In Indian industry, the pace for mergers and acquisitions activity picked up in response to various economic reforms introduced by the Government of India since 1991, in its move towards liberalization and globalization. The Indian economy has undergone a major transformation and structural change following the economic reforms and “size and competence" have become the focus of business enterprises in India. Indian companies realized the need to grow and expand in businesses that they understood well, to face growing competition; several leading corporates have undertaken restructuring exercises to sell off non-core businesses and to create stronger presence in their core areas of business interest. Mergers and acquisitions emerged as one of the most effective methods of such corporate restructuring and became an integral part of the long-term business strategy of corporate in India. Over the last decade, mergers and acquisitions in the Indian industry have continuously increased in terms of number of deals and deal value.

Meaning and Definition of Merger and Acquisition

Merger is defined as combination of two or more companies into a single company where one survives and the other lose their corporate existence. The survivor acquires the assets as well as liabilities of the merged company or companies.

According to the Oxford Dictionary

The expression merger or amalgamation means “Combining of two commercial companies into one” and “Merging of two or more business concerns into one” respectively. A merger is just one type of acquisition. One company can acquire another in several other ways including purchasing some or all of the company’s assets or buying up its outstanding share of stock. 

To end up the word “MERGER” may be taken as an abbreviation which means:

• M- Mixing

• E-Entities

• R-Recourses for

• G-Growth

• E-Enrichment and

• R-Renovation.

Acquisition

Acquisition in general sense is acquiring the ownership in the property. Acquisition is the purchase by one company of controlling interest in the share capital of another existing company. This means that even after the takeover although there is change in the management of both the firms retain their separate legal identity. 

Review of Literature

In this study an attempt has been made to briefly review the work already undertaken and methodology employed. A brief review of selected studies has been presented as below:

• Healy et al. [1] examined post-acquisition performance for 50 largest U.S. mergers between 1979 and 1984 by measuring cash flow performance and concluded that operating performance of merging firms improved significantly following acquisitions, when compared to their respective industries

• Weston and Mansingka [2] studied the pre and post-merger performance of conglomerate firms and found that their earnings rates significantly underperformed those in the control sample group, but after 10 years, there were no significant differences observed in performance between the two groups. The improvement in earnings performance of the conglomerate firms was explained as evidence for successful achievement of defensive diversification

• Marina et al. [3] examined the long-term operating performance of Japanese companies using a sample of 56 mergers of manufacturing firms in the period 1969 to 1997. By examining the cash-flow performance in the five-year period following mergers, the study found evidence of improvements in operating performance and also that the pre- and post-merger performance was highly correlated. The study concluded that control firm adjusted long-term operating performance following mergers in case of Japanese firms was positive but insignificant and there was a high correlation between pre- and post-merger performance

• Salmi et al. [4] compared the pre and post-takeover performance for a sample of 20 acquiring companies during 1997-2000, using a set of eight financial ratios 3, during a 3-year period before and after merger, using t-test. The study concluded that both profitability and efficiency of targeted companies declined in post- takeover period, but the change in post-takeover performance was statistically not significant

• An empirical study entitled ‘Takeovers as a strategy of turnaround’ by Ravi Sanker and Rao K.V. (1998) analysis the implications of takeovers from the financial point of view with the help of certain parameters like liquidity, leverage, profitability etc. They observed that a sick company is takeover by a good management and makes serious attempts; it is possible to turnaround successfully

• Beena [5] analyzed the pre and post-merger performance of a sample of 115 acquiring firms in the manufacturing sector in India, between 1995-2000, using a set of financial ratios 4 and t-test. The study could not find any evidence of improvement in the financial ratios during the post-merger period, as compared to the pre-Merger period, for the acquiring firms

• Pawaskar [6] analyzed the pre-merger and post-merger operating performance of 36 acquiring firms during 1992-95, using ratios 5 of profitability, growth, leverage and liquidity and found that the acquiring firms performed better than industry average in terms of profitability. Regression Analysis however, showed that there was no increase in the post-merger profits compared to main competitors of the acquiring firms [7]

Research Objectives

The main objective of the present study is to examine and evaluate the impact of merger and acquisition on share holder’s value creation of acquiring selected units.

