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CHAPTER II: REVIEW OF LITERATURE
The following are the few existing studies reviewed which were conducted by
researchers in view of analyzing the financial performance during merger activity in
different time periods.
Madhuri Gupta & Kavita Aggarwal (December, 2011): Corporate Merger
& Acquisition: A Strategic approach in Indian Banking Sector – The
process of merger and acquisition is not new to the Indian Banking. This paper
is an attempt to find the impact of Mergers and Acquisitions in Indian Banking
Industry and their .position before and after merger and acquisition. Major
findings from this research are i) The trend shows that the merger and
acquisition has a good impact on the banking sector. Merger and acquisition in
Indian banking so far has been to provide the safeguard to weak banks against
their failure. ii) The small and medium size banks are working under threat
from the economic environment which is full of problems for them. Their
reorganization through merger could offer re-establishment of those in viable
banks of optimum size with global presence. iii) As discussed in above data
analysis all the merged entities after merger and acquisition are continuously
growing rather than before the merger. There is increase in no. of branches
and ATMs as well as in deposit amount, their net profit and worth.
Mergers and Acquisitions: an overview of pre and post-merger activities
(2011) – Our study tries to look into the burning issue of mergers and
acquisitions. Merger and acquisition literature suggests that managers will
have various motives for mergers; in our study we summarize the motives for
mergers into four broad categories, namely economic motives, synergy
motives, strategic motives and managerial motives. We try to explore the post
merger activities of a firm by looking into the potential cross-effects of asset
divestiture on revenue enhancing capabilities and of resource redeployment on
cost savings. Finally we investigate the possible lingering direct effects
between asset divestiture and resource redeployment on acquisition
performance.
38
Ahmad Tisman Pasha (2010): Effects of Merger on Management: Case
Study of a Bank – This study discusses impact of merger with reference to
human resource aspect, it has actually integrated most of the significant
management subjects under considerations into the judgment. The results of
this study are derived from organization of banking sector namely, RBS of
Pakistan. This makes the conclusions more sectors oriented. The results of this
study provide relatively strong support for the existence of a positive
relationship between employee participation from top to bottom with the
employee satisfaction, motivation and performance. Since the basic aim of the
study was to examine the impact of any major change like merge on the
management. Here in this study the organizational performance is measured
by means of employee performance and employee performance was measured
by their motivation, satisfaction of employees towards the job and the
organization. Empirical evidence appears to support the view that human
capital practices like employee participation after merger can influence the
organizational performance and growth. Organizations interested in the
growth and in high performance must involve their employees in decision
making process to motivate, satisfy and better the performance of the
employees. The research provides proofs for the organizations that whenever
the workforce is not satisfied and motivated with their jobs, performance is
affected. The conclusion also suggests that after a merger happened, the
management might be able to increase the level of commitment in the
organization by increasing satisfaction and motivation of employee with
compensation, policies, and work conditions.
Dimitris Kyriazis (2010): “The Long-Term Post Acquisition Performance
of Greek Acquiring Firms” – This study tests for the first time the long-term
post-bid performance of Greek acquiring firms during the 1993-2006 period
by using the 3-factor model of Fama & French (1993). Our results show a
significant and substantial negative abnormal performance of acquirers of
about 2% per month in the 3 years post-acquisition period. Although, this
finding is generally in agreement with the majority of international empirical
evidence, yet it is of a much larger magnitude. It also seems that, even though
the group differences are insignificant, the acquirers lose more in acquisitions
39
of listed targets and these losses are heavier when a stock offer was used.
Thus, our findings are in conflict with the strong positive performance of
about 5% during the short-term announcement period for the same sample of
the acquirers, reported in the Kyriazis and Diacogiannis (2008) study, which
was higher in the case of listed targets. Consequently, our results indicate a
possible overestimation of expected synergies during the announcement period
and market mispricing which is more intense in the case of cash bids targeting
privately held firms.
Dr. Neena Sinha, Dr. K.P.Kaushik & Ms. Timcy Chaudhary (2010):
Measuring Post Merger and Acquisition Performance: An Investigation of
Select Financial Sector Organizations in India – The present paper examines
the impact of mergers and acquisitions on the financial efficiency of the
selected financial institutions in India. The analysis consists of two stages.
Firstly, by using the ratio analysis approach, we calculate the change in the
position of the companies during the period 2000-2008. Secondly, we examine
changes in the efficiency of the companies during the pre and post-merger
periods by using nonparametric Wilcoxon signed rank test. While we found a
significant change in the earnings of the shareholders, there is no significant
change in liquidity position of the firms. The result of the study indicate that
M&A cases in India show a significant correlation between financial
performance and the M&A deal, in the long run, and the acquiring firms were
able to generate value.
K. Ravichandran, Fauzias Mat-Nor and Rasidah Mohd-Said (2010) :
“Market Based Mergers in Indian Banking Institutions” – This research
analyses the efficiency and performance using CRAMEL–type variables,
before and after the merger for the selected public and private banks which
are initiated by the market forces. The results suggest that the mergers did not
seem to enhance the productive efficiency of the banks as they do not indicate
any significant difference. The financial performance suggests that the banks
are becoming more focused on their retail activities (intermediation) and the
main reasons for their merger is to scale up their operations. However it is
found that the Total Advances to Deposits and the profitability are the two
40
main parameters which are to be considered since they are very much affected
by mergers. Also the profitability of the firm is significantly affected giving a
negative impact on the returns.
