Conclusion &

Suggestions
 Chapter-5

CONCLUSION AND SUGGESTIONS

5.1 Introduction
5.2 Findings of the Study
5.3 Suggestions
5.4 Limitations of the Study
5.5 Recommendations for Future Research
5.6 References
Chapter-5 Conclusion & Suggestions

5.1 Introduction

Business entities regardless of size or nature exist only for one reason i.e. maximisation
of shareowners wealth. To create and deliver superior value to owners, business entities
need to grow continually. The subject of shareowners wealth maximisation is abound
with the strategies aiming to enhance top-line or bottom-line or both lines of the income
statement. One such strategy is corporate restructuring which may take the form of
mergers and acquisitions, portfolio restructuring, financial restructuring or organisational
restructuring. Of these, mergers and acquisitions is the most complex and widely used
strategy to achieve better performance. According to Trautwein (1990), this strategy is
propelled by seven theories/motives viz. efficiency, monopoly, valuation, empire
building, process theory, raider theory and distribution theory. Generally, it is more
guided by the efficiency theory than the others. Merger or an acquisition is not new or
the recent phenomenon to the world of business enterprises.

Mergers and acquisitions dates as far back as the turn of 19th century. However, M&A’s
achieved greater significance in the decade of 60’s and 80’s. Most of the mergers and
acquisitions in these two decades have taken place in US and in some parts of Europe.
Six periods of high merger activity, often called as ‘merger waves’ have taken place in
US. The six waves occurred between 1897-1904 (Horizontal mergers), 1916-1929
(Vertical mergers), 1965-1969 (Diversified mergers), 1984-1989 (Cogeneric mergers,
Hostile takeovers), 1992-2000 (Cross border/Mega M&A’s), 2003-2008 (Shareholder
activism/Private equity increased) (Gaughan, 2010).

The M&A activity was somewhat dormant in India till the decade of 90’s. M&A’s as a
strategy to enhance performance gained significance in India after economic reforms that
were initiated in 1990, which among other things embarked on the program of
liberalisation, privatisation and globalisation. The Indian corporate sector in the changed
industrial landscape has shown keen interest in this new business strategy and have
started aggressively building capacities via M&A’s to cater to the growing demand from
domestic and global markets. The M&A’s are found to occur in waves in India as well
and three periods of merger activity based on intensity have been identified (Manish
Agarwal and Aditya Bhattacharjea, 2006). These periods include first sub-period of low
and stagnant merger activity (1973-74-1987-88); second sub-period of moderate merger

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Chapter-5 Conclusion & Suggestions

activity (1988-89-1994-95) and third sub-period of high merger activity (1995-96-2000-

01).

The strategy of M&A’s has attracted the attention of researchers since long. However, it
has received more attention during the last three decades or so. Due to the reasons cited
above, not much research has been conducted to seek answers to various research
questions in the Indian context. Prompted by this and other facts, the present study was
undertaken to seek an answer to the most important research question about M&A’s i.e.
‘Whether or not M&A’s have led to the improved performance of merging entity and
acquiring firm post-merger or acquisitions? An effort in the present study has been made
to assess the impact of sample mergers/acquisitions on operating performance, financial
performance and wealth of shareowners.

To achieve the objectives of the study, scientific methods were used to generate and
analyse data. To test the hypotheses laid down for the study, data about the number and
type of M&A’s and the accounting information of the sample firms was collected from
CMIE database for mergers and acquisitions. Six year time period (from 2004-09) was
chosen as the reference period for the study. A number of techniques were used to
achieve the research objectives. The performance of the sample firms were examined by
analysing the annual reports of the sample firms. The industry-adjusted pre-
merger/acquisition and post-merger/acquisition accounting financial ratios were worked
out and the averages (mean) were computed for the entire set of the sample firms. Mean
industry-adjusted pre-merger/acquisition and post-merger/acquisition performance ratios
calculated were compared to see if there is any statistically significant change in
operating performance, financial performance and shareholders’ return due to
merger/acquisition, using “paired two sample t-test” at a significance level of 0.05.
Besides this, a cross-sectional regression analysis was done to test the relationship
between the dependent variable and the independent variable.

5.2 Findings of the Study

A number of conclusions have been reached and stated at various stages in the present
work. The conclusions were drawn by first reviewing the literature on the subject, next
analysing the performance changes for the overall sample, for the different sectors and
at last, individual firm analysis was done.

