ACKNOWLEDGEMENTS

I wish to express deep sense of gratitude and sincere thanks to my thesis

supervisor and guide, Prof. A. Vidyadhar Reddy, Professor and Dean,

College of Business and Commerce, Osmania University, Hyderabad, for

his able guidance, encouragement and suggestions throughout the

period of this research work. It has been a privilege for me to work under

his guidance.

Gratitude is also accorded to Indian School of Business (ISB),

Gachibowli, Hyderabad for providing the necessary facilities to complete

the research work. My special thanks to Mr Deepak Chandra, Associate

Dean – Centre for Executive education, and Prof. M Ram Mohan Rao,

Dean – ISB, Hyderabad for allowing me to continue my doctoral research

at the Institute. Learning Resource Centre at the ISB has been

particularly helpful by providing several research articles, which were

referred to by the study.

I also express my sincere thanks to Prof. Ravi Prakash, Dean, Research

and Consultancy Division for his encouraging support during the

research work. The work would have not seen light of the day without his

active encouragement and support.

I wish to express my sincere gratitude to the members of Doctoral

Advisory Committee comprising Prof. Arya Kumar, Professor, BITS Pilani

and Dr. Omir Chowdhry, Professor – BITS Pilani, for their constructive

criticism, valuable suggestions and immeasurable moral support, which

had enhanced the quality of the study.

The support of Prof. Sanjay Pohelkar and Prof. Dinesh of the Academic

Regulation and Counselling Division, BITS Pilani was of immense value

for their administrative support throughout the period of the research

study.

This thesis is dedicated to my late mother Dr Mrs. M. Annapurna, who

passed away recently after prolonged illness – she had been a source of

inspiration, encouragement and moral support for me to begin and

pursue this doctoral study. I would like to also record my sincere thanks

to my wife Mrs M. Lalitha who has provided constant persuasion and

support at home while I was working on the research.

ii
 ABSTRACT

Thesis Title: Impact of Mergers and Acquisitions on Operating Performance of

firms in India

In today’s globalised economy, mergers and acquisitions (M&A) are being

increasingly used the world over, for improving competitiveness of companies

by gaining greater market share, broadening the portfolio and reduce business

risk, for entering new markets and geographies, and capitalising on economies

of scale etc.

There has been significant growth in the mergers and acquisition activity in

India since 1991. From a handful of mergers in the early 1990’s, the transaction

volume has reached almost 1000 deals per year since 2000. The research in

this area however, has been relatively less in the context of Indian industry –

research so far has been on examining specific cases of mergers and returns

to shareholders, developing indicators to predict mergers or acquisitions, and

the issues of corporate governance in acquisitions.

This present research study has aimed to study the impact of mergers on the

operating performance of acquiring corporates in Indian industry. The study has

examined the pre merger and post merger performance of merging firms, by

comparison of some key financial ratios. The study has tried to analyse post-

merger operating performance for sub-samples of different types of mergers,

compared differences between merger types, trends in different industry

iii
clusters, mergers during different time- periods, and mergers for different

relative sizes of merging and merged firms. The sample of firms in the research

study was chosen as all mergers involving public limited and traded companies

in India between 1991 and 2003.

Suitable hypotheses have been formulated to test the objectives of the study.

Secondary data on financial operating ratios was collected from Prowess

database of Centre for Monitoring Indian Economy and Capitaline Ole

database of Capital Market publishers. Stock price data for merging firms in the

sample was collected from Bombay Stock Exchange publications and web site.

The pre-merger and post-merger operating ratios for the selected sample firms,

were compiled, compared and tested for differences between the means using

“t-test for paired samples”

The general conclusions reached by prior research on mergers and

acquisitions, that the financial performance and returns to shareholders of

acquiring firms diminished following merger have been statistically verified by

this study in the context of Indian industry. The study has found some

differences in terms of impact of mergers, when sub-samples were examined

for merger types, industry clusters, time-period of merger occurrence, and

relative sizes.