Rong Zhang (11 Nov 2010): Cultural Integration in Cross-Border Mergers
& Acquisitions – The research consists of both a literature study and
interviews with different companies. Results of the literature study show that
cultural differences, especially of national nature, play an important role in the
integration process. It appears that cultural differences not always have a
negative impact, but they can also positively influence the integration process.
From the interviews, it became clear that every relevant aspect of the
integration process as found in literature is subjected to the influence of
cultural differences. Also strategies are presented that can be applied to bridge
the cultural differences and to turn the negative influence to their advantage.
This can be accomplished by adopting tools to facilitate the cultural
integration, leadership, cultural learning and information system. Moreover, in
an era of globalization, this study contributes to company management
practice by expanding across national boundaries through transformation into
a new organizational culture.
Okpanachi Joshua (2010): Comparative analysis of the impact of mergers
and acquisitions on financial efficiency of banks in Nigeria – Mergers and
acquisitions in the Nigerian banking sector are reform strategies recently
adopted to reposition the banking sector. These were done to achieve
improved financial efficiency, forestall operational hardships and expansion
bottlenecks. It is against this backdrop that the paper made a comparative
analysis of the impact of mergers and acquisitions on financial efficiency of
banks in Nigeria. This paper used gross earnings, profit after tax and net assets
of the selected banks as indices to determine financial efficiency by comparing
the pre-mergers and acquisitions‟ indices with the post-mergers and
acquisitions‟ indices for the period under review. For this paper, three
Nigerian banks were selected using convenience and judgmental sample
selection methods. Data were collected from the published annual reports and
accounts of the selected banks and were subsequently analyzed applying t-test
41
statistics through statistical package for social sciences. It was found that the
post mergers and acquisitions‟ period was more financially efficient than the
pre-mergers and acquisitions period. However, to increase banks financial
efficiency, the study recommends that banks should be more aggressive in
their profit drive for improved financial position to reap the benefit of post
mergers and acquisitions bid.
Ting-Kun Liu (2010): “An Empirical Study of Firms‟ Merger Motivations
and Synergy from Taiwanese Banking Industry”: They extracted factors
using the factor analysis method and used these factors to evaluate
performance scores. Results showed that banks associated with financial
holding companies constituted 80% of the top ten banks in the sample;
subsidiary banks of financial holding companies made up approximately 60-
70% of the top fifteen banks in the overall sample. These results show that
post-merger banks belonging to financial holding companies produced
merger synergies. In further analysis of the top ten financial holding company
banks and the top ten non-financial holding company banks, the top three
banks in the top ten financial holding company banks started with banking and
are associated with financial holding companies emphasizing banking,
showing that post-merger financial holding companies have better overall
operating performance if they have banking as a primary operating entity. In
comparing financial holding companies by operating entities, they found that
subsidiary banks associated with financial holding companies emphasizing
banking did have better performance than subsidiary banks associated with
financial holding companies emphasizing insurance or securities.
Fabio Braggion, Narly Dwarkasing and Lyndon Moore (November 17,
2010): Mergers and Acquisitions in British Banking: Forty Years of
Evidence from 1885 until 1925 – We study the effects of bank mergers and
acquisitions in the U.K. from 1885 to 1925. The lack of a regulatory authority
and the confidential nature of merger negotiations allows us to precisely
measure the wealth effects of M&As in a laissez-faire environment. We find
positive wealth effects for bidders (0.7%-1%) and targets (6.7%-8%) over the
announcement month. When takeovers took place in a competitive
42
environment wealth creation appears to be related to efficiency gains. As
competition decreased, gains to shareholders appear to be related to increased
oligopoly power. In a less competitive environment, banks tended to reduce
the amount of loans and their capital ratios.
Utz Weitzel &Killian J McCarthy (August 2009): Theory and Evidence on
Mergers and Acquisitions by Small and Medium Enterprises – The theory of
mergers and acquisitions (M&As) has been developed almost exclusively
from the study of large deals by large firms. In this paper we argue that the
behavior and success of M&As by small and medium sized enterprises
(SMEs) may be significantly different. Accordingly, we revisit established
M&A theories, and develop a theoretical framework, and several testable
hypotheses, regarding the distinctive features of SME M&As. Our empirical
results support our expectations and show that, compared to large firms,
acquiring SMEs: rely more intensively on external growth via M&As; are
more likely to be withdrawn, suggesting that SMEs are more flexible, and
more able to avoid deals that turn sour; and, finally, SME M&As are more
likely to be financed with equity rather than debt, indicating that the influential
financial pecking order theory is of less relevance to SMEs.
Tariq Hassaneen Ismail, Abdulati A. Abdou & Radwa Magdy (2009):
Review of Literature Linking Corporate Performance to Mergers and
Acquisitions – The purpose of this paper is to synthesize and analyze prior
literature of mergers and acquisitions (M&A) and its effects on the financial
performance in an attempt to determine factors that might influence post-
mergers and acquisitions performance. The main conclusion is that there are
inconclusive results among studies on the literature, where, corporate
performance is improved in some cases but not in others. Previous studies are
using varieties of measures to examine the impact of M&A on corporate
performance, where measures might be accounting measures-based, market
measures-based, mixed measures, or qualitative measures-based. In addition,
there is a dispute regarding the factors that affect the reported performance,
where eight factors might affect performance as follows: (1) method of
43
payment (Cash or Stock), (2) book to market ratio, (3) type of merger or
acquisition transaction (related or unrelated), (4) cross-boarder versus
domestic M&A, (5) mergers versus tender offers, (6) firm size, (7) macro
economic conditions, and (8) time period of transaction. Managers should be
aware of the impact of such factors on post-merger corporate performance to
accurately evaluate proposed offers of mergers and acquisitions and take
sound decisions.