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1. The mergers and acquisitions in the Indian industry have revealed that the nature and
pattern of M&A strategies adopted by the Indian firms reveal mostly horizontal and
vertical type of deals (Rabi Narayan Kar & Amit Soni, 2008; Beena Saraswathy,
2010; Partap Singh, 2012; Khanna, 1998; Basant, 2000). Indian companies are
focusing on their core areas and expanding mostly in related areas of strength to
realize the synergistic benefits. The possible reasons for restructuring of business by
the Indian firms is to improve the core competencies, increase competition both
globally and domestically, improve debt-equity restructuring to reduce high interest
obligations, efficient utilization of assets to generate higher cash flows, reduce time
over-run costs, strong brand presence, reduce the number of organizational layers for
increasing the operational efficiency, attain increased market power, economies of
scale, economies of scope and improve managerial efficiency. All these are generally
aimed at the transformation of the uncompetitive, fragmented nature of Indian firms
into consolidated and operationally more viable business units.

2. A series of mergers and acquisitions have taken place in India and abroad. In light of
the review of the various studies conducted so far, it was found that some of the
studies reported a positive change in performance post-merger/acquisition (Jeannette
A. Switzer, 1996; Ramaswamy and Waegelein, 2003; Lau et al., 2008; K.
Ramakrishnan, 2008), while as, some of the studies revealed that the deals were
unable to generate positive returns (Ismail et al., 2011; Akben-Selcuk and Altiok-
Yilmaz, 2011; Kumar, 2009; Jawahar Lal & Sunil Kumar, 2013). Thus, it can be
inferred that the results by and large were inconclusive.

3. The process of merger and acquisition in India is court driven, long drawn and
delayed (Neelam Rani, Surendra S. Yadav & P. K. Jain, 2012; Afra Afsharipour,
2010; Umarkanth Varotill, 2012; Sayantan Gupta, 2008; P. K. Swain & M. D. Pahi,
2014).

4. The analysis of data using well defined accounting ratios and statistical procedures
has revealed a positive change in the operating performance, financial performance
and shareholders’ wealth of the sample merging/acquiring post-merger and
acquisition but the change in performance was not found statistically significant.

5. The type of industry did not affect much, the performance of the sample firms post-
merger or acquisition, revealing somewhat similar results. The results were found to

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Chapter-5 Conclusion & Suggestions

be inconsistent with respect to industry type. Although, for majority of the sectors,
the performance was found to be positive but again, the improvement was not found
statistically significant.

i) For the banking sector, the impact of mergers and acquisitions on the sample
banks was found to be positive but majority of the changes in performance was
found statistically insignificant.

ii) For chemical & fertilizers, FMCG and infrastructure sector, the performance was
positive post-merger or acquisition but the mean difference for all the ratios was
found statistically insignificant.

iii) Mixed results were obtained with respect to computer software, cement, drugs &
pharmaceuticals and textile industry and other sectors but again, the changes in
performance were not found statistically significant in most of the cases.

6. The results have also revealed that M&A’s have failed to produce significant changes
in the operating performance, financial performance and shareholders’ wealth for the
individual firms as well. Though, M&A’s have been able to improve operational cost
efficiencies and increased profitability margins but the improvements were not found
statistically significant. It has been observed that merger and acquisition deals do
provide real benefits but the same have not been detected by the empirically based
studies. A variety of factors like over-optimistic appraisals of market potential, over
estimation of synergies, overbidding, empire-building, poor integration strategies and
many others have contributed to the same.

5.3 Suggestions

The literature on mergers and acquisitions is quite diverse. A number of studies have
been conducted in this area, both nationally and globally, however, the number of studies
in the Indian context are limited, primarily because this aspect of corporate restructuring
has gained momentum only after liberalisation. Majority of the studies conducted earlier
evidenced no significant change in the performance of the sample merging or acquiring
firms post-merger/acquisition. (Beena, 2004; Smith & Ward, 2007; Mahesh R. and
Daddikar Prasad, 2012). The present study also found similar results. M&A’s have failed
to produce significant improvement in operating performance, financial performance and
wealth of the shareholders’. A number of reasons have been identified for such poor

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performance of M&A’s. These are over-optimistic appraisals of market potential, over

estimation of synergies, overpayment, empire- building, integration issues, economic
disturbances etc. (Porter, 1989; Jensen 1984; Mueller 1969; Leibenstein, 1966; Daniel
Rottig, 2007; Gort, 1969). Keeping in consideration the probable reasons that have been
put forth above and also the findings in the previous literature and that of the present
study, following suggestions by the researcher are being offered.

 Merger and acquisition deals should be entered into for creating a win-win situation
for all the stakeholders. Mergers and acquisitions alone cannot achieve strong,
efficient and competitive systems because performance is dependent on a number of
other factors as well. They need to be supplemented by other measures such as
enhancing the expertise and professionalism of the personnel, congruence between
the two companies' preferences about the implementation strategy for the merger or
acquisition, bringing about more effective corporate governance measures to further
elevate the competitiveness of the institutions in the context of the challenges of a
globalized and liberalized environment.

