.3 2.1 1.1 1.2 0.0 0.1 1.8 1.7 0.3 0.1 0.29 0.1 0.1 0.1 10.6 15.6
07 6 4 2 2 9 6 6 6 3 3 2 2
2007- 1.2 1.9 1.0 0.9 0.0 0.1 1.8 1.3 0.5 0.2 0.34 0.1 0.0 0.1 16.4 10.0
08 4 9 4 9 8 4 6 2 3 4 2 1 7
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2008- 1.3 2.2 1.0 0.9 0.0 0.1 1.7 1.0 0.5 0.1 0.32 0.0 0.0 0.1 22.5 7.87
09 3 3 3 7 7 2 3 6 8 2 2
2009- 1.2 2.2 1.0 1.1 0.0 0.1 1.4 1.0 0.5 0.1 0.35 0.1 0.0 0.0 46.5 18.8
10 9 5 1 9 7 4 9 6 2 7 2 1 9 3 1
2010- 1.2 2.1 0.9 1.2 0.0 0.1 1.4 1.1 0.4 0.1 0.3 0.1 0 0.1 45.8 22.0
11 6 1 4 8 5 9 5 2 1 6 1 8
* CG: Crompton Greaves; CF: Control Firms

Table 4 shows that on average the current ratio, the quick ratio and networking capital ratio is lower
than the control firms. Crompton Greaves’ liquidity position is worse than those firms in same industry
who have adopted organic growth strategy. From 1994 to 2001, the ROCE of Crompton Greaves has
been lower relative to rival industries, but from 2002 till 2011, the company has been able to generate
higher returns compared to the firms who have not gone for any M&A deals. Similarly From 1992 to
2003, the RONW of Crompton Greaves has been poorer relative to comparable industries, but from
2004 to 2011, the company has been able to generate higher returns compared to control firms. It
indicates Crompton Greaves was able to control their target firms, made proper implementation and
integration thus experiencing superior returns. For 2005 and 2006 the Crompton greaves have higher
debt ratio as well as higher interest coverage ratio. But from 2008-2011, the Crompton greaves faced
favourable situation as the total debt ratio was higher for control firms but interest coverage ratio was
higher for Crompton Greaves. M&A create financial synergy. It is also found that Crompton Greaves had
improvements in operating cash flows from asset productivity compared to the median results for
control firms, specifically after 2002 when Crompton Greaves started adopting M&A due to loss making
phases in 2000-2001. Thus it is inferred that assets have been properly utilised by the company after
M&A to generate sales. This explains M&A increases assets productivity by eliminating facilities that are
unused.

6. CONCLUSION AND FUTURE RECOMMENDATION

Acquisition has made significant influence in Crompton Greaves performance in various ways. Keeping in
view various financial results it can be concluded that M&A improves performance which explains the
general hypothesis that successful M&A increases profitability which could be due to improvement in
efficiencies like cost reduction or enhanced market power or operating synergies. From the analysis
made it is found that M&A do not improve the liquidity position of firms since the companies that do
not went for any M&A deals have better liquidity position relative to Crompton Greaves. The solvency
position of the manufacturing companies improves after few years of M&As.

ACKNOWLEDGEMENT

This paper is a part of PhD program in Vinod Gupta School of Management, Indian Institute of Kharagpur
India.
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REFERENCES

Crompton buys Pauwels Group available from


http://www.hindu.com/2005/02/26/stories/2005022603001600.htm accessed on 2nd April 2012

Crompton buys Sonomatra for 1.3 mn Euros (2008), available from http://www.business-
standard.com/india/news/crompton-buys-sonomatra-for-13-mn-euros/38794/on accessed on
2nd April 2012

Crompton Greaves acquires Emotron for $82.2 Million (2011) available from
http://www.siliconindia.com/shownews/Crompton_Greaves_acquires_Emotron_for_822_Million
-nid-83761-cid-3.html accessed on 2nd April 2012

Crompton Greaves buys French firm Sonomatra for Euro 1.3 million (2008) available from
http://www.domain-
b.com/companies/companies_c/Crompton_Greaves/20080602_crompton_greaves.html accessed
on 2nd April 2012

Crompton Greaves buys US-based QEI for $30 mn, available from http://smartinvestor.in/pf/news-
74647-newsdet-Crompton_Greaves_buys_US_based_QEI_for_30_mn.htm accessed on 2nd April
2012

Sinha, V., & Mathew, J. (2005). Crompton Greaves acquires Pauwels available from
http://articles.economictimes.indiatimes.com/2005-02-25/news/27479170_1_crompton-greaves-
s-m-trehan-bm-thapar-group accessed on 2nd April 2012
Amity Management Review Copyright 2012 by ABS,
2012, Vol. 2, No. 2 Amity University Rajasthan (ISSN 2230 - 7230)

Merger Performance: The Marriage between SAIL and MEL


N. M. Leepsa*

The purpose of the study is to analyse the financial performance of Steel Authority of India Ltd (SAIL) after merger deal with MEL. The
financial statements are analysed for pre and post merger five years (2000-2010) by using seven financial ratios. The accounting approach
uses accounting measures and productivity measures of financial statements to evaluate the M&A success. In spite of creation
limitations, accounting ratios are considered as reliable and convenient for making analysis since financial statements are audited. Ratio
analysis is employed as is considered as a convenient technique to make a quantitative analysis of companies' performance. The results
show that the financial performance of SAIL in terms of profitability, liquidity and solvency has improved after merger. It indicates that
merger deals improve the financial performance of companies. The limitation of the study is that it only focused on the financial aspect of
merger but ignores which factor have impacted the deal's success and failure. Study can be made by controlling factors affecting steel
industries. It would enable the organizations to have a choice between organic and inorganic growth strategy. Case based research on
pre and post merger on steel companies is made which is few as far as knowledge is concerned. This paper is an attempt to look into a
specific deal by which it would make deep understanding of merger performance in India.
Keywords: SAIL, MEL, Merger, Acquisition, Financial Performance

Introduction There is evidence from various research studies


that shareholders have to face disappointing returns
In today's cut throat competition in rat race
after M&A. There is no positive return from the
pace, mergers and acquisitions are the corporate
merger (Meeks, 1977; Mueller, 1980; Chatterjee &
strategies that are used worldwide for getting
Meeks, 1996; Parrino & Harris, 2001; Ghosh, 2001;
various benefits like gaining market share,
Sharma and Ho, 2002; Salter and Weinhold, 1979
increasing the economies of scale and scope,
cited from (Bruner, 2004). The acquirers get return
reducing business risk, cutting costs, increasing
on assets same as control firms in the post
revenues, acquiring technological competence and
acquisition period. Hence, M&As are considered as
entering new market and geographies. The
a strategy that gives no cash outflow or results in
combining of two or more entities into one, through
Net Present Value of zero worth (Healy, Palepu &
a purchase acquisition or a pooling of interests is
Ruback, 1992). The return on assets for acquirers is
known as the merger (Investorwords.com). The
two per cent lower than for non-acquirers in the post
motives of the merger are to gain various types of
acquisition period (Dickerson, Gibson & Euclid,
financial, cost and revenue synergies. The
1997). The firms occupied in merger transactions are
regulatory aspect of companies has changed a lot
less profitable compared to industry counter firms
and M&A deals have increased compared to the pre
in terms of various profitability parameters like
liberalisation period. Liberalisation has made
return on equity, return on asset, and return on sales
Indian corporate to face competition from foreign
(Mueller, 1980 cited from Bruner 2004; Singh, 1975
companies which comparatively bigger in size and
cited from Daga, 2007). There is no improvement in
technological competence. In such circumstances
efficiency (Profit margin on sales adjusted for
mergers and acquisitions are considered as an
changes in input and output prices) of firm through
important growth strategy to survive and grow.
M&A (Cowling et al, 1980 cited from Daga, 2007). So
from the above studies, it is observed that acquirers
Review of Literature get a negative return, when they are compared with
In order to understand the impact of M&A deals on companies engaged in M&A transactions and
the financial performance of the company on companies not engaged in M&A transactions.
acquirer and the target firm's success and failure,
literature review has been made M&A studies. Return on capital for acquirers differ from
period to period. While there was increased in
return on capital for sample period 1975-78, there
was a decrease in return on capital employed in
1981-83 sample period (Herman & Lowenstein,
1988). There is post merger improvement of
* Research Scholar - Vinod Gupta School of Management, Indian companies involved in mergers. However, this
Institute of Technology Kharagpur, Kharagpur, West Bengal
increase is only for those firms that use pooling of
69
interest method (Ravenscraft & Scherer, 1989). The in nature for companies. The aim of the M&A
performance of the merged firms improves studies has been to see whether merger improve
significantly following their combination. Buyers, efficiency, profitability, liquidity solvency or not
targets, the combined firms under perform their and whether M&A deals should be motivated to
peers in five years before the merger, and increase or not. Thus, from the above literature it is
outperform their peers in five years after (Carline et concluded that accounting based studies show
al, 2004). Long term operating performance is mixed results. These mixed results may be because
positive but insignificant. Operating performance of studies made in different countries or using
as described by (Rahman & Limmack, 2004) is different performance variables or other deal
judged from return on sales and asset turnover . specific factors.
Return on sales is defined as operating cash flow to
sales while asset turnover is denied as sales divided Companies Background
by assets. Thus , in the post acquisition period the
A brief discussion on the background of SAIL
two parameters increase resulting in improvements
(acquirer) and MEL (target) is made below:
in long run operating cash flow performance
(Rahman & Limmack, 2004). Steel Authority of India Limited (SAIL)
Sometimes for same companies involved in
The Steel Authority of India Limited (SAIL) is
M&A may give both positive and negative returns.
one of the largest steel maker companies in India. It
Operating synergies in terms of extra cash flows are
has always remained in the top position among all
positive and financial synergies in terms of required
steel companies in the steel industry. The company
rate of return are negative after M&A (Seth, 1990).
is activities are fully integrated to serve as iron and
Pautler (2001) made literature survey and found
steel maker company. The company is engaged in
that pre merger and post merger studies provide no
producing both basic as well as special steels. These
clear answers to questions about the efficiency and
steels are utilized for various activities like activities
market power effects of M&As. In case of large scale
involved in household construction, engineering,
studies (those used large sample, as viewed by
power, railway, automotive and defence purposes.
Pautler, 2001) M&A are unsuccessful. There is
This is their secondary objective. The most
significant gain to target firms and little or no gains
important goal of the company is to export
to acquiring firms. Again there are price
products. The company remained among the top
enhancement and cost reduction in multiple merger
ten public sector Indian companies by continuously
cases.
improving its turnover. The core business of SAIL is
Review of above academic financial and to manufacture and sell various categories of steel
economic literature shows that number of studies products (Source: CMIE prowess database).
has measured the financial performance of
The different products of SAIL are hot and cold
companies' pre and post M&A period. Those studies
rolled sheets and coils, galvanised sheets, electrical
have focused on the impact of the post merger
sheets, structurals, railway products., plates, bars &
operating and financial performance in short and
rods, stainless steel, other alloy steels (Source: CMIE
long run period on shareholder's wealth. The
prowess database). Maharashtra Elektrosmelt
studies have focused on whether mergers and
Limited (MEL) is a subsidiary company which is
acquisitions are creating value or value destroying
under the ownership and management of SAIL. It is

Table 1 Background Details of Acquirer and Target Firm


Particulars Steel Authority of India Ltd. Maharashtra Elektrosmelt Ltd.
Industry group Steel Ferro alloys
Main product Finished Steel (Non-Alloy Steel) Ferro manganese
Ownership group Central Government - Central Government-
Commercial Enterprises Commercial Enterprises
Entity type Public Ltd. Public Ltd.
Incorporation year 1954 1973

Source: CMIE Prowess Database

70
located in Maharastra. SAIL is a government owned Research and Development Centre for Iron and
company and is controlled by the Government of Steel (RDCIS) at Ranchi with all required facilities.
India. Around 86 per cent shares of SAIL is held by The sole motive behind the centre is to investigate
Government of India (Source: CMIE prowess how to produce qualitative steel and to build up
database). new technologies that would aid the steel industry
in producing better quality steel.
SAIL produces ample varieties of long and flat
steel products. These products get huge orders from The important divisions of SAIl are located in
consumers both in Indian as well as international various parts of the country. For example, Bhilai
market. SAIL has also good distribution network Steel Plant (BSP) that is located in Chhattisgarh,
system. It has around thirty seven 'branch sales Durgapur Steel Plant (DSP) situated in West Bengal,
offices' which are located in around four regions of Rourkela Steel Plant (RSP) placed in Orissa, Bokaro
the country. Apart from it, it has the pride of having Steel Plant (BSL) located in Jharkhand and IISCO
twenty five departmental warehouses, forty two Steel Plant (ISP) situated in West Bengal. Apart from
consignment agents and twenty seven customer these are the integrated steel plants, there are also
care offices. Not only SAIl has a strong distribution some special steel plants like Alloy Steels Plants
network but also a strong marketing division. This (ASP) in West Bengal, Salem Steel Plant (SSP) in
marketing division of SAIl has more than 2000 Tamil Nadu, Visvesvaraya Iron and Steel Plant
dealers which works to supply qualitative steel (VISL) in Karnataka (Source: CMIE prowess
across all parts of the country. SAIL also posses a database).

Table 2 M&A deals done by Steel Authority of India Ltd


Deals where Steel Authority of India Ltd is the acquirer
Date Deal type Target company Price/Cost swap ratio
4th January 1999 Merger Visvesvaraya Iron & Steel Ltd 0
28-Jul-2000 Minority Acquisition Maharashtra Elektrosmelt Ltd 140
1-Sep-2004 Merger Indian Iron & Steel Co. Ltd 0
3-Sep-2005 Merger Neelanchal Ispat Nigam Ltd. 0
29-Oct-2005 Merger Maharashtra Elektrosmelt Ltd. 1:1.7
21-May-2006 Merger Rashtriya Ispat Nigam Ltd. 0
31-May-2006 Sale of Asset Malvika Steel Ltd. 0
15th Jun-2006 Substantial Acquisition Neelanchal Ispat Nigam Ltd. 0
21st June 2006 Merger Neelachal Ispat Nigam Ltd. 0
21st June 2006 Merger Bharat Refractories Ltd. 0
21st June 2006 Merger M O I L Ltd. 0
12th December 2008 Substantial acquisition Steel Complex Ltd. 83.8
Deals where Steel Authority of India Ltd is target
Date Deal Type Acquirer Company Price/Cost swap ratio
8th December 1999 Sale of asset Proposed 0
3rd February 2000 Sale of asset Proposed 0
5th March 2000 Sale of asset Proposed 0
21st April 2000 Sale of asset Proposed 0
16th March 2001 Sale of asset S A I L Power Supply Co. Ltd. 3,910.00
13th February 2002 Sale of asset Bokaro Power Supply Co. Pvt. Ltd. 5,600.00
22nd March 2002 Sale of asset Bhilai Electric Supply Co. Pvt. Ltd. 940
6th May 2002 Sale of asset Various Parties 2,000.00
12th April 2006 Sale of asset Unknown 0
31st May 2006 Minority acquisition Fiis 1,787.40
Source: CMIE Prowess Database

71
Maharashtra Elektrosmelt Limited (MEL) returns in spite of increase in the cost of power and
no supply of qualitative manganese ore. Again the
Maharashtra Elektrosmelt Limited was company managed to obtain technical know-how
incorporated on 17th April, 1974. The company is and engineering package from Uddeholm in 1986
located in Maharashtra. The central aim of MEL is to (Source: CMIE prowess database). ..
carry out manufacturing activities for producing
mild steel, other carbon or spring steel billets/ingots SAIL took over MEL as on 1st January 1986. Ltd.
that are derived from iron ore (Source: CMIE MEL became the the subsidiary of SAIL on on 18th
prowess database). October 1986. MEL transferred 82 per cent of its
shares to SAIL. The company went for
If the history of MEL is looked inside, then it diversification resulting in improvement in the
would be found that the company has entered many performance of the company. The company
agreements to continuously improve its technology expanded into value added products like medium
base and improve its production capacity. The carbon ferro manganese apart from improving its
company have made deal with Elkem-Spigerverket existing products. As on 31st March 1992, SAIL
a/s (ELKEM) of Norway in 1974. It was a technical owns 47, 87,935 number of equity shares of MEL. In
collaboration agreement for supplying know-how 1996, 50, 00,000 number of equity shares issued to
that would used for the smelting furnace and also to SAIL (Source: CMIE prowess database).
supply a range of patented designs and process. For
the purpose, around 24, 50,000 shares were taken up Merger Background
by the promoters and 1, 00,000 shares were kept to
The merger deal between SAIL and MEL was
give to the Development Corporation of Vidarbha
announced on 29th October 2005 with a swap ratio
Ltd. (DCVL). Then during August 1975 public were
of 1:1.7. The deal between mergers of MEL with
offered around 24, 50,000 shares at par. In the
SAIL was completed on June 14, 2011 with the
year 1985, MEL made another contract with
receipt of final order from the Ministry of Corporate
M/s. Uddeholm, a Sweden based company. The
Affairs. The following table shows the event dates of
collaboration was made for launching new
the merger event. It has been renamed as
technology in the converter that is required in the
Chandrapur Ferro Alloys Plant. Maharashtra
process of making steel. A year later during 1986, the
Elektrosmelt Limited (MEL) is a 99.12 per cent
company saw its production and turnover were
subsidiary of SAIL.
higher at 41,470 tonnes. It managed to get good

Table 3 M&A deals done by Maharashtra Elektrosmelt Ltd


Deals where Maharashtra Elektrosmelt is a target
Date Deal type Acquirer company Price/Cost swap ratio
29th October 2005 Merger Steel Authority of India Ltd. 1:1.7
28th July 2000 Minority Acquisition Steel Authority of India Ltd. 140

Source: CMIE Prowess Database

Table 4 Event dates of the merger event between SAIL and MEL
Event Date Event Name
29th October 2005 First media announcement
18th May 2006 Cabinet Clearance
25th May 2006 Acquirer Company Board meeting
15th April 2010 Merger Date w.e.f
10th June 2011 Government Clearance
13th July 2011 Deal Completed
30th September 2011 Date of Allotment

Source: CMIE Prowess Database

72
The merger benefits are discussed in following considered as event year as the impact of merger
points: starts from the date of the announcement of the
merger.
• The merger of MEL with SAIL is anticipated to
support the growth and expansion of MEL and Source of Data
also related investments which are linked with
various requirements of SAIL in relation to The database, Centre for monitoring Indian
ferro-alloy. Economy (CMIE) Prowess is used to collect the
secondary data of the two companies that includes
• SAIL is also looking for different opportunities the financial statements like profit and loss account
so as to establish a captive power plant with items, Balance sheet items, cash flow statement
appropriate capacity by making a joint venture items.
agreement with MEL. The plant would be based
on the location within the MEL plant area. The Tool and Technique
purpose for setting up such plant is to produce
cost-effective ferro-alloys. Ratios are used as to evaluate the current and
potential companies' performance to know whether
Research Methodology companies are profitable or not than the
competitors, the company efficiently uses its assets,
The research is carried out by following ways: enough cash and liquidity assets to meet its current
liabilities, it is generating an accepted rate of the
Research Objective return for shareholders, it has the ability to pay long
The aim of the study is to find out whether the term debt. Thus, ratio analysis is used after data are
merger of manufacturing companies improves the collected from the financial statements. For this
performance or not. Thus the following objectives purpose, profitability ratios, liquidity ratios,
are framed in the study: solvency ratios have been chosen to evaluate the
performance since they are considered as the most
• To evaluate out the liquidity position of SAIL,
reliable and efficient ratios to check performance of
MEL and the combined firm in the post merger
companies. Since real effects of the merger are seen
period
in the long term period when companies have
• To find out the profitability position of SAIL, enough time for integration and implementation of
MEL and the combined firm in the post merger merger, so five year average of the pre and post
period merger year has been taken for data analysis.
• To access the solvency position of SAIL, MEL
and the combined firm in the post merger
Results and Discussions
period With the help of financial data available in the
audited statements of SAIL and MEL, financial
• To observe the operating efficiency of SAIL,
ratios are calculated from 31st March 2000 to 31st
MEL and the combined firm in the post merger
March 2010.
period

Hypothesis
Chart 1 Pre and Post Merger Current Ratio
Based on the review of literature made and in order
Current Ratio
to fulfil the main objective of the study, following 2.50
hypothesis has been formulated: 2.18

1.95
Ho: Post merger performance improves after the 2.00
1.78
1.88

merger
1.50 1.39
1.34
Ha: Post merger performance does not after the 1.24
1.13
merger 0.97
0.92
1.00 0.85

Sample
0.50
SAIL is chosen as the sample for this study.
0.00
Sample Period 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Current Ratio
The sample period is from 2000 to 2010. 2005 is

73
The combined firm's performance has quick ratio of the company but after that there has
improved in terms of the current ratio. There is a rise been an increase in the quick ratio. A quick ratio of
in the current ratio of the company after 2005 1:1 is the standard norm for evaluating the accuracy
indicating that the merger has increased the of the information pertaining to going concern
liquidity of company by improving the ability of the solvency of a business. In post merger period, the
company to meet its maturing obligations. More company is able to maintain the norm which was
liquid assets might be kept intentionally to use the below one in pre merger case. The quick ratio is even
liquid funds for expansion purpose. As per the plans more than the standard norm 1:1 may be because the
of SAIL, it plans to invest around Rs.1500 crore in company plans expansion of business that might
expanding capacity and putting up a power plant. require more of quick assets.
There is a chance of building up a captive power
plant (investing around Rs 1200 crore) with the help The net working capital by sales ratio has
of joint venture inside the MEL so as to cost-effective improved in the post merger period compared to the
ferro-alloys. pre merger year. There is a steady rise in the net
working capital/sales ratio (NWCS) during the five
The post merger quick ratio has improved years after the merger took place. It indicates that
compared to the pre merger period. Even though in the degree of efficiency in the use of short term funds
the first year after the merger there was a fall in the has improved to generate higher sales.

Chart 2 Pre and Post Merger Quick Ratio

Quick Ratio
1.80
1.65
1.60
1.37 1.37
1.40
1.19
1.20

1.00
0.86 0.83
0.80

0.60 0.51 0.49 0.51


0.43
0.38
0.40

0.20

0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Quick Ratio

Chart 3 Pre and Post Merger Net Working Capital by Sales Ratio

Net Working Capital By sales


0.50
0.46

0.40 0.36

0.30 0.28
0.23
0.20 0.15
0.11
0.10

0.00 -0.04
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-0.09 -0.09 -0.08
-0.10
-0.19
-0.20

-0.30
Net Working Capital By sales

74
Chart 4 Pre and Post Merger Return on Capital Employed Ratio

Return on Capital Employed


0.70
0.64

0.60

0.50 0.46 0.45

0.37
0.40

0.30 0.27 0.27


0.21
0.20

0.10 0.06 0.07


0.00 -0.01
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-0.10
Return on Capital Employed

Chart 5 Chart 4 Pre and Post Merger Return on Net worth Ratio

Return on Net Worth


0.80
0.68

0.60 0.54

0.40 0.36 0.33


0.32
0.22 0.20
0.20

0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-0.18 -0.15
-0.20
-0.36
-0.40

-0.60

-0.80 -0.77

-1.00
Return on Net Worth

The company has been utilising the affected in 2008-2009 due to financial crisis
shareholders fund to the optimum level in the event worldwide. But if is compared with pre and post
year of merger but in the post merger years it has first and second year, then in the post merger period
failed to deliver good returns. In the second year the RONW has been better than the pre merger
after the merger the return on capital employed period.
increased compared to the pre merger second year,
but then the return has decreased in the five years in The combined firm's financial leverage was low
post merger year. up to three years in the post merger year, but it has
increased in the fourth and fifth year after the
The return on net worth improved in the merger merger. The reason may be that other factors have
year but declined in the post merger first year and influenced the company's debt position. Low debt
improved in the post merger second year, but equity ratio indicates that SAIL has repaid its debt
afterwards it has declined in 3rd, fourth and fifth over the years and is in a very good position to
year. The declining performance might have been borrow funds or debt for its future expansion plans.

75
Chart 6 Pre and Post Merger Total Debt Ratio

Total Debt Ratio


0.70

0.59
0.60 0.57
0.55 0.56

0.50

0.40 0.38

0.30
0.24
0.19
0.20
0.14 0.14
0.12
0.10 0.07

0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Total Debt Ratio

Chart 7 Pre and Post Merger Interest Coverage Ratio

Interest Coverage Ratio


60.00

49.68
50.00

40.00 38.91

31.08
30.00 27.53

20.00 16.59
14.35

10.00
3.86
0.02 0.59 -0.08 0.77
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-10.00
Interest Coverage Ratio

Chart 8 Pre and Post Merger Asset Turnover Ratio

Asset turnover Ratio


1.20
1.11
1.08 1.09
1.06 1.05

1.00
0.88
0.84

0.80
0.64 0.66
0.62 0.64
0.60

0.40

0.20

0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Asset turnover Ratio

76
post merger first year the interest coverage ratio synergistic effects of merger and then in the second
has declined, even though it has been better than the year the profit margin was lower due to both
pre merger first year. The company's ability to pay companies took time for adjusting to the merger, but
its debt has declined may be because it has been in afterwards the company's profit margin was higher
the initial year of merger which needs time for thus with higher asset turnover ratio.
integrating activities and improving performance to
pay back the debt. However in the second and third The following table depicts the pre and post
year the company was able to meet its financial merger company performance with explanations
charges by paying off the interest or fixed expenses. below it:
As the total debt ratio has increased in the fourth and Stage1: Without Industry adjusted Returns (or Without
fifth year, the interest coverage ratio has decreased Control/Comparable Firms)
in the same years.
The comparison of pre and post merger
As it is known that the asset turnover ratio liquidity performance ratios for the acquirer, target,
exhibits the relationship between the revenue and the combined firm showed that there is an
earned and the total assets of the company, a higher increase in the current ratio, quick ratio and net
asset turnover ratio indicates that the company's working capital ratio in the post merger period. The
total asset has been properly utilised to generate post merger profitability improved in both ROCE
sales or earn revenues. The asset turnover ratio and RONW positively. The debt reduced while the
decreased in the first year after the merger and then debt paying capacity increased which is reflected in
it has increased and after three years again it has a decrease in total debt ratio and increase in interest
decreased. It means that the company's profit coverage ratio. The turnover also increased in
margin improved in the initial year with the average in a post merger year.

Table 5 Five Year Average Pre and Post Merger Financial Performance
Financial Ratios Steel Authority Maharashtra Combined Firm Industry Difference
of India Ltd Elektrosmelt Ltd Median
Pre Current Ratio 1.03 0.64 1.02 2.08 -1.06
Post Current Ratio 1.84 1.34 1.84 2.35 -0.52
Difference 0.81 0.70 0.82 0.27 0.55
Pre Quick Ratio 0.47 0.25 0.46 1.21 -0.75
Post Quick Ratio 1.29 0.69 1.28 1.29 -0.005
Difference 0.82 0.44 0.82 0.08 0.74
Pre Net Working Capital/Sales -0.10 -0.19 -0.10 0.07 -0.17
Post Networking Capital/Sales 0.30 0.10 0.30 0.09 0.20
Difference 0.39 0.29 0.39 0.02 0.35
Pre Return on Capital Employed 0.08 -0.57 0.08 0.06 0.02
Post Return on Capital Employed 0.35 0.51 0.35 0.11 0.24
Difference 0.27 1.07 0.27 0.05 0.22
Pre Return on Net Worth -0.18 -107.14 -0.19 0.06 -0.25
Post Return on Net Worth 0.29 0.33 0.29 0.10 0.19
Difference 0.47 107.48 0.47 0.04 0.43
Pre Total Debt Ratio 0.53 0.38 0.53 0.36 0.17
Post Total Debt Ratio 0.14 0.01 0.14 0.35 -0.21
Difference -0.39 -0.37 -0.39 -0.01 -0.04
Pre Interest Coverage Ratio 1.04 0.04 1.03 1.65 -0.61
Post Interest Coverage Ratio 32.14 2391.18 32.31 2.19 30.12
Difference 31.11 2391.15 31.28 0.54 30.74
Pre Asset Turnover Ratio 0.76 2.04 0.76 1.24 -0.48
Post Asset Turnover Ratio 0.95 1.70 0.95 1.36 -0.40
Difference 0.19 -0.33 0.19 0.12 0.05

77
Stage2: With Industry adjusted Returns (or With that influence the performance of steel companies
Control/Comparable Firms) like global recession, availability of finance, cost
The combined performed better than the structure, level of competition-concentration in
industry in terms of liquidity. This indicates the different geographies, market position-market
firms who have not used merger strategy have not share and the customer profile, product mix-
done well in terms of three ratios used for liquidity. commodity and value added products, production
On average, the acquirer have performed well in cycle, rising energy cost, supply and demand,
terms of profitability compared to those in industry supply of raw materials, technology-cost
who have not gone for any M&A deals. The merger cutting/competitive, investment in R&D-
has led to financial synergy which is reflected in the innovations, and labour productivity.
increase in debt ratio and increase in the interest
coverage ratio, an average of five years in pre and References
post merger years. Bruner, R. (n.d.). Does M&A Pay? A Survey of Evidence for the
Decision-Maker, retrieved on 19th November 2012 from
http://www.fma.org/JAF/Bruner.pdf?&lang=en_us&out
Conclusion put=json
This study is conducted to find out the Bruner, R. (2004). Applied Mergers and Acquisitions. John Wiley
& Sons.
profitability, liquidity, solvency, the operating
Daga, V. (2007). Post Merger Profitability Analysis of
efficiency of SAIL after merger deal with MEL. The Shareholders: Evidence from Europe, Unpublished
results of the study showed that, there is a different Master's Dissertation, retrieved on 29th November 2011
impact of merger on different financial performance from http://edissertations.nottingham.ac.uk / 1094 /
parameters. Out of the eight ratios, on average of 1/07MAlixvd1.pdf
five years all ratios showed favourable performs Dickerson, A.P., Gibson, H.D., & Euclid (1997). The Impact of
Acquisitions on Company Performance: Evidence from a
before and after the merger, by considering both Large Panel of UK Firms, Oxford Economic Papers, New
with and without the industry adjusted returns. But Series, 49 (3), 344-361.
if we look year specific results, then return on capital Pautler, P.A. (2001). Evidence on Mergers and Acquisitions,
employed, return on net worth, interest coverage retrieved on18th May 2010 from http://www.ftc.gov / be /
workpapers/wp243.pdf
ratio, asset turnover ratio have declined and total
Rahman, R. A., & Limmack, R.J. (2004). Corporate Acquisitions
debt ratio has increased in the post merger fourth and the Operating Performance of Malaysian Companies,
and fifth year. The reason may be that the impact of Journal of Business Finance & Accounting, 31(3-4), 359-400.
merger doesn't remain during the long years as Narayanan, R. Y (2011). Centre okays Maharashtra Elektrosmelt
other players adopt the same strategy or many other merger with SAIL, retrieved on 22 December 2011 from
factors have influenced other than a merger during http://www.thehindubusinessline.com/companies/articl
e2256682.ece
this year.
Mel Merged With Sail, http://indscan.in/mel-merged-with-
sail/
Limitations Maharashtra Elektrosmelt Ltd amalgamated with SAIL , 18 July
There are certain limitations of this study. The 2011 , r e t r i e v e d o n 2 2 D e c e m b e r 2 0 1 1 f r o m
http://www.domainb.com/companies/companies_s/Ste
main limitation of this study is the lack of financial el_Authority/20110718_expansion_plans.html
data. Another drawback of the study is that it only MEL merges with SAIL, 18 July 2011 retrieved on 22 December
focused on the financial aspect of merger but 2011 from http://www.sail.co.in / showpressrelease.
ignores which factor have impacted the deal's php?id=264
success and failure. There might be certain inherent Maharashtra Elektrosmelt merges with SAIL, Tuesday, 19 Jul
2011, retrieved on 22 December 2011 from
limitations of accounting approach.
http://leeuniversal.blogspot.com/2011/07/maharashtra-
elektrosmelt-merges-with.html
Future Scope of Study Maharashtra Elektrosmelt Ltd, retrieved on 29th August 2012
from http://www.moneycontrol.com/company-
Future research in such area can be made to
facts/maharashtraelektrosmeltltd/history/MEL01
understand the impact of merger and acquisition by Scheme of Amalgamation, retrieved on 22 December 2011 from
taking M&A deal done in other sector like banking http://www.sail.co.in/MELper cent20Mergerper
and financial institutions. The same work can be cent20Scheme.pdf
extended by taking into account the industry Agenda for 100 days retrieved on 22 December 2011 from
average returns based on all steel companies and http://steel.nic.in/Agendaper cent20forper cent20100per
cent20days.pdf
then comparing the performance. It means the
Delisted Companies, retrieved on 22 December 2011 from,
performance of steel companies who have gone for http://www.bseindia.com/about/datal/delist/a-
the M&A deal (inorganic strategy) and who have delist.asp?alpha=M
not gone for the M&A deal (organic strategy). The Investorwords.com. (n.d.). Retrieved April 15, 2012, from
study can be extended by taking into consideration Investorwords.com: http://www.investorwords.com /
3045/merger.html
various factors other than mergers and acquisitions
78
Table: Pre and Post Merger Performance of SAIL

Post Networking Capital/Sales


Pre Net Working Capital/Sales
t-Test: Paired Two Sample for

Post Interest coverage ratio


Pre Interest coverage ratio

Post Asset turnover ratio


Pre Asset turnover ratio
Post Total Debt Ratio
Pre Total Debt Ratio
Post Current Ratio
Pre Current Ratio

Post Quick Ratio


Pre Quick Ratio

Post RONW
Post ROCE

Pre RONW
Pre ROCE
Means

Mean 0.90 1.67 0.39 1.09 -0.13 0.23 -0.14 0.40 -35.84 0.30 0.48 0.10 0.70 818.55 1.19 1.20
Variance 0.05 0.08 0.02 0.12 0.00 0.01 0.14 0.01 3813.43 0.00 0.01 0.01 0.33 1854 0.54 0.19
893.38
Observations 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Pearson
Correlation 1 1 1 -1 -1 1 -1 1
Hypothesised
Mean Difference 0 0 0 0 0 0 0 0
df 2 2 2 2 2 2 2 2
t Stat -20.03 -5.46 -10.06 -2.03 -1.01 66.24 -1.04 -0.09
P(T<=t) one-tail 0.00 0.02 0.00 0.09 0.21 0.00 0.20 0.47
t Critical one-tail 2.92 2.92 2.92 2.92 2.92 2.92 2.92 2.92
P(T<=t) two-tail 0.00 0.03 0.01 0.18 0.42 0.00 0.41 0.94
t Critical two-tail 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30

Source: Calculated and Evaluated

i - Acknowledgement - The variable definitions are taken from my Phd thesis (on going research work at VGSOM IIT Kharagpur) entitled
“Post Merger and Acquisition Performance: A Study with Reference to Manufacturing Companies in India.

79
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Find this Journal Online at
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Volume I Number-1 October-December 2012 ISSN : 2278-1838

Asia-Pacific
Finance and
Accounting Review
• The Impact of Rights Issue on Stock Returns in India
Akshita Agarwal , Prof. Pitabas Mohanty

• Post Acquisition Performance of Indian Manufacturing


Companies: An Empirical Analysis
N.M. Leepsa, Dr. Chandra Sekhar Misra

• Inter Linkages of Indian Stock Market with


Advanced Emerging Markets
Dr. Vanita Tripathi, Ms. Shruti Sethi

• The Relationship between Comprehensiveness of Corporate


Disclosure and Firm Characteristics in India
Prof. (Dr.) Sanjay Bhayani

• Financial Business Process Re-engineering in ABC Ltd.


Parijat Upadhyay, Anupam De
An International Quarterly Refereed Journal of
• Book Review
Asia-Pacific Institute of Management, New Delhi
Asia-Pacific Finance and Accounting Review
Vol. I, No. 1, Oct-Dec 2012
Chief Patron
Amarendra Kumar Shrivastava
Chairman
Asia-Pacific Institute of Management
Editor
Prof. Arindam Banerjee, Asia-Pacific Institute of Management, New Delhi, India
Editorial Advisory Board
Dr. Raj S Dhankar, Faculty of Management Studies, Delhi University, India
Dr. Madhu Vij, Faculty of Management Studies, Delhi University, India
Dr. Jai Prakash Sharma, Delhi School of Economics, Delhi University, India
Dr. Arindam Bandyopadhyay, National Institute of Bank Management, Pune, India
Dr. D K Batra, Asia-Pacific Institute of Management, New Delhi, India
Dr. A N Sarkar, Asia-Pacific Institute of Management, New Delhi, India
Dr. Chetan Bajaj, Asia-Pacific Institute of Management, New Delhi, India
Faculty Advisory Board
Prof R K Srivastava, Prof. Ravindra Bhatia, Prof. Alok Pandey
Prof. A K Viswakarma, Prof. R. Ganeshan

Asia-Pacific Finance andAccounting Review is published quarterly byAsia-Pacific Institute of Management,


New Delhi. Copyright © Asia-Pacific Institute of Management, New Delhi. The views expressed in this
journal are those of the authors. No part of this publication may be reproduced in any form without the written
consent of the publisher. All works published in this journal are blind reviewed as per the standard procedures
of refereed journals. The Journal focuses on theoretical, applied and interdisciplinary research in Finance,
Accounting & Related Areas. For online version fo AFAR, log on to www.asiapacific.edu/far or Contact Mr.
Arindam Banerjee, Editor (AFAR), at abanerjee@asiapacific.edu

Asia-Pacific Finance and Accounting Review


Asia-Pacific Institute of Management
3 & 4 Institutional Area, Jasola, New Delhi-110 025
Tel. (011) 42094800, Mobile 9711694689
E-mail: abanerjee@asiapacific.edu, arindam20011@gmail.com
Website: www.asiapacific.edu/far

Published by
Asia-Pacific Institute of Management
3 & 4 Institutional Area, Jasola, New Delhi-110 025
Asia-Pacific Finance and
Accounting Review
Volume I Number-1 October-December 2012 ISSN : 2278-1838

An International Quarterly Refereed Journal of

Asia-Pacific Institute of Management, New Delhi


Asia-Pacific Finance and
Accounting Review
Volume I Number-1 October-December 2012 ISSN : 2278-1838

Contents
• The Impact of Rights Issue on Stock Returns in India Akshita Agarwal and Prof. Pitabas Mohanty 5 - 16

• Post Acquisition Performance of Indian Manufacturing N.M. Leepsa and Dr. Chandra Sekhar Misra 17 - 33
Companies: An Empirical Analysis

• Inter Linkages of Indian Stock Market with Dr. Vanita Tripathi and Ms. Shruti Sethi 34 - 51
Advanced Emerging Markets

• The Relationship between Comprehensiveness Prof. (Dr.) Sanjay Bhayani 52 - 66


of Corporate Disclosure and Firm
Characteristics in India

• Financial Business Process Parijat Upadhyay and Anupam De 67 - 87


Re-engineering in ABC Ltd.

• Book Review Malhar Majumder 88 - 89

An International Quarterly Refereed Journal of

Asia-Pacific Institute of Management, New Delhi


3

EDITOR’S NOTE

Welcome to the inaugural issue ofAsia-Pacific Finance andAccounting Review (AFAR).


Around six months back, when we decided to come out withAFAR, the goal was simple. The goal was to make
AFAR a leading journal in the area of finance and accounting, where academicians, scholars, and researchers
would be excited to publish research papers, case studies etc. The journey has started. It took lot of
underpinning during the last six months to come out with this first issue, which is in your hand. On behalf of
Asia-Pacific Institute of Management (AIM), and Asia-Pacific Finance and Accounting Review (AFAR), it is
our pleasure to introduce the inaugural issue.
AFAR is committed to publish high quality empirical and theoretical research papers in the area of finance,
accounting, and allied areas. The Mission of AFAR is to publish prominent research papers and case studies in
the area of finance and accounting, which will enrich, extend, and build the theoretical framework as well as
application of knowledge. Starting from this issue,AFAR will be published four times a year.
This issue of Asia-Pacific Finance and Accounting Review contains four peer reviewed articles, and a case
study. The first by Akshita Agarwal and Pitabas Mohanty discusses the impact of rights issue on stock returns
in India. The second paper is an empirical study about post acquisition performance of Indian manufacturing
companies authored by N M Leepsa and Dr. C S Mishra The third paper is authored by Dr. Vanita Tripathi, and
Ms. Shruti Sethi, which examines both short-term and long-term linkages between Indian stock market and
advanced emerging markets. Corporate disclosure is an important global issue, which requires intensive
study. Dr. Sanjay Bhayani explores this issue in his AICTE funded research paper. Parijat Upadhyay and
Anupam De deliberated on Financial Business Process Reengineering in Reliance Industries Limited in the
case study section. Nature gave us water, which is supposed to be freely available to all of us. But in modern
world, how water is becoming a major business commodity is discussed in book review section.
In a sense,AFAR is a toddler with a long journey ahead. In this occasion, I would like to thank our contributors,
reviewers, academicians, and editorial board members for their valuable support and contribution. Let us wish
a long and successful journey ahead!

Arindam Banerjee
Editor (AFAR)
Email: abanerjee@asiapacific.edu
Cell: 9711694689

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Asia-Pacific Finance and Accounting Review
Vol. I, No. 1, October - December 2012
pp. 5-16, ISSN: 2278-1838
www.asiapacific.edu/far

The Impact of Rights Issue on


Stock Returns in India
Akshita Agarwal 1, Prof. Pitabas Mohanty 2

This study examines the stock price reaction to announcement of 205 rights offer of equity in India made during the
period April, 2000 to March, 2011. It adds to the limited study of impact of rights offer conducted in the Indian
context where rights offer is the most preferred for subsequent equity issue. We observe positive but statistically
insignificant market response to the rights issue. The results are consistent with those observed in developing
countries. Moreover, the abnormal returns observed around the announcement date hold a negative relationship
with decrease in leverage and the price discount offered in the rights issue.