DAUBER, Daniel (June 2009): MERGERS AND ACQUISITIONS,
INTEGRATION AND CULTURE: WHAT WE HAVE LEARNED AND
FAILED TO LEARN IN THE PAST TEN YEARS – This paper provides a
review of papers within the last decade in highly cited journals. Based on the
index, influential journals were selected. Within 58 papers drawn from 20
journals, this literature review identified themes relating to integration and
culture in M&As. Findings across papers are contradictory and to some extent
biased. It is concluded that future research should consider different facets of
integration and culture, consider both partners in M&A deals and question the
way cultural differences and integration are managed.
Mohibullah (2009): Impact of Culture On Mergers and Acquisitions: A
Theoretical Framework – Mergers and acquisitions M&As are the front line
strategic option for organizations attempting to have competitive advantage
over its competitors. Organizations word-wide spend billions of dollars in
pursuit of this strategy. However, the success rate is less than estimated. This
is mainly due to the clashes of corporate cultures. The objectives of this
theoretical paper are to find out the reasons why most of the mergers and
acquisitions fail. Four main issues related to the culture clashes are highlighted
in this paper, ambiguity and communication problems within the merged
entity, properly management of cultural integration, the acquisitions and
organizational culture, and Improper acculturation process among the merged
organizations. The factors in this paper are based on previous literature. On the
basis of different views of authors, a conceptual framework is put forth that
uses the afore-mentioned issues throughout the acquisition process to produce
44
and negotiate some workable approaches. It is suggested that this conceptual
framework can give a new insight into explaining the causes.
Keisha Chambers & Andrew Honeycutt (February 2009):
Telecommunications Mega-Mergers: Impact On Employee Morale And
Turnover Intention – The number of mergers and acquisitions grew at record
rates in the United States over the past 10 years, and mega
telecommunications mergers have been no exception. Three very high-profile
telecommunications mergers included MCI and Verizon, Sprint and Nextel,
and BellSouth and AT&T. These megamergers have changed the competitive
landscape dramatically in the telecom arena. Despite the popularity of mergers
and acquisitions (M&As), evidence has shown that the majority have failed to
improve performance and failed to achieve anticipated strategic and financial
objectives set forth in the premerger planning phase, according to J. Krug and
R. Aguilera‟s 2004 article “Top Management Team Turnover in Mergers and
Acquisitions” in Advances in Mergers and Acquisitions. The primary reason
behind such common performance failures according to S. Cartwright and C.
L. Cooper‟s 2000 HR Know-How in Mergers and Acquisitions was based on
various human resources factors such as culture, management, poor
motivation, and loss of talent. Based on the aforementioned post corporate
merger performance failure considerations, this research study examined the
impact on employee morale and turnover intention related to a recent
megamerger between two telecommunications conglomerates.
Ahmad Ismail, Ian Davidson & Regina Frank (2009) concentrates on
European banks and investigates post-merger operating performance and
found that industry-adjusted mean cash flow return did not significantly
change after merger but stayed positive. It finds that low profitability levels,
conservative credit policies and good cost-efficiency status before merger are
the main determinants of industry-adjusted cash flow returns and provide the
source for improving these returns after merger.
Murugesan Selvam, Manivannan Babu, Gunasekaran Indhumathi,
Bennet Ebenezer (2009): “Impact of mergers on the corporate performance
of acquirer and target companies in India” –The present study is limited to a
45
sample of companies which underwent merger in the same industry during the
period of 2002-2005 listed in one of the Indian stock exchanges namely
Bombay Stock Exchange. It is proposed to compare the liquidity performance
of the thirteen sample acquirer and target companies before and after the
period of mergers by using ratio analysis and t-test during the study period of
three years. The study found that the shareholders of the acquirer companies
increased their liquidity performance after the merger event.
Maureen F. McNichols & Stephen R. Stubben (May 2009): The Role of
Target Firms‟ Accounting Information in Acquisitions – We examine
whether higher-quality accounting information of target firms leads to more
profitable acquisitions for acquirers in a large sample of acquisitions of public
firms over the period 1990-2007. We find that acquiring firms realize lower
stock returns at the acquisition announcement when the value of the target
firm is more uncertain. However, controlling for uncertainty, acquirer returns
are higher when the target firm has better accounting information. The benefits
to acquiring firm shareholders seem to come at the expense of target firm
shareholders, who realize lower returns upon announcement of an acquisition
when the target‟s accounting information quality is high. These findings
support the hypothesis that acquirers are able to bid more efficiently and are
therefore less likely to overpay when the target has higher-quality accounting
information.
Kumar and Bansal (2008) examined that while going for mergers and
acquisitions (M&A) management smell financial synergy or/and operating
synergy in different ways. But actually are they able to generate that potential
synergy or not, is the important issue. The aim of this study is to find out
whether the claims made by the corporate sector while going for M&As to
generate synergy, are being achieved or not in Indian context.
Anthony (2008) investigates the effect of acquisition activity on the
efficiency and total factor productivity of Greek banks. Results show that
total factor productivity for merger banks for the period after merging can be
attributed to an increase in technical inefficiency and the disappearance of
46
economies of scale, while technical change remained unchanged compared to
the pre-merging level.