 The existing failure rate of merger and acquisition deals suggest that neither
academicians nor practitioners have a thorough understanding of the variables
involved in planning and implementing a successful deal. To remain ahead of
competitors, business leaders need to have a global vision, be pro-active, should take
calculated risk and initiate and manage such processes in a very smooth manner.

 It is essential for managers of parent firms to decide about the immediate benefits
they will derive from mergers and acquisitions and how this will result in long term
synergies for both the parties. Management should seek for creating new
combinations of the merging/acquiring and merger/acquired firm indigenous
capabilities; understand each other’s technologies and businesses. Providing clear,
consistent, factual, and up-to-date information will increase the coping abilities of
employees which in turn will increase their productivity leading to sustained
competitive advantage by achieving the projected strategic fit and synergies.

 It is believed that the size of the firms involved in a merger or an acquisition deal
should be reasonably large to ensure effective pooling of the resources so that benefits
of the large scale operations can be realized. Size is considered to be a very important
yardstick by which most organizations judge themselves. There is a strong tendency

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on part of managers to build big empires, as their compensation is affected by size,

leading to unwise merger and acquisition deals. It is suggested that while evaluating
such deals, focus should be on maximizing shareholders’ value rather than on the
increasing size of the company.

 Today, speed is of prime essence. A sign of corporate readiness and skill is the ability
to do such merger and acquisition deals with ‘digital’ speed and e-governance could
provide a helpful tool in achieving the objective of speed with provisions for online
registration and approval etc. Corporate governance has been much emphasized in
recent years. One could undertake a more comprehensive study to investigate the role
of governance in such deals. The law should provide for a single forum which would
approve the scheme of mergers and acquisitions in an effective time bound manner.

 It is also suggested that the firms should enter into merger and acquisition deals with
firms of related business only. Very few firms have the ability to successfully manage
diverse businesses as they lack familiarity with each other’s business. The temptation
to stray into unrelated areas often appears to be strong. However, the reality is that
such deals are often very risky.

 Buyers should be able to assess the hidden problems and contingent liabilities of the
seller and should not put them aside because of its infatuation with the other party.
Failure to fully investigate the business of the seller may exaggerate its worth, leading
to wealth destruction as buyers don’t know what exactly what they are getting. Often
the highest bidder is one who overestimates value out of ignorance. Though he
emerges as the winner, but in a way, “the unfortunate winner”.

 Many integration problems have been seen to occur when firms merge or get
acquired. Inadequate understanding of such cultural differences have led to the failure
of a number of M&A deals to deliver the desired results. Even the best strategy can
be ruined by poor implementation. A proper integration of two different
organizations post-merger or acquisition is a pre-requisite for the success of such
deals and should be duly taken into consideration.

 The data on mergers and acquisitions is not so easily accessible. It is thus suggested
that the government should take measures to install information system on company

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mergers and acquisitions so that all the practitioners, policy makers, academicians
etc. who are interested in such information can have an easy access to the same.

5.4 Limitations of the Study

The results of any study should be considered with a degree of knowledge of its
limitations. The following limitations of the study have been discussed specifically
related to the general applicability of the research findings.

1. During the given reference period, one of the great economic depressions of the world
has happened, triggered by ‘sub-prime crisis’ of 2008 in U.S. The adverse effects of
this depression would have spilled over few more years which forms the substantial
part of the researcher’s reference period. This has definitely acted as a limitation of
the present study in terms of the time period selected.

2. All the limitations associated with tools like ratio analysis may affect the richness of
this work.

3. There is an acute deficiency with reference to the studies on mergers and acquisitions
in India which may have its impact on the CMIE database, from where the secondary
data has been collected.

4. Non-availability of data for certain parameters for the period under study, hence
forcing to work with somewhat incomplete records.

5. The size of the sample used to conduct the various studies in the study might have
been larger if an adequate database was available. Small sample size of merger and
acquisitions in each industry is another limitation of the study.

6. Many strategic and non-financial motives may also influence the performance of the
sample firms. Such motives fell outside the scope of this study and were not
considered for the present study.

7. The study has ignored the impact on target firms due to the typical constraints of
obtaining data as mentioned earlier in the study.

5 Mode of financing the merger and acquisition could make a difference but has not
been taken into consideration.

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Chapter-5 Conclusion & Suggestions

5.5 Recommendations for Future Research

The scope proposes that mergers and acquisitions throw tremendous opportunities for
future research and hence need to be further explored. Various recommendations for
further investigation are provided in order to obtain greater insight on the subject.

 Most of the studies done only compares the results of two or three years before and
after the merger or acquisition. This may be misleading as the correct benefits to such
a transaction are long term and the returns will be realized after several years. Some
firms may undertake M&A’s as long-term strategic activity which they expect to
generate high profits for them over a very long time period. Therefore, future research
should examine such events for longer time periods in order to check whether or not
the impact on the performance of firms change over longer time periods or not.