Among merger types, vertical mergers seemed to have helped merging firms

more in improving operating performance, when compared to conglomerate

and horizontal types, in that order. Firms merging with same group companies

iv
saw a significant decline in performance, after merger. Among industry clusters,

banking and finance industry mergers have done better in improving

performance while Textiles and Chemicals sectors saw the highest decline in

performance after mergers.

Post-merger operating performance of merging firms in Indian industry during

2000-03 seemed to have significantly improved compared to mergers in the

earlier periods. The increase in the profitability margins in that period was in

complete contrast to the two earlier time-periods in which the profitability

margins had declined after merger.

When market capital of acquired firm was higher than the acquiring firm there

was a negative impact in profitability ratios and a significant decline in return on

net worth and capital employed. The best results were seen when relative size

was between 70% and 100%. The results also indicated that cumulative post-

merger overall stock price returns had improved for mergers in the most recent

period of the study, when compared to the earlier periods.

v
 TABLE OF CONTENTS

Page No.

Acknowledgements

Abstract

iii

List of Figures

xvii List of Tables

xviii

List of Abbreviations / Symbols xxiv

CHAPTERS

Chapter 1: Introduction 1

1.0 Introduction and Background 1

1.1 Global Trends in Mergers and Acquisitions 2

1.2 Mergers and Acquisitions in Indian Industry 4

1.2.1 Trends in Indian M&As 6

1.2.2 Cross Border M&A Deals in Indian industry 11

1.2.3 Rationale for M&As, according to Indian Industry 12

1.3 Theoretical background 13

1.3.1 Types of mergers and acquisitions 14

1.3.2 Reasons for Mergers and Acquisitions 17

1.3.3 Merger Theories 19

vi
 1.3.3.1 The Synergy (Efficiency) Theory

19

1.3.3.2 The Market for Corporate Control Theory 23

1.3.3.3 The Free Cash Flow Theory

23

1.3.4 Legal Aspects of M&As 24

TABLE OF CONTENTS (continued)

1.3.4.1 Income Tax Act of India with

respect to M&As 24

1.3.4.2 Accounting Procedure for Mergers in India 25

1.3.4.3 Legal/ Statutory approvals for mergers 27

1.3.4.4 SEBI's Takeover Code for substantial

acquisitions of shares in listed companies 28

Chapter 2: Literature Review 29

2.1 Global Literature 29

2.1.1 Studies on Wealth effects of mergers 30

2.1.1.1 Studies in USA 32

2.1.1.2 Studies in Europe 44

2.1.1.3 Summary of results from Event Studies 46

2.1.2 Limitations of Event Studies 47

2.1.2.2 Limitations of short-term event studies 47

2.1.2.2 Limitations of long-term event studies 49

2.1.3 Studies on Impact of mergers on long-term

vii
 firm performance 50

2.1.3.1 Studies in USA 50

2.1.3.2 Studies in Europe 57

2.1.3.3 Studies in Asia 64

TABLE OF CONTENTS (continued)

2.1.4 Limitations of post-merger profitability studies 66

2.1.5 Other Studies on mergers 67

2.1.6 Summary of Global Research 71

2.2 Indian Literature 73

2.2.1 Summary of research on mergers and

acquisitions in India 86

2.3 Research Gaps identified 87

Chapter 3: Research Objectives and Methodology 88

3.1 Scope of the research study 88

3.1.1 Study of post-merger operating performance 89

3.1.2 Study of stock price returns 89

3.2 Research Objectives 89

3.3 Research Hypotheses 90

3.4 Research Methodology 91

3.4.1 Financial Ratios analysed by the study 94

3.4.2 Definition of the Financial Ratios 95

viii
3.4.3 Variables used for categorising the sub-samples 96

3.4.4 Tests to be performed as part of the study 98

3.4.4.1 Testing for changes in operating

Performance of acquiring firms,

for the entire sample 98

TABLE OF CONTENTS (continued)