Key Words: rights issue, under-pricing, announcement effect

Introduction Veeraraghavan (2008) and Suresh and Naidu (2012)


report insignificant excess return on the announcement
In a rights issue, the existing shareholders get the right to date by the Nifty stocks. Miglani (2011) uses data for
buy additional shares issued by the company. Since the only 32 rights issues, while Suresh and Naidu (2012) use
additional shares are inevitably issued at a discount to the only the Nifty stocks to conduct their studies. This lack of
current market price, the rights issue can be compared to uniformity in findings and the smaller size of the sample
an in-the-money call option. Theoretically the rights motivated us to conduct a similar study in India (with a
issue should not have any effect on the stock returns, as a much larger sample size) to find the reaction of stock
rights issue is nothing but a portfolio of a public issue at market to the announcement of the rights issue.
the current price and a bonus issue (i.e., stock dividends).
In an informationally efficient market, any new issue of Even in a reasonably efficient market, the market’s
equity at the current market price, combined with the reaction may be non-neutral if there is information
bonus issue will merely decrease the stock price after the asymmetry, or if the announcement of the rights issue
stock goes ex-rights. signals about the poor quality of the projects being
accepted by the management. Secondly, as the debt-ratio
Empirical research, however, shows that the market’s of the firm falls after the rights issue, the market may
reaction to a rights issue is not always value-neutral. react negatively as the ratio of the present value of tax
These studies have documented mixed results with shield to the firm value falls after the rights issue.
positive average stock market reactions in some
countries (Finland, Japan, Norway, Switzerland, Sweden Our motive in this paper is two-fold: i) to understand if
and Greece) and statistically significant negative the market reacts to the announcement of the rights issue
announcement effects in others (US, UK, Australia, in India, and ii) to understand the different firm-specific
Hong Kong, Korea etc.) (See Marisetty et al (2008), factors that can explain the change in the value of the
Shahid et al (2010), Tsangarakis (1996), Adaoglu (2001), stock after the announcement. In the Indian market,
Kang and Stulz (1999), Eckbo and Masulis (1992), and majority of the subsequent equity issues are sold through
Owen and Suchard (2008).) In India, while Miglani rights offering and our study demonstrates that
(2011) report significant excess returns on the announcement of rights offering (made between April
announcement date, Marisetty, Marsden, and 2000 and March 2011) are met with positive but

1
Cairn Energy India Limited, INDIA (E-mail: akshita.agarwal@ymail.com)
2
XLRI, School of Business and Human Resources, Jamshedpur, INDIA. (E-mail: pitabasm@xlri.ac.in)
6

statistically insignificant market response. These results Neutral Event hypothesis. We also find strong evidence
differ from those obtained in developed markets such as of the Decreased Leverage hypothesis and Increased
US and UK but are consistent with the results obtained in Liquidity hypothesis. However, we only find partial
lesser developed markets of China, Finland and Norway. evidence of the Overvaluation and Overinvestment
Our study adds to the limited studies conducted in this hypotheses. The rest of the paper proceeds as follows.
field in India (Marisetty et al, (2008)) and helps to Section 2 reviews the set of literature in this area. Section
understand the relevance of firm specific and issue 3 describes our model. We also give details of our data in
specific factors in the Indian context. We utilise event this section. Section 4 reports our key results. Finally,
study methodology to examine market response to rights section 5 concludes the study.
offer during the specified period and then investigate the
determinants of the abnormal returns observed during the
Literature Review
announcement date. We do not use the effective date as Empirical results on the reaction of the market to rights
the market comes to know of the issue on the issue made by companies are mixed. Capital markets in
announcement date itself and in an efficient market, the the U.S. and UK, for example, react negatively to rights
entire reaction of the market would be felt on the issue announcements whereas the reaction of markets in
announcement date itself. China, Finland, and Norway is neutral to the rights
announcements (Shahid et al (2010), Tsangarakis (1996),
We propose five possible hypotheses that may explain
Adaoglu (2001), Kang and Stulz (1999), Eckbo and
the stock price reaction to the announcement of the rights
Masulis (1992), and Owen and Suchard (2008)). These
issue. Our first hypothesis, the Value Neutral Event
differences can be explained by sample sizes and country
hypothesis argues that in an informationally efficient
specific factors such as severity of adverse selection
market, rights issue should have no effect on the
problems, structural differences in issuing firms,
shareholders’ wealth and hence it predicts no reaction
liquidity, price elasticity of assets in small capital
from the market on the announcement date. However,
markets and tax and regulatory differences (Owen and
following Myers and Majluf (1984), we propose a
Suchard, 2008).
second hypothesis, namely, the Overvaluation
hypothesis which argues that management would go for Tsangarakis (1996) finds that the statistically significant
an equity issue when the stocks are overvalued and the positive abnormal stock returns to rights issue
market would react negatively to the rights issue announcements in Greece are primarily due to the
announcement as it signals overvaluation of the stock. If amount of capital raised relative to the existing capital,
the market believes that the management is investing the relatively larger ownership concentration and the market
funds raised in negative NPV projects, then the stock conditions prevailing prior to the rights issue
price may decline even if there is no signalling of announcement. Kang and Stulz (1999) further support
overvaluation of the stock. We, therefore propose this finding and report a significant positive
Overinvestment hypothesis that argues that if the rights announcement effect of 2.2% in Japan. Shahid et al
issue announcement signals about the poor quality of the (2010) observe positive market reaction after the
projects, then the market reaction will be negative. announcement of rights issue on the Board of Meeting
Rights issue also decreases the leverage of the company date in China. Miglani (2011) also reports positive excess
and hence the market revises its valuation of the tax returns from India.
shields that leverage offers to a company. We propose Andrikopoulos (2007) documents long term
Decreased Leverage hypothesis, our fourth hypothesis underperformance following rights issue across all
that argues that the reaction of the market to the rights industries. He reports evidence that post issue negative
announcement should be negative. Finally, we propose a performance can be considered as the reaction of
fifth hypothesis, Increased Liquidity hypothesis, that investors to prior excessive stock valuations and
argues that the fall in the price of the stock makes the reaffirms the information asymmetry hypothesis and
stock more attractive to the retail investors and hence the managers overconfidence hypothesis. Owen and
market should react positively to the rights Suchard (2008) find that the announcement of rights
announcement. issue of equity in Australia is met with a significant
Overall, we find that rights issue has positive but abnormal return of -1.83% and these abnormal returns
insignificant effect on the stock returns on the continue even after the announcement. Balachandran et
announcement date. This is consistent with the Value al (2007) observe average abnormal return of -1.74% for

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
7

a three day announcement period over a sample of 636 basis. Thus the rights offering acts as a signal to outside
rights issue announcements inAustralia. investors of high degree of private benefits in the firm
Announcement effects of rights issue in US have been and is interpreted negatively leading to negative
found to have negative effect on stock returns in all the abnormal returns after announcement date.
research studies. Eckbo and Masulis (1992) document Jung, Kim and Stulz (1996) argue that when managerial
statistically significant two day announcement period interests (agent) are not aligned with those of
return of -1.03% for industrial users and -0.53% for shareholders (principal), managers may choose to invest
utility users in standby rights offering. Jung, Kim and in value destroying opportunities aimed at fulfilment of
Stulz (1996) report that announcement of seasoned personal objectives at the expense of shareholders’funds.
offerings of common stocks in the U.S. leads to a 3-4% Investors’ awareness about such potential misuse of
average abnormal decline in stock prices in a period of funds raised in rights offerings leads to negative reaction
two days. Ngatuni et al (2007) observe from a sample of to the announcement.
818 rights issue that 63.57% of the issuing firms Masulis and Korwar (1986) argue that firms on the
experienced negative post-announcement abnormal average are underleveraged and thus fail to take the full
returns statistically significant at 1% level. Gajewski benefit offered by tax shield of debt. The announcement
and Ginglinger (1998) document significantly negative of rights issue further increases the equity and lowers the
abnormal returns around announcement dates in France. debt to equity ratio. The decreases in leverage through
Marisetty, Marsden, and Veeraraghavan (2008) and equity issues are thus interpreted negatively and lead to
Suresh and Naidu (2012) report insignificant excess negative abnormal returns at the announcements.
return in India.
Scholes (1972) argues that the demand curve of each type
Various explanations have been offered to explain of security is downward sloping and as per the principle
market reaction to announcement of rights issue by firms. of ceteris paribus the price of a block of shares is
Myers and Majluf (1984) argue that the market reacts negatively related to demand. Thus, rights issue
negatively to any equity issue made by a company. They increases the supply of shares and thus should lead to a
argue that the management has more information about decrease in the share price.
the value of the stock and hence the management would
issue equity only if they find the stock to be overvalued. Altinkilic and Hansen (2003) observe that firms offering
So the market looks at the equity issue as a signal that the relatively larger amounts in rights rely on discounted
stock is overvalued. Eckbo and Masulis (1992) apply this offering to ensure full take up of the shares. Owen and
model to rights offering under certain broad assumptions. Suchard (2008) document that issues made at a premium
observed an announcement return of 4.17% in
Myers and Majluf (1984) state the adverse selection comparison to -2.64% returns for issues made at a
problem inherent in the issue of new shares because of discount. Thus the issue price acts as a signal of quality to
the potential of wealth transfers from old to new the market. Moreover, they further observe that
shareholders. Of course, in a rights issue, if existing renouncing the rights issue reduces the level of discount
shareholders are expected to take up all the new shares offered with 26.61% discount given on renounceable
the adverse selection issue does not exist. However, this rights issue in comparison with 35.05% discount offered
is not true for firms in general and thus rights issue on non-renounceable issues.
announcement leads to negative reaction amongst
shareholders. Balachandran et al (2008) further corroborate this
finding and observe that high quality firms signal their
Wu and Wang (2002) suggest an alternative theory based quality by selecting lower issue price discounts. Kabir
on private benefits of control enjoyed by the and Roosenboom (2002) observe that relative offer price
management which are against the shareholder wealth is significantly positively related to the stock return and
maximisation and are not known to outside investors. operating performance and firms with larger offer price
They argue that the announcement of rights offering discount exhibit larger decline in performance.
cause a larger drop in the stock prices of the issuer when
the pre-issuance firm specific market condition looks As can be seen from the above literature review, there is
poorer. Rights offering generally do not tend to increase no consistency in the research finding on the effect of
the level of monitoring of existing management since rights issue announcement on the stock returns. Even
they are offering to current shareholders on a pro rata within India, research by Miglani (2011) reports positive

© Asia - Pacific Institute of Management, New Delhi


8

excess return while research by Marisetty, Marsden, and where the rights ratio is m:n and the issue price is X. It is
Veeraraghavan (2008) and Suresh and Naidu (2012) important to note that for the rights issue to succeed, the
report negative but insignificant excess returns. This following condition must hold:
shows that research in this area is not conclusive and
X ≤PO–ε1 (3)
hence we get motivated to conduct this study in India
again by using a much larger sample size and for a If the above condition does not hold, then the rational,
different time period that the time period used in earlier profit maximizing shareholders will prefer not to
studies. exercise the rights as being a free-rider is a positive NPV
strategy here.
Based on the above simple model, we propose and test
Methodology and Data Description five hypotheses to explain the possible reaction of the
Both Miglani (2011) and Suresh and Naidu (2012) use market to the announcement of the rights issue.As per the
relatively smaller samples and in this paper we decide to Value Neutral Event Hypothesis, since rights issue is a
use a larger sample size to carry out our test. We include value neutral event, the market should not react to the
all the rights issues that have been made in India in the announcement of a rights issue. Of course, the price of
2000 – 2011 period (and for which we get the relevant the stock should fall after the stock goes ex-rights. The
data from Prowess database of CMIE). We discuss our stock price, however, should not change on the date of the
data selection criteria later in this section. We also use the announcement (cum-rights price). This model actually
standard event study methodology that all the researchers assumes that the market has valued the stock correctly
have used to find the impact of rights issue and ε0 and ε1 equal 0.
announcement on the stock returns. The value neutral event hypothesis presumes strong-
form efficiency on the part of the stock market. If,
Our Model however, the managers of a company have better
We propose a simple model in this paper to look at the information about the value of the stock as compared to
likely impact of a rights issue announcement on the stock the outsiders (as suggested by Myers and Majluf (1984)),
returns. We assume that the management has better then the market may react negatively to a rights issue.
information about the true value of the stock. In This happens when the market perceives ε0 to be
particular, we assume that P0 is the pre-announcement positive. We call it the Overvaluation Hypothesis. The
price of the stock and that P̄ is the true value of the stock. managers will obviously prefer equity issue (over debt
issue), if they believe the stock is overvalued. Hence the
We assume that: P̄ =Po – εo (1) market reacts negatively to any equity issue as equity
In our model, only the promoters know the true value of issue signals possible overvaluation of the stock. If X is
εo The stock is overvalued if εois positive. sufficiently low, then the market may believe ε1 to be high
and that would definitely lead to a negative reaction by
When the rights announcement is made, the market the market on the announcement date. So the
revises its valuation of the stock and P1 is the post Overvaluation hypothesis predicts a negative reaction
announcement price (the cum-rights price). from the market to any rights issue. In addition, the
We make the following assumption about P1. reaction should be highly negative for issues with higher
discounts.
P1 =Po – ε1 (2)
The rights issue may signal the market about the poor
Here, ε1=E(εO),where E(.) is the standard expectation quality of the project in which the management invests.
operator. Financing any new project with debt always has the
The abnormal return on the announcement date will be disciplinary effect on the management of the company.
strongly related to P1 – P0, which is actually equal to Equity issue has no such disciplinary effect and a rights
issue may signal the market about the poor quality of the
following Equation (2). So the abnormal return observed
projects in which the management is going to invest. We
on the announcement date will depend on the sign of ε1 .
call this the Overinvestment Hypothesis and as per this
The ex-rights price will be given by hypothesis, one should expect a negative reaction by the
P1 n + X m market on the rights announcement date. The
n+m

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
9

overinvestment signal would be particularly strong for stock price. Since the stock price comes down because of
companies that have performed poorly just prior to the the bonus effect, the stock becomes more accessible to
rights issue. This hypothesis is similar in spirit to Jensen the retail investors. So in case retail investors have
(1986). invested substantially in a company, they would treat the
There is another reason, why the market may react rights issue more favourably and that should marginally
negatively to a rights issue. The market might have increase the stock price. We call this the Increased
valued the stock assuming a fixed debt ratio (this is the Liquidity hypothesis.
standard practice followed by most valuation A rights issue may decrease the reported earnings per
professional). Rights issue decreases the debt ratio of the share if the funds raised are invested in projects that do
companies and the market may revise downwards the not give immediate returns. This dilutive impact of the
present value of the expected tax shield. We call this the rights issue may reduce the stock prices if the market
Decreased Leverage Hypothesis. Secondly, instead of values the stocks using the same earnings multiple that it
financing any new project with debt (with associated used earlier. However, in an efficient market, the market
disciplining effect of debt), when a company finances it participants will definitely revise the earnings multiples
with equity, the market may get the signal that the based on the profitability of the new projects in which the
management is investing capital in projects with poor company invests its money. We therefore, ignore this
quality. Decrease in leverage will revise the P0 value itself possibility here.
in Equation (2), keeping ε1 constant. This argument is Table-1 summarizes all the hypothesis we have
also similar to Jensen (1986). developed (and tested) in this paper along with a brief
Rights issue can however, have a positive effect on the discussion on the possible effect of rights issue

Table 1: List of all the hypothesis used in this paper

Hypothesis Possible Effect of Rights Issue


Comments
Announcement on Stock Returns
Value Neutral Event Hypothesis No effect In a perfect capital market, rights issue
should have no effect on stock returns.

Overvaluation Hypothesis Negative excess return Follows from Meyers and Mujluf
(1984).

Overinvestment Hypothesis Negative excess return Similar to the argument made by


Jensen (1986)

Decreased Leverage Hypothesis Negative excess return Similar to the argument made by
Jensen (1986)

Increased Liquidity Hypothesis Positive Excess Return Rights issue increases the liquidity of
the stock by making it cheaper and
hence the stock returns may be high.

announcement on the stock returns. for which the relevant firm-specific information is not
available in the Prowess database. This filtering criterion
Data reduced our final sample size to 205 issues. Our final
We start by including all the rights issues for which the sample, therefore, consists of 205 rights issue of equity
event announcement date is available in the Bloomberg made by 170 firms during the period April 1, 2000 to
Database Services. Since Bloomberg provides rights March 31st 2011. We obtain the rights issue data from the
announcement data only from 2000, we restrict our Bloomberg Database Services.
sample period to 2000-2011. During this sample period, a Table 2 provides a breakdown of the 205 rights issues in
total of 365 rights issue was made in India. We obtain the sample by year of announcement. We also provide the
firm specific information about these rights issues from aggregate size of the issues for each of the years in Table
the Prowess database of CMIE. We remove all the issues 2. In our sample, the highest number of announcement of

© Asia - Pacific Institute of Management, New Delhi


10

rights issues was witnessed in the year 2005 with 31 capital raised each year with the maximum capital being
rights offer. There is significant variance in the amount of raised in 2005 amounting to Rs. 7,041.28 crores.

Table 2 :Year-wise distribution of rights issue and issue-amount

Issue Amount Avg. Promoters' Avg. Institutional Average Individual


Year No of Issues
(Rs. Crores) Holdings (%) Investors' Holdings % Investors' Holdings %
2000 10 577.95 41.92 11.66 11.69
2001 8 2,497.37 37.39 19.66 26.59
2002 9 1,551.12 27.69 12.30 46.71
2003 23 2,166.22 49.30 8.23 31.81
2004 19 3,870.46 45.26 16.89 25.81
2005 31 7,041.28 48.27 12.54 27.38
2006 29 2,686.21 49.16 5.64 30.03
2007 18 3,597.74 49.36 12.96 26.05
2008 20 2,103.12 47.08 8.78 33.42
2009 17 2,286.12 48.24 12.37 25.89
2010 18 6,999.69 54.41 8.48 22.69
2011 3 148.44 39.59 5.18 31.23
Total 205

Source: Prowess Database of CMIE and Bloomberg Database Services


The relative issue size (as percentage of pre- ARi,t=Ri,t− (αi+βi*Rm,t) (4)
announcement market capitalization) in our sample was
Here Rm,t is the return on the market portfolio and is
56.92% which is lower than that documented in some of
the international rights issue of equity (Owen and represented by the value weighted BSE Sensex which is a
Suchard, 2008). The firms had an average market free float market capitalization market index, Ri,tis the
capitalisation of Rs. 1830.84crores. We also note that rate of return of security i for even day t and (αi+βi*Rm,t)
promoters hold a large share of the companies in our represents the estimated return of security i for event day
sample with an average promoters’ shareholding being t.
48%. In terms of external monitoring, average individual The parameters αi and βi in the model have been
investor shareholding in the firm was 28% and estimated using the ordinary least squares (OLS)
institutional investors comprised 11% of the regression over the estimation period from t=-180 to t= -
shareholding. 30. Finance theory does not recommend the exact length
of the estimation period. Ideally the estimation period
Computation ofAbnormal Returns should not overlap the event window (Campbell, Lo, and
We use the famous Brown and Warner (1980, 1985) Mackinlay, 2007). A very long estimation period may
methodology to estimate the announcement effect of affect the regression parameters if the risk of the stock
rights issues. We use the Brown and Warner (1980, 1985) has changed during the estimation period. We stop the
methodology because almost all the short-term event estimation period six weeks (30 trading days) before the
studies conducted use this methodology (Khotari and event announcement date to ensure that possible insider
Warner, 2006). This will also make our results trading does not affect our event study parameters.
comparable with other studies all of whom have used this
Abnormal returns were calculated over various window
methodology. For each security i in the sample, the
periods surrounding [-5, +5] trading days around the
abnormal return (ARi,t) for the event day t is calculated as:
announcement day of the rights issue.

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
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For the sample of N securities, the Mean Abnormal consistent with other studies conducted in developing
Return (MARt) on any event day t is calculated as: nations, Shahid et al (2010) in China, Tsangarakis (1996)
in Greece, Adaoglu (2001) in Istanbul and Kang and
MARt= Σ AR i,t
(5) Stulz in Japan (1999). However, these results differ from
N the results observed in developed nations, Eckbo and
The statistical significance of Mean Abnormal Returns Masulis (1992) in the US, Gajewski and Ginglinger
and the Cumulative Abnormal Returns (CAR(t1,t2)) (1998) in Greece, Owen and Suchard (2008) inAustralia.
(which is calculated by summing mean Abnormal Table 3: Daily average market adjusted abnormal
Returns over event days t1 to t2), are tested by the returns and the corresponding t-statistic around the
following t-statistics: announcement day of 205 rights offer of equity by
firms listed on the Bombay Stock Exchange, 2000-
2011
tMAR,t= MAR1 (6)
σ

CAR(t1,t2) Event Day MAR t-Statistic


t(CAR)= (7)

L x σ (MARt ) -5 0.66% 0.15
-4 0.99% 0.21
Where σMAR is the sample standard deviation of the Mean
-3 0.52% 0.12
Abnormal Returns over the estimation period from t= -
180 to t= -30, resulting in 150 total observations L = t2- -2 0.87% 0.20
t1+1 : the number of days from t2 to t1 -1 1.37% 0.25

Empirical Results 0 0.84% 0.17


1 1.48% 0.27
Abnormal Returns around the period of rights offer
announcement 2 1.11% 0.21
We first compute the mean abnormal returns (MAR) as 3 0.27% 0.05
explained in Equation 5 in Section 3. Then we estimate 4 0.56% 0.08
the cumulative abnormal returns (CAR) across firms
around the announcement day event periods. We present 5 0.34% 0.08
the data on CAR and the associated t-statistic in table 3.
We also present the CAR figures in Figure 1 below. One 1.60%
can see from Table 2 that though the MAR over the event 1.40%
period are positive, they are statistically insignificant. 1.20%
Mean CAR(%)

Even on the date of the announcement i.e. t=0 the return 1.00%
is 0.84% but statistically insignificant. This gives 0.80%
credence to the Value Neutral Event hypothesis. In an
0.60%
informationally efficient market, one should expect the
0.40%
market reaction to the rights announcement to be neutral.
0.20%
We can also see from Figure 1 that there is no particular 0.20%
trend in the CAR around the announcement date. It
0.20%
fluctuates over the entire time period. The abnormal
-5 -4 -3 -2 -1 0 1 2 3 4 5
returns observed after the announcement day are
Event Period
observed to be higher than that witnessed on the day of
the announcement with average abnormal returns of
1.48% on day 1 as compared to 0.84% on day 0. Figure 1: The Mean CARs over the event window
However, after day 1 the abnormal returns progressively period [-5, +5] for all 205 rights issues in our sample
decrease falling to 0.34% on day 5. This result is
consistent with that observed in the other Indian study
conducted by Marisetty et al (2008). This result is also

© Asia - Pacific Institute of Management, New Delhi


12

Cross SectionalAnalysis and also helps measure agency problems in the firm
(Burch et al, 2001). Stocks that are overvalued will have a
Though the average CAR is insignificant, it is possible higher MB ratio. The level of information asymmetry
that the market reacts positively to some rights issues, will also be high if the MB value is high for a stock, as
while reacting negatively to others. We use cross- most of the market value consists of intangibles like
sectional regression to identify the firm-specific growth opportunities. So as per our Overvaluation
characteristics that can further explain the firm-level hypothesis, one would expect a negative relationship
variation in abnormal returns. Our regression between MB and abnormal returns. Low market-to-book
specification is given below: would be observed for stocks with relatively poor
Abnormal Returns = β0+β1Size+β2MB + β3DISC + financial performance. So a low market-to-book would
β4LEVERAGE + β5PromoInt + β6IndivInt + β7InstInt + + increase the chances of overinvestment and hence as per
β8ISSUE (8) our Overinvestment hypothesis, one should expect a
positive relationship between the market reaction to the
where, rights issue and the market-to-book ratio.
Size is the pre-announcement market capitalization of Balachandran et al (2008) report that firms with better
the stock prospects of future earnings would offer lower price
MB is the market-to-book ratio of the stock discounts as compared to firms with poorer prospects.
This view is also consistent with our Overinvestment
DISC measures the discount at which shares are issued hypothesis. If the level of information asymmetry is
compared to the existing market price of share (a value of higher, then one would expect a negative relationship
-0.3, for example, signifies that the issue was made at a between abnormal returns and the discount (DISC)
30% discount) offered (Overvaluation hypothesis). However, higher
Leverage is the change in the debt-equity ratio of the price discount would lower the ex-rights price of the
issuing company stock and hence the stock would be more liquid after it
PromoInt is the equity stake of the promoter in the goes ex-rights. So as per our Increased Liquidity
company hypothesis, a higher discount would result in higher
abnormal returns.
IndivInt is the equity stake of the retail investors
LEVERAGE seeks to factor the impact of change in
InstIint is the equity stake of the institutional investors capital structure on the stock price. Suchard and Owen
Issue is the ratio of issue size to the market capitalization (2008) suggest the ratio of debt-equity (post
of the firm on the last trading day prior to the announcement and pre-announcement) as a proxy for the
announcement change in leverage associated with the announcement of
the rights issue If the firm does not change the absolute
Balachandran et al (2007) and Suchard and Owen (2008)
value of debt after the rights issue, then this ratio
suggest that firm size is an inverse proxy of the level of
completely ignores the effect of debt. We, therefore use
information asymmetry as larger firms are more closely
the arithmetic difference between post-announcement
followed by the market. Size is measured as the natural
and pre-announcement Debt-equity ratio as a proxy for
logarithm of the market capitalisation of the firm on the
leverage. Since, rights issue decreases the leverage for a
day before the announcement and serves as a proxy for
company, it affects the stock price adversely and hence as
firm size. Since larger companies will have lesser
per our Decreased Leverage hypothesis, we should find a
information asymmetry, our Overvaluation hypothesis
negative relationship between LEVERAGE and
would predict a flat relationship between firm size and
abnormal returns.
abnormal returns. It is, however, possible that managers
of large companies would like to maintain the size of the We also include the equity ownership stake of the
companies (or increase it further) because of the prestige promoters, retail investors and institutional investors
they get from managing a large company. So, our prior to the rights announcement as independent
Overinvestment hypothesis would postulate a negative variables in the regression. IndivInt represents the
relationship between size and abnormal returns. percentage interest in the firm held by retail investors.
Retail investors like the increased liquidity following a
The market-to-book ratio (MB) serves as a proxy for the
decrease in the price after the rights price. As per our
growth prospects of the firm as perceived by the market
Increased Liquidity hypothesis, stocks with higher retail

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
13

ownership should exhibit positive reaction from the the date of announcement may be different for the
market to the rights issue announcement. So one should different hypotheses.
expect a positive relationship between abnormal returns The dependent variable CAR [-1,+1] is the cumulative
and the equity stake of the retail investors. abnormal return for the firm between days [-1 to +1]. We
We include PromoInt to capture the equity ownership use a 3 day event period in order to capture the full impact
stake of the promoters in the firm. Research shows that of the announcement effects of rights issue. Moreover,
higher stake by the management aligns the interest of the since highest abnormal returns have been observed in
management with that of the other shareholders. this period it will help us identify all the parameters
(Kaplan, 1994; Murphy, 1985) Higher equity stake by the having effect on the abnormal returns observed. This is
management reduces the conflict of interest between the the reason, we do not use the longer window period (-5 to
management and the shareholders and this also ensures +5) that we discussed in Table 4.
that the management will not invest money (raised from We present our regression results in Table 3. We find very
the rights issue) in projects with poor quality. A higher strong support for our Decreased Leverage hypothesis
stake by the promoter would discourage overinvestment here. We defined our leverage as the change in leverage
on the part of the company and hence this argument following a rights issue. So the abnormal returns have
indirectly supports our Overinvestment hypothesis. So been highest when the decrease in leverage is the lowest
one should expect a positive relationship between (or increase in leverage is the highest). The change in
abnormal returns and promoters’stake. leverage will be the lowest following a rights issue with
We use the variable InstInt to capture the equity interest the smaller issue size (as a percentage of market
of the institutional investors in the firm. This variable capitalization). From Figure 3, we can see that issue size
serves as a proxy for the effective monitoring by the is negatively correlated with abnormal returns. So when
institutional investors. Higher institutional investors the issue size is the highest, the decrease in leverage is
holding shall lead to greater incentives to monitor the also high and the market reacts negatively to any such
performance of the companies and thus should have a rights issue.
positive relation with the announcement returns. Of course, negative reaction to issue size is also in
Secondly, the stocks in which these investors invest are conformity with our Overinvestment hypothesis and
highly researched and hence the information asymmetry Overvaluation hypothesis. If the stocks are highly
due to overvaluation of the stock will be lower. So our overvalued, then the management may find it worthwhile
Overvaluation hypothesis predicts a positive relationship financing any new project with issue of equity. Relatively
between abnormal returns and institutional investors’ larger amount of capital can be raised from the market at
stake. what the management perceives to be the fair value of the
We use the issue size (ISSUE) as an additional variable in stock. Secondly, if the projects are not of investment
our regression. If the issue size is very large, then our quality then a larger issue would result in larger value
Decreased Leverage hypothesis would predict a negative loss on the part of the shareholders.
relationship between the issue size and the abnormal We observe significant negative relationship between
returns. Secondly, if equity is overvalued, the price discount (DISC) and announcement returns. This
management is more likely to finance a larger project result is however, not consistent with the results found by
with equity than with debt and hence the Overvaluation Heinkel and Schwartz (1986), Loderer and
hypothesis should also predict a negative relationship Zimmermann (1988) and Owen and Suchard (2008).
between abnormal returns and issue size. Finally, a large Since price discount is a negative variable
issue size (for overinvesting companies) magnifies the (-30% means the issue price is 30% lower than the pre-
value loss following the rights issue and hence the announcement price), a negative relationship with
Overinvestment hypothesis would predict a negative abnormal returns actually implies that the market reacts
relationship between issue size and abnormal returns. positively when the price discount is higher (i.e., more
As can be seen from the above discussion, the five negative). A larger price discount implies a larger decline
hypotheses we postulate in this paper are not competing in the ex-rights price and that makes the stock more
hypotheses that explain the reaction of the market to a affordable to the retail investors. This result lends strong
rights issue. In fact, different hypotheses may explain the support to our Increased Liquidity hypothesis.
same phenomenon and the expected sign of the CAR on

© Asia - Pacific Institute of Management, New Delhi


14

Table 4: OLS Estimates of coefficients in linear cross test the various hypotheses properly. Thus for example,
sectional regressions with the announcement return price-to-book is often used as a proxy for overvaluation
over (-1,1) as the dependant variable of the stock and adding this in the cross-sectional
regression could help us in testing the overvaluation
Regression Output
hypothesis. Similarly, size was added as an additional
Abnormal Returns = β0+β1Size+β2MB + β3DISC regressor to control for any possible association between
+ β4LEVERAGE risk (as envisaged by Fama and French, 1993) and
+ β5PromoInt + β6IndivInt + β7InstInt + + β8ISSUE returns.
2
A. R 0.31 We find that announcement of rights issue of equity are
Adjusted R2 0.29 met with insignificant positive reaction which is similar
Standard Error 0.086 to a number of developing economies. Since rights issue
F 11.198**** is a portfolio of a public issue at the prevailing market
B. β Std. Error t-stat price and a bonus issue, theoretically, a rights issue
should have no effect on the price of the share
Intercept 0.1077 0.0421 2.557 *** (immediately after the announcement) in an
Size -0.0069 0.0040 -1.737 * informationally efficient capital market. Financial
MB 0.0007 0.0007 0.985 economists consider rights issue value-irrelevant
DISC -0.0107 0.0029 -3.747 **** information. It is heartening to find that the post
LEVERAGE 0.0006 0.0001 7.320 **** announcement effect of the Indian stock market to a
Promlnt -0.0002 0.0004 -0.498 rights issue is value neutral. This result also supports our
Indivlnt -0.0005 0.0005 -0.888 Value Neutral Event hypothesis.
Instlnt -0.0011 0.0007 -1.524 Using cross-sectional regression, we make an attempt to
ISSUE -0.0244 0.0112 -2.187 ** find the firm- and issue-specific factors that can explain
the cross-sectional variation in the abnormal returns
observed after a rights issue announcement. We observe
Note: *Significant at 10% level, **Significant at 5% a very strong and positive relationship between increase
level and, *** significant at 1% level, and **** signifies in leverage and the abnormal returns. Rights issue, being
significance at 0.1% level. an equity issue, decreases the leverage of the company.
In addition, we observe moderately significant negative We find that rights issues that cause the lowest change in
relationship between size of the firm and the abnormal leverage bring about the maximum increase in stock
returns generated. This is consistent with the results returns. This result strongly supports our Decreased
obtained by Balachandran et al (2008) and Asquith and Leverage hypothesis. We also find a strong and negative
Mullins (1986). Since larger companies attract investors’ relationship between price discount offered on rights
attention, they are usually more researched and hence are issue (DISC) and the announcement returns generated
less likely to be overvalued. This result however, does which is inconsistent with the results obtained in prior
not support our Overvaluation hypothesis. However, studies conducted in different countries. Larger discount
larger companies are more likely to invest in sub- in a rights issue causes the maximum decline in the ex-
investment grade projects as a larger size of the company rights stock price thereby making the stock more
increases the agency conflicts between the management affordable to the retail investors. So the stock price
and the shareholders. This result, therefore, gives partial increases as the liquidity of the stock increases after the
support to our Overinvestment hypothesis. rights issue. This is consistent with our Increased
Liquidity hypothesis.
Conclusion We also observe negative relationship between the size of
We examine abnormal returns generated from the the rights issue and the abnormal returns. This gives
announcement of a rights issue of equity in India. Our partial support to our Overinvestment hypothesis. The
study adds to the existing literature by including size of the firm (Size) was also observed to hold a
variables indicating firm level control such as size of firm negative significant relationship with the announcement
and MB ratio and issue level controls such as price returns.
discount and leverage. These controls were necessary to Indian stock market does like rights issues that cause the

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
15

largest decline in the ex-price of the stock as that makes Takeup, Renounceability, and Underwriting Status,
the stocks more affordable and hence more liquid. We Journal of Financial Economics, 89, 328 – 346.
also see that the market does not like leverage-reducing
7. Brown, S. and J. Warner, 1980, Measuring Security
strategies as the companies lose on valuable interest tax
shields. Secondly, a decrease in leverage reduces the Price Performance, Journal of Financial Economics,
disciplinary effect of debt. 8, 205-258.
Rights issues usually dilute the earnings per share and in 8. Brown, S. and J. Warne, 1985, Using Daily Stock
an inefficient market where the analysts continue to Returns: The Case of Event Studies, Journal of
value the stocks using the pre-rights-issue price-earnings Financial Economics, 14, 3 – 31.
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observe a decline in stock returns. It is therefore possible
William G., 2001, The Rights Offer Puzzle: Clues
that, the net effect that we find is the cumulative effect of
from the 1930s and1940s, Available at SSRN:
the negative impact (due to dilution in EPS) and the
positive (or negative) effect of other factors that we http://ssrn.com/abstract=283011. Accessed in
considered in this paper. We leave this to our future October 2011.
research. 10. Campbell, J. Y., A. W. Lo, and A. C. Mackinlay,
In order to properly test the overvaluation hypothesis, 2007, The Econometrics of Financial markets,
one can look at the stock returns of the company in the Princeton University Press, Princeton, New Jersey.
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returns of other companies in the industry will give us
Disappearing Rights Offer Phenomenon, Journal of
some indication about the extent of overvaluation. We
leave this to our future research. Applied Corporate Finance, 20, 72 – 85.
12. Eckbo, B. Espen and Masulis, Ronald W., 1992,
Adverse Selection and the Rights Offer Paradox,
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Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Asia-Pacific Finance and Accounting Review
Vol. I, No. 1, October - December 2012
pp. 17-33, ISSN: 2278-1838
www.asiapacific.edu/far

Post Acquisition Performance of


Indian Manufacturing Companies:
An Empirical Analysis
N.M. Leepsa1, Dr. Chandra Sekhar Misra2

Mergers and Acquisitions (M&A) are the inorganic growth strategies which have got its significance in today’s
corporate world due to intensely competitive business environment. While M&A is considered as one of the strategies
for growth, the companies are expected to perform post M&A so that those are proved to create wealth for
shareholders. From the literature review it is found that there is no conclusive evidence about the impact of M&A on
corporate performance. Moreover in recent period M&A deals have gone up manifold. Hence there is a need to look
into the post M&A performance of companies. The present study is an attempt to find out the difference in post-
acquisition performance compared with pre-acquisition in terms of profitability, liquidity and solvency. The scope of
the study is limited to manufacturing sector companies in India. The statistical tools used are Paired Sample t-Test
and Wilcoxon Signed Ranks Test.

Key Words: Merger; Acquisition; Financial Performance; Manufacturing Companies; India

Introduction Previous Research

Today’s corporate world is surrounded with changing Literature review has been made on impact of mergers
and acquisitions on the company’s operating and
business environment in relation to intense competition,
financial performance. Most of research works are done
diversified products, global markets, educated
in United States of America & United Kingdom apart
customers, new technology and advanced process of
from Malaysia, Japan, Australia, Greece, Canada,
manufacture. It is not enough for the companies to keep
Taiwan, Thailand and India. Few numbers of studies are
pace with these changes but is expected to beat done with respect to Indian Mergers and Acquisitions.
competitors and innovate in order to continuously Literature has not been able to provide conclusive
maximize shareholder value. Growth is inevitable for the evidence whether M&A create value or destroy wealth of
companies to keep pace with the changes. The growth shareholders. The literature review is basically on
strategy is divided into two types: Organic Growth ‘Studies using Accounting Measures’, ‘Studies using
Strategy and Inorganic Growth Strategy. Mergers and Event Study Methodology’, and ‘Studies using Multiple
Acquisitions (M&A) are the inorganic growth strategies Performance Measures’.
for achieving accelerated and consistent growth. It has
Studies using Accounting Measures
gained importance throughout the world in the current
scenario due to globalisation, liberalisation, Merged firms show significant improvements in
technological developments and intensely competitive operating performance (Ghosh, 2001). There is
business environment. The greater than before improvement in post-merger operating financial
competition in the global market has encouraged the performance measured by industry-adjusted return on
Indian corporate to go for mergers and acquisitions as an assets (Ramaswamy and Waegelein, 2003). Using book
important strategic alternative to survive and grow. value of asset and sales model, corporate performance
improves after merger (Kumar and Rajib, 2007).

1
Research scholar at Vinod Gupta School of Management, IIT Kharagpur, INDIA. (E-mail: leepsa@vgsom.iitkgp.ernet.in)
2
Asst. Professor, Vinod Gupta School of Management, IIT Kharagpur, INDIA. (E-mail: csmishra@vgsom.iitkgp.ernet.in)
18

Financial performance of merged companies improve All significant positive merger benefits occur during the
(Vanitha and Selvam, 2007). first year (Shick and Jen, 1974). The financial
Acquisition growth is much lower than internal growth performance of Japanese manufacturing companies
but there is an additional and permanent reduction in using the rate of return on equity increased after merger
profitability following acquisition (Dickerson, Gibson, (Katsuhiko and Noriyuki, 1983). There is a significant,
and Tsakalotos, 1997). The acquiring firm experience positive co-movement in vertical merger activity and
reduced operating performance after acquisition (Yook, wealth effects (Goyal, 2002). The performance ratios
2004). The profitability, liquidity and solvency of that have legal implications (capital adequacy and
combined company declines after the M&A event. The solvency ratios) improved after the merger (Kithinji and
negative performance is not different from control firms Waweru, 2007).
(Ooghe, Laere, and Langhe, 2006). The profitability of a The performance of merged firms improves significantly
firm that performed an M &A is decreased due to Merger following their combination. Buyers, targets and
andAcquisition event (Pazarskis et al., 2006). combined firms underperform their peers in five years
Studies using Event Study Methodology before merger, and outperform their peers in five years
after (Carline, Linn, and Yadav, 2001). Using event study
Event study is the approach for the examination of and accounting approach it is found that the stock price
abnormal stock returns to the shareholders of both and operating performance of the acquirers
bidders and target around the M&A announcement. underperformed compared to firms that did not engage in
There is a statistically significant positive return to M&A activity (Becker, Goldberg and Kaen, 2008). The
acquiring firm shareholders (Asquith, Bruner, and returns to the acquirers were marginally negative from
Mullins, 1983; Loderer and Martin, 1992). Bidding firms the serial acquisition of technology firms (Adavikolanu
do not under perform relative to the market (Jakobsen and Korrapati, 2009). Studies have failed to provide
and Voetmann, 2003). Acquisitions by small firms are evidence regarding the relation between industry
profitable for their shareholders, but these firms make relatedness and the Post-M&A performance. There is no
small acquisitions with small dollar gains. Large firms consensus view in the literature regarding the effects of
make large acquisitions that result in large dollar losses firm size on Post-M&A performance (Ismail, Abdou, and
(Moellera, Schlingemannb, and Stulz, 2004). The Annis, 2011).
acquisitions from 1905 to 1930 raised shareholder wealth
(Leeth and Borg, 2004). The cumulative abnormal return Research Objectives
is statistically significant giving positive returns to Based on the research gap areas from the literature
acquiring firm shareholders (Chakrabarti, 2008; Dutta survey, the following are the objectives of the study:
and Jog, 2009; Kyriazis, 2010; Soongswang, 2009). • To find out the long term post acquisition financial
Over the long-term, in the post-announcement period, performance in manufacturing sector companies in
acquiring firms earn lower returns relative to those India.
earned in the pre-acquisition performance but their Research Methodology
relative performance remains exceptionally good, on
average (Rosa et al., 2003). Corporate performance does 4.1 Hypotheses
not improve after merger, if performance is evaluated Based on the research gap areas from the literature
using market value model (Rajib, 2007). Target firm gain survey, the following research hypotheses are
from the takeovers, while acquiring firm just break even tested:
and combined gains were small. The cumulative
1Ho: There is no difference between the Post-
abnormal return is positive to the target firm shareholders
Acquisition financial performances in
(Leeth and Borg, 2000). The bidder shareholders gain in
manufacturing sector companies in India
long run (Fuller, Netter, and Stegemoller, 2002);
Gregory, 2005). 2Ho: There is no difference in performance of
acquirer acquiring relatively large and small
Studies using Multiple Performance Measures
companies
Several studies are reviewed under category of multiple
3Ho: There is no difference in performance of large
performance measures as those may not be classified
size companies and small size acquiring companies
solely to accounting approach or event study approach.

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
19

4Ho: There is no difference in performance of μ1 and μ2 are the population parameters


related acquisition deals and unrelated acquisition The non-parametric statistical hypothesis test used as an
deal acquiring companies alternative to the Paired Student's t-Test is Wilcoxon
4.2. Hypotheses Testing Signed-Rank Test. It is used when the population cannot
Average pre-acquisition and post-acquisition financial be assumed to be normally distributed in case of two
performance ratios is compared to see if there is any related samples or repeated measurements on a single
statistically significant change in financial performance sample. The Wilcoxon signed ranked statistic W+ is
due to mergers and acquisition, using “paired two sample defined as:
n
t-tests”

t=
x̄ –μ0
W+ =
i=1
Σ
øiRi
s
√n
where øi= I(Zi>0)
Where, I(.)is an indicator function,
s is the standard deviation of the sample and n is the θ = median ; Zi = Yi - Xi
sample size.
The study is carried out over various years under
The degrees of freedom used in this test is (n – 1) consideration using Accounting Based Approach using
x̅1 (Pre-M&A) and x̅2 (Post-M&A) are sample different financial parameters .
statistics
Table 1 : Variables of the Study

Parameters Variables Explanation Evidence


Current Ratio (CR) Current Assets/Current (Kumar and
Liabilities and Provisions Rajib, 2007)
Liquidity (Current Assets-Inventory) / (Kumar and
Quick Ratio (QR) Current Liabilities Rajib, 2007).
and Provisions
Networking (Current Assets minus (Kumar and
Capital/Sales Current Liabilities) by Sales Rajib, 2007)
Total Debt Total Debt to Total Assets (Kumar and
Ratio(TDR) Rajib, 2007)
Leverage
Interest Coverage Earnings before Interest and (Kumar and
Ratio(ICR) Taxes (EBIT)/Interest Bansal, 2008)
Return on Capital EBIT/Capital Employed (Kumar, 2009)
Employed (ROCE)
Profitability
Return on Net Profit after Tax /Net Worth (Kumar , 2009)
Worth (RONW)
Source: Compiled from different Sources

All the financial performance parameters are adjusted for Basic Specifications for the Study includes the
industry average. Industry average represents the following-
performance of companies that have not gone through • The M&A cases are classified into large and small
merger and acquisition during the period under acquirers and also on basis of relatedness.
reference.
• Total Assets is taken as the proxy for the size of the

© Asia - Pacific Institute of Management, New Delhi


20

companies. in India.
• The median of the total assets of the acquirer 4.5. Sample Selection
company in the acquisition year is taken into • The sample consists of only manufacturing
consideration for segregating the acquirer into large companies.
and small companies.
• Unlisted firms are eliminated due to unavailability
• For the relative size of the companies (size of of financial information.
acquirer to size of target) the total assets of the
acquirer is compared with the total assets of the • Acquisitions involving firms in banking and
target companies in the acquisition year. financial services industries (BFSI) are not
considered due to the fact that these industries
4.2. Period of Study performance is generally affected by other
The period of study is from 2000-01 to 2009-2010. This economic environmental factors compared to
period specially chosen to so that the performance of the manufacturing sectors. Financial performance
acquisition deals during 2003-04 to 2006-07 is done for measures as mentioned earlier are also not
pre-acquisition three years and post-acquisition three appropriate for firms in BFSI sector.
years. Data for these years are available. • The study is undertaken only for period of pre-
4.3. Sources of Data acquisition period of three years and post-
• CMIE Business Beacon Database acquisition period of three years due to availability
of data up to that period. The sample is further
• CMIE Prowess Database filtered so that three year pre and three year post-
4.4. Scope of Study acquisition data for both acquired and target
• The study is confined to post-acquisition companies are available.
performance of companies in manufacturing sectors

Table 2 : Sample of Sector Wise Acquisitions

Industry Acquirer Target


Total

Total
2004

2004
2005

2005
2006

2006
2007

2007
%

%
Chemical 3 1 4 2 10 30 4 2 3 2 11 33
Food & Beverage 2 3 0 3 8 24 0 1 1 3 5 15
Textiles 1 1 2 1 5 15 1 0 3 1 5 15
Transport Equipment 0 0 1 3 4 12 0 0 1 1 2 6
Diversified 0 0 2 1 3 9 0 0 0 1 1 3
Metals & Metal Products 1 0 0 1 2 6 0 0 0 2 2 6
Miscellaneous 1 0 0 0 1 3 0 2 0 0 2 6
Machinery 0 0 0 0 0 0 2 0 1 1 4 12
Non Metallic 0 0 0 0 0 0 1 0 0 0 1 3
Total 8 5 9 11 33 100 8 5 9 11 33 100
Source: Compiled from CMIE Prowess Database

The highest number of deals found in done in chemical industry followed by food and beverage and textile companies.

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
21

Table 3 : Sample of Deal Wise Acquisitions


Year Total Related % Unrelated %
2004 8 3 38 5 63
2005 5 2 40 3 60
2006 9 6 67 3 33
2007 11 7 64 4 36
Total 33 18 55 15 45
Source: Compiled from CMIE Prowess Database
There were more of related acquisitions (55%) compared to unrelated acquisitions (45%) over the sample period.

Table 4 : Sample of Control Firms for Industry Average Returns

Industry 2004 2005 2006 2007.


Transport Equipment 27 27 27 27
Textiles 75 72 71 72
Non Metallic 24 25 24 23
Miscellaneous 27 26 26 26
Metals & Metal Products 46 46 46 45
Machinery 64 60 60 61
Food & Beverage 63 63 63 61
Diversified 3 3 3 3
Chemicals 119 117 112 111
Source: Compiled from CMIE Prowess Database

In chemical industry more number of companies is found compared to other industries.