Dimitris Kyriazis & George Diacogiannis (2008): “The Determinants of
Wealth Gains in Greek Takeover Bids” – This study examines for the first
time the determinants of the short-term excess stock returns of a sample of
Greek merging firms during the period 1993-2006. Excess stock returns are
estimated using the market index model within the standard event study‟s
methodology framework. Our univariate analysis results first establish, that
Greek acquirers‟ obtain significantly positive and higher abnormal returns
than those observed by the majority of empirical studies concerning the US
and UK markets, while targets‟ corresponding gains are also positive but
lower than those observed respectively. Second, the same results suggest that
Greek acquirers‟ gains are higher when they bid for listed targets using cash,
while acquired firms’ shareholders gain more when they receive cash in
exchange for their shares. Our multiple regression results suggest that
bidders’ gains are positively associated with cash offers and acquisition of
listed targets, while targets’ gains are positively associated with the relative
size of bidders to targets and negatively related with the acquisition of
subsidiaries. These findings are overall consistent with the signaling
overvaluation hypothesis of stock offers because of information asymmetries,
the increased bargaining hypothesis of unlisted targets, and the corporate
monitoring hypothesis due to lower agency costs existing in these firms.
Dorata and Steven (2008) examined whether CEO duality further
exacerbates CEOs' motivation of self-interest to engage in mergers and
acquisitions to increase their compensation.
Ishola Rufus Akintoye and R.O.C Somoye (2008): “Corporate Governance
and Merger Activity in the Nigeria Banking Industry: Some Clarifying
Comments” – This study takes an explorative search into merger activity and
its impact in the sustenance of shareholder value via sound corporate
governance structures. An attempt is made to draw lessons from the US
experience in merger activity to the Nigerian banking industry which has
recently recorded nineteen (19) successful mergers arising from the regulatory
47
demand for consolidation. The data used are essentially secondary and the
study suggests some steps to ensure improvements in corporate governance
through the pursuit of shareholder value and also for managers, constitute
instruments for their job security.
Greg Banach (2008): “Expansion of the European Central Bank: A Merger
of Equals?” – The research is focused on the effect of one uniform monetary
policy will have on the less developed countries that entered the European
Union (EU) in 2004. One of the challenges facing the new entrants involves
the required implementation of monetary policy goals, even though these new
entrants do not have a vote on how monetary policy is determined. Monetary
policy in the Euro-area is the responsibility of the European Central Bank
(ECB) who has a stated goal of price stability. The present study explored
whether the ECB had proper focus on price stability for all countries in the
Euro-area community. Using economic indicators for each country and the
funds rate of the ECB, the current study used a version of the Taylor Rule and
GMM modeling to test whether the ECB focused on price stability for both
old and new member countries. Based on the analysis, it appears the ECB did
not have proper focus on inflation for all countries in the Euro-area during the
period of March 2004 through March 2007. This is evidence that the ECB is
not acting in the best interests of the Euro-area community as whole.
Pramod Mantravadi & A Vidyadhar Reddy (2008): “Post-Merger
Performance of Acquiring Firms from Different Industries in India” – This
research study was aimed to study the impact of mergers on the operating
performance of acquiring corporates in different industries, by examining
some pre- merger and post-merger financial ratios, with the sample of firms
chosen as all mergers involving public limited and traded companies in India
between 1991 and 2003. The results suggest that there are minor variations
in terms of impact on operating performance following mergers, in different
industries in India. In particular, mergers seem to have had a slightly positive
impact on profitability of firms in the banking and finance industry, the
pharmaceuticals, textiles and electrical equipment sectors saw a marginal
negative impact on operating performance (in terms of profitability and
48
returns on investment). For the Chemicals and Agri-products sectors, mergers
had caused a significant decline, both in terms of profitability margins and
returns on investment and assets.
Halil Bader Arslan (2007): Cross-Border Bank Acquisitions: Financial and
Managerial Analysis of BNP Paribas – TEB Deal – Using the BNP Paribas –
TEB deal as a case study, this paper focuses on value creation analysis and
managerial issues of cross-border bank acquisitions. The stock market
responded very positively to this acquisition and TEB shares outperformed the
index performance. Operating performance has improved after the acquisition
with new products and services. The paper also tries to analyze the effects of
the acquisition on TEB‟s management policy and put forth possible drawbacks
during the integration period especially in its expansion toward individual
banking. Results showed that former employees faced adaptation problems
throughout the bank‟s repositioning towards the new strategy. They also had
professional conflicts with the newly hired employees as the bank passes
through a process of organizational change.
Selvam M (2007): A book entitled Mergers & acquisitions in the banking
sector - The Indian scenario – He has analyzed the implications of stock price
reactions to mergers and acquisitions activities taken place in banking industry
with special reference to private and public sector banks. The author has found
from the analysis that the share prices are market sensitive. From the financial
analysis it was observed that majority of the banks went for branch expansion
and this has affected profitability to some extent and has also resulted in
unhealthy competition among the players.
Pramod Mantravadi and Vidyadhar Reddy (2007) in their research study
Mergers and operating performance: Indian experience, attempted to study
the impact of mergers on the operating performance of acquiring corporate in
different periods in India, after the announcement of industrial reforms, by
examining some pre- and post-merger financial ratios, with chosen sample
firms, and all mergers involving public limited and traded companies of nation
between 1991 and 2003. The study results suggested that there are minor
variations in terms of impact on operating performance following mergers in
49
different intervals of time in India. It also indicated that for mergers between
the same groups of companies in India, there has been deterioration in
performance and returns on investment.