Methodology

The data was collected for selected units for a period of five years before the merger and five years after the merger taking the merger year as base year. In the pre-merger years, the data consisted only of the acquiring firm and after the merger the data is that of the merged entity. Using t-test (Paired two samples for means), the pre-merger and post-merger performance was tested. 

Research Hypothesis

On the basis of data collection, the researcher has identified the following broader hypothesis for the study:

• H₀: There is no significant impacts on share holder’s value creation of selected units, after merger and acquisition (Ho = μ₁ = μ₀)

• H₁: There is significant impacts on share holder’s value creation of selected units, after merger and acquisition (H1 = μ₁ ≠ μ₀)

Tools of Analysis

The present study has analyzed the share holder’s value creation of selected units before and after merger and acquisition. In order to evaluate this, tools like, ratio analysis, mean standard deviation and student paired “t” distribution test have been used.

Period of the Study

The present study is mainly intended to examine the share holder’s value creation of merged companies five years before merger and five years after merger. 

Need and Importance of the Study

Investors who have a variety of options will evaluate the performance of companies based on the returns they provide, before making investments. Companied need to improve their financial performance to meet the expectations of investors. So, creation of wealth is an important task for companies. Non-creation of value leads to investor dissatisfaction. This will affect the equity mobilization activities of companies, which have a great impact on the economy. In this context, it is relevant to see whether companies are earning returns on their costs and thereby, creating wealth for their shareholders.

Data Collection and Analysis

Data Collection: Data on key financial ratios depicting the profitability and liquidity performance for up to five years after the acquisition year and five years before the acquisition year was extracted from the database of EMIS.

Data Analysis

Pre-merger and post-merger performance ratios were estimated and the averages computed for the selected units, during five years before merger and five years after merger. Average pre-merger and post-merger share holder’s value creation performance ratios were compared to see if there was any statistically significant change in share holder’s value creation performance due to mergers, using Student paired “t” distribution test.

Analysis and Interpretation: The Table 1 shows the return on gross capital ratio of selected units for 5 years before and after merger and acquisition. Before merger and acquisition ZEEL Co. shows the highest ratio 14.95% and the lowest performance is in Voltas Industry with 5.49%. After merger and acquisition the highest ratio is Tata Chemical Ltd. with 15.73% and the lowest ratio is in Voltas industry with 3.19%. However almost all sample units except Tata Chemical Ltd. show decline growth rate of return on gross capital employed ratio after merger and acquisition:

• H₀: There would be no significant difference in mean score of Return on Gross Capital Employed ratio in selected units, before and after merger and acquisition

• H₁: There would be significant difference in mean score of Return on Gross Capital Employed ratio in selected units, before and after merger and acquisition

Table 1: Return on Gross Capital Employed Ratio in Selected Units 

(Source: Annual reports of the selected units and EMIS database website.)

Analysis of T - Test in Selected Units under the Study Period Return on Gross Capital Ratio

The calculated value of T is 2.168 and table value of T is 2.262(at 5% level of significance). The Null Hypothesis is accepted. The results are as per the expectation i.e. there is no significant impact of merger and acquisition on return on gross capital employed ratio.

The Table 2 shows the return on net capital ratio of selected units for 5 years before and after merger and acquisition. Before merger and acquisition ZEEL Co. shows the highest ratio 21.63% and the lowest performance is in Tata Steel Industry with 9.16%. After merger and acquisition the highest ratio is Tata Chemical Ltd. with 18.25% and the lowest ratio is in GSFC with 4.76%. However almost all sample units except Tata Chemical Ltd. And Reliance Industry Ltd. Show decline growth rate on return on net capital employed:

• H₀: There would be no significant difference in means score of Return on Net Capital Employed ratio in selected units, before and after merger and acquisition

• H₁:  There would be significant difference means score of Return on Net Capital Employed ratio in selected units, before and after merger and acquisition

Table 2: Return on Net Capital Employed in Selected Units 

Source: Annual reports of the selected units and EMIS database website

Analysis of T - Test in Selected Units under the Study Return on Net Capital Employed

The calculated value of T is 2.268 while table value of T is 2.262. The Null Hypothesis is rejected. The results are not as per the expectation i.e. there is significant impact of merger and acquisition on return on net capital employed ratio.