Empirical Results and Discussions

The results of the study are in different categories:

I. Performance of companies without industry average returns

II. Performance of companies with industry average returns

III. Performance of acquiring firm when taking over relatively large and small companies

IV. Performance of large and small size acquiring companies

V. Performance of related and unrelated acquisitions

The results of the study are discussed below:

© Asia - Pacific Institute of Management, New Delhi


22

Table 5 Performance of Acquirer and Target companies using Paired Sample t Test

Paired Differences Acquirer Target

Mean t Sig. (2-tailed) Mean t Sig. (2-tailed)

CR1 - CR2 0.05 0.30 0.77 -0.11 -0.92 0.37


QR1 - QR2 -0.04 -0.24 0.81 -0.25 -2.02 0.06
NWCS1 - NWCS2 -0.01 -0.72 0.48 -0.02 -0.71 0.48
TDR1 - TDR2 0.00 -0.04 0.97 0.00 -1.50 0.15
ICR1 - ICR2 -0.74 -0.40 0.69 -13.47 -1.34 0.20
ROCE1 - ROCE2 -0.06 -1.06 0.30 0.02 0.94 0.36
RONW1 - RONW2 -0.02 -1.02 0.32 0.00 0.21 0.83

The current ratios of the acquirer declined while the return on capital employed and return on net worth has
increased in case of Target Company. The quick ratio and reduced after companies went for acquisition.
net working capital by sales ratio of both acquirer and In terms of the current ratio 13 companies have not
target companies improved after acquisition period. Debt improved in their liquidity position while eight
paying capacity has reduced in both target and acquiring companies have improved. In the quick ratio terms 16
firm. The profitability of the acquirer company improved companies have positive performance while five
while Target Company declined. companies have negative performance. In the similar
way post acquisition networking capital by sales ratio has
Any positive or negative change after post acquisition positive impact for 16 companies while negative for five
period is insignificant in case of acquirer. While based on companies. Debt burden has been more in post
the negative rank target companies, change in the acquisition period to 16 companies while less for four
liquidity ratio is significant for 5 companies. The return companies with one company that remained indifferent.
on capital employed of five companies has positively But to repay the debt burden 11 companies have positive
changed significantly. interest ratio in post acquisition period while 10
companies have negative interest coverage ratio. The
In case of performance of companies without taking the return on capital employed and the return on net worth
control firms into account, the current ratio has declined has reduced in 10 and 14 companies in post acquisition
(statistically insignificant) while the quick ratio has period respectively while 18 companies have improved
improved (statistically significant). This indicates that in their profitability ratios.
growth in inventory is less than the growth in other
Acquirer acquiring large target firms improves
current assets. The networking capital by sales ratio and
interest coverage ratio has gone up which is a good sign performance in terms return on net worth compared to
for the company but along with it the total debt ratio has acquirer acquiring small target firms. Acquirer acquiring
risen. The interest coverage ratio has increased which small target firms has better debt paying capacity
shows that the companies have better capacity to repay compared to those acquiring firms who purchase large
the debt they have taken. But increase in the interest target firms.
coverage ratio is not statistically significant. The
profitability ratios have shown a poor picture as both

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Table 6: Performance of Acquirer and Target companies using Wilcoxon Signed Ranks Test

Wilcoxon Signed Acquirer Target


Ranks Test
Liquidity Ratios Leverage Profitability Liquidity Ratios Leverage Profitability
Ratios Ratios Ratios Ratios

ICR1
ICR1

TDR1
TDR1

ICR2-
ICR2-

NWC1
TDR2-
NWC1
TDR2-

NWC2-
NWC2-

ROCE1
ROCE1
RONW1

ROCE2-
RONW1
ROCE2-

CR2-CR1
RONW2-

RONW2-

CR2-CR1
QR2-QR1
QR2-QR1
Negative Ranks 13 11 9 7 8 13 6 10 5 9 7 10 16 7

Positive Ranks 8 10 12 13 13 8 14 11 16 12 13 11 5 13

Ties 0 0 0 1 0 0 1 0 0 0 1 0 0 1

© Asia - Pacific Institute of Management, New Delhi


Total 21 21 21 21 21 21 21 21 21 21 21 21 21 21

Mean 10.31 10.64 10.39 12.5 9.13 10.69 10 10.2 8.6 8.11 9.36 7.3 10.38 11.43
Rank
12.13 11.4 11.46 9.42 12.15 11.5 10.71 11.73 11.75 13.17 11.12 14.36 13 10

Sum of 134 117 93.5 87.5 73 139 60 102 43 73 65.5 73 166 80


Ranks
97 114 137.5 122.5 158 92 150 129 188 158 144.5 158 65 130

Test Statistics Z - - - - - - - - - - - - - -
0.643(^) 0.052(^) 0.765(#) 0.654(#) 1.477(#) 0.817(^) 1.680(#) 0.469(#) 2.520(#) 1.477(#) 1.476(#) 1.477(#) 1.756(^) 0.933(#)

Asymp. Sig. (2-tailed) 0.52 0.96 0.44 0.51 0.14 0.41 0.09 0.639 0.012 0.14 0.14 0.14 0.079 0.351

Notes: The symbols used in this table as well as subsequent tables:


^: Based on Positive Ranks (Post-Acquisition Performance > Pre- Acquisition Performance)
#:Based on Negative Ranks (Post- Acquisition Performance < Pre-Acquisition Performance)
23
24

Table 7 Post Acquisition Performance using Paired Samples Test

Without Industry Adjustment With Industry


Paired Differences Adjustment Returns
Paired Samples
Test Mean t Sig. (2-tailed) Mean t Sig. (2-tailed)

CR1 – CR2 0.06 .36 .72 -0.22 -1.34 0.20


QR1-QR2 -0.25 -2.38 .03 -0.27 -2.31 0.03
NWC1-NWC2 -0.08 -2.97 .01 0.06 0.45 0.66
TDR1-TDR2 -0.01 -2.40 .03 0.02 0.21 0.84
ICR1-ICR2 -25.10 -1.21 .25 -22.23 -1.07 0.30
ROCE1-ROCE2 0.40 1.14 .27 0.43 1.22 0.24
RONW1- RONW2 1.05 1.09 .29 1.08 1.11 0.28

In case of relatively large target firms, the profitability networking capital/sales which reflects that companies
ratios have not improved but the decline is not have enough liquid assets after post acquisition period.
statistically significant. The liquidity ratio in term of the Return on capital employed has reduced (statistically
networking capital/sales have improved but it is significant) in the post acquisition period which indicates
statistically insignificant. In the leverage ratios, the that there is erosion of equity of the companies may be
interest coverage ratio have improved but it is because of less EBIT being generated to service the cost
statistically insignificant. But the debt has risen of borrowing.
significantly after acquisition. It may be because of the
In case of small size companies, the liquidity ratios have
fact that the acquirer has taken over relatively large target
improved after post acquisition period and also the
companies. The performance has reduced as the acquirer
interest coverage ratios but the result is statistically
company may have not been able to control a larger target
insignificant. The firm's ability to finance additional
company.
sales without incurring additional debt has increased
In case of relatively small target firms, the results suggest since the networking capital/ sales ratio has improved in
that there is a statistically significant difference between the post acquisition period. The leverage ratio in terms of
the pre and post-acquisition quick ratio, networking total asset to total liability has risen but statistically
capital/sales ratio, return on net worth/sales ratio. The insignificant. The profitability ratios show different
three ratios have declined in the post acquisition period. results for different parameter. In terms of return on
The safety margin in terms of being able to meet its capital employed the there is statistically insignificant
interest obligations of five negatively performed decline in performance while in terms of the return on net
companies has reduced but it statistically insignificant. worth there is improvement in performance but
statistically insignificant.
In case of large size companies, the quick ratio has
increased (statistically significant) along with

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Table 8: Post Acquisition using Wilcoxon Signed Ranks Test

Without Industry Adjustment With Industry Adjustment Returns

Liquidity Ratios Leverage Profitability Liquidity Ratios Leverage Profitability


Ratios Ratios Ratios Ratios

Wilcoxon Signed
Ranks Test

ICR1
ICR1

TDR1
TDR1

ICR2-
ICR2-

NWC1
TDR2-
NWC1
TDR2-

NWC2-
NWC2-

ROCE1
ROCE1
RONW1

ROCE2-
RONW1
ROCE2-

CR2CR1
RONW2-

RONW2-

CR2-CR1
QR2-QR1
QR2-QR1
Negative Ranks 13 5 5 4 14 10 14 8 5 6 6 12 17 15

Positive Ranks 8 16 16 16 6 11 7 13 16 15 15 9 4 6

Ties 0 0 0 1 1 0 0 0 0 0 0 0 0 0

© Asia - Pacific Institute of Management, New Delhi


Total 21 21 21 21 21 21 21 21 21 21 21 21 21 21

Mean +Ve 10.62 9.9 6.9 9.38 10.2 11.86 11.64 10.25 10.8 10.17 10.5 11 11.94 10.47
Rank
-Ve 138 49.5 34.5 37.5 102 166 163 11.46 11.06 11.33 11.2 11 7 12.33

Sum of +Ve 11.63 11.34 12.28 10.78 11.73 7.33 9.71 82 54 61 63 132 203 157
Ranks
-Ve 93 181.5 196.5 172.5 129 44 68 149 177 170 168 99 28 74

Test Statistics Z - - - - - - - - - - - - - -
0.78(^) 2.29(#) 2.82(#) 2.52(#) 0.47(#) 2.28(^) 1.65(^) 1.16(#) 2.14(#) 1.89(#) 1.83(#) 0.57(#) 3.04(^) 1.44(^)

Asymp. Sig. (2-tailed) 0.43 0.02 0.01 0.01 0.64 0.02 0.1 0.244 0.033 0.058 0.068 0.566 0.002 0.149
Notes: The symbols used in this table as well as subsequent tables:
^: Based on Positive Ranks (Post-Acquisition Performance > Pre- Acquisition Performance)
#:Based on Negative Ranks (Post- Acquisition Performance < Pre-Acquisition Performance)
25
26

Table 9: Performance of Combined Firms where there are relatively Large and Small Target Firms

Relatively Large Target Firms Relatively Small Target Firms

Paired Samples
Test Mean t Sig. (2-tailed) Mean t Sig. (2-tailed)

CR1 – CR2 0.10 0.48 0.64 0.12 0.387 0.71


QR1-QR2 -0.17 -1.17 0.28 -0.30 -1.629 0.14
NWC1-NWC2 -0.08 -1.68 0.13 -0.08 -2.416 0.04
TDR1-TDR2 -0.03 -3.02 0.02 0.00 -0.405 0.70
ICR1-ICR2 9.07 1.09 0.31 -59.55 -1.447 0.18
ROCE1-ROCE2 0.83 1.01 0.34 0.05 1.96 0.08
RONW1- RONW2 -0.06 -0.67 0.53 2.18 1.084 0.31

In case of large size companies, the changes in quick companies is quite significant in terms of profitability. In
ratio, networking capital by sales ratio, total debt ratio, case of unrelated acquisitions, there is significant change
return on capital employed, and return on net worth is in the quick ratio and networking capital/sales in post
statistically significant in post acquisition period. Based acquisition period. Around 11 companies have positive
on the negative ranks (Post TDR<Pre TDR, which means returns in terms of quick ratio and 9 in terms of
less debt burden in post acquisition period) total debt networking capital/sales ratio.
ratio is statistically significant for one company.
In case of related acquisitions, liquidity performance of
In case of small size companies, in terms of the liquidity the combined firm between chemical industry
ratios the positive performance after acquisition is done companies Indoco Remedies Ltd and Solvay Pharma
by 21 companies and negative performance by 12 India Ltd; textile companies R S W M Ltd and Cheslind
companies. In terms of the leverage ratios the 10 Textiles Ltd. has improved in post acquisition period.
companies have shown increase where as rest have The profitability performance of all the companies has
shown decrease. The improvement in the networking reduced in post acquisition period. Indoco Remedies Ltd
capital by sales is statistically significant. In terms of the and Solvay Pharma India Ltd deal has been successful in
profitability ratios the positive performance after reducing the debt burden in post acquisition period along
acquisition is made by eight companies while negative with increasing the interest paying capacity. But the rest
performance is made by 14 companies. of the related deals were unable to create interest paying
capacity and had high debt burden in post acquisition
In case of related acquisition deals, the profitability ratios
period.
reduced significantly after acquisition. In case of
unrelated acquisitions, there is significant improvement Limitations of the Study
in the liquidity of companies after acquisition in terms of
• Only manufacturing sector companies are
quick ratio and networking capital/sales ratio.
considered for the study.

In case of related acquisitions, the change in profitability • The period of study is up to 2004-2007, since three
for those companies where there is improvement (in year post acquisition performance data are required
profitability) is significant in the positively performed for the study.

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Table 10 : Performance of Combined Firms where there are relatively Large and Small Target Firms

Relatively Large Target Firms Relatively Small Target Firms

Liquidity Ratios Leverage Profitability Liquidity Ratios Leverage Profitability


Ratios Ratios Ratios Ratios

Wilcoxon Signed
Ranks Test

ICR1
ICR1

TDR1
TDR1

ICR2-
ICR2-

NWC1
TDR2-
NWC1
TDR2-

NWC2-
NWC2-

ROCE1
ROCE1
RONW1

ROCE2-
RONW1
ROCE2-

CR2-CR1
RONW2-

RONW2-

CR2-CR1
QR2-QR1
QR2-QR1
Negative Ranks 6 3 3 0 4 6 5 6 2 2 4 5 7 7

Positive Ranks 3 6 6 9 5 3 4 4 8 8 6 5 3 3

Ties 0 0 0 0 0 0 0 0 0 0 0 0 0 0

© Asia - Pacific Institute of Management, New Delhi


Total 9 9 9 9 9 9 9 10 10 10 10 10 10 10

Mean +Ve 4.83 4.67 3.33 0 5.5 5.17 5.5 5.5 5 2.5 5.5 4.4 6.14 6.29
Rank
-Ve 5.33 5.17 5.83 5 4.6 4.67 5.5 5.5 5.63 6.25 5.5 6.6 4 3.67

Sum of +Ve 29 14 10 0 22 31 33 33 10 5 22 22 43 44
Ranks
-Ve 16 31 35 45 23 14 22 22 45 50 33 33 12 11

Test Statistics Z - - - - - - - -
-0.77(^) 1.01(#) 1.48(#) -2.67(#) -0.059(#) -1.01(^) -.178(#) 0.56(^) 1.78 -2.29 0.56(#) 0.56(#) 1.58(^) 1.68(^)
(#) (#)
Asymp. Sig. (2-tailed) 0.441 0.314 0.139 0.008 0.953 0.314 0.859 0.58 0.07 0.02 0.58 0.58 0.12 0.09
Notes: The symbols used in this table as well as subsequent tables:
^: Based on Positive Ranks (Post-Acquisition Performance > Pre- Acquisition Performance)
#:Based on Negative Ranks (Post- Acquisition Performance < Pre-Acquisition Performance)
27
28

Table 11: Performance of Large and Small Size Companies (Combined Firms)

Large Size Companies Small Size Companies


Paired Differences Paired Differences
Paired Samples
Test Mean t Sig. (2-tailed) Mean t Sig. (2-tailed)

CR1 – CR2 0.18 0.99 0.35 -0.05 -0.17 0.87


QR1-QR2 -0.25 -2.11 0.06 -0.26 -1.46 0.18
NWC1-NWC2 -0.05 -1.85 0.10 -0.10 -2.40 0.04
TDR1-TDR2 -0.02 -1.83 0.10 -0.01 -1.50 0.17
ICR1-ICR2 -29.63 -0.96 0.36 -20.98 -0.72 0.49
ROCE1-ROCE2 0.08 2.17 0.06 0.69 1.03 0.33
RONW1- RONW2 2.25 1.12 0.29 -0.04 -0.51 0.62

• Only long term performance measures are traditional performance measures it is found that the
considered. Short term returns as a result of acquirer who has taken over relatively larger companies
announcements of M&A (event studies) are not compared to their size has performed negatively. There is
considered. Long year is defined as three years only. no difference in performance if the companies are
segregated into related and unrelated acquisitions. Both
• Multiple acquisitions (same company making more
have negative returns in the post acquisition period.
than one acquisition deals within the sample period)
Larger the size of acquirer company, larger the loss to
are not excluded from sample keeping in view the
their shareholder as they earn negative returns. It may be
sample size.
the fact that larger firms made larger acquisitions which
Summary and Concluding Remarks earned them larger losses.
This study attempted to evaluate the post acquisition Scope of Further Study
performance of manufacturing companies in India using
The study can be applied in the merger cases in
both traditional performance measures of corporate
manufacturing sector. Study can be made on the pre and
performance. Although the results are subject to
post acquisition in non manufacturing companies. Apart
limitations noted above, this is an important study in
from the liquidity, solvency and profitability other
academic literature in Indian M&A context given the
performance parameters like cash flows can be used to
significance of acquisitions in Indian companies in
know the performance of companies gone for M&A
recent years. There is mixed results of companies’
strategy.
performance in post acquisition period. Using the

Notes:
All the financial parameters are followed by 1 after the abbreviation if those are related to pre-acquisition and likewise
followed by 2 if those are related to post-acquisition.

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Table 12: Performance of Large and Small Size Companies (Combined Firms)

Large Size Companies Small Size Companies

Liquidity Ratios Leverage Profitability Liquidity Ratios Leverage Profitability


Ratios Ratios Ratios Ratios

Wilcoxon Signed
Ranks Test

ICR1
ICR1

TDR1
TDR1

ICR2-
ICR2-

NWC1
TDR2-
NWC1
TDR2-

NWC2-
NWC2-

ROCE1
ROCE1
RONW1

ROCE2-
RONW1
ROCE2-

CR2CR1
RONW2-

RONW2-

CR2-CR1
QR2-QR1
QR2-QR1
Negative Ranks 7 2 2 1 6 7 8 6 3 3 3 4 8 6

Positive Ranks 3 8 8 9 4 3 2 5 8 8 8 7 3 5

© Asia - Pacific Institute of Management, New Delhi


Ties 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total 10 10 10 10 10 10 10 11 11 11 11 11 11 11

Mean +Ve 5.57 4.5 5 1 4.33 6.71 6.25 5.83 5.67 3 5.67 7 5.88 5.17
Rank
-Ve 5.33 5.75 5.63 6 7.25 2.67 2.5 6.2 6.13 7.13 6.13 5.43 6.33 7

Sum of +Ve 39 9 10 1 26 47 50 35 17 9 17 28 47 31
Ranks
-Ve 16 46 45 54 29 8 5 31 49 57 49 38 19 35

Test Statistics Z - - - - - - - - - - - - - -
1.17(^) 1.89(#) 1.78(#) 2.70(#) 0.15(#) 1.99(^) 2.29(^) 0.18(^) 1.42(#) 2.13(#) 1.42(#) 0.44(#) 1.24(^) 0.18(#)

Asymp. Sig. (2-tailed) 0.241 0.059 0.074 0.007 0.878 0.047 0.022 0.859 0.155 0.033 0.155 0.657 0.213
Notes: The symbols used in this table as well as subsequent tables:
^: Based on Positive Ranks (Post-Acquisition Performance > Pre- Acquisition Performance)
#:Based on Negative Ranks (Post- Acquisition Performance < Pre-Acquisition Performance)
29
30

Table 13: Post Acquisition Performance according to Type of Deal

Related Firms Unrelated Firms

Paired Samples
Test Mean t Sig. (2-tailed) Mean t Sig. (2-tailed)

CR1 – CR2 0.42 1.59 0.15 -0.21 -1.05 0.32


QR1-QR2 -0.05 -0.33 0.75 -0.41 -2.99 0.01
NWC1-NWC2 -0.04 -1.69 0.13 -0.10 -2.55 0.03
TDR1-TDR2 -0.02 -1.76 0.12 -0.01 -1.60 0.14
ICR1-ICR2 -28.21 -0.81 0.44 -22.77 -0.86 0.41
ROCE1-ROCE2 0.13 4.49 0.00 0.60 0.97 0.35
RONW1- RONW2 0.30 2.82 0.02 1.61 0.95 0.36

References of Firm Specific and Deal


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Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Table 14: Post Acquisition Performance according to Type of Deal

Related Firms Unrelated Firms

Liquidity Ratios Leverage Profitability Liquidity Ratios Leverage Profitability


Ratios Ratios Ratios Ratios

Wilcoxon Signed
Ranks Test

ICR1
ICR1

TDR1
TDR1

ICR2-
ICR2-

NWC1
TDR2-
NWC1
TDR2-

NWC2-
NWC2-

ROCE1
ROCE1
RONW1

ROCE2-
RONW1
ROCE2-

CR2CR1
RONW2-

RONW2-

CR2-CR1
QR2-QR1
QR2-QR1
Negative Ranks 7 4 2 1 7 9 9 6 1 3 3 3 5 5

Positive Ranks 2 5 7 8 2 0 0 6 11 9 8 9 6 7

© Asia - Pacific Institute of Management, New Delhi


Ties 0 0 0 0 0 0 0 0 0 0 1 0 1 0

Total 9 9 9 9 9 9 9 12 12 12 12 12 12 12

Mean +Ve 5.14 5 4.00 6.00 4.29 5.00 5.00 5.67 5.00 3.83 4.83 5.33 6.4 6
Rank
-Ve 4.50 5 5.29 4.88 7.5 0 0 7.33 6.64 7.39 6.44 6.89 5.67 6.86

Sum of +Ve 36 20 8 6 30 45 45 34.00 5.00 11.5 14.5 16 32 30


Ranks
-Ve 9 25 37 39 15 0 0 44.00 73 66.5 51.5 62 34 48

Test Statistics Z - - - - - - - - - - - - - -
1.60(#) 0.30(^) 1.72(^) 1.96(^) 0.89(^) 2.67(^) 2.67(^) 0.39(#) 2.67(#) 2.16(#) 1.65(#) 1.81(#) 0.09(#) 0.71(#)

Asymp. Sig. (2-tailed) 0.11 0.767 0.086 0.051 0.374 0.008 0.008 0.695 0.008 0.031 0.1 0.071 0.929 0.48
Notes: The symbols used in this table as well as subsequent tables:
^: Based on Positive Ranks (Post-Acquisition Performance > Pre- Acquisition Performance)
#:Based on Negative Ranks (Post- Acquisition Performance < Pre-Acquisition Performance)
31
32

Tell Us? Evidence from Firms that make many


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Kumar, B. R., and Rajib, P. (2007). Mergers and Acquisitions Worthwhile?An
Corporate performance in India:An

Empirical Study of the Post Acquisition Performance of


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33

Economics, 27(2-3), 223-243. 67-84.

Pazarskis, M., Vogiatzogloy, M., Christodoulou, P., and


Drogalas, G. (2006). Exploring the Improvement of
Corporate Performance after Mergers-The Case of
Greece, International Research Journal of Finance and
Economics, 6, 184-192.

Ramaswamy, K. P. and Waegelein, J.F. (2003). Firm


Financial Performance following

Mergers, Review of Quantitative Finance and


Accounting, 20, 115–126.

Rosa, R.D.S., Engel, R., Moore, M. and Woodliff, D.


(2003). PostAcquisition
Performance and Analyst following US Evidence,
R e t r i e v e d f r o m
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/MarkMoore.pdf, [accessed 9/3/2010]

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© Asia - Pacific Institute of Management, New Delhi


Asia-Pacific Finance and Accounting Review
Vol. I, No. 1, October - December 2012
pp. 34-51, ISSN: 2278-1838
www.asiapacific.edu/far

Inter Linkages of Indian Stock Market with


Advanced Emerging Markets
Dr. Vanita Tripathi 1, Ms. Shruti Sethi 2

This paper examines the short run and long run inter linkages of the Indian stock market with those of Advanced
emerging markets viz. Brazil, Hungary, Taiwan, Mexico, Poland and South Africa using daily data for the period 1
January 1992 to 31st December 2009. Using Johansen co-integration test and Granger’s causality test we find that
the short run and long run inter linkages of the Indian stock market with these markets has increased over the study
period. Unidirectional causality is found in most cases. The findings have important implications for policy
regulations and investment decision making.

Key Words: Stock Market Inter linkages, Financial Integration, Market Efficiency, Portfolio Diversification,
Investment Decision, Johansen Co integration test.

JEL classification: G10, G11, G14, G15

Introduction According to the portfolio theory propounded by


Markowitz (1952), the diversification of portfolio is
In the present world that is characterized by massive beneficial only when the correlation among the assets in
liberalization and growing multilateral relations among which the investment is made is low or preferably
economies, the study of inter linkages among economies negative. From this fact it can be derived that in case of
hold very high relevance. Stock markets being an interlinked markets (which demonstrate high
important vehicle in facilitating the capital raising and correlations) the diversification benefits are wiped off.
movement, have gained unparallel importance. Due to Therefore, the analysis of the relationship that the two
this fact researchers worldwide have shown keen interest stock markets have will facilitate global investors in
in the area of the inter linkages of the stock markets since reaching a better investment decision. To be in an
1960s resulting into creation of enormous literature. The advantageous position one should invest in the markets
dynamic global environment makes the relationship which are not well interlinked.
among the economies ever changing; therefore, this area
demands longitudinal research. (Siddique 2009). This Inter linkages among stock markets have important
paper analyzes the inter linkages of the Indian stock implications for the macroeconomic policies of a nation
market with that of the advanced emerging stock as well. Over the time the economies are opening up as
markets. The study of stock market inter linkages has most of them are on the path of liberalization leading to
important implications for the investors as well the closely knit economies. Increased movement of capital
policy makers. in and out of the economies both on the short run and the

1
Department of Commerce, Delhi School of Economics, University of Delhi, INDIA. (E-mail : vanitatripathi1@yahoo.co.in)
2
Research Scholar, Department of Commerce, Delhi School of Economics, University of Delhi, INDIA. (E-mail : shrutisethi0906@gmail.com)
35

long run basis started happening at an exuberantly large those areas, resulting into plethora of literature. Broadly,
scale. Stock markets are one of the mediums through the research in this area can be divided into three
which this capital movement occurs. Such capital flows categories. In the first category exist the studies
impact the foreign exchange reserves and the foreign undertaken with the objective of finding the short run and
exchange rates. Changes in the foreign exchange rates the long run inter linkages, whereas, others focus on
bring about the change in the trade competitiveness and empirically exemplifying the plausible reasons behind
trade relations leading to a change in the balance of the inter linkages (discussed above). The third category
payment position of an economy. All these are important caters to analyzing the impact of some important events
aspects that need consideration for the policy making. In (e.g. OPEC oil crisis, South East Asian crisis, etc) on the
addition to the above highlighted points, the level of inter linkages between the markets considered.
stock market inter linkage with others is an important In the first category, some studies are undertaken to
determinant of the contagion effect that an economy will check the inter linkages between the developed markets,
face from the rest of the world. If the stock market of an whereas others focus on finding the relationship among
economy is highly linked with the other markets then the stock markets of a particular region (e.g. Asian
there is a fear of high contagion effect of the happenings region, American region, etc). United States of America,
in the rest of the world through the stock market route. considered the dominant and most influential economy
The knowledge of this area of finance can equip the of the world also occupies a dominant position in the
policy makers to take better decisions. research. Many studies focus on analyzing the impact of
Another critical area is efficiency of the markets. If the US stock market on the others or on a region as a group.
markets are found to be integrated then the speed with Literature also exists in the area of emerging markets.
which the innovations in one market are absorbed by the The Indian stock market too has been analyzed by
other determines the informational efficiency of the researchers (Lamba (2004), Mukherjee and Mishra
market. Eun and Shim (1989), found that the dynamic (2005, 2007), Bose and Mukherjee (2006), Wong,
response pattern of the stock markets is consistent with Agarwal and Du (2005), Siddiqui (2009)) in the recent
the notion of informational efficiency. years. The inter linkages has been checked with many
Many researchers have attempted to ascertain the reasons stocks markets of both developed and the developing
behind the inter linkages among the stock market. nations. Mixed evidences have been found. The present
According to Janakiramanan and Lamba (1998), the study is undertaken to analyze the inter linkage of the
presence of a dominant economy, geographical and Indian stock market with that of the advanced emerging
economic proximity, common investor group and markets (Brazil, Hungary, Taiwan, Mexico, Poland and
multiple stock listings could be the probable reasons South Africa) over the period of 17 years (January 1992
behind stock market inter linkages. Pretorius (2002) to December 2009). The study also looks into the
divides the reasons behind stock market integration into changes in the inter linkages that have occurred over
three: contagion effect (a part of stock market co period of the study. Limited research exists where the
movement that cannot be explained by the economic relationship of Indian stock market is examined in
fundamentals), economic integration (trade relationships relation to the selected emerging markets. Thus, it
and co movement of economic indicators that impact the contributes to the existing literature.
stock returns) and stock market characteristics (market The economies in the world presently can be divided into
size, volatility and industry similarity). Out of multiple four categories on the basis of their development status –
variables empirically examined as reasons behind the developed, emerging, developing and underdeveloped
inter linkages of the stock market by various researchers, economies. The term emerging market recently has
bilateral trade and time trend were found significant by gained popularity. It was first coined by IFC
most researchers [Pretorius (2002), Mukherjee and (International Finance Corporation) to refer to a narrow
Mishra (2007) and Johnson and Soenen (2003)]. range of middle to high income economies among the
The research in this field started in 1960s. Grubel (1968), developing economies where the securities could be
Agmon (1972) and Hilliard (1979) are some of the earlier bought.
studies which focused on finding the relationship This term has been defined differently by different
between the then developed markets using the basic organizations. Some of the common characteristics of
techniques. As more stock markets started emerging, these economies are described here. They are those
research using new techniques too started spreading in

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
36

economies that are on the path of development and yet section introduces the study. Section II presents a brief
not reached the status of developed markets. They have overview of the existing literature in this area of research.
undertaken the path of liberalization and are still in Research objectives are given in section III while data
process of opening up their economies and making them and methodology used in the study is enumerated in
market oriented. The reform process is still going on at a section IV followed by the empirical results in section V.
rapid pace so as to attract the much needed foreign capital The last section summarizes and concludes the study.
for their development. They have huge population with II Literature Review
immense untapped large resources, high growth
potential, increasing involvement in world trade and Eun and Shim (1989) investigated the transmission of
influential presence in their respective regions. They stock market movements among nine largest stock
offer tremendous opportunities in trade and investment markets of the world (in terms of capitalization value in
(FDI and FII). They still face immense challenges (each 1985) viz. Australia, Canada, France, Germany, Hong
emerging market has its own challenge), for example, Kong, Japan, Switzerland, the United Kingdom, and the
poverty, large income gaps, corruption, etc. They offer United States. Multilateral interactions of significant
very high return but are also considered as high risk amount among the stock markets were observed. On an
markets. average 26 percent of the error variance of a national
stock market was attributed to collective innovations in
The growth rates of these economies are much higher the foreign stock markets. Intra regional factor was seen
than that of the developed world taken together. to be operative as the intra regional pair wise correlations
According to the International Business Report 2010 by were found higher than the inter region correlations
Grant Thorton, the emerging markets are the ones that are (U.S.-Canada and Germany – Switzerland exhibited
leading the way to recovery from the recent crisis. They high correlation whereas Canada – Japan and France –
are not only less hit; they are recovering at a faster pace Hong Kong showed near zero correlation).
than anticipated. The IMF’s January 2010 World Contemporaneous correlation of U.S. with other markets
Economic Outlook forecasts that emerging economies (except U.K.) was low suggesting that U.S. influences
will grow by six per cent this year, accelerating to 6.3 per the other markets and not the other way round (this
cent in 2011. By contrast, mature economies are forecast because the U.S. markets open after all other markets on
to grow by 2.1 per cent in 2010 and by 2.4 per cent next the same calendar day). It was also discovered that
year. Given the kind of influence they have on the world innovations in the US stock market are rapidly
economy, their say in the world forums is also increasing. transmitted to other stock markets in an identifiable
A lot of research has gone into the various aspects of the pattern.All respond to the shock most dramatically on the
emerging economies. This study is an attempt to take into first day i.e. with a lag of one day (except U.K. and
consideration the stock market of these economies. To Canada which react the same day) and the after that the
study the inter linkages of the stock market of the responses narrow down. The speed with which the
particular economy it is important that the stock market is transmission happens from the US market to others
developed enough to ensure the reliability of the results. indicates that the informational efficiency of the
To make sure of this important aspect, FTSE Group’s (the international stock markets.
pioneer index company) country classification 2009 is Agmon (1972) found that in their second sub period
used for selecting the economies. They classify emerging (1961-66) share price movements in Germany were the
markets according to a transparent rules-based process closest to U.S. stock market. U.K. and Japan were found
that monitors markets status against fifteen defined to have a similar type of relation with U.S. during this
Quality of Markets criteria. The FTSE Group has divided period. In the first period (1955-61) the relationship
the emerging markets into advanced emerging and between Germany and U.S. and Japan and U.S. was
secondary emerging countries based on the development found to be weaker. But it was stable between U.K. and
of their market infrastructure for greater granularity. U.S. Therefore the hypothesis that the four countries can
As per 2009 country classification, India is classified as a be treated as one single multinational equity market was
secondary emerging market. There are six advanced accepted. Similar behavior of the share prices of Japan
emerging markets, namely, Brazil, Hungary, Taiwan, and U.K. was observed and it was attributed to the
Mexico, Poland and SouthAfrica. possibility that they can be taken as specializing
This paper is divided into six sections. The present industries within one market (specialization in producing
low beta securities). It was also concluded that the non

© Asia - Pacific Institute of Management, New Delhi


37

U.S. markets responded within one period to the price stock markets of India and USA which was attributed to
changes in the U.S. market index. the strong economic and financial ties among these
Pretorius (2002) reported that bilateral trade, industrial markets. Unidirectional causality is observed in all
production growth differentials and the regional effect cases. UK and USA stock markets were found to Granger
(stock markets in same region are more correlated than cause Indian stock market implying that the
the stock markets in different regions) were found to be developments in the USA and the UK are transmitted to
significant by both the cross sectional and the time series the Indian stock market. Further, the Indian stock market
regression models in explaining the correlation is found to lead the Japanese and Chinese stock market.
coefficients among the emerging stock markets. In The study concluded that portfolio diversification
addition to above, a dummy to reflect the 1998 crisis was benefits exist as no long run equilibrium relationship is
found significant by the time series regression. The found among the markets.
variables not found significant were dropped from the III: Research Objectives
model. The model formulated was instrumental in This study has been undertaken to cater to the following
explaining Forty Percent of the variation in the objectives:
correlation coefficients.
(I) To find whether Indian stock market is
Click and Plummer (2005) found that there is only one interlinked with those of advanced emerging
co integrating vector regardless of data frequency, markets in the long run.
currency denomination and lag length. Secondly, all the
markets participate in the integration and none can be (ii) To find the changes if any, in the long run inter
excluded. Four common trends among the five variables linkages of Indian stock market with those of the
still remain implying that integration is not yet complete. advanced emerging markets over the period of
They are integrated in economic sense. The integration is the study.
strong to the extent that the exchange rate is not able to (iii) To determine the short term relationship between
impact it. the Indian stock market and the stock markets of
Kearney and Lucey (2004) examined three approaches advanced emerging markets.
to define the international market integration – (iv) To find the changes if any, that have occurred in
equalization of the rates of returns, international capital the nature of short term relationship between the
market completeness and sourcing the domestic Indian stock market and the stock markets of
investment. The first approach is the direct approach advanced emerging markets.
based on the law of one price according to which the
IV: Data and Research Methodology
financial assets having the same risk characteristic
should command similar return under the condition of Daily closing index values of the leading indices of the
unrestricted international capital flows. It has been countries under consideration (India, Brazil, Hungary,
mostly checked by using covered interest parity, Taiwan, Mexico, Poland and South Africa) are taken for
uncovered interest parity and real interest parity the period of study i.e. 1st January 1992 to 31st
conditions. The other two are indirect approaches. To December 2009. The study period starts with 1992 as that
measure the equity market integration there are three was the time the liberalization reforms were initiated in
ways – firstly through international CAPM, secondly by India and in other countries as well the process initiated
using correlation and co integration and the last relates to around the same period2 Table 1 gives the details of the
the time varying measures of integration. markets analyzed and the indices selected.
Tripathi and Sethi (2010) examined the integration of While selecting the indices for the analysis as far as
the Indian stock market with those of three developed possible the all share indices are avoided as they are less
economies viz. United States of America, Japan and The liquid and do not reflect the real picture. However, the
United Kingdom and the emerging economy of China data availability was given precedence over the
over the period of 10 years (1st January 1998 to 31st composition of the index. Finally out of the seven
October 2008). Positive and significant correlation was indices, only two indices namely, WIG and TAIEX are all
observed between the Indian stock market and the others share indices. The data for South Africa was available
studied. It was highly correlated with USA and least with since July 1995. The data for the advanced emerging
Japan. Weak long run integration was found between the markets have been extracted from www.bloomberg.com

2
Except in case of South Africa where it started in 1994. The data for South Africa has been taken since July 1995.

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
38

and for India www.nseindia.com is used. The log of the any, in the relationship between these markets have
index series was taken so as to iron out the fluctuations in occurred over 17 years (1992 to 2009):
the data. The return series was derived from the log of (i) Period I: 1992 – 1997
indices.
(ii) Period II : 1998- 2003
To accomplish the objectives of the study correlation
analysis, Granger Causality test and Johansen co (iii) Period III: 2004-2009
integration test are employed. The study period is divided Therefore, all the tests are applied on the total time period
into three time periods so as to determine the change if and the sub periods.

Table 1 : Countries and the indices selected

S.No. Name of the Region Stock Exchange Index Selected Abbreviation


country Used

1. Brazil America BM&FBOVESPA* BOVESPA Index BOVESPA

2. Hungary Europe Budapest Stock Exchange Budapest Stock Index BUX

3. Taiwan Asia Taiwan Stock Exchange (TWSE) TWSE TAIEX Index TAIEX

4. Mexico America Bolsa Mexicana de Valores, BMV Indice Mexico INMEX

5. Poland Europe Warsaw Stock Exchange WSE WIG Index WIG

6. South Africa Africa Johannesburg Stock Exchange FTSE/ JSE Top 40 Index JSE FTSE

7. India Asia National Stock Exchange CNX S&P NIFTY 50 NIFTY

*Bolsa de Valores, Mercadorias & Futuros de São Paulo

To analyze a time series, it is important to check for (1988) use nonparametric statistical method to consider
stationary properties. Granger’s causality test can be the serial correlation in the error terms without adding
applied for a stationary time series only. A time series is lagged difference terms. The results of the PP test are
said to be (weakly) stationary if its mean and variance are similar to those of the ADF test (except BOVESPA was
constant over time and the value of the covariance found non stationary by PP test at level in time period I by
between the two (2) time periods depends only on the PP test). As the series are found to be integrated of order
distance or gap or lag between the two (2) time periods one (except BOVESPA as mentioned earlier), Granger
and not the actual time at which the covariance is causality test can be applied to the stock return series
computed (Gujrati & Sangeetha, 2007). (which is stationary).
To check whether the index series is stationary, the unit Granger causality test is a test of precedence using which
root tests, Augmented Dickey Fuller (ADF) Test and the it can be examined whether a time series is preceding
Phillip Perron (PP) Test, are applied. Random walk another one i.e. whether the past values of an
model with intercept and random walk model with independent time series are influencing the present
intercept and trend were checked and the most values of the dependent series.
appropriate model was selected. Optimal number of lags A time series Xt Granger-causes another time series Yt if
was selected using SIC. All the series are found to be
the later can be predicted with better accuracy by using
integrated of order 1 [I (1)] except BOVESPA that was
past values of Xt rather than by not doing so, other
found to be stationary at level for the total time period and
information being identical. Testing causal relations
time period 1. Therefore, it has been excluded from
between two stationary series ΔXt and ΔYt can be based
analysis for the said time periods. Phillips and Perron
on the following two equations:

© Asia - Pacific Institute of Management, New Delhi


39

=αβ' and β'yt is I(0). r Is the number of co integrating


p p
ΔYt = α0 + ∑α k ΔYt-k + ∑ βk ΔXt-k + μt (1) relations (the co integrating rank) and each column of β
k=1 k=1 is the co integrating vector. Johansen's method is to
estimate the П matrix from an unrestricted VAR and to
test whether we can reject the restrictions implied by the
p p
reduced rank of П .
ΔXt = φ0 + ∑ φk ΔXt-k + ∑ Φk ΔYt-k + υt (2)
k=1 k=1 Johansen co integration test uses two test statistics –
Trace Test and Maximum Eigenvalue statistic. As this
Where Δ is the difference operator, Yt-k and Xt-k represent test is to be applied on the non stationary series, the log of
the lagged value of Yt and Xt, μt and υt are disturbance index series was used. It was checked for lag 1 and 2 as in
terms assumed to be white noise. k = 1, 2, …., p is the lag the present world where the information transmission
length. The null hypothesis that Xt does not Granger- happens within minutes checking for more than 2 lags
cause Yt is not accepted if the βk’s (k>0) are individually as (here 2 lags means 2 days as daily data is being analyzed)
well as jointly significantly different from zero using does not seem theoretically appropriate. SIC was used to
standard test (F test). Similarly, Yt Granger-causes Xt if select the optimal number of lags out of the two in this
the Φk’s, k>0, coefficients of Yt are individually and / or case too. The results are tested at 5% level of
jointly different from zero. significance.

The test is employed on the stationary series which is the V: Empirical findings
stock return series. For determining the optimal number
of lags, the lag length criteria of VAR (found under the This section is divided into following six subsections
views of VAR in Eviews 6.0) was used. On the basis the each of them discussing the results of different tests:
SIC the lags were selected. In all cases lag one was (i) Descriptive Statistics
selected (i.e. one day in the present study). This implies
(ii) Graphical Exposition
that the test checked whether today’s return in the stock
market Y is preceded by previous day’s return of X stock (iii) CorrelationAnalysis
market. The results are checked at 1%, 5% and 10% level (iv) Unit Root Test Results
of significance.
(v) Granger Causality Results
VAR-based co integration tests using the methodology
developed in Johansen (1991, 1995) are used. (vi) Co integration Results

Consider a VAR of order : In each of the subsection the results are divided on the
basis of time period:
yt = A1yt-1+···+Apyt–p + Bxt+εt (3)
• Total Time Period (1st January 1992 to 31st
where yt is a k-vector of non-stationary I(1) variables, xt December 2009)
is a d-vector of deterministic variables, and εt is a vector • Time Period 1 (1st January 1992 -31st
of innovations. This VAR can be written as, December 1997)
p-1 • Time Period 2 (1st January 1998- 31st
Δyt = Пyt -1+ Σ φk PtΔyt-1 + Bαt + ---------------(4) (4) December 2003)
k=1 • Time Period 3 (1st January 2004- 31st
December 2009)
Where:
(I) Descriptive Statistics
p p Before going on to the main findings of the study, the
П = Σ Ai–I1 Pi = – Σ Aj summary statistics of the return series are presented.
i=1 j=i+1 Tables 2 to 5 show the mean, median, standard deviation,
skewness and kurtosis of the daily return series for the
Granger's representation theorem asserts that if the various time periods.
coefficient matrix П has reduced rank r k, then there
Positive daily returns are observed in all the countries
exist k x r matrices α and β each with rank r such that П

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
40

across all the time periods. The highest mean returns are
yielded in the Taiwan’s stock market in all periods except

Table 2 Summary Statistics of Daily Returns


Panel A: Total Time Period

BOVESPA BUX TAIEX INMEX WIG JSEFTSE NIFTY

Mean 0.003809 0.000721 0.004108 0.000658 0.001520 0.000462 0.000510


Median 0.002419 0.000643 0.000116 0.000941 0.000564 0.000838 0.000923
Std. Dev. 0.091377 0.017648 0.184477 0.017528 0.045503 0.014594 0.018327
Skewness 56.05502 -0.605054 46.30608 0.038643 45.20491 -0.423332 0.104415
Kurtosis 3525.130 14.01620 2164.409 8.875925 2594.162 9.160342 11.63300
Observations 4433 4492 4405 4507 4175 3625 4341

Panel B: Time Period I


BOVESPA BUX TAIEX INMEX WIG JSEFTSE NIFTY
Mean 0.006324 0.001494 0.006517 0.000808 0.002300 9.47E-05 0.000473
Median 0.005251 0.000728 0.000256 0.000717 0.001349 0.000612 0.000207
Std. Dev. 0.040545 0.015474 0.223881 0.017919 0.029144 0.011557 0.019441
Skewness -0.509651 -1.264052 37.61452 -0.184147 -0.090652 -2.862626 0.597326
Kurtosis 22.71756 25.04706 1425.687 10.34137 5.883719 48.15392 15.40079
Observations 1464 1493 1448 1485 1190 627 1356

Panel C: Time Period II


BOVESPA BUX TAIEX INMEX WIG JSEFTSE NIFTY
Mean 0.000525 0.000129 0.005659 0.000270 0.002001 0.000434 0.000371
Median 0.000866 0.000257 -0.001171 0.000321 0.000147 0.000185 0.000722
Std. Dev. 0.024948 0.019050 0.228712 0.018542 0.070436 0.014516 0.016266
Skewness 0.883047 -0.569972 37.98585 0.177220 34.48233 -0.284293 -0.063427
Kurtosis 18.88045 12.29069 1452.906 7.460533 1278.081 5.912041 5.418709
Observations 1485 1493 1473 1506 1476 1497 1497

© Asia - Pacific Institute of Management, New Delhi


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Panel D: Time Period III


BOVESPA BUX TAIEX INMEX WIG JSEFTSE NIFTY
Mean 0.004614 0.000542 0.000217 0.000896 0.000432 0.000645 0.000684
Median 0.001530 0.000912 0.000799 0.002007 0.000972 0.001491 0.001505
Std. Dev. 0.150636 0.018202 0.014579 0.016046 0.014380 0.015768 0.019227
Skewness 37.38981 -0.184160 -0.388428 0.146770 -0.410941 -0.134132 -0.266157
Kurtosis 1426.183 9.415691 5.928778 8.655050 5.950164 6.179007 10.59224
Observations 1484 1506 1484 1516 1509 1501 1488

(ii) Graphical Exposition correlated with South African stock market with r =
A graphical representation of the indices over the period 0.947, closely followed by Mexico. It is least correlated
of study is given in Figure1. It can be seen that there is an with that of Taiwan (r = .464). In the middle lie Poland,
upsurge in the all the indices starting around July 2003. Hungary and Brazil.
All the indices seem to be falling during the sub prime During first sub period (1992-97) positive and significant
crisis period. A co movement in the index series can be correlation is found with all the Advanced Emerging
observed in the last sub period hinting towards increasing Markets. It is most correlated with Taiwan (r = 0.644)
linkages over the period of the study. followed by Brazil, Poland, Mexico and Hungary. It is
Figure 1: Movement of Stock Indices (1st January least correlated with that of South Africa. During
1992 to 31st December 2009) second sub period ( 1998-2003) too, the Indian stock
market is significantly and positively correlated with all
BOVESPA WIG
BUX JSEFTSE
the Advanced Emerging Markets. The correlation
TAIEX NIFTY coefficients are higher in comparison to the first time
60000.00 INMEX
period. High correlation is found with Brazil and
Poland. It is equally correlated with Mexico and Hungary
with the r = 0.645. It is least correlated with South Africa
40000.00
as found in the earlier time period as well.
Value

In the third and last sub period ( 2004-2009) the


20000.00 correlations are higher across the board than that of the
earlier sub periods hinting towards increasing inter
linkages among the markets under consideration. The
0.00
Indian stock market is found to be very highly correlated
with the stock markets of Brazil, Mexico and South
01-JAN-92 01-NOV-95 01-SEP-99 02-JUL-03 02-MAY-07
DATE Africa. There is major shift in the trend in this time period
(iii) CorrelationAnalysis as compared to the earlier ones as South African stock
market which was least correlated has moved up
Tables 3 show the cross correlation matrices among the drastically and displays very high correlation (r= 0.967).
selected indices over the mentioned time periods. The log This high correlation in the last time period has impacted
of indices was taken so as to smoothen out the the correlation in the total period results largely. High
fluctuations in the data and all the tests are applied on the correlation as stated earlier is also found with other
logged series. The findings are discussed time period markets. It is least correlated with that of Taiwan (r =
wise: 0.692).
Over the entire period of the study Indian stock market is
significantly and positively correlated with all the
Advanced Emerging Markets (refer Table 6). It is most

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
42

Table 3 : Correlations Analysis


Panel A: Correlation among (Log) Indices (Total Time Period)

BOVESPA BUX TAIEX INMEX WIG JSEFTSE NIFTY


BOVESPA 1 0.840* 0.573* 0.746* 0.925* 0.944* 0.621*
BUX 0.840* 1 0.544* 0.928* 0.897* 0.857* 0.787*
TAIEX 0.573* 0.544* 1 0.458* 0.543* 0.159* 0.464*
INMEX 0.746* 0.928* 0.458* 1 0.867* 0.973* 0.939*
WIG 0.925* 0.897* 0.543* 0.867* 1 0.911* 0.799*
JSE FTSE 0.944* 0.857* 0.159* 0.973* 0.911* 1 0.947*
NIFTY 0.621* 0.787* 0.464* 0.939* 0.799* 0.947* 1

Panel B: Correlation among (Log) Indices (Time Period I)


BOVESPA BUX TAIEX INMEX WIG JSE FTSE NIFTY
BOVESPA 1 0.749* 0.769* 0.777* 0.926* 0.577* 0.627*
BUX 0.749* 1 0.853* 0.947* 0.742* 0.571* 0.497*
TAIEX 0.769* 0.853* 1 0.829* 0.702* 0.541* 0.644*
INMEX 0.777* 0.947* 0.829* 1 0.777* 0.531* 0.543*
WIG 0.926* 0.742* 0.702* 0.777* 1 0.695* 0.587*
JSE FTSE 0.577* 0.571* 0.541* 0.531* 0.695* 1 0.337*
NIFTY 0.627* 0.497* 0.644* 0.543* 0.587* 0.337* 1

Panel C: Correlation among (Log) Indices (Time Period II)


BOVESPA BUX TAIEX INMEX WIG JSE FTSE NIFTY
BOVESPA 1 0.714* 0.080* 0.850* 0.730* 0.590* 0.807*
BUX 0.714* 1 0.214* 0.733* 0.801* 0.500* 0.645*
TAIEX 0.080* 0.214* 1 -0.126* 0.539* -0.498* 0.401*
INMEX 0.850* 0.733* -0.126* 1 0.582* 0.788* 0.645*
WIG 0.730* 0.801* 0.539* 0.582* 1 0.172* 0.819*
JSE FTSE 0.590* 0.500* -0.498* 0.788* 0.172* 1 0.324*
NIFTY 0.807* 0.645* 0.401* 0.645* 0.819* 0.324* 1

© Asia - Pacific Institute of Management, New Delhi


43

Panel D: Correlation among (Log) Indices (Time Period III)


BOVESPA BUX TAIEX INMEX WIG JSE FTSE NIFTY
BOVESPA 1 0.635* 0.640* 0.962* 0.748* 0.964* 0.974*
BUX 0.635* 1 0.756* 0.753* 0.912* 0.728* 0.716*
TAIEX 0.640* 0.756* 1 0.668* 0.832* 0.644* 0.692*
INMEX 0.962* 0.753* 0.668* 1 0.852* 0.984* 0.968*
WIG 0.748* 0.912* 0.832* 0.852* 1 0.840* 0.816*
JSE FTSE 0.964* 0.728* 0.644* 0.984* 0.840* 1 0.967*
NIFTY 0.974* 0.716* 0.692* 0.968* 0.816* 0.967* 1

* Correlation is significant at the 0.01 level


Overall it can be said that the correlation has increased series. It can be concluded that the index series are non
over the time period with Advanced Emerging Markets. stationary except that of BOVESPA (Brazil) in the total
This can be attributed to the opening up of all the time period and the first time period it is stationary (it non
economies over the period and rising trade relations with stationary by PP test for time period I). As this has a
these countries. There is a drastic increase in the different integration order than the other series, it has
correlation coefficient of the South African market in the been excluded from further tests for these time periods.
last sub period. The unit root test results for the return series show that all
(iv) Unit Root Test Results the stock markets are stationary. The same results are
Table 4 summarizes the results of the unit root tests (ADF obtained by both the ADF and the PP tests indicating
and PP test) for the log of index series and the return towards the robustness of the finding.