Elena Carletti, Philipp Hartmann & Giancarlo Spagnolo (2007) modeled
the impact of bank mergers on loan competition, reserve holdings, and
aggregate liquidity. The merger also affects loan market competition, which in
turn modifies the distribution of bank sizes and aggregate liquidity needs.
Mergers among large banks tend to increase aggregate liquidity needs and thus
the public provision of liquidity through monetary operations of the central
bank.
A. Soongswang (2006): “Takeover Effects During the Pre-Bid Period on
Thai Bidding Firms” – This study was undertaken and focuses on takeover
announcement effects during the pre-bid period, (-12,-1) months, on Thai
bidding firms. The findings suggest that before the announcement month, the
effect of a potential takeover leads to significantly positive abnormal returns
at approximately 27% and 29%, according to metrics employed, for the
bidding firm’s shareholders. In addition, the market apparently anticipates the
takeovers as being good news four and three months, at least, prior to the
takeover announcement, resulting in positive abnormal returns of about 8-16%
for the bidding firm‟s shareholders. The study suggests that prior to
announcement month; a takeover increases positive wealth gains of the
bidding firm‟s shareholders.
Selvam. M (2007): A book entitled Mergers & acquisitions in the banking
sector- The Indian scenario, written by Selvam. M (2007) has analyzed the
implications of stock price reactions to mergers and acquisitions activities
taken place in banking industry with special reference to private and public
sector banks. The author has found from the analysis that the share prices are
market sensitive. From the financial analysis it was observed that majority of
the banks went for branch expansion and this has affected profitability to some
extent and it resulted in unhealthy competition among the players.
Dube and Glascock (2006) examined the post-acquisition differences in share
and operating performance, and in risk characteristics, for acquirers who pay
50
cash versus those who employ stock, as well as for acquirers who merge with
targets as opposed to those who directly approach target shareholders to tender
their shares.
Susan Cartwright and Richard Schoenberg (2006): Thirty Years of
Mergers and Acquisitions Research: Recent Advances and Future
Opportunities – The complex phenomenon that mergers and acquisitions
(M&As) represent has attracted substantial interest from a variety of
management disciplines over the past 30 years. Three primary streams of
enquiry can be identified within the strategic and behavioural literature, which
focus on the issues of strategic fit, organizational fit and the acquisition
process itself. The recent achievements within each of these research streams
are briefly reviewed. However, in parallel to these research advances, the
failure rates of mergers and acquisitions have remained consistently high.
Possible reasons for this dichotomy are discussed, which in turn highlight the
significant opportunities that remain for future M&A research.
R Chatterjee and A Kuenzi (2006): MERGERS AND ACQUISITIONS:
THE INFLUENCE OF METHODS OF PAYMENT ON BIDDER‟S
SHARE PRICE – The purpose of this paper has been to examine the
acquiring companies‟ short-term abnormal return around the announcement
date of a transaction and to determine how these abnormal returns are related
to the companies‟ choice of methods of payment. The sample consisted of UK
transactions, covering the years 1991, 1995, and 1999. The main result can be
summarized as follows: comparison across time seems to indicate that a shift
in the assessment of the information content associated with the method of
payment has taken place from 1991/95 to 1999. This appears to be particularly
true for the case of stock transactions: Stock transactions no longer lead to
negative abnormal returns over the announcement period, but achieve highly
significant positive abnormal returns.
Morris Knapp, Alan Gart & Mukesh Chaudhry (2006) research study
examines the tendency for serial correlation in bank holding company
profitability, finding significant evidence of reversion to the industry mean in
profitability. The paper then considers the impact of mean reversion on the
51
evaluation of post-merger performance of bank holding companies. The
research concludes that when an adjustment is made for the mean reversion,
post-merger results significantly exceed those of the industry in the first 5
years after the merger.
Siriopoulos et.al. (2006): In their study of Mergers and Acquisitions in
Greece also find that acquired firms have highly productive operations.
These results support McGuckin & Nguyen (1995) and Harris & Robinson
(2002) studies who have found that acquisition activity in the UK is generally
associated with the transfer of firms with above average productivity. Since
large firm size and high productivity are common characteristics of relatively
mature targets, which have accumulated past experiences as a result of
dynamic learning procedures, age of firm also emerges as a significant
determinant variable of target firms in the study of Siriopoulos et.al. (2006).
Overall, these studies favour rejection of the market for corporate control
hypothesis.
Suchismita Mishra, Arun, Gordon and Manfred Peterson (2005) study
examined the contribution of the acquired banks in only the non conglomerate
types of mergers (i.e., banks with banks), and finds overwhelmingly
statistically significant evidence that non conglomerate types of mergers
definitely reduce the total as well as the unsystematic risk while having no
statistically significant effect on systematic risk.
Marc J Epstein. (2005) studied on merger failures and concludes that mergers
and acquisitions (M&A) are failed strategies. However, analysis of the causes
of failure has often been shallow and the measures for success weak.
Jarrod McDonald, Max Coulthard, and Paul de Lange1 (2005):
PLANNING FOR A SUCCESSFUL MERGER OR ACQUISITION:
LESSONS FROM AN AUSTRALIAN STUDY – Mergers and acquisitions
(M&As) continue to be a dominant growth strategy for companies worldwide.
This is in part due to pressure from key stakeholders vigilant in their pursuit of
increased shareholder value. It is therefore timely to identify key planning
steps that will assist CEOs and company boards to achieve M&A success.