3.4.4.2 Testing for changes in operating

performance of acquiring firms by

merger type 98

3.4.4.3 Comparing Performance of acquiring

firms (by merger type) for differences 99

3.4.4.4 Testing for changes in operating

performance of acquiring firms in

different industries 99

3.4.4.5 Testing for changes in operating

Performance of firms merging

with group companies 99

3.4.4.6 Testing for changes in post-merger

operating performance of acquiring

firms in different time-periods 100

3.4.4.7 Testing for changes in operating

performance of acquiring firms for

different relative sizes 100

ix
 3.4.4.8 Analysis of post-merger stock price

returns for acquiring firms 101

Chapter 4: Data Collection and Analysis 102

4.1 Scope of Work 102

4.2 Criteria for companies to be included in the sample 102

TABLE OF CONTENTS (continued)

4.3 Sample Selection 103

4.3.1 Sources of data to identify merger cases 103

4.3.2 Verification of descriptive data for list of

sample firms 104

4.3.3 Operating Data Collection for Sample Firms 105

4.4 Final Sample 106

4.5 Data Analysis 109

4.5.1 Comparing pre-merger and post-merger

operating performance of acquiring firms

(3 years before and 3 years after merger) 109

4.5.2 Comparing pre-merger and post-merger

operating performance of acquiring firms

(3 years before and 5 years after merger) 110

4.5.3 Analysis of stock price returns

(1 to 5 years following mergers) 114

Chapter 5: Findings and Results 115

x
5.1 Observations on the sample of Mergers used

for the study 115

5.2 Results based on comparison of operating

performance (3 years before and after mergers) 115

5.2.1 Horizontal Mergers 116

5.2.2 Vertical Mergers 118

TABLE OF CONTENTS (continued)

5.2.3 Conglomerate Mergers 120

5.2.4 All Mergers 123

5.2.5 Same Group Company Mergers 124

5.2.6 Comparison of results between merger types 127

5.2.6.1 Horizontal vs. Vertical Mergers 128

5.2.6.2 Vertical vs. Conglomerate Mergers 130

5.2.6.3 Horizontal vs. Conglomerate Mergers 132

5.2.7 Analysis of Operating Performance of acquiring

firms in different industries 134

5.2.7.1 Agri- Products 134

5.2.7.2 Chemicals 136

5.2.7.3 Textiles and textile products 137

5.2.7.4 Banking & Finance 139

5.2.7.5 Pharmaceuticals 141

5.2.7.6 Electrical Equipment 142

5.2.8 Analysis of mergers in different time-periods 145

5.2.8.1 Analysis of Mergers during 1991 – 1995 145

5.2.8.2 Analysis of Mergers during 1996 – 1999 147

xi
 5.2.8.3 Analysis of Mergers during 2000 – 2003 149

5.2.9 Analysis of Mergers for different relative sizes

of acquiring and acquired companies 151

5.2.9.1 Issue ratio between 0.11 and 0.40 151

5.2.9.2 Issue ratio between 0.41 and 0.70 153

5.2.9.3 Issue ratio between 0.71 and 1.00 155

TABLE OF CONTENTS (continued)

5.2.9.4 Issue ratio above 1.00 156

5.3 Results based on comparison of performance

(3 yrs before and 5 years after mergers) 160

5.3.1 Horizontal Mergers 161

5.3.2 Vertical Mergers 162

5.3.3 Conglomerate Mergers 164

5.3.4 All Mergers 167

5.3.5 Same Group Company Mergers 169

5.3.6 Comparison of results between merger types 171

5.3.6.1 Horizontal vs. Vertical Mergers 172

5.3.6.2 Vertical vs. Conglomerate Mergers 174

5.3.6.3 Horizontal vs. Conglomerate Mergers 176

5.3.7 Analysis of Performance of acquiring firms in

different industries 178

5.3.7.1 Agri- Products 178

5.3.7.2 Chemicals 180

xii
 5.3.7.3 Textiles and textile products 181

5.3.7.4 Banking & Finance 183

5.3.7.5 Pharmaceuticals 185

5.3.7.6 Electrical Equipment 187

5.3.8 Analysis of mergers in different time-periods 190

5.3.8.1 Analysis of Mergers during 1991–1995 190

TABLE OF CONTENTS (continued)