Table 4: Unit Root Test Results


Panel A: for the Index (log) Series

Index Time Period


Total period Period I Period II Period III
ADF PP ADF PP ADF PP ADF PP
BOVESPA -7.129169* -7.906181* -3.795651* -3.428921 -0.724995 -0.607315 -1.035176 -0.913944

BUX -1.731436 -1.657606 -0.300180 1.022003 -1.702547 -1.908254 -1.703420 -2.267874

TAIEX -2.698502 -2.725859 -1.065192 -1.065736 -2.044238 -2.064790 -1.371097 -1.396605

INMEX -2.711327 -2.548994 -0.595090 -0.686903 -2.539143 -2.409611 -1.836658 -1.653213

WIG -2.659747 -2.743879 -2.945859 -3.771932 -2.122061 -2.222208 -1.569113 -1.498391

JSE FTSE -2.151753 -2.084853 -1.636531 -1.842389 -1.603421 -1.549546 -1.674948 -1.685738

NIFTY -0.527179 -0.557510 -1.989718 -2.244292 -0.822510 -0.929030 -1.075339 -1.051686

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
44

Panel B: for the Return Series


Index Time Period
Total period Period I Period II Period III
ADF PP ADF PP ADF PP ADF PP
BOVESPA -18.20460* -201.6429* -5.882403* -39.66698* -37.22280* -37.28660* -36.98349* -320.6206*

BUX -61.35150* -61.34385* -32.79888* -32.86670* -36.96018* -36.98789* -14.40224* -35.75849*

TAIEX -765.7567* -753.1761* -542.6987* -543.9589* -496.4575* -481.9796* -37.09217* -37.09505*

INMEX -59.09867* -58.93585* -33.58735* -33.50051* -33.23902* -33.25935* -35.86121* -35.86960*

WIG -145.9813* -138.5660* -20.07744* -19.44968* -147.3918* -142.9372* -35.51945* -35.52248*

JSE FTSE -33.91923* -55.80905* -13.48698* -25.56606* -33.54679* -33.53888* -37.33749* -37.62471*

NIFTY -60.50414* -60.56933* -32.16592* -32.22585* -26.50318* -36.17417* -36.48422* -36.53812*

* Significant at 1%
Notes: ADF – Augmented Dickey Fuller test statistic, PP – Phillip Perron test statistic
Null Hypothesis: the series is non stationary

(v) Granger Causality Test Results However in the second sub period unidirectional
This test shows the short term relationship of precedence precedence is observed in all cases expect with Poland
among variables. It is applied on the stationary series. In where no relationship was found. Indian returns were
the present study it is the daily return series. This found to be preceded by Brazilian, Mexican, Hungarian
changes the variable that is being interpreted i.e. the and South African returns. The Indian stock returns
returns. Optimal number of lag was selected using SIC unidirectionally precede Taiwan’s stock returns.
and in all cases it was found to be Lag 1 (implying one While in the last sub period unidirectional relationship
day). This implies that the results display whether the was found in all cases except between the Indian and the
previous day returns of X stock market are influencing Hungarian returns where both of them found to be
today’s return in the stock market under consideration. impacting each other. The Indian stock returns were
The results are checked till 10% level of significance. discovered to have weaker impact on the Hungarian
As shown in Table 5 for the Total Period, no relationship stock returns as it is significant at 10%. In addition to the
was found between the Indian and the Hungarian returns. returns which were preceding the Indian returns in the
Same holds true for Poland as well. Unidirectional previous period, the Poland returns too were found to be
causality was found between three pairs. Both the preceding Indian returns which were not the case in the
Mexican and the South African returns were discovered earlier time periods. Indian returns as in the earlier time
to precede the returns in the Indian stock market. On the period were found to be preceding the returns of Taiwan’s
other hand, Indian returns were observed to be preceding stock market. Similar causality results were reported by
the returns in Taiwan’s stock market. Siddiqui (2009) in context of Indian and Taiwan’s return
for the period June 2004 to June 2009.
During first sub period no relationship of precedence was
found with Taiwan and the Poland. Mexican (significant
at 1%), Hungarian (significant at 5%) and South African
returns (significant at 10%) were discovered to be
preceding Indian returns. This implies that the Indian
returns are being impacted by the previous day’s returns
of the earlier mentioned countries.

© Asia - Pacific Institute of Management, New Delhi


45

Table 5: Pair wise Granger Causality Test Results


Panel A: Total Time Period
Null Hypothesis Observations F statistic Prob.
BUX does not Granger Cause NIFTY 3843 0.77207 0.3796
NIFTY does not Granger Cause BUX 2.68772 0.1012
INMEX does not Granger Cause NIFTY 3846 95.8691 2.E-22*
NIFTY does not Granger Cause INMEX 0.66651 0.4143
TAIEX does not Granger Cause NIFTY 3712 0.00768 0.9302
NIFTY does not Granger Cause TAIEX 44.9484 2.E-11*
WIG does not Granger Cause NIFTY 3477 0.09551 0.7573
NIFTY does not Granger Cause WIG 0.85738 0.3545
JSEFTSE does not Granger Cause NIFTY 3213 14.1755 0.0002*
NIFTY does not Granger Cause JSEFTSE 0.17278 0.6777

Panel B: Time Period I


Null Hypothesis Observations F statistic Prob.
BUX does not Granger Cause NIFTY 1160 5.81946 0.0160**
NIFTY does not Granger Cause BUX 1.08057 0.2988
INMEX does not Granger Cause NIFTY 1138 8.04559 0.0046*
NIFTY does not Granger Cause INMEX 2.15622 0.1423
TAIEX does not Granger Cause NIFTY 1085 0.10436 0.7467
NIFTY does not Granger Cause TAIEX 0.27007 0.6034
WIG does not Granger Cause NIFTY 794 2.26543 0.1327
NIFTY does not Granger Cause WIG 0.02080 0.8854
JSEFTSE does not Granger Cause NIFTY 540 2.82908 0.0932***
NIFTY does not Granger Cause JSEFTSE 0.21999 0.6392

Panel C: Time Period II


Null Hypothesis Observations F statistic Prob.
BOVESPAdoes not Granger Cause NIFTY 1326 35.8581 3.E-09*
NIFTY does not Granger Cause BOVESPA 0.07812 0.7799
BUX does not Granger Cause NIFTY 1341 4.86839 0.0275**
NIFTY does not Granger Cause BUX 0.00195 0.9648
INMEX does not Granger Cause NIFTY 1354 38.5839 7.E-10*
NIFTY does not Granger Cause INMEX 0.30174 0.5829
TAIEX does not Granger Cause NIFTY 1313 0.02883 0.8652
NIFTY does not Granger Cause TAIEX 18.8142 2.E-05*
WIG does not Granger Cause NIFTY 1326 0.11565 0.7339
NIFTY does not Granger Cause WIG 0.59255 0.4416
JSEFTSE does not Granger Cause NIFTY 1344 25.5840 5.E-07*
NIFTY does not Granger Cause JSEFTSE 0.11085 0.7392

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
46

Panel D: Time Period III


Null Hypothesis Observations F statistic Prob.
BOVESPAdoes not Granger Cause NIFTY 1314 3.86261 0.0496**
NIFTY does not Granger Cause BOVESPA 0.76963 0.3805
BUX does not Granger Cause NIFTY 1342 4.03717 0.0447**
NIFTY does not Granger Cause BUX 3.71828 0.0540***
INMEX does not Granger Cause NIFTY 1354 82.2928 4.E-19*
NIFTY does not Granger Cause INMEX 0.00058 0.9808
TAIEX does not Granger Cause NIFTY 1314 0.29619 0.5864
NIFTY does not Granger Cause TAIEX 60.3250 2.E-14*
WIG does not Granger Cause NIFTY 1357 4.67620 0.0308**
NIFTY does not Granger Cause WIG 0.00505 0.9434
JSEFTSE does not Granger Cause NIFTY 1329 3.04205 0.0814***
NIFTY does not Granger Cause JSEFTSE 0.34430 0.5575

Panel E: Summary of Granger Causality Results


NIFTY and Total Time Period Time Period I Time Period II Time Period III
BOVESPA - - BOVESPA → NIFTY* BOVESPA → NIFTY**
BUX NO BUX → NIFTY** BUX → NIFTY** BUX ↔ NIFTY^
TAIEX NIFTY → TAIEX* NO NIFTY → TAIEX* NIFTY → TAIEX*
INMEX INMEX → NIFTY* INMEX → NIFTY* INMEX → NIFTY* INMEX → NIFTY*
WIG NO NO NO WIG → NIFTY**
JSE FTSE JSE → NIFTY* JSE → NIFTY*** JSE → NIFTY* JSE→ NIFTY***
Notes: * significant at 1%, **significant at 5%, *** significant at 10%
→ signifies unidirectional causality
↔ signifies bidirectional causality
^ Causality flowing from NIFTY to BUX is significant at 10%; causality flowing from BUX to NIFTY is
significant at 5%

Overall it can be said that there are short term linkages of long term equilibrium relationship among the
with these markets have been increasing over the period variables under consideration. Pairwise test is used
of study. Indian stock returns were found to be impacted wherein; each of the Advanced Emerging Markets is
by the previous day stock returns of South Africa and tested with the Indian stock market. The test is applied on
Mexico in all the time periods. Indian stock returns were the non stationary series which is the log of index series
observed to precede the Taiwan’s stock returns in all the in the present case. The results are presented time period
time periods except the first. Relationship with Poland wise in the following subsections:
was found to be established only in the last time period. As shown in Table 6, during the total study period ,co
(vi) Co integration Test Results integration was found only in one case. One co
This section enumerates the results of the Johansen co integrating equation was found between India and
integration test. This test is applied to check the existence Poland by both the trace test and the Eigenvalue test
indicating towards long term relationship among the two

© Asia - Pacific Institute of Management, New Delhi


47

markets. No co integration was found with the other with these markets. No long term relationship was found
Advanced Emerging Markets. with Hungary, Taiwan and Poland. In June 2003, India –
During the period 1992-1997 Indian stock market is not Brazil-South Africa (IBSA) Dialogue Forum, was set up
found to be co integrated with any of the Advanced as a coordinating mechanism to promote cooperation and
Emerging Markets in this period. The first time period consensus on issues of trade, poverty alleviation,
being the period when all these stock markets were in the intellectual property rights, social development,
initial stage of their development and opening up, also agriculture, climate change, culture, defense, education,
being the period of lesser developed technology and energy, health-care, information society, science and
slower information transmission, the results stand technology, peaceful nuclear energy, tourism and
justified. Similar results are found in the period 1998- transport between these three emerging economies
2003. No long term relationship is found with any of the belonging to different continents of the world. Since then
Advanced Emerging Markets. The same results are it has been actively engaged in multitude activities and
obtained by both the trace test and maximum eigen value summits to further the cause. The consequences of this
test. forum along with the other measures taken in the
direction of building close economic ties could be reason
However in the last sub period ( 2004-2009) Indian stock behind the increased inter linkages of Indian stock
market is found to be integrated with three Advanced market with those of Brazil and South Africa in the last
Emerging Markets viz. Brazil, Mexico and South Africa. time period. Since 2005, a lot of bilateral agreements are
These results are in line with that of the correlation results signed with Mexico.
which displayed very high correlation in the last period

Table 6: Co integration Test Results


Panel A: Total Time Period
NIFTY No of Trace Critical Prob Maximum Critical Prob.
and Hypothesized CE statistic value value Eigenvalue Value
Statistic
BUX None 9.564875 20.26184 0.6824 8.295024 15.89210 0.5129
At most 1 1.269851 9.164546 0.9125 1.269851 9.164546 0.9125
TAIEX None 5.241615 20.26184 0.9757 3.646326 15.89210 0.9730
At most 1 1.595289 9.164546 0.8560 1.595289 9.164546 0.8560
INMEX None 8.626218 20.26184 0.7706 6.506573 15.89210 0.7292
At most 1 2.119644 9.164546 0.7538 2.119644 9.164546 0.7538
WIG None 20.63292* 20.26184* 0.0445* 18.66815* 15.89210* 0.0179*
At most 1 1.964773 9.164546 0.7847 1.964773 9.164546 0.7847
JSE FTSE None 14.73553 20.26184 0.2419 13.95116 15.89210 0.0985
At most 1 0.784364 9.164546 0.9754 0.784364 9.164546 0.9754

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
48

Panel B : Time Period I

NIFTY No of Trace Critical Prob Maximum Critical Prob.


and Hypothesized CE statistic value value Eigenvalue Value
Statistic
BUX None 16.09489 20.26184 0.1700 14.12452 15.89210 0.0928
At most 1 1.970369 9.164546 0.7836 1.970369 9.164546 0.7836
TAIEX None 8.442990 20.26184 0.7868 7.225210 15.89210 0.6420
At most 1 1.217779 9.164546 0.9207 1.217779 9.164546 0.9207
INMEX None 7.162488 20.26184 0.8867 6.694475 15.89210 0.7066
At most 1 0.468013 9.164546 0.9960 0.468013 9.164546 0.9960
WIG None 14.89497 20.26184 0.2324 8.437888 15.89210 0.4963
At most 1 6.457086 9.164546 0.1583 6.457086 9.164546 0.1583
JSE FTSE None 6.982454 20.26184 0.8984 4.535855 15.89210 0.9248
At most 1 2.446598 9.164546 0.6882 2.446598 9.164546 0.6882

Panel C : Time Period II

NIFTY No of Trace Critical Prob Maximum Critical Prob.


and Hypothesized CE statistic value value Eigenvalue Value
Statistic
BOVESPA None 15.01157 20.26184 0.2257 14.69923 15.89210 0.0762
At most 1 0.312336 9.164546 0.9994 0.312336 9.164546 0.9994
BUX None 11.66436 20.26184 0.4793 10.96194 15.89210 0.2546
At most 1 0.702418 9.164546 0.9825 0.702418 9.164546 0.9825
TAIEX None 5.068302 20.26184 0.9800 3.644325 15.89210 0.9730
At most 1 1.423977 9.164546 0.8868 1.423977 9.164546 0.8868
INMEX None 6.995937 20.26184 0.8975 6.256009 15.89210 0.7587
At most 1 0.739927 9.164546 0.9794 0.739927 9.164546 0.9794
WIG None 14.67380 20.26184 0.2457 12.08249 15.89210 0.1812
At most 1 2.591312 9.164546 0.6594 2.591312 9.164546 0.6594
JSE FTSE None 7.963423 20.26184 0.8273 6.827632 15.89210 0.6905
At most 1 1.135791 9.164546 0.9330 1.135791 9.164546 0.9330

© Asia - Pacific Institute of Management, New Delhi


49

Panel D : Time Period III

NIFTY No of Trace Critical Prob Maximum Critical Prob.


and Hypothesized CE statistic value value Eigenvalue Value
Statistic
BOVESPA None 18.11195* 15.49471* 0.0197* 17.53504* 14.26460* 0.0147*
At most 1 0.576916 3.841466 0.4475 0.576916 3.841466 0.4475
BUX None 9.600824 20.26184 0.6789 5.391383 15.89210 0.8521
At most 1 4.209441 9.164546 0.3818 4.209441 9.164546 0.3818
TAIEX None 3.466591 20.26184 0.9985 3.135983 15.89210 0.9881
At most 1 0.330608 9.164546 0.9992 0.330608 9.164546 0.9992
INMEX None 24.93442* 20.26184* 0.0105* 21.29470* 15.89210* 0.0064*
At most 1 3.639719 9.164546 0.4684 3.639719 9.164546 0.4684
WIG None 7.899946 20.26184 0.8324 5.201680 15.89210 0.8703
At most 1 2.698267 9.164546 0.6385 2.698267 9.164546 0.6385
JSE FTSE None 15.74770* 15.49471* 0.0458* 14.42720* 14.26460* 0.0471*
At most 1 1.320507 3.841466 0.2505 1.320507 3.841466 0.2505
*Significant at 5%
Panel E : Summary of Johansen Co integration Test
NIFTY and Total Time Period Time Period I Time Period II Time Period III
BOVESPA - - NO YES
BUX NO NO NO NO
TAIEX NO NO NO NO
INMEX NO NO NO YES
WIG YES NO NO NO
JSE FTSE NO NO NO YES

It can be concluded from the cointegration test results that as these economies are growing and opening up to the world
the inter linkages among them have increased. The plausible reasons behind these results could be the liberalization
policies adopted by these countries, rapid information transmission, common investor group, rapid economic growth
and the increasing bilateral trade relations. [Pretorious (2002), Mukherjee and Mishra (2007) and Johnson and Soenen
(2002) found bilateral trade relations to be one of the major factors behind increasing inter linkages beside the other
factors].

Table 7: Bilateral Trade Growth Rate*


Market 1997- 2009 1997-2003 2004-2009
Brazil 24.56 15.08 36.66
Hungary 26.46 6.33 31.98
Taiwan 15.74 5.98 22.39
Mexico 25.82 9.42 38.47
Poland 18.60 18.17 27.43
SouthAfrica 21.35 19.35 20.57

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
50

Notes: *CAGR. periods. Indian stock returns were observed to precede


Data was available since 1997. the Taiwan’s stock returns in all the time periods except
the first. Relationship with Poland was found to be
Data source: Export Import Data Bank (Department of established only in the last time period. In the total time
Commerce, India) period and first time period three unidirectional relations
http://commerce.nic.in/eidb/ecntcomq.asp of precedence were observed. In the second time period
five unidirectional relations were found. In the last time
period five unidirectional and one bidirectional
Table 7 shows the growth rate of the bilateral trade with relationship (with Hungary) was found. Therefore, the
the advanced emerging markets. It can be clearly seen short term linkages with advanced emerging markets
that the trade with Mexico and Brazil has increased have increased over the period of study.
magnificently in the last sub period as compared to the
Long term inter linkage (as per the Johansen co
prior period.
integration test) was found only with Poland in the total
VI: Conclusions time period. No co integration was found in the first two
This paper examined the long term and short term inter time periods. The first time period is characterized when
linkages of the Indian stock market with advanced the liberalization measures were in their initial stage and
emerging markets (as per FTSE Group’s country the technology was lesser developed justifying the co
classification 2009) viz. Brazil, Hungary, Taiwan, integration results. In the last time period co integration
Mexico, Poland and South Africa over the period 1st is found with Brazil, Mexico and South Africa. A lot of
January 1992 to 31 December 2009 using daily data. The efforts in the direction of increasing the bilateral relations
time period was divided into three sub periods (Time with these markets have been undertaken in the last time
Period I: 1992 – 1997, Time Period II: 1998- 2003, Time period (eg. IBSA (India- Brazil- South Africa) dialogue
Period III: 2004 – 2009) so as check the changes in the forum was set up in June 2003; multiple agreements have
inter linkages if any, over the period of the study. To cater been signed with Mexico too. These efforts have
to the objectives of the study correlation analysis, increased the economic ties with these markets and could
Granger Test of Causality and Johansen co integration be a possible reason behind such results. Secondly, there
test were employed. is possibility of existence of the contagion effect
especially during the crisis period which could have led
The Indian stock market was found to be positively and to such results. Over the study period there has been an
significantly correlated with all the advanced emerging increase in the long run inter linkages with the markets
markets for total time period. Highest correlation was considered.
found with South Africa and least with Taiwan. The
correlation with the advanced emerging markets Therefore it can be concluded that both the short run and
increased over the study period. Indian stock market was long run inter linkages of Indian stock market with the
most correlated with Taiwan in the first time period and advanced emerging markets have increased over the
in the second time highest correlation was found with period of time. Plausible reason behind such results
Poland and Brazil. Least correlation was found with could be liberalization policies adopted by these nations,
South Africa in the both above mentioned time periods. increasing economic relations as a consequence of
Highest correlation coefficients were observed in the last various efforts undertaken, rapid information
time period being the latest period. Indian stock market transmission, contagion effect and common investor
was found to be most correlated with South Africa, Brazil group [Janakiramanan and Lamba (1998)]
and Mexico in the last time period and least with that of The study has important implications for the global and
Taiwan. There is major shift in the relationship in this institutional investors (which look at the emerging
time period as South Africa has become the most markets as an asset class). As the consequence of the
correlated market from the least correlated in the earlier increase in the inter linkages the portfolio diversification
time periods. benefits have gone down. Secondly, the causality results
The Granger causality test results revealed unidirectional can be used for policy making and regulations.
relationship of precedence in most cases. Indian stock References:
returns were found to be impacted by the previous day
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© Asia - Pacific Institute of Management, New Delhi


51

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Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
Asia-Pacific Finance and Accounting Review
Vol. I, No. 1, October - December 2012
pp. 52-66, ISSN: 2278-1838
www.asiapacific.edu/far

The Relationship between Comprehensiveness


of Corporate Disclosure and Firm
Characteristics in India
Prof. (Dr.) Sanjay Bhayani
Corporate governance and corporate disclosure is an important issue now-a-days. In India, a number of attempts have
been made on part of different governmental and non-governmental institutions for ensuring better corporate
governance as a mandatory disclosure. On other hand corporate disclosure are the disclosure made by the firm
voluntarily to increase transparency in the management of the firm. This research is an extension of previous research
where a set of variables is considered to examine their association with the level of corporate disclosure. The objective of
this study is to examine firm characteristics and their influence on corporate disclosure. These factors include Age of the
Firm, Listing Status of the Firm, Ownership Structure of the Firm, Leverage of the Firm, Size of the Audit Firm,
Residential Status of the Firm, Size of the Firm and Profitability of the Firm. In particular, the study aimed to determine
which of these factors were significantly related to increased corporate disclosure. The study used the disclosure index to
measure corporate disclosure on a sample of 45 listed non financial firm of India. The study is based on sample of NSE
50 firms for the period of 2008-09 to 2010-11. An unweighted disclosure index with 74 reporting items were applied to
sample firms. In the paper an attempt has been made to examine the quantum of corporate disclosure and its relationship
with corporate characters such as size, profitability, leverage, listing status, shareholding pattern, audit firm,
residential status of a firm, and age of the sample companies. To measure the association between the variables of the
study pearson correlation matrix was used. The results of the study indicate that the extent of corporate disclosure within
the sample firm varies within 15% to 75% (approximately) for the period of study. It implies that though all the firms
disclose mandatory information as required by law, but at the same time, a large number of firms disclose more than
required by legal provisions. These firms are globally recognized and have overseas operations too. These firms are also
known for maximization of the shareholders wealth. That is why these companies try to be more transparent in the eyes of
domestic as well as foreign investors and have better disclosure level. It has also been observed that the extent of
corporate disclosure is influenced by listing status of the firm, ownership structure, leverage of the firm, size of the audit
firm, size (as measured by total assets, sales and market capitalization), and profitability (as measured by return on
capital employed). The companies with large assets size, higher profitability, higher leverage, listing in foreign stock
exchanges, lower holding of promoters share and audited by big audit firms have tendencies to be more transparent and
hence disclose more information. However, age of a company and residential status do not significantly influence the
level of corporate disclosure.

Key Words: Corporate Governance, Corporate Disclosure, Disclosure Index, Firm Characteristics

Introduction practices. The changes have occurred not only in the


information content of annual reports, but also in
Corporate voluntary disclosure refers to information presentation. These changes are driven by the additional
made available at the discretion of the corporation. disclosure requirements prescribed through amendments
Liberalization and Globalization of Indian economy has to the Companies Act, 1956; by considerably amending
made more dynamic and transparent of Indian corporate disclosure requirements under SEBI regulations; and by
sector. In India, the last two decade has experienced additional disclosure requirements stipulated in revised
profound change in corporate financial reporting and new accounting standards. As a result of these

Professor, Department of Business Management, Saurashtra University, Rajkot, Gujarat, INDIA. (E-mail: sanjaybhayani@yahoo.com)
53

changes, companies listed on stock exchange have been Barret, M.E. (1977). , Zareski, M. (1996), and
forced to disclose the minimum information in their Camfferman, K. & Cooke, T.(2002).
annual reports as set out by the statutory requirements. It is worth noting that the essence of the quality of
However, particularly large and publicly traded leading disclosure (dependent variable) is not firmly defined. For
companies have gone beyond those minimum instance, Buzby, S.L. (1974) applied the term adequacy,
requirements. Reporting information voluntarily has Barret, M.E. (1977). and Wallace, R. S. O. & Naser, K.
become a norm for large companies. Companies compete (1995), used the term of comprehensiveness and Patton,
with an extensive amount of business information J. & Zelenka, I. (1997), used the term of extent.
voluntarily to establish competitive advantage in the
capital market. The disclosure of information is Furthermore, the number and type of firm characteristics
dependent on the characteristics of the firm. The study is (independent variable) vary among studies. A consistent
an attempt to assess empirically the extent of corporate finding is that size is an important predictor of corporate
disclosure practices and influence of firm characteristics. reporting behaviour. Most researchers in this area found a
close relationship between size and the extent of
With this end in view, the rest of the sections are disclosure Singhvi, S.S., & Desai, H.B. (1971), Kahl, A.
organized as follows: Section 2 presents the review of & Belkaoui A. (1981), Cooke, T. E. (1989), Cooke, T. E.
literature; Section 3 provides objectives of the study; (1992), Ahmed, K., & Nicholls, D. (1994)., Hossain, M.,
Section 4 describes the methodology of the study and Tan, L.M., Adams, M., (1994), Wallace, R. S. O., Naser,
development of hypotheses; Section 5 finds out the K., & Mora, A. (1994), Craig, R. & Diga, J. (1998),
results of the study; and Section 6 summarizes the Narasimhan and Vijayalakshmi (2006), Mahajan and
findings and draws a conclusion. Chander (2007), Mahajan and Chander (2008), Despina
2. EXTANT LITERATURE et. al. (2011), However, Ahmed, K., & Nicholls, D.
The section reviews some of the studies on the extent of (1994); Archambault, J.J., & Archambault, M.E. (2003),
corporate disclosure henceforth conducted since early and Akhtaruddin, M. (2005), did not find a relationship
1960 in the various countries of world. Since 1960s between size and level of disclosure.
various researcher has tried to study the corporate With the exception of size, findings concerning
disclosure practices. Among them are Cerf, A.R. (1961) association between company characteristics and
measured disclosure by an index of 31 information items corporate disclosure practices are mixed. Singhvi,
and concluded that financial reporting practices of many S.S.(1968), and Wallace, R. S. O., Naser, K., & Mora, A.
US companies need improvement. Several researchers (1994), Sehgal, Bhalla & Bhalla (2006), Mahajan and
have replicated his methodology. The majority of these Chander (2007), found a significant positive association
studies were applied to developed countries such as the between profitability and the level of corporate
UK Spero, L.L. (1979). , Firth, M. (1979), USA Buzby, disclosures, whereas, Belkaoui, A., & Kahl, A. (1978)
S.L. (1974). Lang, M., & Lundholm, R. (1993). Canada and Wallace, R. S. O. & Naser, K. (1995), Despina et.
Belkaoui, A., & Kahl, A. (1978), Sweden Cooke, T. E. al.(2011), observed a significant negative relationship
(1989), Switzerland Raffournier, B. (1995), Japan between the two variables and some other researchers
Cooke, T. E. (1992), and in Hong Kong Wallace, R. S. find no relationship at all McNally, G.M., Eng, L.H.,
O. & Naser, K. (1995). Hasseldine, C.R. (1982), Sehgal, Bhalla & Bhalla
A smaller group of studies have examined developing (2006), Mahajan and Chander (2008).
countries, such as Egypt Mahmood, A. (1999), Jordan Similarly, Hossain, M., Perera, M.H.B., & Rahman, A.R.
Naser, K., Alkhatib, K. and Karbhari, Y. (2002), Nigeria (1995) and Wallace, R. S. O. & Naser, K. (1995), found a
Wallace, R.S.O. (1987), Bangladesh Ahmed, K., & positive association between leverage and the level of
Nicholls, D. (1994), India Narasimhan and disclosure. Wallace, R. S. O., Naser, K., & Mora, A.
Vijayalakshmi (2006), Sehgal, Bhalla & Bhalla (2006), (1994), and Bradbury, M.E. (1992), Mahajan and
Mahajan and Chander (2007), Mahajan and Chander Chander (2007), Mahajan and Chander (2008), found no
(2008), Greece Despina et. al. (2011), Zimbabwe significant association between leverage and the extent
Owusu-Ansah, S. (1998), Bangaladesh Rahaman, M. of voluntary disclosure.
Mizanur (1999). Also, some studies have adopted a The results of the study Sehgal, Bhalla & Bhalla (2006),
comparative approach to assess the intensity of Mahajan and Chander (2007), Mahajan and Chander
disclosure across two or more countries, for example (2008), Despina et. al. (2011), have not found any

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
54

significance relation with age of the firm and level of disclosure requirements for these companies are
corporate disclosure. specialized & regulated by other regulatory authority.
Findings concerning relationship between auditing type Total 45 firms, including, Pharmaceutical, FMCG sector,
and the level of corporate disclosure are not consistent. Cement, Steel & Fertilizers, Automobile & others were
Singhvi, S.S., & Desai, H.B. (1971), Mahajan and selected. Annual reports of the firms were collected from
Chander (2007), Mahajan and Chander (2008), corporate offices of the companies and from the web sites
confirmed this hypothesis, but Firth, M. (1979), and of the firms.
Wallace, R. S. O., Naser, K., & Mora, A. (1994) did not 4.2 Computation of Index
report any relation. The annual report of firms were studied and differences
Association between the level of disclosure and industry were observed in the levels of information disclosed,
types provides mixed evidence. Cooke, T. E. (1989) which provided an important base for identifying the
findings report that manufacturing companies disclose items of the disclosure index. In order to improve the
more information than other types of companies. business reporting, several committees and studies were
Mahajan and Chander (2008), finds that software, It, undertaken all over the world like, The AICPA special
Media and telecommunication industry disclose more committee report and FASB steering committee report.
information than other industry. But the findings of These have also influenced the selection of the items in
Inchausti,B. (1997), Owusu-Ansah, S. (1998), and the index. Disclosure list used in the study by Meek et al.
Despina et. al. (2011), provide no evidence of this (1995) was also used extensively in this study. In all 74
association. items were included in the disclosure index.
Additionally, prior studies Owusu-Ansah, S. (1998), Items listed in the index are disclosed in the various
Wallace, R. S. O. & Naser, K. (1995), define mandatory sections of the annual report such as the director’s report,
disclosure as the presentation of a minimum amount of MDA and sections before the financial statements or
information required by laws, stock exchanges and the even in the chairman’s speech. Part of this information is
accounting standards setting body of facilitate evaluation also kept available through other sources of
of securities. communication by the companies and from sources such
Akhtaruddin, M. (2005), investigated the mandatory as the industry reports and communication through the
disclosure by 94 listed companies in Bangladesh and press. Certain information is required to be filed with the
found that companies, on average, disclose 44% of the registrar of companies. However, for this study, only the
items of information, which leads to the conclusion that annual reports are considered because of their general
prevailing regulations are ineffective monitors of nature as comprehensive documents and any user of the
disclosure compliance by companies. reports must get all the information about the firm in one
document.
Similarly, the present study concentrates on corporate
disclosure practices of Indian firm and influence of the The disclosure index is developed using the information
firm characteristics on it. listed in disclosure checklist. The content of the annual
report were examined & the scoring for the voluntary
3. OBJECTIVES OFTHE STUDY disclosure is done in the form of 1 & 0. If the disclosure
The primary objectives of the study is to assess the level item is present, then a score of (1) is given & if the item is
of corporate disclosure of listed firm in India and to not present then a score of (0) is entered as a score. The
measure empirically the association between firm entire annual report was scrutinized carefully before
characteristics and corporate disclosure levels of listed giving an item 0 or 1. The scores for each company were
firm in India. then aggregated. The voluntary disclosure index for each
of the companies was computed as Total Voluntary
4 .METHODOLOGY OFTHE STUDY:
Disclosures Divided by Maximum Voluntary
4.1 Sample selection: Disclosures. The disclosure index of the sample firm
The sample for the study was collected from the NSE 50 developed for the year ended 31st March, 2008 to 31st
Index, reason behind selection of NSE 50 index was that March, 2010 of the sample firm.
includes the major sector firms of India. So sample can be 4.3 Model Development:
considered as representative sample. From this sample,
In the present study to examine the impact of
banking & finance companies were eliminated as the

© Asia - Pacific Institute of Management, New Delhi


55

independent variables on the disclosure score of the firm


the following Ordinary Least Square (OLS) regression
model has been used.

Disclosure Score = β0 + β1AGE + β2LIST+ β3OWNER + β4LEV + β5AUDIT + β6RS + β7SIZE + β8PROFIT + €

Where
OWNER = Ownership Structure of the Firm
LEV = Leverage of the Firm
AUDIT = Size of theAudit Firm
RS = Residential Status of the Firm
SIZE = Size of the Firm
PROFIT = Profitability of the Firm
AGE = Age of the Firm
LIST = Listing Status of the Firm
β = Slopes of the independent variables
β0 = Constant
€ = The error term

4.4 Definition and Estimation of Variables: incentives to voluntarily disclose information to meet the
The corporate disclosure literature suggests several needs of undispersed shareholders groups. In Australia,
attributes that influence the voluntary disclosure made by McKinnon and Dalimunthe (1993) note that companies
the firms. These factors are discussed below:- with a single ownership structure disclose more
voluntary information. Hossain et al. (1994) suggested a
4.4.1 Ownership structure negative association between management ownership
Ownership structure is another mechanism that aligns the structure and the level of voluntary disclosure by
interest of shareholders and manager. The functioning of Malaysian listed firms. In addition, Hongxia, Li &
the firm is highly dependent on the ownership structure. Ainian, Qi (2008) shown that higher managerial
According to the agency theory there is a separation of ownership have high level of voluntary disclosures. Eng
ownership and control of a firm, the potential for agency and Mark (2003) reported that lower management
costs arises because of conflicts of interest between ownership and significant government ownership are
contracting parties. It is believed that agency problems associated with higher disclosure among listed firms in
will be higher in the widely held companies because of Singapore. Haniffa and Cooke (2002) indicate that the
the diverse interests between contracting parties. By extent of family control in a firm is negatively associated
utilizing voluntary disclosure, managers provide more with the amount of voluntary disclosure. Their evidence
information to signal that they work in the best interests suggests that family controlled firms do not require
of shareholders. additional information because the owner managers
could access the information easily, thus leading to low
In this study, ownership structure is proxied by
agency costs and low information irregularity. The
management ownership. Using agency theory, it is
management entrenchment hypothesis could also
argued that firms with higher management of ownership
explain the negative association and its effects could
structure may disclose less information to shareholders
negate the positive effects of the agency cost
through voluntary disclosure. It is because the
explanations. The significant role of management
determined ownership structure provides firms lower
ownership in influencing voluntary disclosures practices

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
56

of firms from the prior researcher. So it is expected that 4.4.4 Residential Status of a Firm:
ownership structure will influence the voluntary Subsidiaries of multinational companies operating in
disclosure information. developing countries are expected to disclose more
The hypothesis is formally stated as: information and observe higher standards of reporting
The management ownership has a negative for a number of reasons: Firstly, they have to comply with
association with disclosure score. regulations of not only their host country but also the
parent company where substantially higher standards of
4.4.2 Leverage reporting and accounting are maintained. Secondly, they
According to agency theory higher monitoring costs are usually equipped with more advanced accounting
would be incurred by firms that are highly leveraged. To software tools, efficient audit staff, competent and
reduce these costs, firms are expected to disclose more efficient management and staff, and so on, have the
information i.e. the relationship between leverage and potential to disclose more information without any
the extent of disclosure is expected to be positive (Jensen incremental processing costs. Thirdly, they are under
and Meckling, 1976). Signaling theory on the other hand closer scrutiny of various political and pressure groups
provides contradicting explanations to the direction of with in the host country that view them as sources of
relationship between disclosure and leverage: Ross economic exploitation and agents of imperialist power
(1997) suggests that markets interpret increased leverage (Ahmed and Nicholls, 1994). Hence, they have an
as a signal of firm’s superior quality, but Myers and incentive to disclose more information in order to avert
Majluf (1984) argue that increased leverage is a signal of any pressure for excessive control for exploitation.
below-expected cash flow. Most empirical studies have Ahmed and Nicholls (1994) used multinational company
found inconclusive results and only a few annual report influence as an explanatory variable in developing their
studies have supported positive association. The models and the latter found it to be the most significant
hypothesis of the study is as below. variable explaining disclosure levels. Therefore, the
following hypothesis has been formulated and tested in
The leverage of the firm has a positive association
this study.
with disclosure score.
The residential status of the firm has a positive
4.4.3 Size of theAudit Firm:
association with disclosure score.
It is expected that large audit firms will be more
The influence of residential status is operationalized by
concerned about their clients’ quality and amount of
means of dummy variable, with 1 for multinational
reporting in the annual reports. Any financial statement
companies and 0 for domestic companies.
certified by any big four audit firm must be more credible
than that of non-big four firms. Ahmed and Karim (2005) 4.4.5 Size of the Firm:
found that companies audited by big four audit firms One of the important variables taken in many disclosure
comply more with reporting requirements than that of studies is the size. From the various researches it is found
others. For our study we expect to have a positive that size of firm does affect the level of disclosure of
relationship between corporate governance disclosure companies. Generally large firms disclose more
and big four affiliation. information as they may have low cost for generating the
The hypothesis for the study is: information and companies may tend to allocate larger
resources for production of his information. New. D., et
The size of the audit firm has a positive association
al., (1998) ˇ Ahmed & John,(1999)ˇ Adams, C. A., et al.,
with disclosure score.
(1998) Barako et al. (2006) investigated that the larger
In the present study size of the audit firm of the sample the firm, the more likely they will make voluntary
firm were divided into big four firm and small firms disclosures. Based on the study done world wide, for
(other than the Big four). If the audit of the firm is done by example (Aripin, N., et al., (2008), Watson et al., (2002)ˇ
Ford, Rhodes, Parks & Co., Deloitte, Haskins & Sells, DaSilva & Christensen, (2004), Wallace et al., (1994)ˇ
Price Waterhouse & Co. and Lovelock & Lewes audit Samir, M. et al.,(2003)ˇ Ho and Wong, 2001)ˇ they
firm it consider as big four and other wise small firm. In suggested the underlying reasons why larger firms
this study this variable used as dummy. The firm being disclose more information. The reasons proposed are that
audited by big four audit firm was assigned 1 and others managers of larger companies are more likely to realize
0. the possible benefits of better disclosure and small

© Asia - Pacific Institute of Management, New Delhi


57

companies are more likely to feel that full disclosure of possibility that old firms might have improved their
information could endanger their competitive position. financial reporting practices over time Alsaeed, K.
Thus, the impact of firm size is expected to be positively (2006), and secondly they try to enhance their reputation
associated with the extent of social responsibility and image in the market Akhtaruddin, M. (2005).
disclosures. Barako, D.G., (2006)ˇ Hossain et al., (2006) Owusu-Ansah, S. (1998), states that the competition
suggested that firm’s size does not affect the level of argument proposes that young companies are not likely
corporate voluntary disclosure. In this study, market to disclose full information about their financial results
capitalization, total sales and total assets will be used as and position, because this may prove to be detrimental if
the measures of firm size. The following specific sensitive information is disclosed to the established
hypotheses have been tested regarding size of the firm: competitors.
The size of the firm has a positive association with The resulted hypothesis is:
disclosure score The age of the firm has a positive association with
4.4.6 Profitability disclosure score.
There is a general proposition that a company's 4.4.8 Listing Status of a Firm:
willingness to disclose information is positively related The listing status of a firm also influences the disclosure
to its profitability. Managers are motivated to disclosure level of that firm. Every Indian company listed on Indian
more detailed information to support the continuance of stock exchange has to comply with its listing agreement.
their positions and remuneration and to signal The companies whose shares are actively traded have
institutional confidence. Apostolos, K. et al., (2009)ˇ always been scrutinized sharply by the market as a whole
Karim, A.K.M.W., (1996)ˇ Simir, M., (2003)ˇ Meek, et and investors in particular. Empirical evidence also
al. (1995) suggests that profitability of the companies is suggests a significance association between disclosure
expected to disclose more information about their level and the listing status of a firm (Singhavi and Desai,
performance. Bujaki and McConomy (2002) show that 1971; Cooke, 1989; Cooke, 1992; Malone et al., 1993;
firm facing a slowdown in revenues tends to increase and Wallace et al., 1994). So, the above discussion led to
their disclosure of corporate governance practices. the formulation and testing of the following hypothesis:
Moreover, firms suffering serious corporate governance
failures tend to provide extensive disclosure of The listing status of a firm has a positive association
governance guideline implemented in the period after with disclosure score.
such failures. Haniffa and Cooke (2002) find a positive The companies trading on stock exchanges in India have
and significant association between the firm’s been categorized as category ‘A’, ‘B1’, ‘B2’, ‘S’, and ‘T’.
profitability and the extent of voluntary disclosure, The impact of listing status of a firm on the extent of
which is consistent with the earlier (Leventis and disclosure level has been examined by introducing a
Weetman, (2004)ˇ Kusumawati, D.N., 2006). Since the dummy variable, with 1 if firm falls under ‘A’ category
studies supporting positive relationship between and 0 otherwise.
profitability and disclosure are conducted in corporate
disclosure field, the hypothesis of this study will be in the
form of positive relationship. In this study, profitability
as measured by return on capital employed (ROCE),
return on net worth (RONW) and return on sales (ROS).
The following specific hypotheses have been tested
regarding profitability of the firm:
The profitability of the firm is positively associated
with disclosure score.
4.4.7Age
In the research of Camfferman, K. & Cooke, T. (2002),
they have identified a number of new variables, such as
the age of the company to be investigated by future
studies. The rationale for selecting this variable lies in the

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
58

5. EMPIRICAL RESULTS:
5.1 Sample Statistics

Table 1: Descriptive statistics of the variables of the study

Variables Minimum Maximum Mean Std. Deviation

DIS 0.15 0.75 0.5321 0.09213

Ownership Structure 0.05 98.42 42.245 28.3215

Leverage -1.23 30.65 1.8362 1.78652

Size of the Audit Firm 0.00 1.00 0.4231 0.48974

Residential Status of a Firm 0.00 1.00 0.1676 0.44876

Market Capitalization 6.5 13.87 10.4341 1.49812

Sales -6.43 13.54 9.8123 2.71607

Total Assets -5.51 14.119 9.6125 1.97611

ROCE -15.16 121.33 17.324 15.5412

RONW -21.13 144.12 25.5634 23.0432

ROS -241.32 87.66 15.9355 34.2512

Age 1.00 105 27.4456 22.1234

Listing Status of a Firm 0.00 1.00 0.2241 0.59813

The results of descriptive statistics presents in Table–1. 5.2 Pearson Correlation analysis
The results from the disclosure index indicate (DIS) that Table-2 presents the result of the Pearson correlation
the level of average voluntary disclosure in the sample coefficients of the continuous explanatory variables as
firms is 53.21% the highest score achieved by a firm is well as the dependent variable included in the study. The
75% and the lowest score is 15% with a standard result of Pearson correlation exposed that listing status of
deviation of 0.0921. So the firms are widely distributed a firm and return on sales are positively related with
with regard to corporate disclosure. The mean age of the voluntary disclosure (P<0.05, Two- tailed), but
firm is 27 years with standard deviation of 22.123. residential status of a firm is negatively related with
Ownership structure proportion mean is 42.245 with disclosure score (P<0.05, Two- tailed). Ownership
minimum of 5% to 99%. The average leverage of the firm structure, market capitalization, sales, total assets, and
is 1.83 with standard deviation of 1.78. Minimum and return on capital employed are positively related with
maximum value of market capitalization is 6.5 and 13.87 voluntary disclosure (P<0.01, Two- tailed). While size of
respectively with mean value of 10.43. The average sales the audit firm is negatively related with disclosure score
value is 9.81 with standard deviation of 2.71. The (P<0.01, Two- tailed).
average total asset is 9.61. The mean value of ROCE,
RONW, and ROS are 17.32, 25.56 and 15.93
respectively.