 The study focuses on accounting ratios to examine the corporate performance.

However, different approaches such as survey and clinical studies can be used in
future studies in order to add to the understanding of consequences of M&A
transactions, because there is a possibility that the other approaches may result in
different conclusions about the effects of M & A’s. In addition to this, the method of
payment (cash or stock or mixed), the type of target (public or private) etc. that
contribute to the success or failure of a merger or acquisition, should be explored
further. In other words, there are many other aspects, both qualitative and quantitative
as well which deserve a deeper investigation and should be included in the studies to
come up with a more comprehensive conclusion.

 An obvious extension of this study would be to investigate the effects of merger and
acquisition announcements from the point of view of acquired companies. As
mentioned already, the present study did not take this aspect into consideration
because of the scanty data available. As such, any conclusion drawn from such a study
would rest on a narrow data base and would raise questions on the validity of the
results.

 Future studies with similar objectives could be made with reference to other sectors
not covered in this study or in the previous literature.

 Very few studies have been done so far which have laid emphasis on the impact of
merger and acquisition activities on the employees of an organization. If employees

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feel that the changes emerging out of merger or acquisition activity may breach their
psychological mindset, it can adversely affect the reputation of the firm and
consequently result in reduced performance. Employees are regarded as the biggest
assets for any organization and therefore, such studies are of prime importance and
crucial for any organization. Gauging the success of mergers and acquisitions through
this aspect could be another area of research.

 The present study focuses only on domestic deals. A study comparing the change in
performance for both domestic and cross border deals may provide a useful
understanding of the impact of M&A announcements.

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Chapter-5 Conclusion & Suggestions

5.6 References

 Agarwal, M., & Bhattacharjea, A. (2006). Mergers in India. A Response to

Regulatory Shocks. Emerging Markets Finance and Trade, 42(3), 46-65.

 Akben-Selcuk, E., & Altiok-Yilmaz, A. (2011). The impact of mergers and

acquisitions on acquirer performance: Evidence from Turkey. Business and
Economics Journal, 22, 1-8.

 Beena, P. L. (2004). Towards understanding the merger-wave in the Indian

corporate sector: A comparative perspective. Trivandaram: Centre for Development
Studies.

 Gaughan, P. A. (2010). Mergers, acquisitions, and corporate restructurings. John

Wiley & Sons.

 Gort, M. (1969). An economic disturbance theory of mergers. The Quarterly Journal

of Economics, 624-642.

 Ismail, T. H., Abdou, A. A., & Annis, R. M. (2011). Exploring Improvements of

Post-Merger Corporate Performance: The Case of Egypt. IUP Journal of Business
Strategy, 8(1), 7.

 Jensen, M. C. (1984). Takeovers: Folklore and science. Harvard Business Review,

November-December.

 Kumar, R. (2009). Post-merger corporate performance: an Indian

perspective. Management Research News, 32(2), 145-157.

 Lal, J., & Kumar, S. (2013). Impact of merger and acquisition on corporate financial
performance: Empirical analysis. Indian Journal of Accounting, 44(2), 6-17.

 Lau, B., Proimos, A., & Wright, S. (2008). Accounting measures of operating
performance outcomes for Australian mergers. Journal of Applied Accounting
Research, 9(3), 168-180.

 Leibenstein, H. (1966). Allocative efficiency vs." X-efficiency". The American

Economic Review, 56(3), 392-415.

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Chapter-5 Conclusion & Suggestions

 Mahesh, R., & Prasad, D. (2012). Post merger and acquisition financial performance
analysis: A case study of select Indian airline companies. International journal of
engineering and management sciences, 3(3), 362-369.

 Mueller, D. C. (1969). A theory of conglomerate mergers. The Quarterly Journal of

Economics, 643-659.

 Porter, M. E. (1989). From competitive advantage to corporate strategy. In Readings

in Strategic Management (pp. 234-255). Macmillan Education UK.

 Ramakrishnan, K. (2008). Long-term post-merger performance of firms in

India. Vikalpa, 33(2), 47-63.

 Ramaswamy, K. P., & Waegelein, J. F. (2003). Firm financial performance following

mergers. Review of Quantitative Finance and Accounting, 20(2), 115-126.

 Rottig, D. (2007). Successfully managing international mergers and acquisitions: A

descriptive framework. International Business: Research Teaching and
Practice, 1(1), 103-126.

 Smit, C. J., & Ward, M. J. D. (2007). The impact of large acquisitions on the share
price and operating financial performance of acquiring companies listed on the
JSE. Investment Analysts Journal, 36(65), 5-14.

 Switzer, J. A. (1996). Evidence on real gains in corporate acquisitions. Journal of

Economics and Business, 48(5), 443-460.

 Trautwein, F. (1990). Merger motives and merger prescriptions. Strategic

management journal, 11(4), 283-295.

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