This study used semi-structured interviews to: identify the link between
52
corporate strategic planning and M&A strategy; examine the due diligence
process in screening a merger or acquisition; and evaluate previous experience
in successful M&As. The study found that there was a clear alignment
between corporate and M&A strategic objectives but that each organization
had a different emphasis on individual criterion. Due diligence was also
critical to success; its particular value was removing managerial ego and
justifying the business case. Finally, there was mixed evidence on the value of
experience, with improved results from using a flexible framework of
assessment.
Guest et al. (2004): suggest that having a successful first merger is a predictor
of declining performance in subsequent acquisitions. This is in contrast to
Hayward (2002), who found that acquirers who have an unsuccessful first
merger learn from their mistakes and improve their subsequent performance.
Even though these acquirers do learn from their mistakes, they never quite
catch up with the organizations successful in their first acquisition. Guest et al.
(2004) concluded that if your first merger does not succeed, it is not
worthwhile pursuing future mergers.
Gregor Andrade & Erik Stafford (2004): “Investigating the economic role
of mergers” We investigate the economic role of mergers by performing a
comparative study of mergers and internal corporate investment at the industry
and firm levels. We find strong evidence that merger activity clusters through
time by industry, whereas internal investment does not. Mergers play both an
„„expansionary‟‟ and „„contractionary‟‟ role in industry restructuring. During
the 1970s and 1980s, excess capacity drove industry consolidation through
mergers, while peak capacity utilization triggered industry expansion through
non-merger investments. In the 1990s, this phenomenon is reversed, as
industries with strong growth prospects, high profitability, and near capacity
experience the most intense merger activity.
Guest et al. (2004) suggest that having a successful first merger is a predictor
of declining performance in subsequent acquisitions. This is in contrast to
Hayward (2002), who found that acquirers who have an unsuccessful first
merger learn from their mistakes and improve their subsequent performance.
53
Even though these acquirers do learn from their mistakes, they never quite
catch up with the organizations successful in their first acquisition. Guest et al.
(2004) concluded that if your first merger does not succeed, it is not
worthwhile pursuing future mergers. Overall, the body of literature on the
usefulness of prior experience in undertaking M&As has shown mixed results.
Ya-Hui Peng & Kehluh Wang (2004) study addresses on the cost efficiency,
economies of scale and scope of the Taiwanese banking industry, specifically
focusing on how bank mergers affect cost efficiency. Study reveals that bank
merger activity is positively related to cost efficiency. Mergers can enhance
cost efficiency, even though the number of bank employees does not decline.
The banks involved in mergers are generally small and were established after
the banking sector was deregulated.
Rovit and Lemire (2003) established that frequent buyers, regardless of
economic cycles, were 1.7 times more successful than those firms who were
not as frequent, (i.e. between 1 - 4 deals). They suggest consistent purchasing
will increase the chances of success, as to being prepared to walk away from
deals that are considered too risky.
Paul A. Pautler (2003): The Effects of Mergers and Post-Merger
Integration: A Review of Business Consulting Literature – Beginning in the
mid-1990s, several consulting firms commissioned surveys concerning the
outcome of recent mergers. The surveys and related analyses were used to
examine three general questions: First, did the mergers tend to achieve the
goals and objectives of the executives involved in the deals? Second, on a
more objective basis, did the deals enhance shareholder value relative to
industry benchmarks? That is, were the deals a financial success? Third, and
perhaps most important to the consultants, what were the characteristics of the
more successful deals compared to those of the less successful deals? The
surveys tend to focus on larger, transnational mergers and acquisitions
examining the views of top managers in the acquiring companies regarding the
success or failure of a deal. The questions to be answered often include the
original purpose of the merger, how the merge performed relative to plan and
expectations, how the acquiring firm went about the post-merger integration
54
process, what types of synergies or strategic advantage were expected and
achieved, and what types of problems developed in implementing the merger.
In addition to summarizing and analyzing the results of the interviews, the
consulting studies often bring objective data to bear on deals covered by the
surveys, examining whether the post-merger stock prices rose or fell relative
to the pre-merger trend and/or relative to the industry average share price. The
results of this financial analysis often differ from those obtained in the
executive survey portion, because the firm perhaps succeeded in the deal, but
paid too much for the assets. In that instance, executives might think that the
deal achieved their strategic and cost reduction objectives (e.g., reducing real
costs or positioning the firm for future growth), but it did not achieve an
increase in shareholder wealth. Indeed, unless the deal improves the position
of the firm relative to its rivals in the race for consumer patronage, it may not
increase shareholder wealth at all. Answering the third general question - what
are the characteristics of successful deals? - requires drawing overall
tendencies from the surveys based on up to 700 idiosyncratic transactions.
This is often done by comparing the deals on several criteria drawn from the
survey of executives.
Mansur. A. Mulla (2003): In his case study Forecasting the viability and
operational efficiency by use of ratio analysis: A case study, assessed the
financial performance of a textile unit by using ratio analysis. The study found
that the financial health was never in the healthy zone during the entire study
period and ratio analysis highlighted that managerial incompetence accounted
for most of the problems. It also suggested toning up efficiency and
effectiveness of all facets of management and put the company on a profitable
footing.
Lynch and Lind (2002) examined whether the average M&A adventure is
just an executive ego trip? Is it management folly, or can it be done so that it
reliably produces growth? A model presented here may help executives who
are engaged in making acquisitions and making them work navigate the shoals
of mergers and acquisitions more successfully.