© Asia - Pacific Institute of Management, New Delhi


Table 2: Pearson Correlation Analysis Results
Listing Size of
Status the Residential Market
of a Ownership Audit Status of Capital- Total
Variables DIS Age Firm Structure Leverage Firm a Firm -ization Sales Assets ROCE RONW ROS

DIS 1

Age 0.064 1

Listing Status of a Firm 0.121* 0.152** 1

Ownership Structure 0.281** -0.311** -0.018 1

Asia - Pacific Finance and Accounting Review


Leverage -0.088 0.026 0.031 0.011 1

Size of the Audit Firm -0.158** -0.152** 0.007 -0.016 -0.064 1

Residential Status of a Firm -0.114* 0.242** 0.002 -0.483** -0.083 -0.142* 1

Market Capitalization 0.162** 0.045 -0.017 0.321** -0.173** 0.124* 0.053 1

Sales 0.183** 0.122* 0.162** 0.091 -0.004 -0.06 0.163** 0.512** 1

Total Assets 0.195** 0.171** 0.078 0.362** 0.072 -0.063 -0.07 0.643** 0.496** 1

ROCE 0.183** -0.0331 -0.163* 0.143* -0.168** 0.017 0.231* 0.164** -0.243** -0.113* 1

RONW 0.083 0.041 -0.065 -0.058 -0.134* -0.084 0.231** 0.166** -0.005 -0.186** 0.412** 1

ROS 0.118* 0.007 -0.069 0.362** -0.062 0.032 -0.342** 0.083 -0.093 -0.098 0.336** 0.465** 1

*. Correlation is significant at the 0.05 level (2-tailed).


**. Correlation is significant at the 0.01 level (2-tailed).
59

Vol. I, No.1, October-December 2012


60

5.3 Multiple RegressionAnalysis 1995ˇ Wallace et all., 1994). The results from the multiple
regression analysis have been presented in Table 3. Three
To measure association between dependent and
separate determinants of firm size sales, total assets, and
independents variables in present study regression
market capitalization) as well as three different
analysis has been run. Regression has been used in much
measures of profitability (ROCE, RONW, and ROS)
previous research (Roef Abur, 2010, Aktaruddin, M. et
were used. Each surrogate to represent size and
al., 2009ˇ Apostolos, K. et al., 2009ˇ Hossain and
profitability was used only once in a model. This led to
Hammami, 2009 HongxiaLi & Ainian Qi, 2008ˇ Lim, S.
the creation of nine regression equations, the results of
et al., 2007ˇ Mahajan and Chander (2007), Barako, D, G.
which have been presented in Table 3.
et al., 2006ˇ Da-Silva and Christensen, 2004ˇ Gerald and
Sidney, 2002ˇ Owusa-Ansah, 1998ˇ Wallace & Naser,

Table 3: Multiple Regression Results


Variables 1 2 3 4 5 6 7 8 9
0.321 0.256 0.341 0.306 0.431 0.311 0.431 0.313 0.332
Constant
4.317* 5.223* 5.519* 5.631* 4.835* 4.822* 4.931* 4.625* 5.141*
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Age
0.832 1.231 1.234 0.843 1.159 1.077 0.51 0.932 0.789
0.043 0.024 0.026 0.084 0.036 0.034 0.048 0.029 0.029
Listing Status
2.123** 1.564*** 1.874*** 2.841** 1.899** 1.971*** 2.052** 1.964*** 1.711***
Ownership 0.001 0.002 0.003 0.001 0.001 0.001 0.001 0.001 0.001
Structure 2.936* 3.764* 5.61* 3.439* 3.796* 3.821* 3.49* 4.054* 4.245*
-0.022 -0.015 -0.016 -0.014 -0.014 -0.016 -0.015 -0.016 -0.016
Leverage
-2.852** -2.876* -2.845* -2.62** -2.723*** -2.78* -2.841* -2.841* -2.732*
Audit Firm -0.065 -0.047 -0.055 -0.072 -0.084 -0.083 -0.083 -0.072 -0.06
Size -3.981* -3.172* -3.149* -3.821* -3.631* -3.755* -3.854* -3.431* -3.085*
Residential -0.061 -0.015 -0.007 -0.033 -0.023 -0.014 -0.022 -0.004 0.005
Status -2.345 -0.456 -0.431 -1.764 -0.613 -0.615 -0.842 -0.241 0.15
Market 0.06 0.02 0.013
Capitalization 1.895 1.754 1.921***
0.016 0.009 0.004
Sales
3.065** 1.764 1.224
0.014 0.02 0.009
Assets
1.851*** 1.639 1.342
0.004 0.003 0.002
ROCE
4.832* 3.931* 3.731*
0.00 0.00 0.00
RONW
1.345 0.913 1.541
0.00 0.00 0.00
ROS
-0.143 -0.821 0.009
R
2
0.689 0.636 0.644 0.676 0.621 0.653 0.678 0.639 0.654
2
Adj R 0.654 0.615 0.613 0.642 0.602 0.631 0.654 0.609 0.613
F (Sig) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
DW 2.134 2.329 2.087 2.287 2.281 2.132 2.083 2.198 2.081
*, **, and *** significant at 1%, 5% and 10% level respectively.

© Asia - Pacific Institute of Management, New Delhi


61

Table 3 reveals that for all nine models of regression and Wong (1987). This is significant with Mahajan and
ownership structure was positively found to be Chander (2007); Hossain and Hammami,(2009),
significant at 1 % level. But audit firm size was Despina et. al. (2011).
negatively found significant in all nine model of ROCE explains more significant variations in corporate
regression at 1% level of significant. This result is similar disclosure index of firm among the profitability
to that of Mahajan and Chander (2007). Listing status of measures. So, it can be concluded that ROCE has a
firm were found significant at 5% level of significant in positive impact on corporate disclosure of the firm. This
equation no. 1,4,5, and 7 where as in equation no. 2,3,6,8, result is similar to that of Hossain and hammami,(2009) ˇ
and 9 it found significant at 10% level. Leverage of the Kusumawati, D.N, (2006)ˇ Leventis and
firm found negatively correlated with corporate Weetman,(2004). On other hand it is found that RONW
disclosure of the firm at 1%, level of significant in and ROS have no any significant impact on disclosure
equation no. 2, 3, 6, 7, 8 and 9, while it found significant level of the firm.
at 5% level in equation no. 1 and 4 and in equation no. 5 it
found significant at 10% level. ROCE was significant at The firm is listed in international stock exchanges and the
1% level when applied in combination with all surrogates firm audited by the big four firm of auditor, disclose more
of size. Other profitability surrogates could not information than others. So, hypotheses are accepted
significantly explain variations in the corporate with both the variables that listing status of firm and audit
disclosure level. Market capitalization was found size of the firm has positive impact on the disclosure level
significant (equation no. 6) at 10% level when append in of the firm.
the combination of ROS. While in equation no. 7 total The leverage of the company has negative significant
assets was found significant at 10% level in the association with disclosure level of the firm. It indicates
combination of ROCE. Sales were found significant in that firms having more debt have policy of disclosing
equation no. 1 with the combination of ROCE. only mandatory information because the Firm discloses
So, out of 9 models, the model, which is satisfying maximum information when they have more share
validity requirements and having improved adjusted R2 capital.
has been chosen and selected as a valid model. Out of 9 The residential status of a firm has negative insignificant
models 2 models were found which satisfying validity association with disclosure of the firm. Form the results it
requirements and having improved adjusted R2. The can be concluded that the Indian firm have to comply
model with combination of Age, listing status, ownership with legal provisions of Indian rules so it disclose more
structure, leverage, audit firm size, residential status, information than foreign firm.
sales, and ROCE (measure of profitability), has 65.4
On the other hand, it is found out that firm age have no
(Adjusted R2), F value is significant at 0.00 level of effect on mandatory disclosure level this results is similar
significance and DW is 2.134. The second model was to the result of Despina et. al.(2011).
with the combination of Age, listing status, ownership
structure, leverage, audit firm size, residential status, 6. CONCLUSION
total assets, and ROCE (measure of profitability), has This research is an extension of previous research where
65.4 (Adjusted R2), F value is significant at 0.00 level of a set of variables is considered to examine their
significance and DW is 2.083. In these two model listing association with the level of corporate disclosure. The
status of firm, ownership structure, leverage, audit firm objective of this study is to examine firm characteristics
size, size of firm (sales and total assets) and ROCE is and their influence on corporate disclosure. These factors
found to be significant. The adjusted R2 values suggest include Age of the Firm, Listing Status of the Firm,
that a significant percentage of the variation in corporate Ownership Structure of the Firm, Leverage of the Firm,
disclosure score can be explained by the variations in the Size of the Audit Firm, Residential Status of the Firm,
whole set of independent variables. It is clear form the Size of the Firm and Profitability of the Firm. In
analysis of regression results that larger the firm size particular, the study aimed to determine which of these
(sales and total assets) disclose more information and it is factors were significantly related to increased corporate
also found significant. So our hypothesis is accepted in disclosure. The study used the disclosure index to
favour of that size of the firm has a positive association measure corporate disclosure on a sample of 45 listed
with disclosure score. The regression results for firm size non financial firm of India. The results of the study
by total assets are insignificant which similar with Chow indicate that the extent of corporate disclosure within the

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
62

sample firm varies within 15% to 75 % (approximately) + Akhtaruddin, M., Hossain, M. A., Hossain, M. &
for the period of study. It implies that though all the firms Yao Lee, “Corporate Governance and Voluntary
disclose mandatory information as required by law, but at Disclosure in Corporate Annual Reports of
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shareholders wealth. That is why these companies try to
be more transparent in the eyes of domestic as well as + Akhtaruddin, M., “Corporate mandatory disclosure
foreign investors and have better disclosure level. It has practices in Bangladesh”, International Journal of
also been observed that the extent of corporate disclosure Accounting, Vol. 40, pp. 399-422, 2005.
is influenced by listing status of the firm, ownership
structure, leverage of the firm, size of the audit firm,
+ Alsaeed, K., “The association between firm-specific
size (as measured by total assets, sales and market
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capitalization), and profitability (as measured by return
Arabia”, Managerial Auditing Journal, Vol. 21, pp.
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size, higher profitability, higher leverage, listing in
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© Asia - Pacific Institute of Management, New Delhi


Asia-Pacific Finance and Accounting Review
Vol. I, No. 1, October - December 2012
pp. 67-87, ISSN: 2278-1838
www.asiapacific.edu/far

Financial Business Process


Re-engineering in ABC Ltd*.
Parijat Upadhyay1 , Anupam De2

This case captures the journey and experience of an Indian company which decided to undertake fianacial business
process re-engineering and subsequent implementation of an enterprise system.It highlights the cost-benefit analysis
involved in the implementation of a enterprise wide information system like that of ERP (Enterprise Resource
Planning) system in an Indian company. To start with, a complete business process reengineering (BPR) has been
carried out to study the existing system and to propose a future recommended business processes to be followed in the
company. A managerial interpretation to the analysis has been given considering the robustness of the system and its
criticality to the organization as a whole since the new system is set to overhaul the financial transaction of the
company. The benefits of the system have been discussed in details.

Key Words: Financial Business Process Reengineering,Cost Benefit Analysis,ERP

Introduction On the other hand, Enterprise Resource Planning is a


system environment which deals with the complete
“In today’s ever-changing world, the only thing that integration of various key business functions like,
doesn’t change is ‘change’ itself. In a world increasingly material management, production, marketing,
driven by the three “C”s: Customer, Competition and account/finance, receivables management, human
Change, companies are on the lookout for new solutions resource planning and management, etc. ERP system
for their business problems. Reengineering is the provides the information about key performance
fundamental rethinking and radical redesign of business indicators (KPIs) and thereby it improves the efficiency
processes to achieve dramatic improvements in critical, of the managerial decision making process. It reduces the
contemporary measures of performance such as cost, cost of production or rendering services, helps in keeping
quality, service and speed.” [1] optimum inventory and thereby improving the
The most of the business corporations in the world, who productivity of the fund invested in the business, reduces
are facing serious business challenges, seem to have hit the product obsolescence and improves the productivity
upon an incredible solution: Business Process of the process and personnel. The indirect benefits
Reengineering (BPR). Business Process Re-engineering include better corporate image, improved customer
is the analysis and re-design of workflow within and goodwill, customer satisfaction, lower paper and postage
between enterprises. BPR advocates that enterprises go cost and so on. Hence, it may be said that “having a
back to the basics and reexamine their very roots. It properly implemented ERP system and a fully trained
doesn’t believe in small improvements. Rather it aims at workforce that knows how to use system in best possible
total reinvention. It endeavors to redesign the strategic way is a must for survival in this brutally competitive
and value added processes that transcend organizational world.” [2].The system provides consistency and
boundaries. BPR focuses only on processes and not on visibility or transparency across the entire enterprise. A
tasks, jobs or people and makes an attempt to optimize it. primary benefit of ERP is easier access to reliable,

*The name of the company has been intentionally concealed. The authors acknowledges the valuable
contribution of Shubhi Tripathi in developing the case study.
1
Institute of Management Technology (IMT) Ghaziabad, INDIA. (E-mail: parijat.upadhyay@gmail.com)
2
National Institute of Technology, Durgapur, INDIA. (E-mail: dgp_anupamca@yahoo.com)
68

integrated information. The consequent benefits are the world in major petrochemical products.
elimination of redundant data as well as rationalization of To understand the extent of the high performance level of
the entire processes, which result in substantial cost ABC Ltd. and how it benchmarks its activities against its
savings. The integration among business functions own standard, there are some statistics from the annual
facilitates communication and information sharing, report FY 2011-12. [4] highest ever revenues, record
leading to dramatic gains in productivity and speed.ERP exports ,turnover increased by 31.4 % to Rs 339,792
systems are based on the best practice business crore ($ 66.8 billion), PBDIT decreased by 3% to Rs
processes- the best ways of doing processes. It provides 39,812 crore ($ 7.8 billion),PBT increased by 2% to Rs
the primary tool for guiding efforts towards BPR, so 25,750 crore ($ 5.1 billion),Net profit declined
much so that ERP is often called the electronic marginally by 1% to Rs 20,040 crore ($ 3.9 billion) due to
embodiment of reengineering. higher tax provisions,Exports increased by 41.8% to Rs
The Central Banking Division at Exploration and 208,042 crore ($ 40.9 billion),Record crude throughput
Production (E& P) division of ABC Ltd. wanted to at 67.6 million tonnes and achieved an average GRM of $
undergo this BPR to make the divisional system achieve 8.6/bbl.
improvements in quality and service. The treasury The Exploration and Production business of ABC
procedures of ABC Ltd. (E&P), along with processing Ltd.
of payments require a lot of manual intervention and
effort, administrative delays, paper work and physical India imports about two-thirds of its crude oil
record keeping of invoice and supporting documents. requirement. Exploration and production of oil and gas is
Partial automation of various treasury processes has critical for India's energy security and economic growth.
already been done using the financial module of ERP ABC Ltd.'s oil and gas exploration and production
system. For achieving complete automation, a business business is therefore inexorably linked with the national
process re-engineering is being done by the executives imperative. Exploration and production, the initial link in
for the financial processes, which is an organizational the energy and materials value chain, remains a major
level activity for keeping a common procedure for all growth area and ABC Ltd. envisions evolving as a global
divisional finance departments. energy major. It’s a champion of deepwater oil
exploration. [3].The diverse oil and gas business at ABC
ABC Industries Limited (ABC LTD.) Ltd. can be stated as achievements in the following
The ABC Ltd. Group, is one of the India's largest private points:
sector enterprise, with businesses in the energy and • Acreages across different basins - Unparalleled
materials value chain. Group's annual turnover is in knowledge base [4]
excess of US$ 66 billion. The flagship company, ABC
Ltd. , is a Fortune Global 500 company and is the one of • Partnership with BP across the hydrocarbon chain in
the largest private sector company in India. India
Backward vertical integration has been the cornerstone • A world class infrastructure at KG-D6 with
of the evolution and growth of ABC Ltd. Starting with production contributed to $ 25-30 Billion of oil
textiles in the late seventies, ABC Ltd. pursued a strategy equivalent energy replacement for India
of backward vertical integration - in polyester, fibre • Poised to develop and produce CBM resources
intermediates, plastics, petrochemicals, petroleum
• Investment in US-based shale gas joint ventures
refining and oil and gas exploration and production - to
exceeds $ 3.5 billion
be fully integrated along the materials and energy value
chain.The Group's activities span exploration and • Significant production upside in liquid and wet gas
production of oil and gas,petroleum refining and plays
m a r k e t i n g , p e t r o c h e m i c a l s ( p o l y e s t e r, f i b r e ABC LTD.'s E&Pbusiness: KG Basin
intermediates, plastics and chemicals),textiles ,retail,4G
(4th Generation) network and special economic KG-D6 gas fields completed 1092 days of 100% uptime
zones.[3] and zero-incident production. An average daily gas
production from KG-D6 block for the year was 42.65
ABC Ltd. enjoys global leadership in its businesses, mmscmd with a cumulative production of 1,808 bcf since
being the largest polyester yarn and fibre producer in the inception, of which 551.31 bcf was produced in FY 2011-
world and among the top five to ten producers in the

© Asia - Pacific Institute of Management, New Delhi


69

12. An average oil production for the year from the block that the Performance Bank Guarantees are also renewed
was 15,481 barrels per day with a cumulative production on time.
of 19.44 mmbl of oil and condensate since inception, of Imports Division
which 5.67 mmbl was produced in the current fiscal. In
the D1-D3 gas fields a total of 22 wells have been drilled, The Imports Division is responsible for releasing goods
of which 18 are production wells. Of these, 2 wells have from the customs upon intimation by Treasury Team. It is
been ABC Ltd. this fiscal. 6 wells in the D26 field are also responsible for providing the Treasury with bill of
under production. Of these, MA-2 which was earlier a entry and shipping document, for dispatch to the paying
gas injection well has been converted to a production bank, within six months from the date of remittance.
well since April 2010. An integrated development plan Treasury Team
for all gas discoveries in KG-D6 is being conceptualized.
The Treasury team is responsible for processing of
This will encompass existing wells and other discoveries
vendor payments for both foreign as well as Indian
within the block to maximize capital efficiency and to
vendors. The team’s responsibility begins on receipt of
accelerate monetization. [3]
verified invoices from the Accounts Payable team. The
Finance, Control and Accounting Department Treasury team co-ordinates with Forex Remittance Non
(FC&A) of the E&Pbusiness Trade team and Corporate Taxation Team for forex
The FC&A department is the function of the Exploration booking and tax orders respectively. Treasury team is
and Production commercial business. Here the also responsible for booking of withholding tax liability
concerned department and which is relevant to this on Foreign Service Invoices and for uploading form
project is the divisional Treasury team. It is responsible 15CAand 15CB from income-tax purposes.
for all payment processing. It interacts with the Accounts The main procedures followed by the E&P Treasury at
Payable team and the Central Banking division, ABC Ltd. are as follows:Payment to foreign supply
corporate taxation division, Procurement Team and vendors,payments to Indian vendors,bank
Imports Division. reconciliation,monitoring Bank guarantees of
Roles and Responsibilities vendors,preparation of statements for funding and issue
of letter of credit
Accounts Payable
The Operational Policies of Treasury Team of E&P
Accounts Payable team provides the approved invoice,
documents for receipt of goods and completion of Vendor payments
services, transportation document and the system Vendor payments are processed by the Treasury team and
generated Invoice verification document for processing made through cheques or electronic payment
of payment to the Treasury team. The Accounts Payable mechanism.Every payment voucher is reviewed and
team also provides concurrence on terms and conditions approved by Manager Treasury for correctness and
mentioned on the Letter of Credit request made by the accuracy.All cheques, e-payments and Real Time Gross
procurement team for Issue of Letter of Credit. Settlement (RTGS) transfer letters are to be approved by
Corporate Banking Division (CBD) the authorized signatories as per the Board
Resolution.Bill of Entry for all materials imported is
CBD is responsible for transfer of funds to INR bank submitted to the authorized dealers within six months of
account on the basis of the daily fund requirement made the date of remittance.
by the Treasury team.
Bank Reconciliation
Corporate Taxation Division
Separate bank accounts are maintained for all
This division ensures the availability of tax order and transactions related to different ventures like KGD6 for
Chartered Accountants Certificate (Form 15 CA & CB). both INR and foreign payments.Bank Reconciliation is
Foreign Exchange (Forex) Remittance - Non Trade carried out for both INR and Dollar account on a daily
supports the funding requirement for payment to vendor. basis.
Procurement Bank Guarantee
This team provides terms and conditions on the Letter of Bank Guarantee received from vendors is verified with
Credit request form for its preparation. It also ensures the issuing bank for authenticity.Commercial division’s

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
70

concurrence is taken before acceptance of any Bank (BPR). The main reason for this happening in this
guarantee by the treasury team. company’s division is no different The Central Banking
Funding ofAccounts Division at ABC Ltd. wishes to implement this BPR to
make the divisional system achieve improvements in
Funding of accounts is done on a daily basis by the CBD, quality and service.
on the basis of request made by the Treasury team. Daily
updation of an excel file, known as the Cash Call Sheet is The Business: Exploration and Production
done by the deputy treasury managers for the fund Commercial
requirement of the next day. Exploration and Production commercial business is done
MANAGERIALPROBLEM on the basis of partnership and production sharing as per
the norms and regulations set by the Government of India
There has been much automation at the Central banking in the Production Sharing Contract (PSC) and further
division. And quite a few has been implemented at the defined as operating agreements, practices and
E&P divisional level. The level of automation has not yet procedures in the Joint Operations Agreement (JOA)
reduced manual efforts. with business partners respectively.
Recently, some of the more successful business The take from the entire operations of the business is
corporations in the world seem to have hit upon an depicted in the figure 1 below:
incredible solution: Business Process Reengineering

Figure 1 : The breakup of the take of the government and the contractor from the E&P business

Revenue

Royalty

Cost Petroleum

Profit Petroleum Profit Petroleum

Contractor takes Tax Government takes

The business requirement is such that ABC Ltd. being the The Current Practices
Operator of the KG-D6 wells has to deal with the
The financial and accounting practices of the E&P
payments to vendors and suppliers as well as call for the
business follows the Joint Venture Accounting (JVA)
share from partners in the joint venture.
procedure. In this there are dealings done for every
Reserve Bank of India (RBI) does not allow any Indian exploration block and each block has with multiple bank
company to hold foreign currency bank accounts in accounts, for making money transfers in INR and in
India. Every foreign payment has to be further divided foreign currency. Every single invoice that is received for
and paid into Indian currency and foreign currency payment by the treasury, has to be bifurcated to the
payment. Such division of payments further complicates respective bank account for payment as per the payment
the payment procedure. currency, and remittances has to be made as per the

© Asia - Pacific Institute of Management, New Delhi


71

demands of the contract with Indian and foreign vendors. whose customized portions are guaranteed also for new
The compliances and checks are to be maintained with versions is important in this respect.
respects to taxation, Chartered Accountant (CA)
ERP: The Most Important Tool for Business Process
certificates, performance bank guarantee, approvals and
Reengineering
physical record keeping, tracking of foreign exchange
rates and maintenance of cash flow from the central team BPR is the analysis and re-design of workflow within and
to the divisional team and then to the various block bank between enterprises.ERP provides perhaps the primary
accounts. tool for guiding efforts, so much so that ERP is often
called the electronic embodiment of reengineering. ERP
Enterprise Resource Planning: Need and
systems are based on so called best practice business
Significance
processes- the best ways of doing processes.
Today having an ERP is not a luxury, but a necessity’
Financial Excellence through ERP
Having a properly implemented ERP system and a fully
Delivering financial excellence means striking the right
trained workforce that knows how to use system in best
balance between sound stewardship and value creation,
possible way is a must for survival in this brutally
entrepreneurship and caution, and focusing on the big
competitive world. [2] Selecting an ERP System that is
picture versus accuracy in the details. On a practical
best suited for the organization and implementing and
level, the following priorities come to the forefront:
operating it in most efficient manner is a very difficult
task and chances of failure are very high. • Fulfilling the stewardship role through regulatory
compliance and effective risk management
ERP: How
• Adding value by helping your organization
The enterprise has to identify a consulting firm that
outperform stakeholders’ financial expectations– in
possesses all attributes necessary to conduct the
the private sector, generating more profit; in the
implementation project successfully. An ERP project
public sector, achieving more cost-effective
consists of a group of people, the company employees,
outcomes
the implementation consultants, package vendors, the
hardware vendors, the communication experts and so on. • Delivering superior financial services to the
“Success of the project of this magnitude and scope organization at a reduced cost
depends largely on each party playing its role well,
because the roles are singular in nature.” [2] The None of this is easy, considering the stakes and
appropriate architecture, customization features, challenges that have surfaced over the past few years. At
installation procedures and level of complexity that is the same time, the personal consequences of failure can
needed in ERP Solutions will vary depending on the size go beyond the public embarrassment of a late filing or a
and nature of the company. restatement of earnings. When ensuring regulatory
compliance and having effective risk management, there
ERP: Strategy are no financial restatements, minimal revenue at risk
and no fines or penalties due to noncompliance. When
The most important and critical activity the company
there is outperforming of stakeholders’ financial
management is to do is to designate the right people to
expectations, it consistently realized a superior return on
lead the project. These individuals must acquire a
capital employed, high total return to stakeholders (either
reasonable degree of knowledge about the ERP package.
stockholders or the Government) and protected stock
Finally it is the company that should motivate its
price and shareholder value by avoiding erosion of
employees to change and learn new technologies and
capital and when there is delivering of superior service,
prepare them to assume their new responsibilities. The
there will be taking less time to close the books,
company should create an environment where the ERP
continually driving down the cost of finance and
system can grow thrive and produce the dramatic
minimizing the day’s sales outstanding to reduce the
benefits it is capable of. The selection of packages that
amount of working capital required by the business [5]
are constructed so as to enable minimum processes and

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
72

Reengineering: What and Why process falls short of meeting those requirements.
Having identified the customer driven objectives, the
“Reengineering is the fundamental rethinking and
mission or vision statement is formulated. The vision is
radical redesign of business processes to achieve
what a company believes it wants to achieve when it is
dramatic improvements in critical, contemporary
done, and a well-defined vision will sustain a company’s
measures of performance such as cost, quality, and
resolve through the stress of the reengineering process. It
service and speed [3].” The key words in the preceding
can act as the flag around which to rally the troops when
definition are the italicized ones.
the morale begins to sag and it provides the yard stick for
BPR advocates that enterprises go back to the basics and measuring the company’s progress [1, 8].
reexamine their very roots. It doesn’t believe in small
Activity #2: Map and Analyze As-Is Process:
improvements. Rather it aims at total reinvention. As for
results: BPR is clearly not for companies who want a Before the reengineering team can proceed to redesign
10% improvement. It is for the ones that need a ten-fold the process, they should understand the existing process.
increase. According to Hammer and Champy [1], the last The important aspect of BPR (what makes BPR, BPR) is
but the most important of the four key words is the word- that the improvement should provide dramatic results.
‘process’. BPR focuses on processes and not on tasks, The main objective of this phase is to identify
jobs or people. It endeavors to redesign the strategic and disconnects (anything that prevents the process from
value added processes that transcend organizational achieving desired results and in particular information
boundaries. [6] The BPR aims at total reinvention. Hence transfer between organizations or people) and value
it is for companies who want ten-fold increase in the adding processes [8]. This is initiated by first creation
improvement process. BPR focuses on processes and not and documentation of Activity and Process models
on tasks, jobs or people. It endeavors to redesign the making use of the various modeling methods available.
strategic and value added processes that transcend Then, the amount of time that each activity takes and the
organizational boundaries. [6] cost that each activity requires in terms of resources is
calculated through simulation and activity based costing
The Process of Re-engineering
(ABC). All the groundwork required having been
Activity #1: Prepare for Re-engineering: completed; the processes that need to be reengineered are
identified.
This activity begins with the development of executive
consensus on the importance of reengineering and the Activity #3: Design To-Be process:
link between breakthrough business goals and
The objective of this phase is to produce one or more
reengineering projects. A mandate for change is
alternatives to the current situation, which satisfy the
produced and a cross-functional team is established with
strategic goals of the enterprise. The first step in this
a game plan for the process of reengineering. While
phase is benchmarking. “Benchmarking is the
forming the cross functional team, steps should be taken
comparing of both the performance of the organization’s
to ensure that the organization continues to function in
processes and the way those processes are conducted
the absence of several key players [7]. As typical BPR
with those relevant peer organizations to obtain ideas for
projects involve cross-functional cooperation and
improvement [9].” The peer organizations need not be
significant changes to the status quo, the planning for
competitors or even from the same industry. Innovative
organizational changes is difficult to conduct without
practices can be adopted from anywhere, no matter what
strategic direction from the top. The impact of the
their source. Having identified the potential
environmental changes that serve as the impetus for the
improvements to the existing processes, the development
reengineering effort must also be considered in
of the To-Be models is done using the various modeling
establishing guidelines for the reengineering project.
methods available, bearing in mind the principles of
Another important factor to be considered while
process design. Then, similar to the As-Is model, we
establishing the strategic goals for the reengineering
perform simulation and ABC to analyze factors like the
effort is to make it your first priority to understand the
time and cost involved. It should be noted that this
expectations of your customers and where your existing

© Asia - Pacific Institute of Management, New Delhi


73

activity is an iterative process and cannot be done part in the success of every reengineering effort lies in
overnight. The several To-Be models that are finally improving the reengineered process continuously. The
arrived at are validated. By performing Trade off first step in this activity is monitoring. Two things have to
Analysis the best possible To-Be scenarios are selected be monitored – the progress of action and the results. The
for implementation. [6] progress of action is measured by seeing how much more
informed the people feel, how much more commitment
Activity #4: Implement Reengineered Process:
the management shows and how well the change teams
The implementation stage is where reengineering efforts are accepted in the broader perspective of the
meet the most resistance and hence it is by far the most organization. This can be achieved by conducting
difficult one [10]. The question that confronts us would attitude surveys and discrete ‘fireside chats’ with those
be,’ If BPR promises such breath taking results then why initially not directly involved with the change. As for
wasn’t it adopted much earlier?’One could expect to face monitoring the results, the monitoring should include
all kinds of opposition - from blatantly hostile such measures as employee attitudes, customer
antagonists to passive adversaries: all of them perceptions, supplier responsiveness etc [13].
determined to kill the effort. When so much time and Communication is strengthened throughout the
effort is spent on analyzing the current processes, organization, ongoing measurement is initiated, team
redesigning them and planning the migration, it would reviewing of performance against clearly defined targets
indeed be prudent to run a culture change program is done and a feedback loop is set up wherein the process
simultaneously with all the planning and preparation. is remapped, reanalyzed and redesigned. Thereby
This would enable the organization to undergo a much continuous improvement of performance is ensured
more facile transition. But whatever may be the juncture through a performance tracking system and application
in time that the culture change program may be initiated, of problem solving skills. Continuous improvement
it should be rooted in our minds that “winning the hearts (TQM) and BPR have always been considered mutually
and minds of everyone involved in the BPR effort is most exclusive to each other. But on the contrary, if performed
vital for the success of the effort” [11]. Once this has been simultaneously they would complement each other
done, the next step is to develop a transition plan from the wonderfully well. In fact TQM can be used as a tool to
As-Is to the redesigned process. This plan must align the handle the various problems encountered during the BPR
organizational structure, information systems, and the effort and to continuously improve the process. In
business policies and procedures with the redesigned corporations that have not adopted the TQM culture as
processes. “Rapid implementation of the information yet, application of TQM to the newly designed processes
system that is required to support a reengineered business should be undertaken as a part of the reengineering effort
process is critical to the success of the BPR project. [9].
Additional requirements for the construction of the To-
Be components can be added and the result organized
into a Work Breakdown Structure (WBS). Recent
developments in BPR software technologies enable
automatic migration of these WBS activity/relationships
into a process modeling environment. The benefit here is
that we can now define the causal and time sequential
relationships between the activities plan [12].” Using
prototyping and simulation techniques, the transition
plan is validated and its pilot versions are designed and
demonstrated. Training programs for the workers are
initiated and the plan is executed in full scale [6].
Activity #5: Improve Process Continuously:
A process cannot be reengineered overnight. A very vital

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
74

The flowchart of the current scenario is given in the figure 2 below:


Figure 2 : Flowchart “As-Is” :The Process of Payments to Foreign Vendors

START

Treasury receives invoice and supporting documents from


Accounts Payable for payment processing

Is performance bank No Send the invoice back


guarantee available? to Accounts Payable
Yes

No
Is PAN available?

Yes No

No Corporate taxation
Is tax order available?
cell advice available?
Yes

Check for CA
Yes certificates

Prepare tax advice

Prepare foreign exchange (forex) booking sheet in excel

Propose a PRV in ERP

© Asia - Pacific Institute of Management, New Delhi


75

Make payment entry in SAP

Prepare A2/A1 in excel sheet

Prepare covering letter in excel sheet

Send documents to signatory for approval

Send documents to paying bank for approval

Send letter to bank for transfer of funds from INR to NOSTRO Account

Receive payment advice from bank and forward to vendor

PRV closure

END

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
76

Flowchart Description: Before “As-is” Automation • Thereafter a tax advice for the specific payment for
Scenario for the process of Payments to Foreign the vendor is made which is prepared by the team
Vendors treasury itself
The boxes in grey highlight the treasury (internal) • The amount to be paid to the vendor in foreign
operational points of manual intervention that can be currency is to booked 2 days prior to the payment date
done away post the automation. As identified by the is to be intimated to the central banking division
CBD, these will be done away with as shown in the (CBD) through an excel sheet input
flowchart of “To-be” (after automation) scenario. • A payment requisite voucher (PRV) entry is proposed
• The Treasury team receives invoices and supporting in SAP manually by the executive which is a mode of
documents from the Accounts Payable team for informing the CBD that the PRV specific invoice is
payment processing. The documents have been open for payment and requires payment through
scanned to the SAP and all the information regarding foreign currency
the document number and posting date are already • The payment entries are passed in ERP. This involves
punched into the system clearing the ledger entries specific to the vendor in
• There is a payment “Due Date” which is generally 30 ERP corresponding to the PRV #
days after the receipt of invoice from the vendor • Along with this A1/A2 sheet is also prepared side by
• The next step for the Treasury after receiving the side in an excel sheet. The A1/A2 sheets are the
invoices is to perform three checks for the vendor and compiled version and services respectively including
its: the details of Invoice, Bill of Entry/Lading details
o Performance Bank Guarantee (PBG) • The covering letter is also prepared manually for
o PermanentAccount Number (PAN) every payment made. This is a letter to the bank
o Tax Order which asks it to withdraw the payment amount from
the specified bank account and transfer funds into the
• Manual checks in the system are done for the NOSTRO account through SWIFT payment mode.
availability of these three supporting documents and The bank account contains the forex converted
associated numbers. In case the first two are missing currency as requested and transferred by the CBD on
then the invoice is sent back to the Accounts Payable the date of payment
to make the documents available from the vendor. In
case tax order is not available the corporate taxation • The entire set of documents is sent to the authorized
cell’s advice is asked for and a requisite of a CA signatories and then sent to banks for payment
certificate is checked for approval and one set is kept as a hard copy for records
• Any Indian company which requires forwarding a • When the bank confirms the payment, it sends
payment to a foreign vendor is expected to inform the payment advice in the electronic form which is
Government of India (GOI) about the tax deductions. forwarded to the vendor and hence the PRV is
Either a vendor prepares it (tax order) or ABC Ltd. manually closed by the Treasury executive
prepares it on behalf of vendor (15CB). It is required • It can be seen that one foreign payment takes
that a 15CA and a tax order(if sent by vendor itself) is approximately 12 days for payment by Treasury. In
required or a combination of 15CA and 15CB is a general the payment process cycle for one invoice,
requisite for tax compliances as mandated by the GoI the period for which the invoice stays with the
for foreign payments treasury can be shown in the table below:

Table 1 : Breakdown of time spent by a foreign payment invoice in the E&P treasury
Activity No. Days required Event
1 1 Scrolling and calculation of tax
2 1 Passing of tax liabilities
3 1 CA certificates generation
4 7 Clearance from taxation cell
5 2 Booking of Foreign currency and its clearance via CBD
Total days 12

© Asia - Pacific Institute of Management, New Delhi


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Flowchart Description: After “To-be” Automation and other practices that come under the Banking
Scenario for the process of Payments to Foreign Communication Measures (BCM), as the SAP will
Vendors be doing that automatically and providing the alert
• The scenario expected to be present after the to theAccounts Payable team in case of any default
automation process, is projected to reduce the • The process of PRV generation and its closure which
workload to only the administrative supervisory was a manual punching process into the SAP will
effort of checking the presence of bank guarantee also be automated hence saving time. Other steps
and PAN for the vendor and tax memo generation continue to prevail as is
Figure 3 : Flowchart “To-be” The Process of Payments to Foreign Vendors

START

Treasury receives invoice and supporting documents from Accounts


Payable for payment processing

Send the invoice


Is tax order back to
available? Accounts Payable
No
Yes

No
Corporate
taxation cell
advice available?