The Table 3 shows the Return on Share Holder’s funds ratio of selected units for 5 years before and after merger and acquisition. Before merger and acquisition ZEEL Co. shows the highest ratio 31.88% and the lowest performance is in Tata Steel Industry with 3.69%. After merger and acquisition the highest ratio is Tata Chemical Ltd. with 19.62%.

Table 3: Return on Share Holder’s Funds Ratio in Selected Units 

Source: Annual reports of the selected units and EMIS database website

Analysis of T-Test in Selected Units under the Study Return on Share Holder’s Funds Ratio

After mergers and acquisitions the performance of Tata Steel Ltd., Tata Chemical Ltd. and Reliance Industry Ltd. has been increased by 0.93, 4.21 and 0.56% respectively. All the samples units except these three units show decline growth rate on share holders’ funds ratio:

• H₀: There would be no significant difference in means score of Return on Share Holder’s funds ratio in selected units, before and after merger and acquisition

• H₁: There would be significant difference in means score of Return on Share Holder’s funds ratio in selected units, before and after merger and acquisition

The calculated value of T is 1.999 and table value of T is 2.262 (at 5% level of significance). The Null Hypothesis is accepted. The results are as per the expectation i.e. there is no significant impact of merger and acquisition on Return on Share Holder’s funds ratio.

The Table 4 shows the return on gross capital ratio of selected units for 5 years before and after merger and acquisition. The Sterlite Industry shows the highest EPS of Rs.30.13 and the Voltas Ltd. Shows the lowest EPS of Rs.1.33 before mergers and acquisitions. And remaining units like Ambuja Cement, Exide Industry, India Cement, Tata Steel, Tata Chemical and Reliance Industry show on an average EPS of Rs.13 during before mergers and acquisitions. After mergers and acquisitions Reliance Industry Ltd. shows the highest EPS of Rs.52.26. After mergers and acquisitions the performance of 5 units Exide Industry, Sterlite Industry, Tata Steel, Tata Chemical and Reliance industry has been increased. And the remaining 5 units show the decline growth rate on EPS ratio after mergers and acquisitions:

• H₀: There would be no significant difference in means score of Earning per share ratio in selected units, before and after merger and acquisition

• H₁: There would be significant difference in means score of Earning per share ratio in selected units, before and after merger and acquisition

The calculated value of T is 0.056 and table value of T is 2.262 (at 5% level of significance). The Null Hypothesis is accepted. The results are as per the expectation i.e. there is no significant impact of merger and acquisition on Earning per share ratio.

Findings of the Study

Return on Gross Capital Employed: This ratio was the highest in ZEEL Co. by 14.95% and the lowest in Voltas Ltd. by 5.49% before mergers and acquisitions.

Table 4: Earning per Share Ratio in Selected Units

Source: Annual reports of the selected units and EMIS database website

Analysis of T-Test in Selected Units under the Study Earning per Share Ratio

After merger and acquisition it was the highest in Tata Chemical Ltd. by 15.73% and the lowest in Voltas Ltd. by 3.19%. After mergers and acquisitions the financial performance of selected units was decreased except Tata Chemical Ltd. The result shown by paired ‘t’ test reveals that the difference in return on gross capital employed is not significant at 5% level of significance in the selected units, before and after mergers and acquisitions. After mergers and acquisitions the return on gross capital employed is not improved in selected units.