5.3.8.2 Analysis of Mergers during 1996–1999 192

5.3.8.3 Analysis of Mergers during 2000 – 2003 194

5.3.9 Analysis of Mergers for different relative sizes

of acquiring and acquired companies 197

5.3.9.1 Issue ratio between 0.11 and 0.40 197

5.3.9.2 Issue ratio between 0.41 and 0.70 200

5.3.9.3 Issue ratio between 0.71 and 1.00 201

5.3.9.4 Issue ratio above 1.00 203

5.3.10 Comparison of results obtained with

3-years post- merger data and 5-years

post- merger data 206

5.3.11 Analysis of post-merger stock price returns

for acquiring firms 213

5.3.12 Companies successful in achieving superior

post- merger operating performance 214

xiii
Chapter 6: Conclusions and Recommendations

for further study 216

6.1 Conclusions

216

6.2 Specific Contributions

224

6.3 Limitations of the study 226

6.4 Recommendations for Further Study 228

TABLE OF CONTENTS (continued)

References 229

Appendices 238

A-1: Final List of mergers for research study

(during 1990-91 to 2003-04) 238

A-1.1: List of Horizontal Mergers 241

A-1.2: List of Vertical Mergers 243

A-1.3: List of Conglomerate Mergers 243

A-1.4: List of Group Company Mergers 244

A-2: Operating Performance Data for sample firms involved

in Horizontal Mergers (3 years before and after) 246

A-3: Operating Performance Data for sample firms involved

in Vertical Mergers (3 yrs before and after) 250

A-4: Operating Performance Data for sample firms involved

in Conglomerate Mergers (3 yrs before and after) 251

xiv
A-5: Operating Performance Data for sample firms

involved in Same Group Company Mergers

(3 yrs before and after) 253

A-6: Operating Performance Data for sample firms

involved in Mergers in different time-periods

(3 years before and after merger) 257

A-6.1: Analysis of Mergers during 1991 – 1995 257

A-6.2: Analysis of Mergers during 1996 – 1999 259

A-6.3: Analysis of Mergers during 2000 – 2003 261

TABLE OF CONTENTS (continued)

A-7: Operating Performance Data for different relative sizes

of mergers (3 years before and after merger) 263

A-7.1: Issue Ratio between 0.11 and 0.40 263

A-7.2: Issue Ratio between 0.41 and 0.70 266

A-7.3: Issue Ratio between 0.71 and 1.00 268

A-7.4: Issue Ratio above 1.00 269

A-8: 5 yrs post-merger performance based analysis:

Final List of mergers for research study

(during 1990-91 to 2003-04) 270

A-8.1: List of Horizontal Mergers 272

A-8.2: List of Vertical Mergers 273

A-8.3: List of Conglomerate Mergers 274

A-8.4: List of Group Company Mergers 275

xv
 A- 9: Operating Performance Data for all sample firms

involved in Mergers

(3 yrs before and 5 years after) 277

A-10: Post-merger Stock Price Returns

(Cumulative for 1,2,3 4 and 5 years) 282

TABLE OF CONTENTS (continued)

A-11: List of merging firms found successful in achieving

superior post- merger operating performance 284

A-12: Briefs of merging firms successful in achieving

superior post-merger operating performance 285

List of publications 291

Biography of the Candidate 291

Biography of the Supervisor 291

xvi
 List of Figures

Figure 1: Global M&A Market activity (1997 – 2003)

Figure 2: Global M&A Deal Announcement Activity 1995 - 2006

xvii
 List of Tables

Table 1: Trends of M&As during 1990 to 2000

Table 2: Mergers and Acquisitions in India from 1998 to 2004

Table 3: Sector wise break-up of all M&A Deals in India in 2005

Table 4: Cross-border M&A Deals in 2005

Table 5: Objectives of Indian Corporates for M&As

Table 6: Which types of acquisition have the highest incidence of failure?

Table 7: Which functions produce the biggest payoff from synergy after
acquisitions?