Yes

Check for CA certificates

Prepare tax advice

Make payment entry in ERP software

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
78

Send documents to signatory for approval

Send documents to paying bank for approval

Send letter to bank for transfer of funds from INR to NOSTRO Account

Receive payment advice from bank and forward to vendor

END

The Process of Payments to Indian Vendors scanned to the ERP software and all the information
The payment process is almost fully automated which regarding the document number and posting date are
has reduced the manual work to almost the supervisory already punched into the system
checks and passing correct entries in the system and • The tax deduction entries are already passed by The
check for coordination and compliance with the banks. Accounts Payable team and hence no entry is to be
The boxes in grey highlight the treasury internal manually punched by the Treasury team. The process
operational points of manual intervention that can be of payment entry is started in ERP software in which
done away with automation. As identified by the CBD, as per the amount and the frequency of vendor the
these will be done away with as shown in the flowchart of mode of payment is decided.
“To-be” after automation scenario. • If e-payment is greater than 0.2 million then the
The flowchart and the description of the before and after RTGS method is used and if it is less than 0.2 million
scenario have been discussed below: then NEFT is used as the mode. If payment is for
Flowchart Description: Before “As-is” Automation administrative purposes or any one time vendor with
Scenario for the process of Payments to Indian whom no future transaction is foreseen, then a
Vendors cheque is used.As per the mode the similar entries are
passed in SAP a “G” for RTGS and “I” for NEFT is
• The Treasury team receives invoices and supporting entered or a manual cheque entry is passed in ERP
documents from the accounts payable team for Software.
payment processing. The documents have been

© Asia - Pacific Institute of Management, New Delhi


79

• The entire set of documents is sent to the authorized • The tax advice is manually updated by the executive
signatory and then sent to banks for payment in the NSDL website to meet the compliances
approval and one set is kept as a hard copy for records Flowchart Description: After “To-be” Automation
• The payments passing processes are made in batches Scenario for the process of Payments to Indian
in and they are given batch numbers. After a Vendors
proposal is made in ERP software, these files are • The payment process is fully automated expect for
encrypted by ERP software and then vouchers are the times when a special case of manual/one time
uploaded via telnet the payments are posted to bank payments or when the Indian vendor expects
site. Once posted the signatory has to confirm the payment in foreign currency.
payment online on the bank website. One is the
approval and the other is confirmation by the • There is no scope of further automation that can
signatory reduce the cycle time for normal cases, only there is
scope of improvement in the cases are there where
• There is a system generated payment advice which is special cases as mentioned above.
forwarded to the vendor either through ERP software
or manually using e-mail

Figure 4 : Flowchart “As-Is” The Process of Payments to Indian Vendors

START

Team treasury receives invoice and supporting documents from Accounts payable Team

Start making payment entry in ERP Software

Selection of mode of No Assign cheque


payment as: number in ERP software

Yes

Send cheque, invoice and


supporting documents to authorized
Is it RGTS signatories for approval
transfer?
Yes No

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
80

Use code G in Use code I in Approval receipt


payment code payment code

Dispatch cheque and


Complete payment entry in SAP payment advice to vendor

Send invoice and supporting, performance bank


guarantee documents to manager treasury END

Correctly prepared voucher is uploaded


through telnet on ICICI bank’s website

Obtain batch reference number from


system and refer in payment voucher

Send invoice and supporting documents to


authorized signatories for approval online

Receive payment advice from


bank and forward it to vendor

END

© Asia - Pacific Institute of Management, New Delhi


81

Figure 5 : Flowchart “To-be” The Process of Payments to Indian Vendors

START

Team treasury receives invoice and supporting documents from Accounts payable Team

Start making payment entry in ERP Software

Selection of mode of No Assign cheque number


payment as: in ERP Software

Yes

Send cheque, invoice and supporting


documents to authorized
Is it RGTS signatories for approval
transfer?
Yes No

Use code G in Use code I Approval receipt


payment code in payment code

Complete payment entry in ERP Software Dispatch cheque and


payment advice to vendor

Send invoice and supporting documents,


performance bank guarantee documents
to manager treasury END

Correctly prepared voucher is uploaded


through telnet on ICICI bank’s website

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
82

SAP system automated email notification to signatory


for batch number easy reference and dashboard

Obtain batch reference number from bank


site and refer in payment voucher

Send invoice and supporting documents to


authorized signatories for approval online

Receive payment advice from


bank and forward it to vendor

END

Cost Benefit Analysis Model for ABC Ltd. (E&P) the overtime the executive had to perform for the task.
Treasury Also in the alternate scenario it also signifies idle time the
The proposed model begins with the input as the total employee is having redundant in his office hours, which
number of transactions that the E&P treasury gets. Then can be utilized in some other activity. Hence it also shows
the percentage of transactions for foreign vendors and the effect on the administrative lifestyle and an
Indian vendors are identified.The model assumes items, improvement that automation provides.
mentioned in the notes and assumption section, due to the Since the payment process for Indian vendors is almost
confidentiality clause stated by ABC Ltd. The Work fully automated and the process is almost fully efficient
Structuring is for the two scenario are stated as Before with the automation so here we consider the impact of the
andAfter automation include the following details for the payment process for foreign payments on the time aspect
total time for the internal processes which include and hence the manpower aspect.
execution as well as supervisory time from the The following table shows the time wise breakup of the
executives. activities for foreign payment process and also identifies
The model identifies that the time consumed in the “As- the activity as internal/external to the Treasury. This data
Is” and “To-be” scenario has a drastic reduction post has been the basis of the Cost BenefitAnalysis model.
automation and how the man-days required are reduced To start with the Cost-Benefit Analysis, break-down of
and hence manpower/executive can be utilized for some activities for foreign payments process has been given in
other process and hence a diversion of executives to the table below:
more productive work can take place.The value after the
decimal digits for the man power required figures signify

© Asia - Pacific Institute of Management, New Delhi


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Table 2 : Activity Breakdown for foreign payments process of ABC LTD. (E&P) Treasury

Activity Classification of the Time consumed


Activity relative to Treasury
Tax Order Generation External NA
Tax Memo Generation Internal 1 min
Performance Bank Guarantee Generation External NA
CAcertificates generation External 7 days
Confirmation of Forex rates from CBD External 2 days
A1/A2 generation Internal 10 min
Covering letter generation Internal 15 min
PRV generation in ERP software Internal 1 min
Payment Entry in ERP software Internal 5 min
The total time used for internal processes hence will be 32 minutes and 16 minutes for foreign payment process for
supplies and services respectively.A supervisory time of 5 minutes have been observed and hence added to both the
cases.
Table 3 : The initial Cost-Benefit analysis in respect of time.
Cost Benefit Analysis (Proposed Model v1)
Particulars % Year 1 Year 2 Year 3 Year 4
Total number of Transactions 11,779 15,140 26,713 42,395
Foreign Payments 80% 9,423 12,112 21,370 33,916
Monthly Invoices Payable (Non- INR) 785 1,009 1,781 2,826
No. of Vendors Invoices for Supplies 55% 432 555 979 1,554
No. of Vendors Invoices for Services 45% 353 454 801 1,272

Work Structuring
BEFORE AUTOMATION SCENARIO Time Hrs. Year 1 Year 2 Year 3 Year 4
Total Time for internal processes per invoice
for supplies
A1 (Considering 37 min (32 min for preparation 0:37 266 342 604 959
+5 min for supervision))
Total Time for internal processes per invoice
for services
A2 (Considering 21 min (16 min for preparation 0:21 124 159 280 445
+5 min for supervision))
A3 Grand Total for time required (A1+A2) 390 501 884 1,404
Total Man Days Required for Only Materials 41 53 93 147
B1 Invoices (A1/6.5)
Total Man Days Required for Only Services 19 24 43 68
B2 Invoices (A2/6.5)

B3 Grand Total for Man days required (B1+B2) 60 77 136 216


B4 Man Power required (B3/22) 2.73 3.51 6,19 9.82
Man Power Recruited 3.00 3.00 6.00 10.00

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
84

BEFORE AUTOMATION SCENARIO Time Hrs. Year 1 Year 2 Year 3 Year 4


Total Time for internal processes per invoice
for services
C1 (Considering 5 min for supervision) 0:05 36 46 82 130
Total Time for internal processes per invoice
for services
C2 (Considering 5 min for supervision) 0:05 29 38 67 106
C3 Grand Total for time required (C1+C2) 65 84 148 236
Total Man Days Required for Only Materials
D1 Invoices (C1/6.5) 6 7 13 20
Total Man Days Required for Only Services
Invoices
D2 Invoices (C2/6.5) 5 6 10 16
D3 Grand Total for time required (D1+D2) 10 13 23 36
D4 Man Power require (D3/22) 0.46 0.59 1.04 1.6470
Man Power Recruited 1.00 1.00 1.00 2.00

Anaysis Date Year 1 Year 2 Year 3 Year 4


Difference in time (min)(C3-A3) 325 417 736 1.168
Difference in mandays(D3-B3) 50 65 113 180
Difference in manpower (D4-B4) 2 3 5 8
Relative improvement in work rate 5.96 5.96 5.96 5.96

ManagerialAnalysis Interpretation 1 of Cost BenefitAnalysis Model:


The analysis has been across the four years, with data The robustness of the system can also be seen through a
varying number of transaction depicting the variation of reverse model which shows how the calculated
workload that E&P treasury has undergone and manpower in the “After” automation scenario has the
manpower required has also varied as in direct increased capacity to work on transactions. When re-
proportion,for instance, in the 4th year where workload worked back it shows that with “Before” Automation
has been at peak the “As-is” scenario has a requirement scenario this shows an increased man power
of nine executives and the “To-be” scenario shows a requirement. It can be seen that post automation one
reduced requirement of two executives. After analyzing person can process 20592 invoices and before
other cases also, it is seen that automation is improving automation 6 people were required to process the same
the relative work rate by 5.96 in every case. Hence we can number of invoices. Hence the post automation system is
conclude that the system will perform with the same robust. A comparison between the scenario before and
efficiency provided the extreme invoice transaction load after theAutomation has been given in the table below:
scenario so team strength can be diverted to other areas of
use

© Asia - Pacific Institute of Management, New Delhi


85

Table 4 : Before and After The Automation Scenario (Interpretation 1)

AUTOMATION SCENARIO After Before


Man power Recruited 1.00 5.96
Total Man days avilable in a Month 22.00 131.12
Total Man Hours avilable in a Month 143.00 852.28
Total Time for internal processes per invoice for services 0.05 0:37
(Considering 5 min for supervision )
Total Time for internal processes per invoice for supply 0.05 0:21
(Considering 5 min for supervision )
Maximum Supply Invoices can be Processed in Month 1,716
Maximum Service Invoices can be Processed in Month 1,716
Ratio of Supply Invoices 55% 944 944
Ratio of Services Invoices 45% 772 772
Total Foreign Invoices can be processed in a month 1,716 1,716
Total Foreign Invoices can be processed in a Year 20,592 20,592

Interpretation 2 of Cost BenefitAnalysis Model: the system and how well the system can manage the
Another scenario that can be seen is how the same varying workload. 40000 invoices can be processed by
number of invoices can be processed in the manpower approx 1.94 manpower post automation. In current
required. A variation can be seen that if work is reduced scenario, approximately 11.58 manpower is required to
down with the same workload how it can affect the handle it. A comparison between the scenario before and
manpower. This is just a way to justify the robustness of after the Automation (as per Interpretation 2) has been
given in the table below:

Table 5 : Before and After The Automation Scenario (Interpretation 2)


After Automation Before Automation
Total Foreign Invoices can be processed in a Year 40,000 40,000
Total Foreign Invoices can be processed in a Month 3,333 3,333
Ratio of Supply Invoices 55% 1,833 1,833
Ratio of Services Invoices 45% 1,500 1,500
Total Time for internal processes per invoice for supply 0:05 0:37
(Considering 37 min (32 min for preparation + 5
min for supervision ))
Total Time for internal processes per invoice for services 0:05 0:21
(Considering 21 min (16 min for preparation + 5
min for supervision ))
Total Time for internal processes for supplies (hrs) A1 153 1131
Total Time for internal processes for services (hrs) A2 125 525
Grand total for time required A3=A1+A2 278 1656
Total Man Days Required for Materials & Services Invoices A4=A3/6.5 43 255
Man Power required A4/22 1.94 11.58

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
86

Budget Model for ERPAutomation of E&PTreasury analysis model. The yearly manpower cost and
The model states how the budget utilization can be done overheads are calculated for each scenario and hence the
in both the “As-is” and “To-be” processes, the scenario savings are stated.The initial and operating expenses for
before automation and after automation, taking into automation are also included, also the tax savings on
account how the outflow of cash in both scenarios can be depreciation included.The Net Present Value is also
utilized.This model will help to later justify the taken into account for the computation of discounted
hypothesis stated in the research problem statement will cash flow for both scenario is calculated followed by
form the foundation pillar for the managerial Internal Rate of Return estimated
interpretation.The numerical figure for manpower Budget module for ERP automation is given below:
required is taken, as calculated, from the cost benefit

Table 6 : Budget model for ERP automation (Amount in INR)


Budget model v1 for SAP automation
Particular (Rs.) Year 1 Year 2 Year 3 Year 4 Sum
(G1) Manpower required (No.) 3 3 6 9
(G2) Yearly Manpower Cost 550000 1,650,000 1,650,000 3,300,000 4,950,000
Scenario
(G3) Yearly overhead Cost 10% 165,000 165,000 330,000 495,000
Before
Automation (A) Net Cash Out Flow ((G1)+(G2)+(G3)) 1,815,000 1,815,000 3,630,000 5,445,000 12,705,000

(G4) Manpower required (No.) 1 1 1 2


(G5) Yearly Manpower Cost 550000 550,000 550,000 550,000 1,100,000
(G6) Yearly overhead costs 10% 55,000 55,000 55,000 110,000
(G7) Initial expenses 10,000,000
(G8) Operating expenses 150,000 125,000 125,000 125,000
(E) Total Cost ((G4)+(G5)+(G6)+(G7)+(G8)) 10,755,000 730,000 730,000 1,335,000 13,550,000
Scenario
After (F) Tax Savings on Depreciation (875000) (875000) (875000) (875000) (3,500,000)
Automation (B) Net Cash Out Flow (E+F) 9,880,000 (145,000) (145,000) 460,000 10,050,000

NPV factor 10% 1 0.909090909 0.826446281 0.751314801

Discounted Cash Flow for (A) 1,815,000 1,650,000 3,000,000 4,090,909 10,555,909

Discounted Cash Flow for (B) 9,880,000 (131,818) (119,835) 345,605 9,973,952

Net Present Value (C-D) 581,957

Internal Rate of Return (A-B) (8,065,000) 1,960,000 3,775,000 4,985,000 14%

ManagerialAnalysis initial expense of Automation system setup.In the years


Keeping all assumptions in mind it can be said that the following the first year, the automation proves to be a
cash flows shows that post automation “To-be” scenario cost saver and with increasing workload “As-Is” scenario
incurs a high cost during the first year as it includes the will prove to be expensive and automation a cheaper
course of action.Sometimes there are two ways to build a

© Asia - Pacific Institute of Management, New Delhi


87

dam across a particular river. You can do one or the other, Sons Inc, New York.
but not both. There are several ways to address to the 9. Manganelli, Raymond.L., Klein, Mark.M., (1994),
issue of increasing work efficiency of the division. The The Reengineering Handbook: A Step-By-Step
solution involved here is not mutually-exclusive, both Guide To Business Transformation., American
scenario involves automation, one scenario in lesser ManagementAssociation, New York.
percent and the latter in higher percent. It is expected to
go with an investment that has the highest net present
value at a discount rate appropriate to the company. The 10. Furey, Timothy.R., (1993), A Six Step Guide To
concern has been that discount rate can change with Process Reengineering., Planning Review 21 (2),
economic condition, a case not considered in the model 20-23
described above. The investment with higher net present
value over a broad range should be selected.The projects
with no big late/ cleanup costs, the better projects will 11. Obolensky, Nick., (1994)., Practical Business
have higher internal rate of return, this is what can be Reengineering., Gulf Publishing Company,
assessed here. Houston.

REFERENCES 12. Mayer, Richard.J., Dewitte, Paula.S., (1998),


Delivering Results: Evolving BPR From Art To
1. Hammer,M., Champy.J., (1993), Reengineering The
Engineering.
Corporation: A Manifesto For Business Revolution.,
Harper Collins, London.
13. Martin, James., (1995),The Great Transition: Using
The Seven Disciplines Of Enterprise Engineering To
2. Leon , Alexis, (2008), ERP Demystified, 2nd
Align People, Technology, And Strategy., American
Edition
ManagementAssociation, New York.

3. The Official Website Of ABC LTD., www.ABC


14. Ford, Jeffery D. and Ford, Laurie W. (ApABC Ltd.
Ltd..com
2009), Managing Yourself: Decoding Resistance to
Change, Harvard Business Review
4. TheAnnual Report OfABC LTD. For FY2011-2012

5. Defining Financial Excellence Through SAP, SAP 15. Demetres, Andrews (2007), Project Management
Financial Tutorials Institute Westchester, Dueling Methodologies:
Challenges to the Program Management Office.
6. Business Process Reengineering: A Consolidated
Methodology Subramanian Muthu, Larry Whitman,
And S. Hossein Cheraghi Dept. Of Industrial And
Manufacturing Engineering Wichita State
University, USA

7. Harrison, Brian.D., Pratt, Maurice.D., (1993), A


Methodology For Reengineering Business.,
Planning Review 21(2), 6-11

8. Hunt, Daniel.V., (1996), Process Mapping: How To


Reengineer Your Business Process., John Wiley And

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
88

Book Review

Steve Hoffmann (2009)


Planet Water, John Wiley & Sons
352 Pages

The business of water is the ‘third largest’ in the world only after oil & gas and electricity. In this comprehensive book on
water, the author who is a water investment expert and founder of the private investment company called WaterTech
explores the link between the water ecology, regulation and economics apart from identifying specific investment
opportunities in water universe.
Around 39 billion cubic kilometer of water covers 75% of the planet’s surface, out of which only 3% is fresh water.
According to WHO (World Health Organization), 1.1 billion people do not have access to clean drinking water. Around
40% of the world’s population resides in areas without adequate sanitation, which explains why 50% of the hospital beds
are filled with patients suffering from water related diseases. In future as water becomes even scarcer commodity, the
government around the globe will invest huge amount on water infrastructure. The OECD (Organization for Economic
Cooperation and Development) estimates that its member countries along with BRIC (Brazil, Russia, India and China)
countries will spend $ 15 trillion on these processes.
The investing community divides the water industry into companies that provide potable drinking water, those with
waste water treatment infrastructure and those that test and analyze water. The Palisades Water Index tracks these water
companies.
Traditionally municipal and private water utilities were engaged in supplying water to public. Nowadays many of these
utilities are publicly held and for some of these companies, the investment results have exceeded the returns of major
stock indices. This trend started in US in the year 1999, when Vivendi acquired US Filter. Investors in these types of
companies will bear technological risk, interest rate risk, regulatory risk etc. However companies with proven
technologies will deliver above average returns in this sector.
The waste water treatment infrastructure consists of pumping stations, storage, sanitary and storm sewers. The most
common issues posing challenges before these systems are deterioration in pipes, which result in leaks and
contamination. This segment will present new investment opportunities particularly in emerging pumping technology.
These advanced category pumping units (including self actuating, controller-less pneumatics) are also useful in landfills.
Testing and analyzing water is a $21 billion business globally. These processes are becoming extremely critical because
of new regulations and cost control measures. Water utilities have started using automatic meter reading (AMR) to
monitor and control consumption and to raise accurate billings. Denver Water installed 2,20,200 meters, each with a
miniature radio transmitter to convey data. An US General Accounting Office study found that 29% of drinking water
utilities and 41% of waste water utilities were not recovering their costs from user payments. This shortfall, combined
along with the requirement of more infrastructural spending persuades water and waste water utilities to implement
better system monitoring controls that rely on sophisticated data management and geographic information method.
Desalinization treatment removes dissolved minerals and solids from water primarily through distillation, reverse
osmosis and membrane technologies. Globally around 14000 desalinization plants are active mostly in Saudi Arabia and
Spain.
Environmentalists and water resource experts agree that future generations must continue to have access to drinkable

© Asia - Pacific Institute of Management, New Delhi


89

water. Translating that goal into water policy, current practices focus on preserving the quality of watersheds and
protecting them from contamination. The watershed management requires comprehensive strategy and companies in
engineering and consulting, design, hydraulic modeling, construction and environment restoration can benefit by
contributing to this cause.
Overall the water industry is comprised of many companies and functions. Increasing demand will lead to significant
consolidation accompanies by mergers and acquisitions, Initial Public Offerings (IPOs) and Private Equity (PE)
investments. Investors therefore can buy stocks in companies in all aspects of water industry as well as Exchange Traded
Fund (ETF) based on water indices. These ETFs are based on Palisades Water Indexes, S&P Global Water Index and ISE
Water Index.Around 16 mutual funds, private equity funds and hedge funds focus on the global water industry.

Malhar Majumder
Director
Glise Consulting Pvt. Ltd.
E-mail : malhar@gliese.co.in

Asia - Pacific Finance and Accounting Review Vol. I, No.1, October-December 2012
90

Call for Contributions


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International Research Journal of Finance and Economics
ISSN 1450-2887 Issue 83 (2012)
© EuroJournals Publishing, Inc. 2012
http://www.internationalresearchjournaloffinanceandeconomics.com

Post Merger Financial Performance: A Study with Reference to


Select Manufacturing Companies in India

N. M. Leepsa
Doctoral Student
Vinod Gupta School of Management, IIT Kharagpur
E-mail: leepsa@vgsom.iitkgp.ernet.in

Chandra Sekhar Mishra


Corresponding Author, Assistant Professor
Vinod Gupta School of Management, IIT Kharagpur
E-mail: csmishra@vgsom.iitkgp.ernet.in

Abstract

Mergers and acquisitions (M&A) are the inorganic growth strategies which have
got its significance in today’s corporate world due to intensely competitive business
environment. The present paper intends to study the trend in merger and acquisition
(M&A) particularly with reference to manufacturing companies. While M&A is considered
as one of the strategies for growth, the companies are expected to perform post M&A so
that those are proved successful. From the literature review it is found that there is no
conclusive evidence about the impact of M&A on corporate performance. Moreover in
recent period M&A deals have gone up manifold and regulations relevant for M&A have
also undergone change. Hence there is a need to look into the trend of M&A and the post
M&A performance of companies. The present study is an attempt to find out the difference
in post merger performance compared with pre merger in terms of profitability, liquidity
and solvency. The scope of the study is limited to manufacturing sector companies in India.
The statistical tools used are descriptive statistics, paired sample t-test.

Keywords: Mergers, Acquisitions, Financial Performance

1. Introduction
Today, the business environment is rapidly changing with respect to competition, products, people,
markets, customers and technology. It is not enough for the companies to keep pace with these changes
but is expected to beat competitors and innovate in order to continuously maximize shareholder value.
Growth is inevitable for the companies to keep pace with the changes. Growth strategy is divided into
two types viz. organic and inorganic. Mergers and acquisitions (M&A) are the inorganic growth
strategies for achieving accelerated and consistent growth. It has gained importance throughout the
world in the current scenario due to globalization, liberalization, technological developments and
intensely competitive business environment. The increased competition in the global market has
prompted the Indian companies to go for mergers and acquisitions as a significant strategic alternative
to survive and grow.
International Research Journal of Finance and Economics - Issue 83 (2012) 7

1.1. Merger and Acquisition Trends in India


The trends of mergers and acquisitions in India have changed over the years. M&A activities have also
become increasingly global due to the growing global competition among many other reasons.

Figure 1: Volume of Mergers and Acquisitions deals announced in India

Source: CMIE Business Beacon Database

The total number of acquisitions from 1st April 1999 to 30th November 2010 is 9,228, highest
being 1,160 in 2007. The total number of merger deals is 3,454, highest being 415 in 2006. The lowest
consideration amount is `15,925.28 crore and highest is `2, 09,247.97 crore, total amount being ` 9,
58,147.28 crore. M&A is prevalent in all the sectors but compared to other sectors the manufacturing
sector has the highest number of M&A deals. Manufacturing industries accounted for the most of
M&A deals in these years with 40% share out of total.

Figure 2: Sector wise Volume of Deals

Source: Emerging Markets Information Service (EMIS) Data Base


8 International Research Journal of Finance and Economics - Issue 83 (2012)

2. Previous Research
Study of both Indian and International research papers are made on the works relating to post merger
corporate financial performance. As surveyed through literature most of the work has been done in
USA & UK apart from Malaysia, Japan, Australia, Greece, Canada, Taiwan, Thailand and India. But
few works are done with respect to India. Many studies have been made on the effects of mergers and
acquisitions on share prices, shareholder wealth, and the pre and post merger operating and financial
performance of the target and bidder firms. There is no conclusive evidence whether M&A enhances
efficiency or not. The literature review is classified into three viz. ‘Studies using Accounting
Measures’, ‘Studies using Event Studies’ and Studies using Multiple Performance Measures’.

2.1. Studies using Accounting Measures


Cornett and Tehranian, (1992); Switzer (1996) cited from Ramakrishnan, (2008); Ghosh (2001) found
merged firms show significant improvements in operating performance. Pawaskar (2001) observed the
shareholders of the acquirer companies increased their liquidity performance after the merger.
Ramaswamy and Waegelein (2003) found that there is improvement in post-merger operating financial
performance measured by industry-adjusted return on assets. Rahman and Limmack (2004) found that
there is improvement in long run operating cash flow performance of companies. Kumar and Rajib
(2007a) estimate the impact on the shareholder value after merger has been completed using
accounting measure. Using book value of asset and sales model, corporate performance improves after
merger. Kukalis (2007) found that the acquirer company’s pre-merger performance partially
outperformed the post merger performance of merged company. Vanitha and Selvam (2007) also agree
financial performance of merged companies improves. Ramakrishnan(2008) shows that mergers in
India have resulted in improved long term post merger firm operating performance compared to pre-
merger period.
Dickerson, Gibson and Euclid (1997) observed that acquisition growth is much lower than
internal growth but there is an additional and permanent reduction in profitability following
acquisition. Yook (2004) states that the acquiring firm experience reduced operating performance after
acquisition. Tambi (2005) states that merger neither provides economies of scale nor synergy. Mergers
were failed to provide any positive contribution in terms return on capital employed. Ooghe, Laere and
Langhe (2006) found that the profitability, liquidity and solvency of combined company declines. The
negative performance is not different from control firms. Pazarskis, Vogiatzogloy, Christodoulou, and
Drogalas (2006) found that the profitability of a firm that performed an M &A is decreased due to
merger/acquisition event. Kumar (2009) show that on average, the post-merger profitability, assets
turnover and solvency of the acquiring companies show no improvement when compared with pre-
merger values. Mergers usually do not lead to improvement of the acquirer’s financial performance.
Mantravadi and Reddy (2008) found that mergers have positive impact on profitability of firms
in the banking and finance industry. Pharmaceuticals, textiles and electrical equipment sectors saw a
marginal reduction in performance in terms of profitability and returns on investment. For the
Chemicals and agri-products sectors, performance after mergers declined, both in terms of profitability
margins and returns on investment and assets

2.2. Studies using Event Study Methodology


The approach for the examination of abnormal stock returns to the shareholders of both bidders and
target around the announcement of an offer and includes both successful (i.e. completed transactions)
and unsuccessful M&A is called event studies, event being the M&A announcement.
Asquith, Bruner and Mullins (1983) found that mergers are positive net present value activities
for bidding firms. Loderer and Martin (1992) found that the cumulative abnormal return is statistically
significant giving positive returns to acquiring firm shareholders. DeLong (1999) affirm that bank
mergers that focus both geography and activity are value-increasing. Jakobsen and Voetmann (2003)
International Research Journal of Finance and Economics - Issue 83 (2012) 9

state that bidding firms do not under perform relative to the market. Moellera, Schlingemannb and
Stulz (2004) observe that the announcement returns for acquiring-firm shareholders higher irrespective
of the form of financing and whether the acquired firm is public or private. Leeth and Borg (2004)
observe that the acquisitions from 1905 to 1930 raised shareholder wealth. Fields, Fraser and Kolari
(2007) found that there is a positive bidder abnormal return for bancassurance mergers. Tsung-Ming
and Hoshino, 2000 cited from Ramakrishnan (2008) show that the stock market reaction to acquisition
announcement is positive. Chakrabarti (2008) found that the average Indian acquirer gains in value
both on announcement as well as over the long-run post takeover period and these gains are
statistically significant. Boubakri, Dionne and Triki (2008) suggest that M&A create value in the long
run as buy and hold abnormal returns are positive and significant. Anand and Singh (2008) found
merger announcement in the Indian banking industry has positive and significant shareholders wealth
effect both for the bidder and target banks. Soongswang (2009) observe that Thai takeovers create
values of the successful bidding firm’s shareholders. Dutta and Jog (2009) shows that there is long
term abnormal return for Canadian acquirers. Kyriazis (2010) found that the cumulative abnormal
return is statistically significant giving positive returns to acquiring firm shareholders
Kumar and Eckbo (1983) state that there is no significant evidence that horizontal merger
reduce the value of the competitors of the merging firms. Agrawal, Jaffe, Mandelker (1992) found that
the stockholders of the acquiring firm experience a statistically significant wealth loss after merger.
DeLong (1999) gives opposite view that diversifying mergers do not create value. Rosa, Engel, Moore
and Woodliff (2003) views that over the long-term, in the post-announcement period, acquiring firms
earn lower returns relative to those earned in the pre-acquisition performance but their relative
performance remains exceptionally good, on average. Mueller and Sirower (2003) shows that merger
destroy more of the value of the bidding firms than the amount paid as premium to the target. Rajib
(2007a) found that corporate performance do not improves after merger using market value model.
Dennis and Mcconnell (1986) found that acquired firm’s stockholders and bondholders receive
significant gains in mergers which is not the case with such stakeholders of acquiring companies. Leeth
and Borg (2000) state that target firm gained from the takeovers, while acquiring firm just break even
and combined gains were small. The cumulative abnormal return is positive to the target firm
shareholders. Fuller, Netter and Stegemoller (2002) found that the bidder shareholders gain when
buying a private firm or subsidiary but when purchasing a public firm. The greater the return, the larger
the target, and bidder offers stock. Gregory (2005) states that acquirer cash flows appear to be
positively associated with long run performance. Boone and Mulherin (2008) found that there is an
inverse relation between bidder returns and takeover competition.

2.3. Studies using Multiple Performance Measures


Several studies are based on multiple performance measures which may not be classified purely related
to accounting measures or event studies. Shick and Jen (1974) put forward that all significant positive
merger benefits occur during the first year. Johnson and Meinster (1975) using multivariate regression
found that acquisitions have favorable effect on bank performance. Katsuhiko and Noriyuki (1983)
found that the financial performance of Japanese manufacturing companies using the rate of return on
equity increased after merger. Goyal (2002) affirm that there is a significant, positive co-movement in
vertical merger activity and wealth effects. There are efficiency gains from such mergers. Kithinji and
Waweru (2007) view that the performance ratios that have legal implications (capital adequacy and
solvency ratios) improved after the merger. Fan and Santos, Errunza and Miller (2008) observe that
international diversification does not destroy value.
Carline, Linn, and Yadav, (2001) found that the performance of merged firms improves
significantly following their combination. Buyers, targets, combined underperform their peers in five
years before merger, and outperform their peers in five years after. Kithinji and Waweru (2007) found
that profitability ratios of the merged banks declined. Becker, Goldberg and Kaen (2008) using event
study and accounting approach found that the stock price and operating performance of the acquirers
10 International Research Journal of Finance and Economics - Issue 83 (2012)

underperformed compared to firms that did not engage in merger activity. Adavikolanu and Korrapati
(2009) states that the returns to the acquirers were marginally negative from the serial acquisition of
technology firms.

3. Hypothesis
Based on the research gap areas from the literature survey, the following research hypothesis is tested:
Ho: There is no difference in the post merger financial performances in manufacturing sector
companies in India.
Ha: The long term post merger financial performances changes in the post merger period in
manufacturing sector companies in India.

4. Research Methodology
The study is carried out over various years under consideration using Accounting Based Approach
using different financial parameters.
I. Profitability parameters are Return on Capital Employed (ROCE): EBIT/Capital
Employed (Kumar, 2009); Return on Net Worth (RONW): Profit after Tax /Net Worth
(Saboo and Gopi , 2009).
II. Liquidity parameters are Current Ratio: Current Assets/Current Liabilities (Kumar and
Rajib, 2007a); Quick Ratio: Quick Assets/ Quick Liabilities (Kumar and Rajib, 2007a);
Networking Capital/Sales: (Current Assets minus Current Liabilities) by Sales (Kumar
and Rajib, 2007a).
III. Leverage parameters are Total Debt Ratio: Total Debt to Total Assets (Kumar and
Rajib, 2007a); Interest Coverage Ratio: Earning before interest and taxes (EBIT)/Interest
(Kumar and Rajib, 2007a; Kumar and Bansal, 2008)

4.1. Hypotheses Testing


Average pre merger and post merger financial performance ratios is compared to see if there is any
significant change in financial performance due to mergers and acquisition, using “paired two sample t-
tests”
x − µ0
t=
s
n
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

4.2. Scope and Sample


The study is confined to the merger cases in sectors – other than banking and finance – during the
period from 2003-04 to 2006-07. Mergers involving firms in banking and financial services industries
(BFSI) are not considered due to the fact that these industries performance is generally affected by
other economic environmental factors compared to manufacturing sectors. Financial performance
measures as mentioned earlier are also not appropriate for firms in BFSI sector. The time period is
chosen in such a manner so that there is three year time to judge the post merger performance. Hence
only such merger cases are considered where data are available for both the companies from 3 year
prior to and 3 year after merger. The year when merger took place is not considered for analysis.
International Research Journal of Finance and Economics - Issue 83 (2012) 11

Initially 1193 merged companies were found in CMIE prowess. After applying the filtration as
discussed above, finally 115 mergers cases were found relevant to our study.

Table 1: The Sample of Merger Deals

Year Target Acquirer Total Deals Final Sample


2003-04 61 45 61 28
2004-05 87 63 87 47
2005-06 86 64 86 32
2006-07 74 59 74 8
TOTAL 308 231 308 115
Source: Compiled from CMIE Prowess Database

4.3. Sources of Data


• Bombay Stock Exchange and National Stock Exchange Publications
• Business Beacon, CMIE Prowess, EMIS Database
• Securities Exchange Board of India (SEBI) Reports

5. Results and Discussions


The study is carried out for each year separately and then by combining the financial performance over
the years. The following tables provide the results of different tests followed by observations about the
differences in financial performance between pre and post merger periods.

Table 2: Paired Sample t test Results of 2003-04 Merger Deals

Paired Difference
Financial Ratios Level of
Mean* t value
Significance
Pre merger current ratio-post merger current ratio -1.211 -0.941 0.355
Pre merger quick ratio-post merger quick ratio -0.954 -0.989 0.332
Pre merger networking capital/sales ratio-post merger networking capital/sales
-0.245 -1.680 0.105
ratio
Pre merger total debt ratio-post merger total debt ratio 0.011 1.960 0.060
Pre merger interest coverage ratio-post merger interest coverage ratio -364.331 -1.327 0.196
Pre merger return on capital employed ratio-post merger return on capital
-0.210 -2.182 0.038
employed ratio
Pre merger return on net worth ratio-post merger return on net worth ratio -0.074 -0.430 0.671
* The negative sign in the value indicate there is an overall increase in the particular performance parameter in post merger
period compared to pre merger period. This note is applicable to Tables 2 to 6.

• The liquidity ratios like current ratio, quick ratio, and net working capital/sales ratio
improved after merger but it is statistically insignificant.
• In case of the leverage ratios, the debt ratio declined in the post merger period. But it is
not statistically significant. Interest coverage ratio has increased, but it is not statistically
significant too. The mean of interest coverage ratio shows very high figure, it may be
because of outliers.
• The good sign is that the profitability ratios have increased during the post merger period.
It is statistically significant in case of ROCE and statistically significant in case of
RONW.
12 International Research Journal of Finance and Economics - Issue 83 (2012)
Table 3: Paired Sample t test Results of 2004-05 Merger Deals

Paired Difference
Financial Ratios Level of
Mean t value
Significance
Pre merger current ratio-post merger current ratio -0.002 -0.015 0.988
Pre merger quick ratio-post merger quick ratio 0.078 0.994 0.326
Pre merger networking capital/sales ratio-post merger networking capital/sales
0.016 1.006 0.320
ratio
Pre merger total debt ratio-post merger total debt ratio 0.000 -0.202 0.841
Pre merger interest coverage ratio-post merger interest coverage ratio -.563.082 -1.020 0.313
Pre merger return on capital employed ratio-post merger return on capital
-0.149 -5.976 0.000
employed ratio
Pre merger return on net worth ratio-post merger return on net worth ratio -0.142 -6.670 0.000

• The liquidity ratios like current ratio improved after merger but it is statistically
insignificant. But the quick ratio, and net working capital/sales ratio has declined.
• In case of the leverage ratios, the debt ratio increased in the post merger period. But it is
statistically insignificant. Interest coverage ratio has increased, but it is statistically
insignificant too. The mean of interest coverage ratio shows very high figure, it may be
because of outliers.
• The profitability ratios have increased during the post merger period. It is statistically
significant in case of both ROCE and RONW.

Table 4: Paired Sample t test Results of 2005-06 Merger Deals

Paired Difference
Financial Ratios Level of
Mean t value
Significance
Pre merger current ratio-post merger current ratio -0.03 -0.15 0.88
Pre merger quick ratio-post merger quick ratio -0.12 -0.59 0.56
Pre merger networking capital/sales ratio-post merger networking capital/sales
0.00 -0.03 0.97
ratio
Pre merger total debt ratio-post merger total debt ratio -0.02 -3.81 0.00
Pre merger interest coverage ratio-post merger interest coverage ratio 0.11 0.04 0.97
Pre merger return on capital employed ratio-post merger return on capital
-0.05 -2.14 0.04
employed ratio
Pre merger return on net worth ratio-post merger return on net worth ratio 1.79 0.96 0.35

• The liquidity ratios like current ratio, quick ratio, and net working capital/sales ratio
improved after merger but it is statistically insignificant.
• In case of the leverage ratios, the debt ratio increased in the post merger period and it is
statistically significant. Interest coverage ratio has decreased, but it is statistically
insignificant. The mean of interest coverage ratio shows very high figure, it may be
because of outliers.
• ROCE have increased and statistically significant but in case of RONW it has decreased
after mergers.

Table 5: Paired Sample t test Results of 2006-07 Merger Deals

Paired Difference
Financial Ratios Level of
Mean t value
Significance
Pre merger current ratio-post merger current ratio 0.085 0.623 0.553
Pre merger quick ratio-post merger quick ratio 0.019 0.150 0.885
International Research Journal of Finance and Economics - Issue 83 (2012) 13
Table 5: Paired Sample t test Results of 2006-07 Merger Deals - continued

Pre merger networking capital/sales ratio-post merger networking capital/sales


0.009 0.235 0.821
ratio
Pre merger total debt ratio-post merger total debt ratio -0.011 -2.049 0.080
Pre merger interest coverage ratio-post merger interest coverage ratio -18.210 0.227 0.827
Pre merger return on capital employed ratio-post merger return on capital
-0.018 -0.434 0.678
employed ratio
Pre merger return on net worth ratio-post merger return on net worth ratio -0.020 -0.831 0.433

• The liquidity ratios like current ratio, quick ratio, and net working capital/sales ratio has
declined after merger but it is statistically insignificant.
• In case of the leverage ratios, the debt ratio increased in the post merger period which
means the debt has increased after merger. It is statistically significant. Interest coverage
ratio has increased, but it is statistically insignificant. It shows negative performance of
the companies after merger deals. The mean of interest coverage ratio shows very high
figure, it may be because of outliers.
• The good sign is that the profitability ratios have increased during the post merger period
but those are not statistically significant.

Table 6: Paired Sample t test Results for all Merger Deals from 2003-04 to 2006-07

Paired Difference
Financial Ratios Level of
Mean t value
Significance
Pre merger current ratio-post merger current ratio
Pre merger quick ratio-post merger quick ratio -0.232 -0.953 0.342
Pre merger networking capital/sales ratio-post merger networking
-0.053 -1.323 0.189
capital/sales ratio
Pre merger total debt ratio-post merger total debt ratio -0.003 -1.360 0.176
Pre merger interest coverage ratio-post merger interest coverage ratio -320.072 -1.363 0.176
Pre merger return on capital employed ratio-post merger return on capital
-0.127 -4.742 0.000
employed ratio
Pre merger return on net worth ratio-post merger return on net worth ratio 0.420 0.803 0.423

• The liquidity ratios like current ratio, quick ratio, networking capital/sales improved after
merger but it is statistically insignificant.
• In case of the leverage ratios, the debt ratio has increased in the post merger period. But it
is statistically insignificant. Interest coverage ratio has increased, but it is statistically
insignificant too. The mean of interest coverage ratio shows very high figure, it may be
because of outliers.
• The good sign is that the profitability ratio ROCE have increased during the post merger
period and is statistically significant. In case of RONW it has reduced but it is statistically
insignificant.

Table 7: Summary of t test result pre and post merger performance

Particulars 2004 2005 2006 2007 All Years


Sample Size 28 47 32 8 115
Post merger current ratio + + + - +
Post merger quick ratio + - + - +
Post merger net working capital/sales + - + - -
Post merger total debt ratio -* + +* +* +
Post merger interest coverage ratio + + - + +
14 International Research Journal of Finance and Economics - Issue 83 (2012)
Table 7: Summary of t test result pre and post merger performance - continued

Post merger return on capital employed +* +* +* + +*


Post merger return on net worth + +* - + -
Source: Evaluated from test undertaken
The sign + refers to increase in ratio
The sign - refers to decrease in ratio
The sign * refers to statistically significant

• The good sign is that the profitability ratio ROCE have increased during the post merger
period and is statistically significant. In case of RONW it has reduced but it is statistically
insignificant.
From the Table 7 it is observed that for the combined cases of mergers, return on capital
employed has gone up in the post merger period. Ignoring statistical significance, the liquidity, debt
ratio, and interest coverage ratio have gone up whereas working capital turnover and return on net
worth have declined.

6. Limitations of the Study


• Only manufacturing sector companies are considered for the study.
• The period of study is up to 2006-07, since 3 year post merger performance data are
required for the study.
• Only long term performance measures are considered. Short term returns as a result of
announcements of M&A (event studies) are not considered.
• The performance is not compared with the control firms
• Multiple mergers (same company making more than one M&A deals within the sample
period) (within 3-4 years) could not be excluded from sample as it reduced the sample
size.

7. Summary and Concluding Remarks


The liquidity position of the companies has improved but it is not statistically significant. The finding
is similar to Pawaskar (2001). The solvency position in terms of networking capital/sales has
decreased, but it is not statistically significant. Kumar Raj (2009) has also found that the solvency
position of companies reduces after merger. The debt ratio has increased but along with it the interest
coverage ratio has increased, but both are not statistically significant. Ravenscraft and Scherer (1987);
Singh (1975) cited from Daga (2007); Newbould (1970); Meeks (unknown) cited from Daga (2007)
views companies experience a decline in profits each year after the merger. But the paper finds a
different result. The profitability position of the companies has increased in terms of return on capital
employed and decreased in terms of return on net worth. But the good thing is that the increase has
been statistically significant and decrease has been statistically insignificant. The financial performance
of the companies’ improved after merger in terms of current ratio, quick ratio, return on capital
employed, interest coverage ratio. But most of the results are not statistically significant. The not so
significant improvement in financial performance put a question mark on the motive behind mergers.
Also, the financial performance may not be the only parameter for M&A success. The future scope of
study is to compare the performance of companies taking the firms involved in merger activities and
the firms without the merger deals. Study can also be extended to the cases of acquisitions.
International Research Journal of Finance and Economics - Issue 83 (2012) 15

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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012

MERGER MOTIVES, TRENDS AND POST MERGER PERFORMANCE:


EVIDENCE FROM ELECTRICITY COMPANIES IN INDIA
N.M.Leepsa
Indian Institute of Technology Kharagpur, Vinod Gupta School of Management, India.
KEYWORDS ABSTRACT
Electricity, mergers and acquisitions, Mergers and acquisitions (M&A) in India are the outcome of globalisation and
merger motives, post merger liberalisation. The factors that have triggered the volume of M&A are various
performance. economic factors like competitive environment, growth in gross domestic
product, higher interest rates and fiscal policies. Mergers and acquisitions have
gained significance in corporate world as an important growth strategy for both
acquirer and target companies. M&A have mushroomed in almost all sectors like
manufacturing, mining, construction sector, financial services, and services other
than financial. M&A has also played an active role in electricity sector in India.
In this paper we explore the current scenario of M&A in Electricity sector and
the factors driving the M&A. In particular, we investigated related and unrelated
M&A deals, Public & Private companies gone for deal, year wise deals, and
group affiliation deals in electricity sector. We also focused on regulatory aspect
of M&A in electricity sector. The period of study is from 1st January 1990 to
31st December 2011. Our finding suggest that M&A in electricity is highly
regulated and thus deals are made to survive in this regulated environment even
though much deals are not done if compared to other sectors.

1. INTRODUCTION
Mergers1 and acquisitions (M&A) in India are the outcome of globalisation and liberalisation. The
factors that have triggered the volume of M&A are various economic factors like competitive
environment, growth in gross domestic product, higher interest rates and fiscal policies. Mergers
and acquisitions have gained significance in corporate world as an important growth strategy for
both acquirer and target companies. M&A have mushroomed in almost all sectors like
manufacturing, mining, construction sector, financial services, and services other than financial.
Before the year 1990, companies in the electricity sector enjoyed monopoly where government
performed various functions like generation, transmission, distribution and commercial trading.
But there was significant change in the scenario after the economic reforms in 1991 because of
privatisation and deregulation electricity sector. These changes lead to distribution of various
functions like generation, transmission, distribution and trading to separate entities and
privatisation in distribution function. Hence, electricity companies were given importance due to
the presence of both private and government bodies in the electricity sector. There were many

1
Merger is a term used to refer when two corporations join together into one, with one
corporation surviving and the other corporation disappearing. The assets and liabilities of the
disappearing entity are absorbed into the surviving entity (Source: http://www.incorporating-
online.org/Definition-merger.html)

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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012

problems associated with the electricity sector before 1990 like huge technical and commercial
losses due to unprofessionally managed companies; problems of cross subsidisation; and
inadequate distribution channels that lead to poor quality of supply of electricity. These problems
were hurdles for ensuring financial feasibility, rationalisation of tariffs and facilitation of private
investment in attaining policy objectives. Thus, there was always a need for efficiency, economy,
and competition in electricity sector in India. M&A has also played an active role to facilitate the
mobilisation of resources in electricity sector in India.

2. METHODOLOGY AND DATA


The current research is carried out in the following way:
2.1. Sample Description
Data have been collected from Centre for Monitoring Indian Economy (CMIE) Prowess database.
For the study data have been collected for M&A involved companies only in electricity sector.
M&A deals in other sectors like manufacturing, mining, financial services are chosen. There were
451 companies in electricity sector. It was found that 347 electricity companies are there with no
M&A or other forms of business combinations from 1st January 1980 to 30th November 2011 as
they are totally following organic growth strategy for their company. While around 104 companies
in electricity either go for mergers or acquisitions of other business combinations2.
The data have been collected from 1st January 1990 to 31st December 2011. Around 18 electricity
companies made merger deals as acquirer (merging with another company) and around 29
electricity companies merger made deals as target (merged into another company), it means 47
companies went for merger deals Out of 40 acquirer companies, 34 companies are found in
prowess, and out of that 34 acquirer companies, 18 companies are from electricity. Out of the 40
target companies, 33 companies found in prowess, and from the 33 targets, 29 are from electricity
sector. Out of 67 companies available in prowess actually gone for M&A either as target or as
acquirer in merger deals (47 companies are from electricity sector, 18 as acquirer & 29 as target).
Some of the deals are made by acquirers which are with no names of companies (unknown
companies); these were excluded from the sample. So, the final sample is 32 deals i.e. companies
where either acquirer or target with data availability.
The sample acquirers are in main product/service group like thermal electricity, coal based thermal
electricity, wind energy, electricity energy, and hydro electricity. The targets are in the main
product/service group like electricity energy, power transmission line services, wind energy, oil-
based-thermal electricity, thermal electricity, electricity and non-conventional energy, and hydro
electricity.

2
Business Combinations definition: Here we have taken the definitions as in prowess database.
The business combinations means, companies acquiring assets, selling assets, merging with
another company, being merged into another company, minority acquisition of shares, substantial
acquisition of shares

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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012

Table 1: Sample M&A Deals for Performance Evaluation


Acquirer Date Target Company
Tata Power Co. Ltd. 9-Jun-00 Andhra Valley Power Supply Co. Ltd.
[Merged]
Reliance Infrastructure Ltd. 25-Jul-03 B S E S Andhra Power Ltd. [Merged]
C E S C Ltd. 11-Feb-04 Balagarh Power Co. Ltd.
Torrent Power Ltd. 23-Mar-06 Torrent Power A E C Ltd. [Merged]
Torrent Power Ltd. 23-Mar-06 Torrent Power S E C Ltd. [Merged]
Bhilai Electric Supply Co. Pvt. Ltd. 2-Aug-06 N T P C-S A I L Power Co. Pvt. Ltd.
Jaiprakash Power Ventures Ltd. 25-Jun-09 Jaiprakash Power Ventures Ltd. [Merged]
J S W Energy Ltd. 23-Jul-10 J S W Energy (Ratnagiri) Ltd. [Merged]
Source: CMIE Prowess Database

These samples are chosen based on the following criteria:


• Initially merger deals are collected where either acquirer or Target Company is from
electricity industry. To make the performance comparable and better results both the
acquirer and the target firms are taken from electricity industry.
• The companies have continuous financial data for the pre and post merger first, second and
third years
• The deals are completed
• The sample companies are chosen from the merger deals done during 1st January 2000 to
31st March 2010 so that at least data for one year pre and post merger are available.
Initially there were 34 deals found where either the target or acquirer company made merger
deal in electricity industry. Then from them 26 companies were found as the target electricity
companies and eight as acquirer. The final sample deals were eight selected for performance
evaluation.

3. REGULATORY OR LEGAL ISSUES


Electricity companies are highly regulated and M&A particularly in this sector are highly
regulated. In other words, they were the main players in the channel from production through
distribution to final consumers. Besides, as already discussed these monopolies were enjoyed by
the state owned companies. The functions like transmission and distribution are involved in high
capital intensive segments so that substantial investment can be maintained and network
infrastructures and power plants can be build which can meet the electricity needs of consumers.
Since the period of investment is long there is need of continuous planning and monitoring. Thus
there is state intervention in this sector for security of supply and the complexity of this
commodity. Furthermore, some specific features of electricity, such as non-storability and the
continuous balance between demand and supply, supported intervention of government. This
situation led to the lack of economic incentives for efficiency; direct and indirect state subsidies
had been the rule to maintain a stable industry. Since the role of electricity sector is significant for
the economic development for all other sectors, it is highly regulated.