55
Rhodes (2002) merger and acquisition will immediately impact the company
with changes in ownership, in ideology, and eventually in practice. In order to
have a more successful expansion, the company should provide some
marketing strategy for the company. The company should provide a strategy
that could generate revenues and profits from three sources and these are sales
at company-owned stores, royalties from possible franchise stores and
franchisee fee from the new store openings and sales of soft drinks.
Ping-wen Lin (2002) findings proves that there is a negative correlation and
statistical significance exist between cost inefficiency index and bank mergers;
meaning banks engaging in mergers tend to improve cost efficiency. However,
the data envelopment analysis empirical analysis found that bank mergers did
not improve significantly cost efficiency of banks. In another study, he found
that (1) generally, bank mergers tend to upgrade the technical efficiency,
allocative efficiency, and cost efficiency of banks; however a yearly decline
was noted in allocative efficiency and cost efficiency. (2) In terms of technical
efficiency and allocative efficiency improvement, the effect of bank mergers
was significant; however, in terms of cost efficiency improvement, the effect
was insignificant.
Gregor Andrade, Erik Stafford (2002): “Investigating the economic role of
mergers”: investigate the economic role of mergers by performing a
comparative study of mergers and internal corporate investment at the industry
and firm levels. We find strong evidence that merger activity clusters through
time by industry, whereas internal investment does not. Mergers play both an
‘‘expansionary’’ and ‘‘contractionary’’ role in industry restructuring. During
the 1970s and 1980s, excess capacity drove industry consolidation through
mergers, while peak capacity utilization triggered industry expansion through
non-merger investments. In the 1990s, this phenomenon is reversed, as
industries with strong growth prospects, high profitability, and near capacity
experience the most intense merger activity.
Hayward (2002) finds that acquisition experience is not enough to generate
superior acquisition performance; however, firms are more successful when
they acquire companies that are in a moderately similar business. This author
56
also finds that acquirers, who make acquisitions one after another in quick
succession, do not outperform companies that acquire infrequently. According
to Hayward (2002) the best results come from those organizations who take a
modest break in their acquisition process to allow the lessons learnt from
acquisitions to be processed, i.e. a break long enough for management to
consolidate key lessons, but not so long that those lessons are forgotten.
Hayward (2002) states that while people undertaking mergers and
acquisitions have a great opportunity to learn from their experience, they
seldom do. This author found that firms who have small losses in prior
acquisitions are stimulated to learn from their performance and outperform on
subsequent acquisitions. On the other hand, firms that have had great success
or great failure find it difficult to learn from that experience. Hayward (2002)
finds that acquisition experience is not enough to generate superior acquisition
performance; however, firms are more successful when they acquire
companies that are in a moderately similar business. This author also finds that
acquirers, who make acquisitions one after another in quick succession, do not
outperform companies that acquire infrequently. According to Hayward
(2002) the best results come from those organizations who take a modest
break in their acquisition process to allow the lessons learnt from acquisitions
to be processed, i.e. a break long enough for management to consolidate key
lessons, but not so long that those lessons are forgotten.
Ms. Surjit Kaur (2002) in her dissertation entitled, A Study of Corporate
Takeovers in India, examines the M & A activity in India during the post
liberalization period. The study tested the usefulness of select financial ratios
to predict corporate takeovers in India. The study suggests further research
areas that are to be explored.
Vardhana Pawaskar (2001): The study entitled Effect of mergers on
corporate performance in India – studied the impact of mergers on corporate
performance. It compared the pre- and post- merger operating performance of
the corporations involved in merger between 1992 and 1995 to identify their
financial characteristics. The study identified the profile of the profits. The
regression analysis explained that there was no increase in the post- merger
57
profits. The study of a sample of firms, restructured through mergers, showed
that the merging firms were at the lower end in terms of growth, tax and
liquidity of the industry. The merged firms performed better than industry in
terms of profitability.
The study entitled, Trumps for M & A - Information Technology
Management in a Merger and Acquisition Strategy (2001), found that
success of mergers and acquisitions depends on proper integration of
employees, organization culture, IT, products, operations and service of both
the companies. Proper IT integration in mergers plays a critical role in
determining how effectively merged organizations are able to integrate
business processes and people, and deliver products and services to both
internal and external customers of the organization. The study suggests that to
address the challenges, Chief Information Officers (CIOs) should be involved
from the earliest phase.
Nikandrou.L.et.al (2000) examined that Acquisitions often have a negative
impact on employee behavior resulting in counter-productive practices,
absenteeism, low morale and job dissatisfaction. It appears that an important
factor affecting the successful outcome of acquisitions is top management‟s
ability to gain employee trust. Explores a number of variables which bear an
impact on managerial trustworthiness. Among them, frequent communication
before and after acquisition, and the already existing quality of employee
relations seems to play the most important role. Therefore, a carefully planned,
employee-centered communication program, together with a good level of
employee relations, seem to form the basis for a successful outcome as far as
employee relations in the face of acquisitions is concerned.
Huzifa Husain (2000): The paper entitled, „M&A Unlocking Value‟ by
Huzifa Husain (2000), explains that takeovers (hostile or non-hostile) may be
beneficial to the shareholders if they help unlock the hidden value of a
company. They also help the existing management to be more receptive to
shareholders. Economically, takeovers make sense if the 'Private Market
Value' of a company is higher than the market capitalization of the company.