Table 8: Trends of M&As during 1990 to 2000

Table 9: Distribution of Mergers and Acquisitions in India by various categories,

1991 – 97

xviii
Table 10: Distribution of Mergers and Acquisitions in India during 1991-97 by
identity of Active Company

Table 11: Distribution of mergers by Category Type

Table 12: Relative size of merging and merged firms in the sample under study

Table 13: Break-up of all mergers in sample, during different time-periods

Table 14: Industry Wise Distribution of mergers in the sample

Table 15: Break-up of Same Group Company Mergers during the different
time- periods in the study

Table 16: Distribution of mergers by Category Type

Table 17: Relative size of merging and merged firms in the sample under study

Table 18: Break-up of all mergers in sample, during different time periods

Table 19: Industry Wise Distribution of mergers in the sample

Table 20: Break-up of Same Group Company Mergers during the different
time-periods in the study

Table 21: Horizontal Mergers: Mean pre-merger and post-merger Ratios for
acquiring firms

Table 22: Vertical Mergers: Mean pre-merger and post-merger Ratios for
acquiring firms

Table 23: Conglomerate Mergers: Mean pre-merger and post-merger Ratios

for acquiring firms

xix
Table 24: All Mergers: Mean pre-merger and post-merger Ratios for acquiring
firms

Table 25: Summary: Different types of Mergers and their operating

performance ratios: Mean pre-merger and post-merger Ratios for acquiring
firms (3 yrs before and after)

Table 26: Same Group Company Mergers: Mean pre-merger and post-merger
Ratios for acquiring firms

Table 27: Comparison between Horizontal vs. Vertical types of mergers

(Differences in Mean pre-merger and post-merger Ratios for acquiring firms
Calculated as post-merger average minus pre-merger average)

Table 28: Comparison between Vertical vs. Conglomerate types of mergers

(Differences in Mean pre-merger and post-merger Ratios for acquiring firms
Calculated as post-merger average minus pre-merger average)

Table 29: Comparison between Horizontal vs. Conglomerate types of mergers

(Differences in Mean pre-merger and post-merger Ratios for acquiring firms
Calculated as post-merger average minus pre-merger average)

Table 30: Mean pre-merger and post-merger Ratios for acquiring firms in
Sugar, Beverages & Agri- Products Sector

Table 31: Mean pre-merger and post-merger Ratios for acquiring firms in
Organic & Inorganic chemicals Sector

Table 32: Mean pre-merger and post-merger Ratios for acquiring firms in
Textiles and textile products Sector

Table 33: Mean pre-merger and post-merger Ratios for acquiring firms in
Banking & Finance Sector

xx
Table 34: Mean pre-merger and post-merger Ratios for acquiring firms in
Pharmaceuticals Sector

Table 35: Mean pre-merger and post-merger Ratios for acquiring firms in
Electrical Equipment Sector

Table 36: All Mergers during 1991-95: Mean pre-merger and post-merger
ratios for acquiring firms

Table 37: All Mergers during 1996-1999: Mean pre-merger and post-merger
ratios for acquiring firms
Table 38: All Mergers during 2000-2003: Mean pre-merger and post-merger
ratios for acquiring firms

Table 39: All Mergers with issue ratio between 0.11 and 0.40: Mean pre-merger
and post-merger ratios for acquiring firms

Table 40: All Mergers with issue ratio between 0.41 and 0.70: Mean pre-
merger and post-merger ratios for acquiring firms

Table 41: All Mergers with issue ratio between 0.71 and 1.00: Mean pre-
merger and post-merger Ratios for acquiring firms

Table 42: All Mergers with issue ratio above 1.0: Mean pre-merger and post-
merger ratios for acquiring firms

Table 43: Horizontal Mergers: Mean pre-merger and 5-year post-merger ratios
for acquiring firms

Table 44: Vertical Mergers: Mean pre-merger and 5-year post-merger ratios for
acquiring firms

Table 45: Conglomerate Mergers: Mean pre-merger and 5-year post-merger

ratios for acquiring firms

xxi
Table 46: Summary: Different types of Mergers and their operating
performance ratios: Mean pre-merger and 5-year post-merger ratios for
acquiring firms (3 yrs before and 5 years after)