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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012

To discuss the regulatory aspect it is first necessary to understand the nature of electricity sector
that differentiates it from other network industries. The characteristics of the industries is
important to know as it will help to know the nature of regulation and competition policy in the
sector and the problems involved in achieving the goals of the liberalisation process. It is also
important to know the features of electricity as a commodity. Firstly, for consumers electricity is a
homogenous product. It does not have any particular feature or quality that differentiates it.
Secondly, production costs are heterogeneous depending on the technology and the energy sources
used. Thirdly, demand is highly inelastic and there are no substitutes for it. This means that
changes in prices have little influence on consumption. Fourthly, unlike gas, electricity is a non-
storable commodity. It is not possible to produce more during normal periods in order to cover
peak demand periods. It is necessary instead to balance demand and supply at every single point in
time. Fifthly, the transmission (high voltage) and distribution (medium, low voltage) of electricity
depend on the distance, but also on the resistance in the transmission network. For these reasons,
in the case of congested network infrastructures, it is possible that inefficient generators located in
a specific place could provide electricity more cheaply than efficient generators in other locations.
The Electricity Act, 2003 is currently regulating the electricity sector in India with some
amendments in 2007 and 2008. This is an Act to consolidate the laws relating to generation,
transmission, distribution, trading and use of electricity and generally for taking measures
conducive to development of electricity industry, promoting competition therein, protecting
interest of consumers and supply of electricity to all areas, rationalisation of electricity tariff,
ensuring transparent policies regarding subsidies, promotion of efficient and environmentally
benign policies, constitution of Central Electricity Authority, Regulatory Commissions and
establishment of Appellate Tribunal and for matters connected therewith or incidental thereto. A
transfer scheme under this section may- (a) provide for the formation of subsidiaries, joint venture
companies or other schemes of division, amalgamation, merger, reconstruction or arrangements
which shall promote the profitability and viability of the resulting entity, ensure economic
efficiency, encourage competition and protect consumer interests; (b) define the property, interest
in property, rights and liabilities to be allocated - (i) by specifying or describing the property,
rights and liabilities in question; or (ii) by referring to all the property, interest in property, rights
and liabilities comprised in a described part of the transferor's undertaking; or (iii) partly in one
way and partly in the other; (c) provide that any rights or liabilities stipulated or described in the
scheme shall be enforceable by or against the transferor or the transferee; (d) impose on the
transferor an obligation to enter into such written agreements with or execute such other
instruments in favour of any other subsequent transferee as may be stipulated in the scheme; (e)
mention the functions and duties of the transferee; (f) make such supplemental, incidental and
consequential provisions as the transferor considers appropriate including provision stipulating the
order as taking effect; and (g) provide that the transfer shall be provisional for a stipulated period.
(6) All debts and obligations incurred, all contracts entered into and all matters and things engaged
to be done by the Board, with the Board or for the Board, or the State Transmission Utility or
generating company or transmission licensee or distribution licensee, before a transfer scheme
becomes effective shall, to the extent specified in the relevant transfer scheme, be deemed to have
been incurred, entered into or done by the Board, with the Board or for the State Government or
the transferee and all suits or other legal proceedings instituted by or against the Board or
transferor, as the case may be, may be continued or instituted by or against the State Government
or concerned transferee, as the case may be. (7) The Board shall cease to be charged with and shall
not perform the functions and duties with regard to transfers made on and after the effective date.
Explanation.- For the purpose of this Part, -(a) "Government company" means a Government
Company formed and registered under the Companies Act, 1956. (b) "Company" means a

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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012

company to be formed and registered under the Companies Act, 1956 to undertake generation or
transmission or distribution in accordance with the scheme under this Part.
As regards M&A transactions in the energy sector, some of the most relevant risks to be identified
by the buyer normally relate to regulatory issues (e.g. sale and tariff of electricity), the survival to
the transfer of shares of all permits, licences, concessions and authorisations held by the company,
agreements with the grid operator, liabilities on environmental matters (e.g. contamination of the
site) as well as liabilities on taxes, accounting, labour, health and safety, pending litigation, judicial
and/or extrajudicial (Marcenaro, E)

4. M&A IN ELECTRICITY: THE CURRENT TREND


M&A in electricity sector is gradually increasing by year to year. There are various factors that are
driving these deals. There has been increase in number of mergers and acquisitions as companies
go face high electricity prices, regulatory uncertainties. Companies in electricity sectors were
enjoying their monopoly over the line of production (generation and distribution). For couple of
years especially before 2000, the merger deals in electricity sector was very rare. The scenario has
taken new turn after year 2000 when there was less regulatory environment, change in economic
environment, better government policies and motivated corporate people going for new investment
trends like mergers and acquisitions. Mostly acquirers merged with their subsidiary companies.
Figure 1: Merger Deals in Electricity Sector in India from 1996-2011
6

5 5 5
5

4
Volume

3 3
3
3

2 2 2
2

1
1
1
0 0
0 0 0
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Year of Deals

Source: CMIE Prowess Database


Even though an attempt has been to look into M&A from 90’s in electricity sector, but the real
merger activities started after 2000. Only one merger deal is found during 90s which is done
between Nava Bharat Ventures Ltd. with Nav Chrome Ltd. [Merged] on 3rd March 1996. In 2000,
2006, 2009 have highest record of deals in electricity sector which is 16 per cent of total each, in
2003, 2010, 2011 had each 6 per cent of merger deals and 1996, 2007 each had 3 per cent out of
total merger deals. In the years 1997, 1998, 1999, 2001, 2005 there no merger deals made. During
the 90’s the merger deals were not made because of highly regulated environment. During the year

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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012

2000 for the first time, the companies in electricity sector went for merger between the firms and
they were anti-competitive and made their presence in M&A market.
The companies involved in merger in electricity sector mostly are public limited companies.
Among the acquirer there is only one private limited company named Bhilai Electric Supply Co.
Pvt. Ltd. that merged with NTPC-SAIL Power Co. Pvt. Ltd. among the target there are two private
limited companies named L&T Power Investments. Pvt. Ltd. [Merged] and NTPC-SAIL Power
Co. Pvt. Ltd. There were more number of public limited companies than the private companies
which signifies that there is less reform in many segments in this electricity sector and lack of
private people implies lack of competition which may have lead to lack of good performance
record in this sector.
Mostly the companies belong to the industry group electricity generation than the electricity
distribution. Some of the target and target companies gone for deals other than the companies in
same industry like Ferro alloys, tyres & tubes, coal & lignite, polymers, trading, fund based
financial services, pig iron, steel, cement, sugar, trading, business consultancy. These acquirer and
target companies involved in electricity generation and distribution have gone of deals in different
industries may be to take the benefit of diversified business strategy or benefit of unrelated deals
like diversification of loss.
Most of the acquirer and target companies are owned by the business groups apart from Central
Government Commercial Enterprises, Private (Indian), State and Private Sector, State
Government- Commercial Enterprises. The ownership groups are Elgi Group, IndiaBulls Group,
Jaiprakash Group, Kalyani (Bharat Forge) Group, Kirloskar Group, Larsen & Toubro Group, Modi
Umesh Kumar, Monnet Group, Nava Bharat Group, NCL Group, Om Prakash Jindal Group,
Reliance Group [Anil Ambani], RPG Enterprises Group, S. Kumars Group, T G Venkatesh Group,
Tata Group, Torrent Group, VBC Group, Vedanta Group, Weizmann Group. Majority of deals are
done by Jaiprakash Group and Tata Group.
The related deals (Deals where acquirer and target were in Electricity Generation) occurred
between the following companies:
Table 2: Deals where Acquirer and Target were in Electricity Generation
Merger Date Acquirer Target
9-Jun-00 Tata Power Co. Ltd. Andhra Valley Power Supply Co. Ltd. [Merged]
Tata Hydro-Electric Power Supply Co. Ltd.
9-Jun-00 Tata Power Co. Ltd.
[Merged]
7-Dec-00 Tata Power Co. Ltd. Jamshedpur Power Co. Ltd. [Merged]
25-Jul-03 Reliance Infrastructure Ltd. B S E S Andhra Power Ltd. [Merged]
23-Mar-06 Torrent Power Ltd. Torrent Power A E C Ltd. [Merged]
23-Mar-06 Torrent Power Ltd. Torrent Power S E C Ltd. [Merged]
2-Aug-06 Bhilai Electric Supply Co. Pvt. Ltd. N T P C-S A I L Power Co. Pvt. Ltd.
3-Dec-08 Indiabulls Power Ltd. Indiabulls Power Services Ltd. [Merged]
25-Jun-09 Jaiprakash Power Ventures Ltd. Jaiprakash Power Ventures Ltd. [Merged]
23-Jul-10 J S W Energy Ltd. J S W Energy (Ratnagiri) Ltd. [Merged]
14-Feb-11 Jaiprakash Power Ventures Ltd. Bina Power Supply Co. Ltd. [Merged]
Jaypee Karcham Hydro Corporation. Ltd.
14-Feb-11 Jaiprakash Power Ventures Ltd.
[Merged]
Source: CMIE Prowess Database

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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012

The number of related deals is 12 and unrelated deals are 45 over the sample period. Most of the
related deals are done in year 2000 and year 2006. In year 2000, Tata made mergers to bring the
group's power companies under one umbrella with a combined turnover of about Rs 3,000 crore.
The deal was made to get relaxation in stamp-duty norms by the state government. It was
considered year 2000 is good time to go for the deal as the stamp-duty norms are no longer as rigid
as it was in past. Again it was believed that existing shortages and demand growth in the western
grid will be able to absorb the new capacities planned by the company. In 2006, TEL merged with
Torrent Power AEC, Torrent Power SEC and Torrent Power Generation. The merger turned them
into first rate power utilities in terms of operational efficiencies and reliability of power supply.
Torrent has a generation capacity of 1600 MW and distributes electricity to Ahmadabad,
Gandhinagar and Surat. The related deal helped the company for making outstanding performance
in power distribution by the Government of India. In 2011, two deals were made by Jaiprakash
Power Ventures Ltd. Currently, Jaiprakash Associates owns 63 per cent stake in JHPL. Post
merger, its stake is expected to go beyond 80 per cent (depending upon the valuation). JHPL,
which generates 300 Mw power in Himachal Pradesh, has a market capitalisation of Rs 4,250
crore.
The deals done between cash and stock are discussed below:
Table 3: Companies Involved in Cash Deals
Merger Date Acquirer Company Target Company
7-Dec-00 Tata Power Co. Ltd. Jamshedpur Power Co. Ltd. [Merged]
22-Mar-02 C E S C Ltd. Cescon Ltd.
25-Jul-03 Reliance Infrastructure Ltd. B S E S Andhra Power Ltd. [Merged]
11-Feb-04 C E S C Ltd. Balagarh Power Co. Ltd.
23-Mar-06 Torrent Power Ltd. Torrent Power A E C Ltd. [Merged]
2-Aug-06 Bhilai Electric Supply Co. Pvt. Ltd. N T P C-S A I L Power Co. Pvt. Ltd.
16-Apr-08 Treadsdirect Ltd. [Merged] Geo Renewable Power Ltd. [Merged]
Shree Maheshwar Hydel Power
21-Apr-09 Entegra Ltd.
Corporation Ltd.
Kalyani Utilities Development Ltd.
25-Aug-09 B F Utilities Ltd.
[Merged]
16-Sep-09 V B C Ferro Alloys Ltd. Orissa Power Consortium Ltd.
8-Dec-09 Haldia Petrochemicals Ltd. H P L Cogeneration Ltd. [Merged]
26-Mar-10 Weizmann Ltd. Karma Energy Ltd. [Merged]
23-Jul-10 J S W Energy Ltd. J S W Energy (Ratnagiri) Ltd. [Merged]
26-Sep-11 S B E C Sugar Ltd. SBEC Bioenergy Ltd.
Source: CMIE Prowess Database
These deals are done with share swap ratio of 0: 0, which means target shareholders will gain zero
share of Acquirer Company for every shares of Target Company. No shares are required to be
issued by the holding Company who will take over the assets and liabilities of the subsidiary
company. It means they are involved in cash deals. All the acquirer and target in this case are
public limited companies. Among them five of the acquirers are unlisted companies and others are
listed with BSE listing in category A, B, T, but all these target companies are unlisted. The

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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012

acquirer companies belong to the size deciles one, two, three while the target companies belong to
deciles one, two, four, seven, ten with seven targets with deciles zero. Most of the deals are done
in year 2009 and no deals year 2001. This cash deals comprised of 46 per cent of total deals done
in this sector.
Table 4: Electricity Companies Involved in Stock Deals
Share
Merger
Acquirer Company Target Company Swap
Date
Ratio (N)
Sarda Energy & Minerals
12-Jun-07 Chhattisgarh Electricity Co. Ltd. [Merged] 91:10
Ltd.
23-Mar-06 Torrent Power Ltd. Torrent Power SEC Ltd. [Merged] 47:1
Andhra Valley Power Supply Co. Ltd.
9-Jun-00 Tata Power Co. Ltd. 4:5
[Merged]
Nava Bharat Ventures
31-Mar-96 Nav Chrome Ltd. [Merged] 4:5
Ltd.
Tata Hydro-Electric Power Supply Co.
9-Jun-00 Tata Power Co. Ltd. 4:5
Ltd. [Merged]
Jaiprakash Power
25-Jun-09 Jaiprakash Power Ventures Ltd. [Merged] 3:1
Ventures Ltd.
15-Mar-03 Gujarat N R E Coke Ltd. Gujarat NRE Power Ltd. [Merged] 3:1
Jaiprakash Power
14-Feb-11 Bina Power Supply Co. Ltd. [Merged] 2:13
Ventures Ltd.
3-Dec-08 Indiabulls Power Ltd. Indiabulls Power Services Ltd. [Merged] 1:1
Neelachal Ispat Nigam
2-Dec-04 Konark Met Coke Ltd. [Merged] 1:1
Ltd.
India Infrastructure L&T Power Investments Pvt. Ltd.
17-Apr-06 1:1
Developers Ltd. [Merged]
Sterlite Industries (India)
26-Apr-00 Madras Aluminium Co. Ltd. 1:2
Ltd.
5-Jul-10 Reliance Power Ltd. Reliance Natural Resources Ltd. [Merged] 1:4
Jaiprakash Power Jaypee Karcham Hydro Corporation Ltd.
14-Feb-11 1:5
Ventures Ltd. [Merged]
25-Jul-06 NCL Industries Ltd. NCL Energy Ltd. [Merged] 1:6
Sree Rayalaseema Power Corporation. Ltd.
18-Sep-00 SRHHL Industries Ltd. 1:6
[Merged]
Monnet Ispat & Energy
15-Dec-03 Monnet Power Ltd. [Merged] 1:10
Ltd.
30-Oct-02 Kirloskar Industries Ltd. Kirloskar Power Supply Co. Ltd. [Merged] 1:61
Source: CMIE Prowess Database
This comprised 56 per cent of the total merger deals in electricity sector made in stock
deals. Highest number of stock deals are done in the year 2000 may be because during this year the
target companies are highly optimistic about the success of merger and want to retain their equity
stake in the resulting firm. It may also happen that acquirer companies have been paying a higher
premium for pure stock deals.

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5. THE FASCINATION OF M&A IN ELECTRICITY:


THE MOTIVES BEHIND THE DEALS
Energy & Utilities has become a prominent topic around the world. Consumers are facing supply
constraints and higher prices. Governments are concerned about energy & utilities security and
climate change. Global growth and change are putting pressure on scarce energy and water
resources like never before. The energy & utilities sector is in the spotlight as companies,
governments and consumers grapple with issues such as security of supply, environmental impact,
carbon exposure, the impact of efforts to regulate greenhouse gas emissions, and affordability. The
sector is on a journey of major change, anticipating a world with a much wider range of
technologies than at present and in which the industry is taking on a new shape. Companies are
seeking to extend their value chain both upward and downward to secure supply and end-markets.
The traditional boundaries that defined the energy & utilities industry are becoming blurred as the
interdependence of different energy sectors and between utility and technology companies
becomes more critical.
Table 5: Motives of Electricity Companies behind M&A Deals
Deals between
Date Motive behind Mergers
(Acquirer vs. Target)
Nava Bharat Ventures
31-Mar- To reduce the energy cost in production of ferro alloys and
Ltd. & Nav Chrome
96 to achieve economies of scale in post merger period.
Ltd. [Merged]
To get the concessions from STI India Ltd which is
considered more advantageous to set up a 9 MW capture
power plant in STI India Ltd. instead in STI India Vidyut
STI India Ltd. & STI
18-Jan- Ltd. The merger is done because STI India ltd, being 100
India Vidyut Ltd.
00 per cent Export Oriented Unit (EOU) is allowed various
[Merged]
benefits like duty free import of capital goods, raw
materials, spares, consumables and also fuel oil for diesel
generating sets.
To get various benefits from the Madras Aluminium
Sterlite Industries
26-Apr- Company Ltd. (MALCO) because is considered as a
(India) Ltd. & Madras
00 primary Aluminium producer in South India with operations
Aluminium Co. Ltd.
involving mining, refining, smelting and power generation.

To enhance the financial strength of Tata Power that will


Tata Power Co. Ltd. &
enable it to bid for larger projects. It will help those
Tata Hydro-Electric
9-Jun-00 managing projects outside India and engage them basically,
Power Supply Co. Ltd.
in the infrastructure sector of the economy for supplying
[Merged] 59.90
bandwidth, optical fibre network.

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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012

Table 5: Motives of Electricity Companies behind M&A Deals


To enable Tata Power to have a much stronger balance
sheet, focus on larger projects in future and to bring about
greater liquidity of the company’s stocks. The companies
faced several operational hurdles due to emerging scenario
Tata Power Co. Ltd. & of economic liberalisation and globalisation. Tata Electric
Andhra Valley Power becoming a single entity was an appropriate step towards
9-Jun-00
Supply Co. Ltd. overcoming such and other limitations. Tata Power was the
[Merged] largest private power sector company in India. The merger
will again accelerate its growth. With plans going into
related infrastructure of broadband communication and
energy the company can also position itself as a national
player in the energy and communication sector.
To get benefit from the equity participation in a profit
making and large manufacturing company like SRHHL. It
will also help SRPCL in getting ready customer in SRHHL
Sree Rayalaseema Hi-
and its manufacturing units for the wind power generation.
Strength Hypo Ltd
SRHHL would also benefit from the deal by getting ready
(SRHHL) Industries
18-Sep- access to the power generation by SRPCL. Again the cash
Ltd. & Sree
00 flows of SRHHL are expected to benefit SRPCL in repaying
Rayalaseema Power
its lease finance to the Industrial Development Bank of
Corporation. Ltd.
India (IDBI). Moreover, SRHHL would enjoy financial
(SRPCL) [Merged]
benefits as it would no longer be required to repay the loans
of Rs 10.24 crore and the interest payment of Rs 1.22 crore
for 2000-01 to SRPCL.
Tata Power Co. Ltd. &
7-Dec- To increase the generating capacity by a large extent and to
Jamshedpur Power Co.
00 achieve high levels of operational efficiency.
Ltd. [Merged]
To leverage on the CESC Ltd brand name for landing more
power engineering consultancy projects. Cescon Ltd was
facing difficulty in branding itself despite of its domain
knowledge in the field. CESC will directly enter for power
22-Mar- CESC Ltd. & Cescon
sector consultancy contracts across India. The merger
02 Ltd.
between Cescon Ltd and CESC Ltd will improve return
compared to pre liberalisation period. The merger will
consolidate the operations of CESC Ltd and secure term
loans and debentures.

To meet the orders received during the year 2001-02 for re-
Kirloskar Industries power of defence vehicles, and also for supply of engines
30-Oct- Ltd. & Kirloskar Power for Indian Navy ships. It will help to fulfil contract received
02 Supply Co. Ltd. the company to study the feasibility of re-powering certain
[Merged] Naval Ships and meet the requirements of the customers and
end users.

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Table 5: Motives of Electricity Companies behind M&A Deals


To get instant liquidity and to get financial and logistic
support, the shareholders of Gujarat NRE Power made the
deal as the company was facing the problem of insufficient
resources for further development. Gujarat NRE Coke will
Gujarat NRE Coke Ltd. also benefit from the deal in terms of rationalisation and
15-Mar-
& Gujarat NRE Power synergies. The performance of Gujarat NRE Coke
03
Ltd. [Merged] extremely good in merger year and in post merger, it is
expected to do even better when revenues from the
generation of power from waste heat is taken into account.
Again addition of two more chimneys with 56 ovens will
benefit the company.
Reliance Infrastructure
25-Jul-
Ltd. & BSES Andhra To reform the entire power distribution sector.
03
Power Ltd. [Merged]
To expand its sponge iron capacity to 750,000 tonne from
the existing 300,000 tons and lead to a combined entity with
Monnet Ispat & Energy estimated revenues of over Rs 600 crore. The merger will
15-Dec-
Ltd. & Monnet Power create an integrated company and will help for growth. The
03
Ltd. [Merged] new merged entity will have access to coal and iron ore,
prime raw materials of sponge iron. It will also have access
to captive power.
11-Feb- CESC Ltd. & Balagarh To meet the growing power requirement in the state by
04 Power Co. Ltd. setting up of a 500 MW thermal power station.
Websol Energy System
10-Sep-
Ltd. & Delta PV Pvt. To make it a 100 per cent owned subsidiary.
04
Ltd.

To get integrated plant with concomitant benefits.


Neelachal Ispat Nigam
2-Dec- Integration of all units will lead to improved techno-
Ltd. & Konark Met
04 economics, higher capacity utilisation, improved
Coke Ltd. [Merged]
productivity, cost savings and higher profitability.

To have better balance sheet for upcoming investments


opportunities in the sector in the country. Most companies
Torrent Power Ltd. &
23-Mar- and the states which offer opportunities in power sector
Torrent Power SEC
06 normally look for big balance sheet and so the merger
Ltd. [Merged]
would give us that necessary background to compete at the
national level.

To enable the group to leverage its existing material and


Torrent Power Ltd. &
23-Mar- human resources for enhancing the value of all its
Torrent Power AEC
06 stakeholders. With the merger of three companies, the total
Ltd. [Merged]
turnover of the new company would touch Rs 2,400 crore.

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Journal of Business, Economics & Finance (2012), Vol.1 (2) Leepsa, 2012

Table 5: Motives of Electricity Companies behind M&A Deals


To focus on core an area, as (on October 2005) company
India Infrastructure
has totally exited from the packaging business by sale of its
Developers Ltd. &
17-Apr- Glass Containers Business to ACE Glass. . To exploit the
L&T Power
06 opportunities that will come from hydrocarbon,
Investments Pvt. Ltd.
infrastructure, power, minerals & metals and other industrial
[Merged]
sectors.
NCL Industries Ltd. &
25-Jul- To increase the market price of equity shares, to expand and
NCL Energy Ltd.
06 modernise, to have low capital cost.
[Merged]
Bhilai Electric Supply To reduce the operational, administrative and managerial
2-Aug- Co. Pvt. Ltd. & NTPC- expenses, the merger of these two entities is done as they
06 SAIL Power Co. Pvt. are in the same business of power generation and under the
Ltd. same management.
GVK Power & To align all GVK infrastructure companies under one roof
Infrastructure Ltd. & thereby enabling GVK to position itself as an integrated
10-May-
Bowstring Projects & infrastructure company to leverage emerging opportunities
07
Investment Pvt. Ltd. in this sector. It will also provide better realisation of value
[Merged] for our investors
Sarda Energy &
Minerals Ltd. &
12-Jun-
Chhattisgarh To become a leading energy and minerals company.
07
Electricity Co. Ltd.
[Merged]
Entegra Ltd. & Shree
Maheshwar Hydel
21-Apr- To reduce the peak power deficit in Madhya Pradesh and
Power Corporation
09 also provide much needed water supply to the region.
Ltd./SKG Power
Ventures Pvt. Ltd

To enable creation of an integrated corporate structure for


development of power business of the group, to achieve
economies of scale, operational and managerial efficiency
and to enhance resource mobilisation capacity required for
growth. It would also result in uniform management
philosophy, utilisation of common pool of talent, flexibility
Jaiprakash Power
in funding expansion plans and achieving better cash flows
Ventures Ltd. &
25-Jun- substantially enhancing shareholders’ value. It would also
Jaiprakash Power
09 result in better utilisation of resources and capital and would
Ventures Ltd.
not only create a stronger base for future growth of the
[Merged]
power business but would also result in creating a better and
healthier balance sheet facilitating participation in
upcoming large power projects. The amalgamation also
enhances the competitive strength of the company to
participate vigorously in high growth opportunities
available in the power sector.

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Table 5: Motives of Electricity Companies behind M&A Deals


To invest in plant and technology that would reduce the
Haldia Petrochemicals generation cost, which is currently “reasonably higher” than
8-Dec- Ltd. & H P L the cost of grid power. The acquisition will help HPL meet
09 Cogeneration Ltd. its energy requirements that are slated to increase as HPL
[Merged] has embarked on a 30 per cent capacity expansion. It will
also offer flexibility in fuel usage.
To get resource benefit like gas from the RNRL's Coal Bed
Methane (CBM) blocks. It comprises of 45 per cent interest
in four blocks with acreage of 3,251 sq. km. and an
estimated resources of 193 billion cubic metres; and a 10
per cent share in oil and gas block in Mizoram, with acreage
of 3,619 sq. km. and a reserve potential of up to 28 billion
cubic metres. It would also benefit because of reliability and
Reliance Power Ltd. &
cost efficiency for fuel supplies through the RNRL's coal
Reliance Natural
5-Jul-10 supply logistics and shipping business; contribution from
Resources Ltd.
the RNRL's net worth of Rs.1,900 crore, leading to an
[Merged]
increase in Reliance Power's net worth to more than
Rs.16,000 crore. It would further speed up Reliance Power's
overall growth prospects. The RNRL's shareholders will
also benefit from the amalgamation by taking part in future
growth prospects of Reliance Power's diversified generation
portfolio of 37,000 MW, and its substantial coal reserves in
India and abroad.
Jaiprakash Power
To restructure the power business of the group for achieving
14-Feb- Ventures Ltd. & Bina
economies of scale, operational and managerial efficiency
11 Power Supply Co. Ltd.
and enhance resource mobilisation capacity for growth.
[Merged]
Jaiprakash Power
Ventures Ltd. & Jaypee To restructure the power business of the group for achieving
14-Feb-
Karcham Hydro economies of scale, operational and managerial efficiency
11
Corporation Ltd. and enhance resource mobilisation capacity for growth.
[Merged]
Sources: Collected from different online sources
These various benefits discussed above have motivated electricity companies to go for M&A deals
in India.

6. LITERATURE REVIEW
There is vast number of research literatures on effects of mergers, acquisitions, and takeovers on
company performance. Study of both Indian and International research papers are made on the
works relating to post merger corporate financial performance. As surveyed through literature
most of the work is done in USA & UK apart from Malaysia, Japan, Australia, Greece, Canada,
and India. But limited works are done with respect to India. Research on M&As till date has not
been able to provide conclusive evidence whether they enhance efficiency or destroy wealth. The
literature review is organised as ‘Studies using Accounting Measures’, ‘Studies using Event

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studies’, ‘Studies using multiple performance measures’, ‘Studies on post merger performance in
electricity companies’.
6.1. Studies Focusing on Accounting Approach
Accounting approach use accounting and financial measures from financial statements to evaluate
the M&A success. There is evidence from various research studies that shareholders get negative
returns after M&A. There is no positive return from merger (Meeks, 1977; Mueller, 1980;
Chatterjee and Meeks, 1996; Parrino and Harris, 2001; Ghosh, 2001; Sharma and Ho, 2002; Salter
and Weinhold, 1979 cited from Bruner, 2004). Acquiring firms’ performs poorly in post merger
years (Meeks, 1977 cited from Bruner, 2004). The firms with tender offer activity were 3.1 per
cent less profitable than firm without the activity (Ravenscraft and Scherer, 1987; Dickerson,
Gibson and Euclid, 1997; Mueller, 1980 cited from Bruner 2004; Singh, 1975 cited from Daga,
2007). Acquirers get return on assets same as non acquirers, thus making M&A a zero Net Present
Value (NPV) activity (Healy, Palepu and Ruback, 1992). So above studies give evidence that
M&A are value destroying activities. There is post merger improvement of companies involved in
merger (Herman and Lowenstein, 1988; Ravenscraft and Scherer, 1989). The performance of
merged firms improves significantly after they are combined. Buyers, targets, combined firms
underperform their peers in five years before merger, and outperform their peers in five years after
(Carline et al, 2004). There is improvements in long run operating cash flow performance after
acquisition because of both increases in return on sales (operating cash flow per dollar of sales)
and in asset turnover (sales per dollar of assets) (Rahman and Limmack, 2004). There are cases
where companies involved in M&A may give both positive and negative returns. Operating
synergies in the form of additional cash flows is positive (12.9 per cent) and financial synergies in
the form of changes in required rate of return is negative (-3.6 per cent) after M&A (Seth, 1990).
Pautler (2001) made literature survey and found that pre merger and post merger studies provide
no clear answers to questions about the efficiency and market power effects of M&As. In case of
large scale studies (those used large sample, as viewed by Pautler, 2001) M&A are unsuccessful.
There is significant gain to target firms and little or no gains to acquiring firms. Again there is
price enhancement and cost reduction in multiple merger cases. Thus, from the above literature it
is concluded that accounting based studies shows mixed results. These mixed results may be
because of studies made in different countries or using different performance variables or other
deal specific factors.
6.2. Studies Focusing on Event Study Approach
The approach for the examination of abnormal stock returns to the shareholders of both acquirer
and target around the announcement of an offer is called event studies, event being the M&A
announcement. Acquisitions are not value-enhancing for shareholders (Morck et al. 1990).
Stockholders of the acquiring firm experience a statistically significant wealth loss of about 10 per
cent over five years after merger completion date (Agrawal et al., 1992). There is a small and
insignificant abnormal return for acquirer at the date of takeover announcement (Halpern, 1973;
Mandelkar, 1974; Ellert, 1976 from Brailsford and Knights, 1998).There is a negative relationship
between management shareholdings and post acquisition performance of high tech acquisitions.
High managerial ownership seems to reduce managers’ risk aversion and encourage over
investment in value diminishing high tech acquisitions (Gao and Sudarsanam, 2003).The acquiring
firm experiences considerably deteriorating operating performance after acquisition, but the poor
performance is generally not different from industry counter parts (Ken, 2004). The returns to the
acquiring companies are either zero or negative (Maletesta 1983 cited from Bruner, 2004). It is
also found that the post merger stock price and operating performance of the merged companies
are negative and even worse than the stock price and operating performance of a control portfolio

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of companies that did not merge (Becker et al., 2008). Various studies show evidence that both
acquiring and target firm get positive returns from M&A. Stockholders of target firms earn large
positive abnormal returns from tender offers (Dodd and Ruback, 1977; Moeller et al. 2004;
Dennis and McConnell 1986; Asquith et al. 1983; Leeth, 2000). The cumulative abnormal return is
statistically significant giving positive returns acquiring firm shareholders (Loderer and Martin,
1992; Frederikslust et al., 2005; Dutta and Jog, 2009). Combined returns to shareholders of
acquiring firm and target firm showed positive cumulative abnormal returns to both firms
(Berkovitch, 1993; Bradley et al., 1982; Mulherin, 2000; Fan and Goyal, 2002). Target return,
acquirer return and total returns are larger when targets have low q ratios and acquirers have high q
ratios (Servaes, 1991). Literature suggests that M&A returns are based on who gets the returns, the
timing of getting return. Acquiring firm shareholders make small gains before and large losses
after consolidation (Leeth and Borg, 1994). The shareholder value is found to be positive, even
though it is small (Pautler, 2001). Mergers and acquisitions result in benefits to the acquired firms'
shareholders and to the acquiring companies’ managers while in case of losses, it is suffered by the
acquiring companies' shareholders (Firth, 1980). Shareholders of target firm gain while
shareholders of acquirer either gain or lose (Kaplan and Weisbach, 1992). Mergers that focus both
geography and activity are value-increasing, whereas diversifying mergers do not create value
(DeLong, 2001). In stock market studies, it is found that there is significant gain to target firm
shareholders and little or no gain to acquiring firm shareholders around the time when the mergers
and acquisitions took place. Over the long-term, in the post announcement period, acquiring firms
earn lower returns relative to those earned in the pre acquisition performance but their relative
performance remains exceptionally good (Rosa et al., 2003). Since the return varies in different
situations, it is therefore important to know for whom performance is to be evaluated-target,
acquirer or combined firm; for which time period performance is to be evaluated-short term or
long term. There is mixed results in event study methodology also. It is therefore needed to know
the results of studies that have used both accounting return and event study methods to evaluate
the M&A performance.

6.3. Studies Focusing on Mixed Approach


Several studies are based on multiple performance measures which may not be classified purely
related to accounting measures or event studies. For short run announcement period, the average
cumulative abnormal return is positive and similar for the first merger for single as well as
multiple acquirers (Paul et al., 2001). The post merger impact appears stronger when measured
against the acquirer’s results alone. In the banking industry, acquirers tend to be over-achievers
and they add to profitability in post merger period. The positive post merger results are consistent
with the industry results (Knapp, et al. 2006). The financial performance of manufacturing
companies using the rate of return on equity and rate of return on total assets improved after
merger (Katsuhiko and Noriyuki, 1983). The profitability ratios show that the majority of merged
banks show a decline in financial performance (Kithinji and Waweru, 2007). Long term
performance is significantly greater for diversifying mergers. The acquirer company’s pre merger
performance partially outperforms the post merger performance of merged company. Since the
post merger operating performance of combined company is poor than pre merger performance of
the acquirer, the acquirer company may have done better without such transaction (Kukalis, 2007).
Apart from the traditional parameters like ROA and ROE, economic value added (EVA) is also
taken for performance evaluation. One such study is made for Chinese firms. The profitability and
growth of such firms involved in M&A first falls and then rises (Wang and Qian 2006).
Companies improved efficiency through M&A in the year of M&A having better performance

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than average of the industry (Xiao and Tan, 2007). The analysis of pre and post merger
profitability and efficiency ratios for the acquiring firms shows that there is a differential impact of
mergers for different ratios (Agarwal, Nataraj and Singh, 2010). In nutshell, it is observed that
returns to acquirer are situational and the returns vary accordingly influenced by different factors
relating to M&A.

6.4. Studies Based on Post Merger Performance of Electricity Companies


Studies on post merger performance of electricity companies were few as far as literature is
reviewed. Limited studies are made based on accounting and event studies. Mostly were
conceptual and review oriented papers. Kwoka (2006) found that mergers produce efficiencies that
provide benefit to consumers and shareholders in same manner. The results were applicable to the
economy as a whole as well as for mergers amongst electricity companies. Mergers helped in
terms of increased size, and realised economies of scale. Generators and distribution companies go
for mergers to have benefit of economies of scale. Acquirer companies are not efficient in pre
merger and acquisition years and therefore whatever their objectives of merger may be, they are
not in a position to transfer efficiencies to target companies. Target electricity companies are better
performer than the acquirer. The performance levels of target companies after merger did not
increased and declined significantly. The acquirers in electricity companies rather than acquiring
underperforming firms they have acquired better performers. There were no efficiency transfers
and the efficiency of the target companies have declined. It was expected to have net efficiency
gains from merger but there were no gains at all.
Kwoka (2007) analysed the impact on operating and total cost in electricity distribution using data
envelopment analysis to measure the efficiency of each operating unit. It was found that electricity
mergers are inconsistent with improved cost performance. In terms of timing, the merger effects
are seen fairly consistent except for the years immediately before and immediately after the
merger.
Leite and Castro (Unknown) observed that unlike the United States , in the European Union, it is
considered illegal for a firm if it uses its dominant market position (even one gained by innovation,
efficiency etc.) to abuse its market power. Firms cannot fix prices which are considered high, i.e.
where margins above costs are greater than the average range for prices set by competitive firms.
These types of mergers are considered as harmful for social welfare (Leveque, 2006; Gilbert and
Newberry, 2006) because, by reducing inefficiency in vertical transactions, it will lead to reduced
costs and thus lower prices.
Blease, Goldberg and Kaen (2004) found that mergers and acquisitions do not create value for a
fully diversified investor. Acquiring firms do not perform well after deal completion. Buy and hold
returns and operating performance measures show negative returns after deal completion.
Acquirers acquiring more than one target experience poor stock price and operating performance
during and after acquisitions. The merger and acquisition done by electricity companies in regard
to deregulation did not create value for their shareholders and thus reap no synergistic benefits out
of the mergers.
Gilbert, R & Newbery, D (2006) found that vertical mergers between electricity companies and
gas companies with market power in the gas market (often secured through their control over the
pipeline network and storage and balancing services) are problematic, as the incentive to raise gas
prices may be enhanced through ownership of electricity generation. The author suggested that

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regulatory bodies and competition authorities must be particularly vigilant in scrutinising mergers
in the electricity and gas sectors to ensure competitive environment.

7. RESULTS AND DISCUSSIONS


The performance is evaluated taking into various parameters like Return on Net worth (RONW)
and Return on Capital Employed (ROCE), Current Ratio (CR), Quick Ratio (QR), Net Working
Capital by Sales Ratio, Interest Coverage Ratio (ICR), Total Debt Ratio (TDR) and Asset
Turnover Ratio (ATR). The following results are found:

Table 6: Pre and Post Merger One Year Return on Capital Employed
Year Rs. Crore T-1 (ROCE) T0 (ROCE) T+1(ROCE)
2000 Tata Power Co. Ltd. 0.12 0.14 0.12
2003 Reliance Infrastructure Ltd. 0.12 0.07 0.05
2004 C E S C Ltd. 0.12 0.15 0.13
2006 Torrent Power Ltd. 0 0.13 0.03
2009 Jaiprakash Power Ventures Ltd. 0.18 0.13 0.06
2010 J S W Energy Ltd. 0.18 0.16 0.12
0.12 0.13 0.09
During the post merger first year the return on capital employed for electric companies have not
improved and decreased even if it has risen compared to pre merger and merger year.

Table 7: Pre and Post Merger One Year Return on Net Worth
Year Rs. Crore T-1 (RONW) T0 (RONW) T+1(RONW)
2000 Tata Power Co. Ltd. 0.1 0.13 0.1
2003 Reliance Infrastructure Ltd. 0.11 0.05 0.05
2004 C E S C Ltd. 0.02 0.18 0.12
2006 Torrent Power Ltd. 0 0.07 0.03
2009 Jaiprakash Power Ventures Ltd. 0.21 0.13 0.07
2010 J S W Energy Ltd. 0.29 0.16 0.15
0.12 0.12 0.09
During the post merger first year the return on net worth for electric companies have not improved
and decreased If compared pre merger with merger year the RONW has remain unchanged.

Table 8: Pre and Post Merger Two Year Return on Capital Employed
T-2
T-1 T0 T+1(RO T+2(RO pre 2 post 2
Year Acquirer (ROC
(ROCE) (ROCE) CE) CE) year year
E)
2000 Tata Power Co. Ltd. 0.13 0.12 0.14 0.12 0.14 0.13 0.13
Reliance
2003 0.12 0.12 0.07 0.05 0.07 0.12 0.06
Infrastructure Ltd.
2004 C E S C Ltd. 0.11 0.12 0.15 0.13 0.12 0.12 0.13
0.12 0.11

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It is not only during the first year but during the second year the performance of electricity
companies decline in terms of return on capital employed.

Table 9: Pre and Post Merger Two Year Return on Net worth
T-2 T-1 T0 T+1(RO T+2(RO Pre 2 Post 2
Year Acquirer
(RONW) (RONW) (RONW) NW) NW) Year Year
Tata Power
2000 0.11 0.1 0.13 0.1 0.12 0.11 0.11
Co. Ltd.
Reliance
2003 Infrastructure 0.12 0.11 0.05 0.05 0.09 0.12 0.07
Ltd.
2004 C E S C Ltd. -0.2 0.02 0.18 0.12 0.11 -0.09 0.12
0.04 0.10
In terms of return net worth, the companies have improved after post merger and they were able to
generate money for the investments made by the shareholders.

Table 10: Pre and Post Merger Three Years Return on Capital Employed
T-3 T-2 T-1 T0
T+1(R T+2(R T+3(R pre 3 post 3
Year Acquirer (ROCE (ROCE (ROCE (ROC
OCE) OCE) OCE) year year
) ) ) E)
Tata
2000 Power Co. 0.13 0.13 0.12 0.14 0.12 0.14 0.15 0.3 0.14
Ltd.
Reliance
2003 Infrastruct 0.15 0.12 0.12 0.07 0.05 0.07 0.08 0.31 0.07
ure Ltd.
CESC
2004 0.08 0.11 0.12 0.15 0.13 0.12 0.14 0.23 0.13
Ltd.
0.28 0.11
Return on capital employed again decreased in post merger three years compared to pre merger
three years.

Table 11: Pre and Post Merger Three Year Return on Net Worth
T- T-2 T-1 T0
T+1(R T+2(R T+3(R pre 3 post 3
Year Acquirer (RON (RON (RON (RON
ONW) ONW) ONW) year year
W) W) W) W)
Tata Power
2000 0.08 0.11 0.1 0.13 0.1 0.12 0.11 0.22 0.11
Co. Ltd.
Reliance
2003 Infrastructu 0.13 0.12 0.11 0.05 0.05 0.09 0.09 0.29 0.08
re Ltd.
CESC
2004 -0.98 -0.2 0.02 0.18 0.12 0.11 0.15 -1.17 0.13
Ltd.
-0.22 0.10

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Even though the return on net worth has improved in second year, it has again declined in post
merger three years. It means in initial years due to merger pressure the profitability has declined,
and then it improved when company became stable and then it declined being affected by other
factors.
Table 12: Pre and Post Merger One Year Asset Turnover Ratio

Company Name T-1 (ATR) T0 (ATR) T+1(ATR)


2000 Tata Power Co. Ltd. 0.35 0.38 0.44
2003 Reliance Infrastructure Ltd. 0.6 0.78 0.4
2004 C E S C Ltd. 0.38 0.46 0.49
2006 Torrent Power Ltd. 0 0.85 0.24
2009 Jaiprakash Power Ventures Ltd. 0.15 0.15 0.07
2010 J S W Energy Ltd. 0.32 0.27 0.29
0.30 0.32
The ratio of sales to assets, or asset turnover ratio shows improvement in initial first year of
merger and the companies have increased the capital-intensity capacity of a business, and it has
used assets to produce revenue. The companies like Tata Power Co. Ltd., Reliance Infrastructure
Ltd., CESC Ltd have improved performance individually in post merger years. The performance
of Jaiprakash Power Ventures Ltd. has remained unchanged and J S W Energy Ltd. has negative
performance in terms of asset turnover ratio.

Table 13: Pre and Post Merger Two Year Asset Turnover Ratio
Asset T0 T+2
T-2 T-1 T+1(A pos
Turnover Acquirer (ATR (AT pre 2
(ATR) (ATR) TR) t2
Ratio ) R)
0.4
2000 Tata Power Co. Ltd. 0.4 0.35 0.38 0.44 0.45 0.38
5
Reliance 0.3
2003 0.51 0.6 0.78 0.4 0.34 0.56
Infrastructure Ltd. 7
0.4
2004 C E S C Ltd. 0.35 0.38 0.46 0.49 0.37 0.37
3
Jaiprakash Power 0.0
2009 0.16 0.15 0.15 0.07 0.04 0.16
Ventures Ltd. 6
0.3
0.36
3
The two year average asset turnover ratio has declined when compared between pre and post
merger years by three per cent.

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Table 14: Pre and Post Merger Three Year Asset Turnover Ratio
T-3 T-2 T-1 T0 T+1( T+2( T+3( pr po
Acquirer (AT (AT (AT (AT ATR ATR ATR e st
R) R) R) R) ) ) ) 3 3
Tata Power Co. 0. 0.
2000 0.49 0.4 0.35 0.38 0.44 0.45 0.49
Ltd. 41 46
Reliance
0. 0.
2003 Infrastructure 0.53 0.51 0.6 0.78 0.4 0.34 0.27
55 34
Ltd.
0. 0.
2004 C E S C Ltd. 0.31 0.35 0.38 0.46 0.49 0.37 0.34
35 40
0. 0.
44 40
If assets turnover ratio is looked then there is no difference in the pre and post merger performance
in three years average.

Table 15: Performance of Tata Power Co. Ltd for deal with Andhra Valley Power Supply
Co. Ltd.
Year RONW ROCE ATR CR QR NWCS ICR TDR
Mar-95 0.11 0.11 0.49 1.1 0.52 780.04 2.57 0.52
Mar-96 0.18 0.19 0.5 0.4 0.4 -31.5 4.94 0.47
Mar-97 0.08 0.13 0.49 1.24 0.58 134.29 3.65 0.42
Mar-98 0.11 0.13 0.4 1.61 1.03 9 3.79 0.49
Mar-99 0.1 0.12 0.35 1.28 0.7 36.31 3.48 0.5
Average of 5 year pre merger 0.12 0.14 0.45 1.13 0.65 185.63 3.69 0.48
Mar-00 0.13 0.14 0.38 0.96 0.56 -15.8 4.16 0.5
Mar-01 0.1 0.12 0.44 1.76 1.33 4.35 3.28 0.5
Mar-02 0.12 0.14 0.45 1.2 0.82 31.48 3.26 0.49
Mar-03 0.11 0.15 0.49 1.12 0.69 -35.78 3.39 0.45
Mar-04 0.1 0.15 0.53 1.1 0.67 -80.14 3.83 0.36
Mar-05 0.11 0.11 0.43 1.73 1.31 5.53 5.32 0.44
Average of 5 year post merger 0.11 0.13 0.47 1.38 0.96 -14.91 3.82 0.45
Source: Evaluated from Financial data from CMIE Prowess Database

While evaluating performance of particular merger deal of Tata Power Co. Ltd with Andhra
Valley Power Supply Co. Ltd. [Merged], following findings are made:
• Return on Net Worth of Tata Power Co. Ltd improved in merger year if compared with
five year average of pre merger. But if five year average of pre and post merger is
compared then it has reduced.