Return on Net Capital Employed

This ratio was the highest in ZEEL Ltd. by 21.63% and the lowest in Tata Steel Ltd. by 9.16% before mergers and acquisitions while after merger and acquisition it was the highest in Tata Chemical Ltd. by 18.25% and the lowest in GSFC by 4.76%. After mergers and acquisitions the financial performance of selected units was decreased except Tata Chemical Ltd. and Reliance Industry Ltd. The result shown by paired ‘t’ test reveals that the difference in return on net capital employed is significant at 5% level of significance in the selected units, before and after merger and acquisition. The financial performance of selected units is not improved after mergers and acquisitions.

Return on Share Holders Fund 

Return on share holder’s funds ratio was the highest in ZEEL Co. by 31.88% and the lowest in Voltas Ltd. by 3.69% before mergers and acquisitions. After mergers and acquisitions it was the highest in Tata Chemical Ltd. by 19.62% and the lowest in India Cement, GSFC and Voltas Ltd. by 0% due to net loses. After mergers and acquisitions the financial performance of selected units was decreased except Tata Chemical Ltd. Tata Steel Ltd. and Reliance Industry Ltd. The result shown by paired ‘t’ test reveals that the difference in return on share holders funds is not significant at 5% level of significance in the selected units, before and after merger and acquisition. The return on share holder’s funds is not improved after mergers and acquisition in selected units.

Earning Per Share 

The EPS was the highest in Sterlite Industry Ltd. by Rs.30.13 and the lowest in Voltas Ltd. by Rs.1.33 During the post mergers and acquisitions it was the highest in Reliance Industry Ltd. by Rs.52.26 and the lowest in India Cement, GSFC and Voltas Ltd. by Rs.0 because of net loses. After merger and acquisitions EPS was decreased in 5 units (ZEEL Co., Ambuja Cement, India Cement, GSFC and Voltas Ltd.) and increased in 5 units (Exide Industry, Sterlite Industry, Tata Steel Ltd. Tata Chemical Ltd. and Reliance Industry Ltd.). The result shown by paired ‘t’ test reveals that the difference in EPS is not significant at 5% level of significance in the selected units, before and after mergers and acquisitions. The earning per share is not improved in selected units after mergers and acquisitions.

This study measures the effects of merger and acquisition on the share holder’s value creation of acquirer companies for five years before and five years after the merger and acquisition. The pre- and post-merger performances are compared and the degree of change is tested with a paired t-test. Share holders value creation is measured with return on gross capital employed, return on net capital employed, return on share holder’s funds and earning per share ratios. From the above calculation, analysis and interpretation it is concluded that after merger and acquisition there is not any significant change in share holder’s value creation of acquiring companies.

Limitations of the Study

The major limitations of this study are as under:

• This study is mainly based on secondary data derived from the annual reports of industry. The reliability and the finding are contingent upon the data published in annual report

• The study is limited to five years before merger and five years after merger only

• Accounting ratios have its own limitation, which also applied to the study

• This study is related with ten units. Any generalization for universal application cannot be applied here

• Financial analysis do not repict those facts which cannot be expressed in terms of money, for example- efficiency of workers, reputation and prestige of the management

1. Healy, P.M. et al. “Does corporate performance improve after mergers?” Journal of Financial Economics, 1992, pp. 135-165

2. Weston, J.F. and S.K. Mansinghka. “Tests of the efficiency performance of conglomerate firms.” Journal of Finance, September, 1971, pp. 919-936.

3. Martynova, M. et al. “The long-term operating performance of European Acquisitions, International Mergers and Acquisitions Activity since 1990: Quantitative Analysis and Recent Research.” Massachusetts: Elsevier, 2007, pp. 1-40.

4. Salmi, T. et al. “Financial ratios as predictors of firms' industry branch.” The Finnish Journal of Business Economics, 1998, pp. 263-277.

5. Beena, P.L. “An analysis of mergers in the private corporate sector in India.” Center for Development Studies, 2000, pp. 1-62. 

6. Pawaskar, V. “Effect of mergers on corporate performance in India.” Vikalpa, vol. 26, no. 1, 2001, pp. 19-32.

7. Lubatkin, M. “Mergers and performance of the acquiring firm.” Academy of Management Review, vol. 8 no. 2, April, 1983, pp. 218-225.