Table 47: All Mergers: Mean pre-merger and 5-year post-merger ratios for
acquiring firms

Table 48: Same Group Company Mergers: Mean pre-merger and 5-year post-
merger ratios for acquiring firms

Table 49: Comparison between Horizontal vs. Vertical types of mergers

(Differences in Mean pre-merger and 5-year post-merger ratios for acquiring
firms Calculated as post-merger average minus pre-merger average)

Table 50: Comparison between Conglomerate vs. Vertical types of mergers

(Differences in Mean pre-merger and 5-year post-merger ratios for acquiring
firms Calculated as post-merger average minus pre-merger average)

Table 51: Comparison between Horizontal vs. Conglomerate types of mergers

(Differences in Mean pre-merger and 5-year post-merger ratios for acquiring
firms Calculated as post-merger average minus pre-merger average)

Table 52: Mean pre-merger and 5-year post-merger ratios for acquiring firms in
Sugar, Beverages & Agri- Products Sector

Table 53: Mean pre-merger and 5-year post-merger ratios for acquiring firms in
Organic & Inorganic chemicals Sector

Table 54: Mean pre-merger and 5-year post-merger ratios for acquiring firms in
Textiles and textile products Sector

Table 55: Mean pre-merger and 5-year post-merger ratios for acquiring firms in
Banking & Finance Sector

xxii
 Table 56: Mean pre-merger and 5-year post-merger ratios for acquiring firms in
Pharmaceuticals Sector

Table 57: Mean pre-merger and 5-year post-merger ratios for acquiring firms in
Electrical Equipment Sector

Table 58: All Mergers during 1991-95: Mean pre-merger and 5-year post-
merger ratios for acquiring firms

Table 59: All Mergers during 1996-1999: Mean pre-merger and 5-year post-
merger ratios for acquiring firms

Table 60: All Mergers during 2000-2003: Mean pre-merger and 5-year post-
merger ratios for acquiring firms

Table 61: All Mergers with issue ratio between 0.11 and 0.40: Mean pre-merger
and 5-year post-merger ratios for acquiring firms

Table 62: All Mergers with issue ratio between 0.41 and 0.70: Mean pre-
merger and 5-year post-merger ratios for acquiring firms

Table 63: All Mergers with issue ratio between 0.71 and 1.00: Mean pre-
merger and 5-year post-merger ratios for acquiring firms

Table 64: All Mergers with issue ratio above 1.0: Mean pre-merger and 5-year
post-merger ratios for acquiring firms

Table 65: Average Post-merger Cumulative Annual Stock Returns

Table 67: Average Post-merger minus Pre-merger operating ratios for the

successful merger cases

xxiii
 List of Abbreviations / Symbols

 M&A = Mergers and Acquisitions

 MNC = Multi National Corporation
 PSU = Public Sector Undertaking
 OPM = Operating Profit Margin = PBDIT / Net Sales
 PBDIT = Profit before Interest, Depreciation and Tax
 Net Sales = Gross Sales less Excise Duty
 GPM = Gross Profit Margin= PBIT / Net Sales
 PBIT = Profit before Interest and Tax
 NPM = Net Profit Margin= PAT / Net Sales
 PAT = Profit After Tax
 RONW = Return on Net Worth = PAT / Net worth
where Networth = Shareholders’ Equity + Free Reserves & Surplus
 ROCE = Return on Capital Employed = PBIT / Capital Employed
 Capital Employed = Total of (Networth + Long Term Debt Capital)
 DER = Debt Equity Ratio = Book Value of Debt / Book Value of Equity
 EBIAT = Earnings Before Interest, Amortization and Taxes
 EBIT = Earnings Before Interest and Taxes
 ROA = Return on Assets = pre-tax profits (after depreciation, but before
tax) / average of beginning and ending assets for the year
 EBITDA = Earnings Before Interest, Taxes, Depreciation and
Amortization

xxiv
 ROI = Return on Investment
 Issue Ratio** = amount of equity issued to acquired firm shareholders
outstanding equity of acquiring firm before merger

** measured in terms of book value of equity

xxv