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• Return on Capital Employed of Tata Power Co. Ltd has remained unchanged if compared
with five year average of pre merger and if five year average of pre and post merger is
compared then it has reduced.
• Asset Turnover Ratio which is considered as best measure for companies that require a
large infrastructure in order to produce, or deliver their product, such as electric
companies that require a large asset base to generate sales, has improved if five year
average of pre and post merger is compared.
• Current Ratio and Quick Ratio has increased in five year average of post merger when
compared with five year average pre merger years.
• Net Working Capital/ Sales have declined significantly and has given negative returns in
post merger years.
• Tata Power Co. Ltd were able to generate sufficient money to pay back its debt as the
Interest Coverage Ratio has improved from 3.69 to 3.82 in five year average pre and post
merger year. The good thing is Total Debt Ratio has reduced which show the debt burn of
the companies have reduced after getting synergetic befits from the deal.

8. CONCLUSION
Electricity companies are going on merger spree for improving their market share by solving many
financial issues like cost. Post merger performance of companies have been better in second year,
while in the first year and average of three years the electricity companies have declined in
different ratios. The return on capital employed has never improved. But the return on net worth
and asset turnover ratio has increased in two year average pre and post merger years. Mergers and
acquisitions (M&A) in the electricity sector are expected to grow in coming years because to keep
the sector highly profitable in both the short and long term, there is need of M&A. The electricity
companies with strong financial backup acquiring leading to expansion of industry and company.
At that time, the electric power industry will enjoy a long-term development in a physically sound
way. No doubt M&A in electricity industries have resulted in economies of scale and synergetic
benefits to companies but still, it is suggested that acquirer companies should acquire those target
companies whose benefit is above its costs as there are also many problems associated with it like
job cuts which may hamper the ethical and cultural values. Following economic expansion and
large demand for power, the electric power industry has stepped in an accelerated phase of M&A.
The current market is that the major role was played by government owned companies while
private players small part. The local electricity companies have stayed focused on acquisition to
improve their core competitiveness with expanding market share.

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Mergers & Acquisitions Activity, retrieved from
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_________________________________________________ 82
Kushagra International Management Review 
ISSN 2250‐0960 Issue II 2012 
Kushagra Institute of Information & Management Science 
 
 
Performance Evaluation on Acquisitions in India:  
A Case Study on ACC limited acquisition of Everest Industries 
 
N.M. Leepsa* 
Abstract:  
Mergers  and  acquisitions  have  gained  its  significance  around  the  world.  Therefore  most  of 
the research is carried out to find out whether they are value creating or value destroying in nature. 
Limited  Studies  are  undertaken  in  respect  of  Indian  merger  and  Acquisition  cases.  Most  of  the 
empirical studies are based on accounting approach or market approach. This paper made case study 
analysis using financial return method and market return method. Case study was undertaken for the 
deal  ACC  limited  and  Everest  Industries  limited.  It  is  found  that  deal  ACC  limited  and  Everest 
Industries limited is a successful deal. Merger has helped in revenue increase and cost decrease. 
 
Introduction 
Long  term  success  of  business  depends  on  the  various  growth  strategies.  One  of  such 
business  strategy  to  gain  competitive  advantage  is  merger  and  acquisitions.  As  said  by  Marco 
Boschetti that, “A paradox exists in the world of mergers and acquisitions. Other studies that have 
looked  at  M&A  deals  in  the  past  20  years  have  found  that  deals  in  earlier  M&A  cycles  destroyed, 
rather  than  created,  shareholder  value.  Yet  to  grow  to  be  an  organization  operating  on  a  global 
scale,  it  is  almost  impossible  to  do  so  quickly  enough  through  organic  growth  alone.  Mergers  and 
acquisitions have in many ways become necessary.” 
Mergers and acquisitions have gained its significance around the world. With the opening of 
economy mergers and acquisitions have mushroomed in India too. Lot of research are done to find 
out whether these inorganic growth strategies are value creating or value destroying in nature. Most 
of the studies are done evaluating the operating and financial performance of companies in USA, UK, 
Canada, Australia and also India. But few works are done in India specifically when the Indian market 
is  growing  and  when  there  are  increased  volume  of  M&A.  This  research  gap  has  prompted  to 
evaluate  the  company  performance  specifically  in  manufacturing  sector.  Each  merger  and 
acquisition  case  differs  from  each  other.  Therefore  this  is  an  attempt  to  look  into  performance  of 
particular deal in manufacturing sector. 
 
Research Methodology 
A case study analysis was undertaken in which companies in different sector were chosen. 
Case  study  was  done  on  two  acquisition1  deals  one  of  which  is  manufacturing  sector  and  other  is 
from the financial sector. The companies are analysed for a period of nine years in acquisition and 
nine years post acquisition. The analysis was done on the following basis: 
 Brief historical background of the acquirer and target companies. 
 Nature of deal 
 Financial analysis using 
 Liquidity Parameters ( Current ratio2, Quick Ratio3, Networking capital /Sales 
Ratio4) 

                                                            
1
  Acquisition is a purchase by one company of a substantial part of the assets or securities of another, normally
for the purpose of restructuring the operations of the acquired entity. The purchase may be of all or a substantial
part of the target’s voting shares or of a division of the target firm (Daga, 2007, p10). 
2
 Current Ratio is defined as the current assets by current liabilities and provisions
1
 
 
 Solvency Parameters (Interest Coverage Ratio5, Total Debt Ratio6) 
 Profitability Parameters (Return on Capital Employed7, Return on Net worth8) 
 Cost Analysis (Expenses/Sales Ratio) 
 Economic Profit (Rate of EVA (Economic Value Added/Average Net worth)9 
 
Method of Analysis 
 Improvement  or  deterioration  of  sales  trend  by  calculating  the  increase  /  decrease  in  Net 
Sales over previous period 
 Sales  were  related  to  total  assets  of  the  company  for  understanding  the  efficiency  of  the 
management in utilising the assets for generating sales. 
 For each financial ratio the pre and post performance was evaluated. The average of the pre 
and post ratios were compared 
Sample 
Table 1 Sample Case Details 
Deal type  Acquisition or takeover 
Status of deal  Deal completed
Year of acquisition  2001 
Name of Acquirer Company  ACC limited 
Name of Target Company  Everest Industries limited 
Sector of Acquirer and Target  Listed Manufacturing 
Industry of Acquirer and Target  Non Metallic Mineral Products 
Type of Deal  Related Deal/ Congeneric Deal 
Deal Value  Rs. 1628 crore
Source: CMIE Prowess Database 
Period of Study 
The  study  is  carried  out  for  18  years  from  period  31st  March  1992  to  31st  March  2010.  The  pre 
acquisition and post acquisition period is 9 years each (‐9 to +9). 
Source of Data 
 Published annual reports of Companies 
 Prowess database (CMIE) 
Tools and Techniques 
 Wilcoxon sum of Rank Test 
 
ACC Limited vs. Everest Industries Limited 
In  this  section  the  effectiveness  of  the  acquisition  of  ACC  Limited  vs.  Everest  Industries 
Limited which took place in 2001. The effectiveness of the acquisition is evaluated and assed using 
accounting approach. For the purpose of evaluating performance, the pre acquisition period is 31st 
March 1992 to 31st March 2000 and Post acquisition period is 31st March 1992 to 31st March 2010. 
                                                                                                                                                                                         
3 Quick ratio is defined as current assets minus inventories whole divided by current liabilities and provisions
4 Networking Capital/sales is current assets minus current liabilities and provisions whole divided by sales.
Sales are taken to adjust for the size of the companies.
5 Interest coverage ratio is defined as profit before interest and taxes (PBIT) divided by interest
6 Total Debt Ratio is defined as total debt divided by total assets. Total debts is the summation of current
liabilities and provisions and borrowings
7 Return on capital employed is defined as the profit before interest and taxes (PBIT) divided by capital
employed.
8 Return on Net Worth is defined as the Profit after Tax (PAT) divided by Net worth
9 The formula that defines EVA from equity holders’ point of view is below: EVA= Net Profit – Cost of Equity 
*Average Net Worth. Ke is estimated using Capital Asset Pricing Model: Ke =Rf + βi (Rm-Rf) Where
Rf = Risk Free Rate of Return ; Rm= Rate of Return on Market Index; βi = Beta or Company Stock
 
 
2
 
 
 
Basic Information about the companies 
 
ACC Limited 
Table 2 Basic Information on ACC Limited 
Year of Incorporation  1936 
Economic Activity  Cement 
Industry Name  Cement
Ownership Group  Holcim (F) Group 
Scrip ISIN Code  INE012A01025 
BSE Listing Flag  A 
Industry Type  Non‐Financial 
Source: CMIE Prowess Database 
 
History of ACC Limited  
In  a  historic  merger  of  10  cement  companies,  ACC  (formerly  known  as  Associated  Cement 
Companies)  was  incorporated  in  1936.  It  is  one  of  the  largest  cement  producers  in  India.  The 
company was owned by the Tata group during the period 1936‐2000. However, between 1999 and 
2000, the Tata group sold its entire stake in ACC to Gujarat Ambuja Cements Ltd. in three stages. In  a 
major consolidation deal in 2005, Swiss cement major, Holcim in a strategic partnership with Ambuja 
Cements  acquired  a  majority  stake  in  ACC  through  Ambuja  Cement  India  Ltd.  (ACIL),  the  holding 
company.  The  company  is  mainly  engaged  in  the  manufacture  of  ordinary  portland  cement  and 
blended  cement.  It  is  the  only  cement  company  which  has  a  pan‐‐India  presence,  with  15  cement 
factories  situated  across  the  country.  It  has  the  largest  distribution  network  in  India  with  170 
warehouses  and  over  9,000  dealers.  Some  of  the  company's  popular  cement  brands  include  'ACC 
Samrat', 'ACC Suraksha' and 'ACC Super'.  The company also expanded through the acquisition route. 
Cement  companies  acquired  include  Cement  Marketing  Co,  Bulk  Cement  Corporation,  Damodhar 
Cement and Bargarh Cement (the latter two were merged with ACC in March 2006). The company 
has taken various initiatives towards innovative concepts which include usage of waste material to 
produce cement, induction of pollution control equipment, commercial manufacture of ready‐‐mix 
concrete  and  introduction  of  customer  help  centres.    It  has  also  shown  interest  in  the  fields  of 
Sustainable Development & Corporate Social Responsibility. In June 2008, it issued its first Corporate 
Sustainable  Development  Report  for  the  year  2007.    With  a  view  to  completely  focus  on  its  core 
cement  business,  the  company  divested  its  refractory  business  as  well  as  a  50  per  cent  stake  in 
Everest Industries in 2005. In line with this strategy, the company sold its entire share‐holding in the 
wholly  owned,  subsidiaries  ‐  ACC  Nihon  Castings  and  ACC  Machinery  Company  in  July  2007  and 
March  2008  respectively.  It  also  offloaded  certain  surplus  assets  including  land  at  Haryana,  for  a 
consideration of Rs.205 crore in November 2007. 
 
 
 
 
 
 
 
 
 
 
 
 

3
 
 
Key Performance Indicators: 
Figure 1                                                                                     Figure 2 
 

 
Source: Company website 
 
Figure 3                                                                                     Figure 4 

  
Source: Company website 
 
Figure 5                                                                    Figure 6 

 
Source: Company website 
 
4
Figure 7                                                     Figure 8 
 

Source: Company website 
Figure 9                                       Figure 10 

Source: company website 
Figure 11                                                                                  Figure 12 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5
Table 3 List of Mergers and Acquisitions of ACC Ltd 
Deals where ACC Ltd is target 
Date  Deal Type  Acquirer Company  Price/Cost Swap Ratio 
29‐Mar‐99  Sale of asset  Tata Power Co. Ltd. 9000
12‐Jul‐99  Takeover  Tata Sons Ltd.  4357
23‐Dec‐99  Takeover  Ambuja Cements Ltd.  45510
15‐Jan‐00  Takeover  Ambuja Cements Ltd.  0
22‐Mar‐00  Takeover  Ambuja Cement India Pvt. Ltd. 0
24‐Apr‐00  Takeover  Ambuja Cement India Pvt. Ltd.  26161.47
5‐Oct‐00  Takeover  Ambuja Cement India Pvt. Ltd.  19299.98
22‐Feb‐01  Sale of asset  Proposed 0
5‐Sep‐03  Takeover  General Insurance Corpn. Of India  1516
11‐Oct‐03  Takeover  Life Insurance Corpn. Of India  27800
7‐Jan‐05  Sale of asset  Mancherial Cement Co. Pvt. Ltd.  0
21‐Jan‐05  Takeover  Holdcem Cements Pvt. Ltd. 256402.6
14‐Jul‐05  Sale of asset  I C I C I Venture Funds Mgmt. Co. Ltd.  25700
30‐Jun‐06  Sale of asset  Mancherial Cement Co. Pvt. Ltd.  0
26‐Feb‐07  Takeover  Holcim Ltd. 0
8‐Mar‐07  Takeover  Ambuja Cement India Pvt. Ltd.  0
8‐May‐07  Takeover  Holcim Ltd.  52900
Deals where ACC Ltd is Acquirer 
Date  Deal Type  Target company Price/Cost Swap Ratio
15‐Mar‐99  Takeover  A C C‐Nihon Castings Ltd. [Merged]  0
10‐May‐00  Takeover  A C C‐Nihon Castings Ltd. [Merged]  700
18‐Dec‐01  Takeover  Everest Industries Ltd. 1628
3‐Dec‐03  Takeover  Bargarh Cement Ltd. [Merged]  17641
20‐Jan‐04  Merger  Bargarh Cement Ltd. [Merged]  0
11‐Mar‐04  Takeover  Bargarh Cement Ltd. [Merged]  2684.5
19‐Jul‐04  Sale of asset  Tata Power Co. Ltd. 0
6‐May‐05  Merger  Damodhar Cement & Slag Ltd. [Merged]  0
15‐Dec‐05  Takeover  Tarmac (India) Pvt. Ltd. [Merged]  1240
11‐May‐06  Merger  Tarmac (India) Pvt. Ltd. [Merged] 0
20‐Apr‐07  Takeover  Shiva Cement Ltd.  1595
20‐Dec‐07  Sale of asset  A C C Concrete Ltd.  10000
3‐Feb‐11  Merger  Lucky Minmat Ltd.  0
3‐Feb‐11  Merger  National Lime Stone Co. Pvt. Ltd. 0
3‐Feb‐11  Merger  Encore Cement & Additives Pvt. Ltd.  0
Source: CMIE Prowess Database 
 
Everest Industries Limited 
Table 4 Basic Information on Everest Industries Limited 
Year of Incorporation  1934
Economic Activity  Asbestos‐Cement Products 
Industry Name  Other Non‐Metallic Mineral Products 
Ownership Group  Gujarat Ambuja Cement Group 

6
 
 
Scrip ISIN Code  INE295A01018
BSE Listing Flag  T 
Industry Type  Non‐Financial 
Source: CMIE Prowess Database
 
History of Everest Industries Limited 
Everest Industries Limited was incorporated in 1934. It was named as Asbestos Cement Ltd., 
as  a  Private  Limited  Company  under  the  Indian  Company  Act,  VII  of  1913  with  two  corporate 
shareholders viz., C.P. Cement Co. Ltd., [which subsequently in 1936 merged with other companies 
to  form  Associated  Cement  Companies  Ltd.s]  and  Turner  and  Newall  Ltd.,  U.K.  The  name  of 
Company  was  changed  to  Asbestos  Cement  Pvt.  Ltd  as  per  the  requirement  of  law  under  the 
Companies  Act,  1956.  The  name  was  again  changed  to  Asbestos  Cement  Ltd.,  in  1960  when  the 
Comp.  became  a  deemed  public  limited  Comp.  under  Section  43A  of  Company  Act,  1956.  On  24 
October 1983, the name of the company was again changed to Everest Building Products Ltd. It was 
further  changed  to  Eternit  Everest  Ltd.  on  18  September  1990  and  was  renamed  as  Everest 
Industries Ltd. on 29 August 2003. The company was listed on the Bombay Stock Exchange (BSE) on 
22 December 1983 and on the National Stock Exchange (NSE) on 21 December 1994. The registered 
office of the company is located at Lakhampur in Nashik, Maharashtra. The company is part of the 
Gujarat Ambuja Cement Group and is promoted by Everest Finvest India Pvt. Ltd., Trapu Cans Pvt. 
Ltd. and Falak Investment Pvt. Ltd. 
The objective of company is to produce asbestos cement sheeting products like corrugated 
curved tanks, corrugated roofing sheets, roofing extractors, and accessories for roofing sheets. The 
products  are  Asbestos  Cement  Corrugated  (CBS)  roofing  sheets  and  other  Moulded  Goods 
(Accessories)It is known by its the brand name 'Everest'. The Company is the first company to set up 
facilities for manufacturing asbestos cement roofing sheets in India by establishing its first factory at 
Kymore in Madhya Pradesh. The manufacturing business was expanded progressively by establishing 
a second sheeting factory at Mulund [Mumbais] in 1937, a third factory at Calcutta in October 1938 
& a fourth factory at Podanur near Coimbatore in Tamil Nadu in November 1953.  
Table 5 List of Mergers and Acquisitions of Everest Industries Ltd 
Deals where Everest Industries Ltd. is target 
Date  Deal Type Acquirer Company Price/Cost Swap ratio
28‐Sep‐01  Sale of asset Nirmal Lifestyle Ltd.  4300
18‐Dec‐01  Takeover  A C C Ltd.  1628
15‐Jan‐04  Sale of asset Nirmal Developers Pvt. Ltd. 7800
25‐Jan‐05  Takeover  Accurate Finstock Pvt. Ltd.  20472.45
17‐Oct‐05  Takeover  Everest Finvest (India) Pvt. Ltd. 5446.4
Source: CMIE Prowess Database 
 
Financial Position of ACC Ltd and Everest Industries Limited 
The  financial  position  of  ACC  Ltd  and  Everest  Industries  Limited  are  shown  for  18  years  on  the 
following grounds: 
o Growth  (Percentage  Change  of  Total  Assets  and  Sales  (In  Rs.  Crore)  of  the  Companies 
over Previous Year) 
o Efficiency (Percentage Change of Assets Turnover Ratio of the Companies over Previous 
Year ) 
o Revenue  Generation  (Percentage  Change  of  PAT/Sales  Ratio  of  the  Companies  over 
Previous Year) 
o Cost  Reduction:  (Percentage  Change  of  Expenses/Sales  Ratio  of  the  Companies  over 
Previous Year ) 
 
7
 
 
Table 6 Percentage Change of Total Assets (In Rs. Crore) of the Companies over Previous Year 
Assets  A C C Ltd.  % Change  Everest Industries Ltd.  % Change 
Mar‐92  1035.47  ‐  62.28  ‐ 
Mar‐93  1351.25  0.23 68.49 0.09
Mar‐94  1569.13  0.14  81.59  0.16 
Mar‐95  1842.27  0.15  107.7  0.24 
Mar‐96  2179.25  0.15  125.12  0.14 
Mar‐97  2447.58  0.11 139.73 0.10
Mar‐98  2937.8  0.17  149.75  0.07 
Mar‐99  2952.01  0.00  152.3  0.02 
Mar‐00  3201.28  0.08 158.28 0.04
Mar‐01  3457.24  0.07  195.07  0.19 
Mar‐02  3508.67  0.01  176.74  ‐0.10 
Mar‐03  3581.56  0.02  158.29  ‐0.12 
Mar‐04  3917.92  0.09 162.28 0.02
Mar‐05  4430.83  0.12  226.6  0.28 
Mar‐06  4933.91  0.10  238.27  0.05 
Mar‐07  6012.86  0.18 350.82 0.32
Mar‐08  7116.66  0.16  399.23  0.12 
Mar‐09  8643.51  0.18  505.01  0.21 
Mar‐10  10195.44  0.15  490.65  ‐0.03 
Source: Evaluated
Table 7 Percentage Change of Sales (In Rs. Crore) of the Companies over Previous Year 
Year  A C C Ltd.  % Change Everest Industries Ltd. % Change
Mar‐92  1409  ‐  109.48  ‐ 
Mar‐93  1505.79  0.06  105.48  ‐0.04 
Mar‐94  1618.13  0.07 111.14 0.05
Mar‐95  2042.7  0.21  124.1  0.10 
Mar‐96  2329.46  0.12  102.46  ‐0.21 
Mar‐97  2451.05  0.05  148.28  0.31 
Mar‐98  2373.11  ‐0.03 140.49 ‐0.06
Mar‐99  2585.83  0.08  146.11  0.04 
Mar‐00  2679.22  0.03  149.37  0.02 
Mar‐01  2936.12  0.09 156.08 0.04
Mar‐02  3226  0.09  136.72  ‐0.14 
Mar‐03  3371.88  0.04  209.91  0.35 
Mar‐04  3900.37  0.14  199.49  ‐0.05 
Mar‐05  4549.8  0.14 227.78 0.12
Mar‐06  3723.51  ‐0.22  255.21  0.11 
Mar‐07  6468.06  0.42  326.81  0.22 
Mar‐08  7866.62  0.18 321.36 ‐0.02
Mar‐09  8274.61  0.05  560.3  0.43 
Mar‐10  8803.17  0.06  682.21  0.18 
Source: Evaluated 
 

8
 
 
Table 8 Percentage Change of Assets Turnover Ratio of the Companies over Previous Year 
Year  A C C Ltd.  % Change  Everest Industries Ltd.  % Change 
Mar‐92  1.36  ‐  1.76  ‐ 
Mar‐93  1.11  ‐0.23 1.54 ‐0.14
Mar‐94  1.03  ‐0.08  1.36  ‐0.13 
Mar‐95  1.11  0.07  1.15  ‐0.18 
Mar‐96  1.07  ‐0.04  0.82  ‐0.40 
Mar‐97  1  ‐0.07 1.06 0.23
Mar‐98  0.81  ‐0.23  0.94  ‐0.13 
Mar‐99  0.88  0.08  0.96  0.02 
Mar‐00  0.84  ‐0.05 0.94 ‐0.02
Mar‐01  0.85  0.01  0.8  ‐0.18 
Mar‐02  0.92  0.08  0.77  ‐0.04 
Mar‐03  0.94  0.02  1.33  0.42 
Mar‐04  1  0.06 1.23 ‐0.08
Mar‐05  1.03  0.03  1.01  ‐0.22 
Mar‐06  0.75  ‐0.37  1.07  0.06 
Mar‐07  1.08  0.31 0.93 ‐0.15
Mar‐08  1.11  0.03  0.8  ‐0.16 
Mar‐09  0.96  ‐0.16  1.11  0.28 
Mar‐10  0.86  ‐0.12  1.39  0.20 
Source: Evaluated
Table 9 Percentage Change of PAT/Sales Ratio of the Companies over Previous Year 
Year  A C C Ltd.  % Change Everest Industries Ltd. % Change
Mar‐92  0.08  ‐  0.06  ‐ 
Mar‐93  0.04  ‐1.00  0.08  0.25 
Mar‐94  0.04  0.00 0.07 ‐0.14
Mar‐95  0.08  0.50  0.18  0.61 
Mar‐96  0.1  0.20  0.23  0.22 
Mar‐97  0.03  ‐2.33  0.08  ‐1.88 
Mar‐98  0.01  ‐2.00 0.06 ‐0.33
Mar‐99  0.02  0.50  0.01  ‐5.00 
Mar‐00  ‐0.02  2.00  0.04  0.75 
Mar‐01  0.02  2.00 0.05 0.20
Mar‐02  0.04  0.50  ‐0.01  6.00 
Mar‐03  0.03  ‐0.33  0.05  1.20 
Mar‐04  0.05  0.40  0.3  0.83 
Mar‐05  0.08  0.38 0.08 ‐2.75
Mar‐06  0.15  0.47  0.12  0.33 
Mar‐07  0.19  0.21  0.04  ‐2.00 
Mar‐08  0.18  ‐0.06 0.04 0.00
Mar‐09  0.15  ‐0.20  0.03  ‐0.33 
Mar‐10  0.18  0.17  0.04  0.25 
Source: Evaluated 
 

9
 
 
Table 10 Percentage Change of Expenses/Sales Ratio of the Companies over Previous Year 
Year  A C C Ltd.  % Change  Everest Industries Ltd.  % Change 
Mar‐92  0.96  ‐  0.97  ‐ 
Mar‐93  0.99  0.03 0.96 ‐0.01
Mar‐94  0.98  ‐0.01  1.01  0.05 
Mar‐95  0.95  ‐0.03  0.94  ‐0.07 
Mar‐96  0.94  ‐0.01  0.88  ‐0.07 
Mar‐97  0.99  0.05 0.98 0.10
Mar‐98  1.03  0.04  1.01  0.03 
Mar‐99  1.02  ‐0.01  1.02  0.01 
Mar‐00  1.06  0.04 1.05 0.03
Mar‐01  1.01  ‐0.05  1.04  ‐0.01 
Mar‐02  0.98  ‐0.03  1.02  ‐0.02 
Mar‐03  1.01  0.03  1.01  ‐0.01 
Mar‐04  0.99  ‐0.02 0.95 ‐0.06
Mar‐05  0.95  ‐0.04  0.91  ‐0.04 
Mar‐06  0.97  0.02  0.93  0.02 
Mar‐07  0.85  ‐0.14 1 0.07
Mar‐08  0.87  0.02  1.03  0.03 
Mar‐09  0.9  0.03  1  ‐0.03 
Mar‐10  0.84  ‐0.07  0.98  ‐0.02 
Source: Evaluated
 
Performance Evaluation of the Companies 
The post acquisition performance of the combined firm is discussed below: 
Table 11 Mean values during Pre and Post Acquisition 
Ratios  ‐5 year  +5  Outcome  ‐9 year  +9 year  Outcome 
year 
Current Ratio  10.91  28.65  Success  1.46  1.32  Failure 
Quick Ratio  0.16  0.24  Success  0.83 0.73  Failure
Net working capital/sales  0.89  0.72  Failure  0.13  0.09  Failure 
Total Debt Ratio  0.57  0.50  Success  0.54  0.50  Success 
Interest Coverage Ratio  0.15  0.10  Failure  13.45 21.22  Success
Return on capital employed  0.10  0.20  Success  0.25  0.26  Success 
Return on Net worth  0.57  0.50  Failure  0.17  0.21  Success 
Expenses/Sales  1.52  1.38  Success  0.99  0.93  Success 
10
Rate of EVA   ‐0.03  0.07  Success  0.05 0.08  Success
Source: Evaluated 
The liquidity position of the combined firms has decreased after acquisition but the solvency 
position has improved. The long term solvency of the company helps not to go bankruptcy due to 
short term solvency. But the company’s liquidity won’t be a problem as its ability to generate cash 

                                                            
10
 Yield on Long Term Government Bond is considered as Risk Free Rate of Return (Rf) and Compound Annual
Growth Rate (CAGR) in Sensex or Nifty since inception is considered as Rate of Return on Market (Rm).
Accordingly, Rf =7% and Rm=15%. For the study the rate of EVA (EVA/Average Net worth) is taken so that it
would adjust for the size of the companies.

10
 
 
flow  to  service  creditors  is  adequate.   The  acquirer  has  valuable  assets  and  thus  is  not  near 
insolvency. Even they have generated enough profit over the years after acquisition compared to the 
pre acquisition period. The economic value added which is considered as the true profit in view of 
shareholders  has  also  improved.  The  rate  of  EVA  has  increased  after  the  acquisition  which  means 
that the company has enough capacity to generate profit after taking into consideration the cost of 
capital. 
 
Conclusion: 
The acquisition deal between the ACC limited and Everest Limited is a successful deal as it 
has able to generate revenue and reduce cost due to the synergy between the two companies. The 
evidence is the improvement in the economic value added. Even the solvency position improved in 
the  post  acquisition  period.  The  limitation  of  the  study  is  that  it  has  focused  on  only  financial 
performance  in  post  acquisition  period.  Future  studies  can  be  recommended  to  be  done  in  non 
financial performance evaluation of the combined firm. 
 
References: 
Books 
 J.  Rachna  2009.  Mergers  ,  Acquisitions,  Corporate  Restructuring  in  India:  Procedures  and 
Case Studies, New Century, First Edition 
Internet 
 http://www.source2update.com/Company‐History/Everest‐Industries‐ETEEVE.html, 
accessed on 3rd may 2011 
 http://www.everestind.com/about.asp#t, accessed on 3rd May 2011 

11
 
 
APPENDIX A LIQUIDITY RATIOS 
Table 12 Performance based on Current Ratio 
CR1a  CR2a  Outcome  CR1t  CR2t  Outcome  CR1c  CR2c  Outcome 
1.55  1.18  F  1.3 1.37 S 1.24 1.28  S
1.57  1.12  F  1.36  1.96  S  1.24  1.54  S 
1.36  1.16  F  1.24  1.88  S  1.20  1.52  S 
1.33  1.14  F  1.38  1.37  F  1.26  1.26  F 
1.43  0.92  F  1.43 1.64 S 1.18 1.28  S
1.49  1.12  F  1.35  1.33  F  1.24  1.23  F 
1.77  0.98  F  1.55  1.61  S  1.27  1.30  S 
1.68  0.95  F  1.34 1.79 S 1.15 1.37  S
1.32  0.7  F  1.79  1.54  F  1.25  1.12  F 
Source: Evaluated 
 
Table 13 Performance based on Quick Ratio 
QR1a  QR2a  Outcome  QR1t  QR2t  Outcome  QR1c  QR2c  Outcome 
0.97  0.76  F  0.59 0.83 S 0.78 0.80  S 
0.94  0.64  F  0.53  0.55  S  0.74  0.60  F 
0.92  0.69  F  0.42  0.88  S  0.67  0.79  S 
0.94  0.58  F  0.6  0.86  S  0.77  0.72  F 
0.97  0.47  F  0.77 0.93 S 0.87 0.70  F 
0.93  0.74  F  0.71  0.9  S  0.82  0.82  F 
1.16  0.66  F  0.87  0.9  S  1.02  0.78  F 
1.2  0.67  F  0.65 0.87 S 0.93 0.77  F 
0.85  0.45  F  0.8  0.81  S  0.83  0.63  F 
Source: Evaluated 
 
Table14 Performance based on Net Working Capital/Sales Ratio 
NWCS1a  NWCS2a  Outcome  NWCS1t  NWCS2t  Outcome NWCS1c  NWCS2c  Outcome
0.14  0.04  F  0.09 0.17 S 0.12 0.11  F
0.16  0.03  F  0.12  0.16  S  0.14  0.10  F 
0.1  0.03  F  0.09  0.21  S  0.10  0.12  S 
0.08  0.03  F  0.12 0.15 S 0.10 0.09  F
0.11  ‐0.03  F  0.2  0.19  F  0.16  0.08  F 
0.1  0.03  F  0.14  0.14  F  0.12  0.09  F 
0.15  0  F  0.21  0.21  F  0.18  0.11  F 
0.13  ‐0.02  F  0.13 0.2 S 0.13 0.09  F
0.08  ‐0.11  F  0.22  0.13  F  0.15  0.01  F 
Source: Evaluated 
 
APPENDIX B SOLVENCY RATIOS 
Table 15 Performance based on Interest Coverage Ratio 
ICR1a  ICR2a  Outcome  ICR1t ICR2t Outcome ICR1c ICR2c  Outcome
6.09  1.97  F  33.12  0.14  F  19.605  1.055  F 
2.33  1.82  F  27.84  12.33  F  15.085  7.075  F 
1.97  3.22  S  32.6 163.16 S 17.285 83.19  S

12
 
 
2.92  5.42  S  26.09 55.64 S 14.505 30.53  S
3.92  10.6  S  45.13  32.17  F  24.525  21.385  F 
1.74  20.79  S  29.16  4.96  F  15.45  12.875  F 
1.09  19.06  S  18.87 3.01 F 9.98 11.035  S
1.32  21.75  S  2.94  2.14  F  2.13  11.945  S 
0.67  18.52  S  4.25  5.19  S  2.46  11.855  S 
Source: Evaluated 
 
Table 16 Performance based on Total Debt Ratio 
TDR1a  TDR2a  Outcome  TDR1t TDR2t Outcome TDR1c TDR2c  Outcome
0.5  0.69  S  0.34  0.57  S  0.42  0.63  S 
0.65  0.66  S  0.34  0.24  F  0.50  0.45  F 
0.72  0.58  F  0.4 0.25 F 0.56 0.42  F
0.61  0.55  F  0.42  0.46  S  0.52  0.51  F 
0.53  0.65  S  0.5  0.37  F  0.52  0.51  F 
0.59  0.38  F  0.41  0.62  S  0.50  0.50  F 
0.82  0.32  F  0.46 0.76 S 0.64 0.54  F
0.74  0.39  F  0.45  0.58  S  0.60  0.49  F 
0.77  0.42  F  0.44  0.42  F  0.61  0.42  F 
Source: Evaluated
 
APPENDIX C PROFITABILITY RATIOS 
Table 17 Performance based on Return on Capital Employed 
ROCE1a  ROCE2a  Outcome  ROCE1t  ROCE2t  Outcome  ROCE1c  ROCE2c  Outcome 
0.43  0.16  F  0.5  0  F  0.47  0.08  F 
0.17  0.12  F  0.52 0.19 F 0.35 0.16  F
0.14  0.14  F  0.4  0.75  S  0.27  0.45  S 
0.21  0.18  F  0.5  0.27  F  0.36  0.23  F 
0.27  0.24  F  0.4 0.34 F 0.34 0.29  F
0.12  0.43  S  0.25 0.13 F 0.19 0.28  S
0.1  0.46  S  0.13  0.12  F  0.12  0.29  S 
0.14  0.34  S  0.03  0.15  S  0.09  0.25  S 
0.06  0.37  S  0.08 0.22 S 0.07 0.30  S
Source: Evaluated 
 
Table 18 Performance based on Return on Net Worth 
RONW1a  RONW2a  outcome  RONW1t  RONW2t  outcome RONW1c  RONW2c  outcome
0.33  0.13  F  0.27  ‐0.02  F  0.30  0.06  F 
0.18  0.1  F  0.26 0.1 F 0.22 0.10  F
0.15  0.15  F  0.21  0.6  S  0.18  0.38  S 
0.26  0.24  F  0.4  0.17  F  0.33  0.21  F 
0.24  0.25  S  0.32 0.24 F 0.28 0.25  F
0.07  0.39  S  0.15  0.09  F  0.11  0.24  S 
0.01  0.35  S  0.11  0.1  F  0.06  0.23  S 
0.06  0.25  S  0.02  0.1  S  0.04  0.18  S 

13
 
 
‐0.05  0.27  S  0.07 0.17 S 0.01 0.22  S
Source: Evaluated 
 
Table 19 Performance based on Assets Turnover Ratio 
Pre  A C C  Everest  ATR1c  Post  A C C  Everest  ATR2c  outco
Ltd.  Industries  Ltd.  Industries Ltd.  me 
Ltd. 
1992  1.36  1.76  1.56 2002  0.92 0.77 0.85  F
1993  1.11  1.54  1.33  2003  0.94  1.33  1.14  F 
1994  1.03  1.36  1.20  2004  1  1.23  1.12  F 
1995  1.11  1.15  1.13  2005  1.03  1.01  1.02  F 
1996  1.07  0.82  0.95 2006  0.75 1.07 0.91  F
1997  1  1.06  1.03  2007  1.08  0.93  1.01  F 
1998  0.81  0.94  0.88  2008  1.11  0.8  0.96  S 
1999  0.88  0.96  0.92 2009  0.96 1.11 1.04  S
2000  0.84  0.94  0.89 2010  0.86 1.39 1.13  S
Averag 1.02  1.17  1.10  Average  0.96  1.07  1.02  F 

Source: Evaluated 
 
Table 20 Performance based on Cash Profit/Sales Ratio 
Pre  A C C  Everest  CPS1c  Post  A C C  Everest  CPS2c  Outco
Ltd.  Industries  Ltd.  Industries  me 
Ltd.  Ltd. 
1992  0.12  0.07  0.10 2002  0.09 0.03 0.06  F
1993  0.07  0.09  0.08  2003  0.08  0.09  0.09  S 
1994  0.06  0.08  0.07  2004  0.1  0.33  0.22  S 
1995  0.09  0.19  0.14  2005  0.12  0.1  0.11  F 
1996  0.12  0.25  0.19 2006  0.18 0.15 0.17  F
1997  0.06  0.1  0.08  2007  0.23  0.06  0.15  S 
1998  0.04  0.05  0.05  2008  0.22  0.06  0.14  S 
1999  0.05  0.03  0.04 2009  0.18 0.04 0.11  S
2000  0.02  0.03  0.03  2010  0.22  0.07  0.15  S 
Average  0.07  0.10  0.08  Average  0.16  0.10  0.13  S 
Source: Evaluated 
 
Table 21 Performance based on PBDITA/Sales Ratio 
Pre  A C C  Everest  PBDITAS1c Post A C C  Everest  PBDITAS2c  outc
Ltd.  Industries  Ltd.  Industries  ome 
Ltd.  Ltd. 
1992  0.21  0.14  0.18  2002  0.15  0.05  0.10  F 
1993  0.12  0.19  0.16  2003  0.13  0.13  0.13  F 
1994  0.1  0.16  0.13  2004  0.14  0.4  0.27  S 
1995  0.14  0.25  0.20 2005  0.16 0.15 0.16  F
1996  0.19  0.32  0.26  2006  0.25  0.2  0.23  F 
1997  0.12  0.15  0.14  2007  0.3  0.1  0.20  S 
1998  0.11  0.11  0.11 2008  0.3 0.11 0.21  S

14
 
 
1999  0.14  0.04  0.09 2009  0.26 0.1 0.18  S
2000  0.09  0.09  0.09  2010  0.31  0.1  0.21  S 
Aver 0.14  0.16  0.15  Aver 0.22  0.15  0.19  S 
age  age 
Source: Evaluated 
 
Table 22 Performance based on PBDPTA/Sales Ratio 
Pre  A C C  Everest  combi Post A C C  Everest  combi outco
Ltd.  Industries Ltd.  ned  Ltd.  Industries Ltd.  ned  me 
1992  0.18  0.13  0.16 2002  0.11 0.03 0.07  F
1993  0.08  0.18  0.13  2003  0.09  0.12  0.11  F 
1994  0.06  0.15  0.11  2004  0.12  0.4  0.26  S 
1995  0.1  0.25  0.18  2005  0.15  0.15  0.15  F 
1996  0.15  0.31  0.23 2006  0.23 0.2 0.22  F
1997  0.07  0.15  0.11  2007  0.29  0.08  0.19  S 
1998  0.04  0.13  0.09  2008  0.29  0.09  0.19  S 
1999  0.07  0.04  0.06 2009  0.25 0.07 0.16  S
2000  0.03  0.09  0.06  2010  0.3  0.09  0.20  S 
Avera 0.09  0.16  0.12  Avera 0.20  0.14  0.17  S 
ge  ge 
Source: Evaluated 
 
Table 23 Performance based on PBDTA/Sales Ratio 
Pre  A C C  Everest  combi Post  A C C  Everest  combi outco
Ltd.  Industries Ltd.  ned  Ltd.  Industries Ltd.  ned  me 
1992  0.18  0.13  0.16  2002  0.1  0.03  0.07  F 
1993  0.08  0.18  0.13 2003  0.09 0.12 0.11  F
1994  0.06  0.15  0.11  2004  0.11  0.4  0.26  S 
1995  0.1  0.25  0.18  2005  0.14  0.15  0.15  F 
1996  0.15  0.31  0.23  2006  0.23  0.2  0.22  F 
1997  0.07  0.15  0.11 2007  0.29 0.08 0.19  S
1998  0.04  0.1  0.07  2008  0.29  0.09  0.19  S 
1999  0.07  0.04  0.06  2009  0.25  0.07  0.16  S 
2000  0.03  0.08  0.06 2010  0.3 0.09 0.20  S
Avera 0.09  0.15  0.12  Avera 0.20  0.14  0.17  S 
ge  ge 
Source: Evaluated 
 
Table 24 Performance based on PBIT/Sales Ratio 
Pre  A C C  Everest  combi Post  A C C  Everest  combi outco
Ltd.  Industries Ltd.  ned  Ltd.  Industries Ltd.  ned  me 
1992  0.18  0.13  0.16  2002  0.1  0  0.05  F 
1993  0.09  0.17  0.13  2003  0.08  0.08  0.08  F 
1994  0.08  0.14  0.11 2004  0.09 0.36 0.23  S
1995  0.12  0.24  0.18  2005  0.12  0.13  0.13  F 
1996  0.17  0.3  0.24  2006  0.2  0.17  0.19  F 
1997  0.08  0.14  0.11 2007  0.26 0.07 0.17  S

15
 
 
1998  0.08  0.09  0.09 2008  0.26 0.08 0.17  S
1999  0.1  0.02  0.06  2009  0.22  0.07  0.15  S 
2000  0.04  0.06  0.05  2010  0.28  0.08  0.18  S 
Avera 0.10  0.14  0.12 Avera 0.18 0.12 0.15  S
ge  ge 
Source: Evaluated
 
Table 25 Performance based on PBT/Sales Ratio 
Pre  A C C  Everest  Combi Post  A C C  Everest  Combi Outco
Ltd.  Industries Ltd.  ned  Ltd.  Industries Ltd.  ned  me 
1992  0.15  0.12  0.14  2002  0.05  ‐0.01  0.02  F 
1993  0.05  0.16  0.11  2003  0.04  0.07  0.06  F 
1994  0.04  0.14  0.09  2004  0.07  0.36  0.22  S 
1995  0.08  0.23  0.16 2005  0.1 0.13 0.12  F
1996  0.12  0.29  0.21  2006  0.18  0.17  0.18  F 
1997  0.04  0.13  0.09  2007  0.25  0.05  0.15  S 
1998  0.01  0.08  0.05 2008  0.25 0.06 0.16  S
1999  0.03  0.01  0.02  2009  0.21  0.04  0.13  S 
2000  ‐0.02  0.04  0.01  2010  0.26  0.06  0.16  S 
Avera 0.06  0.13  0.09  Avera 0.16  0.10  0.13  S 
ge  ge 
Source: Evaluated 
 
Table 26 Performance based on PAT/Sales Ratio 
Pre  A C C  Everest  Combined Post A C C  Everest  Combined  Outc
Ltd.  Industries  Ltd.  Industries  ome 
Ltd.  Ltd. 
1992  0.08  0.06  0.07  2002  0.04  ‐0.01  0.015  F 
1993  0.04  0.08  0.06  2003  0.03  0.05  0.04  F 
1994  0.04  0.07  0.055  2004  0.05  0.3  0.175  S 
1995  0.08  0.18  0.13 2005  0.08 0.08 0.08  F
1996  0.1  0.23  0.165  2006  0.15  0.12  0.135  F 
1997  0.03  0.08  0.055  2007  0.19  0.04  0.115  S 
1998  0.01  0.06  0.035 2008  0.18 0.04 0.11  S
1999  0.02  0.01  0.015  2009  0.15  0.03  0.09  S 
2000  ‐0.02  0.04  0.01  2010  0.18  0.04  0.11  S 
Aver 0.04  0.09  0.07  Avera 0.12  0.08  0.10  S 
age  ge 
Source: Evaluated 
 
Table 27 Performance Based on Rate of EVA 
REVA1a  REVA2a  Outcome  REVA1t REVA2t Outcome RVA1c REVA2c  Outcome
0.25  ‐0.02  F  0.15  ‐0.17  F  0.2  ‐0.095  F 
0.05  ‐0.04  F  0.14  ‐0.04  F  0.095  ‐0.04  F 
0.02  0.03  S  0.08 0.47 S 0.05 0.25  S
0.17  0.12  F  0.34 0.04 F 0.255 0.08  F
0.16  0.15  F  0.22  0.11  F  0.19  0.13  F 
16
 
 
‐0.06  0.33  S  0.01 ‐0.06 F ‐0.025 0.135  S
‐0.12  0.26  S  ‐0.04  ‐0.04  F  ‐0.08  0.11  S 
‐0.08  0.13  S  ‐0.13  ‐0.05  S  ‐0.105  0.04  S 
‐0.19  0.16  S  ‐0.08 0.04 S ‐0.135 0.1  S
0.02  0.12  S  0.08  0.03  F  0.05  0.08  S 
Source: Evaluated 
 
Table 28 Performances based on Expenses/Sales Ratio 
Pre  A C C  Everest  Comb Outc Post  A C C  Everest  Comb Outc
Ltd.  Industries  ined  ome  Ltd.  Industries  ined  ome 
Ltd.  Ltd. 
1992  0.96  0.97  0.97 S 2002  0.98 1.02 1.00  S
1993  0.99  0.96  0.98  F  2003  1.01  1.01  1.01  F 
1994  0.98  1.01  1.00  S  2004  0.99  0.95  0.97  F 
1995  0.95  0.94  0.95 F 2005  0.95 0.91 0.93  F
1996  0.94  0.88  0.91 F 2006  0.97 0.93 0.95  F
1997  0.99  0.98  0.99  F  2007  0.85  1  0.93  S 
1998  1.03  1.01  1.02  F  2008  0.87  1.03  0.95  S 
1999  1.02  1.02  1.02 F 2009  0.9 1 0.95  S
2000  1.06  1.05  1.06  F  2010  0.84  0.98  0.91  S 
Aver 0.99  0.98  0.99  F  Aver 0.93  0.98  0.96  S 
age  age 
Source: Evaluated 
 
Table 29 Sales Position 
Pre M&A  Sales  Post M&A  Sales  difference 
1992  1409  Mar‐02 3226  
1993  1505.79  Mar‐03  3371.88  ‐0.02 
1994  1618.13  Mar‐04  3900.37  0.08 
1995  2042.7  Mar‐05 4549.8 ‐0.10
1996  2329.46  Mar‐06  3723.51  ‐0.32 
1997  2451.05  Mar‐07  6468.06  0.68 
1998  2373.11  Mar‐08  7866.62  0.25 
1999  2585.83 Mar‐09 8274.61 ‐0.04
2000  2679.22  Mar‐10  8803.17  0.03 
Average  2110.48  Average  5576.00  0.07 
Source: Evaluated
 

17