Further, if takeovers are used as a ploy to prevent competition, it becomes
58
harmful to the economy. Therefore, proper checks and balances have to be put
in place to ensure that takeover facilitation improves overall efficiency of the
economy.
Beena P.L. (2000): The paper entitled, „An Analysis of Mergers in the
Private Corporate Sector in India‟ by Beena P.L. (2000), attempts to analyse
the significance of mergers and their characteristics. The paper establishes that
acceleration of the merger movement in the early 1990s was accompanied by
the dominance of mergers between firms belonging to the same business
group or houses with similar product lines.
Canagavally. R. (2000): The dissertation entitled, „An Evaluation of Mergers
and Acquisitions‟, measures the performance in terms of size, growth,
profitability and risk of the companies before and after merger. The
dissertation also investigates the share prices of sample companies in response
to the announcement of merger.
Anup Agrawal Jeffrey F. Jaffe (1999): The Post-merger Performance
Puzzle – While the bulk of the research on the financial performance of
mergers and acquisitions has focused on stock returns around the merger
announcement, a surprisingly large set of papers has also examined long-run
stock returns following acquisitions. We review this literature, concluding that
long-run performance is negative following mergers, though performance is
non-negative (and perhaps even positive) following tender offers. However,
the effects of both methodology (see Lyon, Barber and Tsai (1999)) and
chance (see Fama (1998)) may modify this conclusion. Two explanations of
under-performance (speed of price adjustment and EPS myopia) are not
supported by the data, while two other explanations (method of payment and
performance extrapolation) receive greater support.
SUMON KUMAR BHAUMIK (1999): Mergers and Acquisitions What can
we Learn from the “Wave” of the 1980s? – During the 1980s, the US
witnessed a merger wave that was much larger than those observed during the
1920s and the 1960s. This in itself may not be surprising, given that the
market for corporate assets was much larger during the 1980s than ever
before. However, the wave of the 1980s left its mark on US‟s financial-
59
corporate history in two different ways. First, aided by banks and private
investors, financial engineering in the form of LBOs and MBOs formed a key
component of this wave. Second, despite the fact that the gains to acquirers
were not significant, the wave continued unabated for nearly 7 years, from the
beginning of the 1980s to 1987. An economist, therefore, is saddled with two
concerns: the possible rationale for the sustenance of the wave, in the absence
of significant gains to acquirers; and the extent of participation of the banks in
the financial engineering, and the impact of such participation on the banks‟
asset risk. This paper addresses these two questions, drawing upon the
theoretical and empirical literature on corporate governance, and the US
merger wave of the 1980s. It argues that ex ante there were many reasons for
the precipitation of a merger wave, but hindsight suggests that managerial
hubris was a key driver of the merger wave. While M&As may have helped
augment the allocational efficiency of the country‟s productive resources,
empirical evidence cited in this paper suggests that there were few reasons, if
any, for the persistence of the merger wave, especially since many of the
mergers involved a high degree of leverage. Further, after taking into account
the nature and extent of the exposure of US banks to the M&As, the paper
argues that exposure to M&As was responsible for increasing the banks‟
financial fragility. It concludes that the risk notwithstanding, M&As can act as
a vehicle for creative destruction that is an integral part of a competitive
market. Hence, an agenda of economic liberalization is inconsistent with anti-
trust legislation aimed at eliminating M&As; rather, M&As should be
supplemented by strong disclosure and prudential norms.
Jayakumar. S. (1999) in his dissertation entitled, „Mergers and Acquisitions:
An Evaluation Study‟ examines the relative benefits expected by a corporate
enterprise when they adopt mergers and acquisitions as a strategy. The author
studies the extent to which the security prices reacted to the announcement of
merger.
Ruhani Ali and Gupta G S (1999) in their paper entitled, „Motivation and
Outcome of Malaysian Takeovers: An International Perspective‟ examine
the potential motives and effects of corporate takeovers in Malaysia. The
60
Muller‟s methodology, which involves the use of accounting measures like
size, growth, profitability, risk and leverage, is employed for the study to
analyze the performance characteristics of takeover firms in the pre – and post
– takeover periods.
Ravi Sanker and Rao K.V. (1998): An empirical study entitled, „Takeovers
as a Strategy of Turnaround‟ by Ravi Sanker and Rao K.V. (1998) analyses
the implications of takeovers from the financial point of view with the help of
certain parameters like liquidity, leverage, profitability etc. They observe that
if a sick company is taken over by a good management and makes serious
attempts, it is possible to turn it around successfully.
Risberg. S (1997) examined that mergers and acquisitions are known to have
failures that often are explained by clashing corporate cultures. Previous
research has tried to predict better acquisition outcomes by prescribing
different kinds of fits between the combining companies. Takes an alternative
perspective to look at mergers and acquisitions. Develops a conceptual
framework that uses communication throughout the acquisition process to
produce and negotiate some meaning out of ambiguities and cultural
differences and suggested that this alternative perspective can give a new
insight into explaining the causes of unfulfilled expectations in international
mergers and acquisitions.
Robert DeYoung (1997) estimated pre- and post-merger X-inefficiency in
348 mergers approved by the OCC in 1987/1988. Efficiency improved in only
a small majority of mergers, and these gains were unrelated to the acquiring
bank's efficiency advantage over its target. Efficiency gains were concentrated
in mergers where acquiring banks made frequent acquisitions, suggesting the
presence of experience effects. SU WU (2008) examines the efficiency
consequences of bank mergers and acquisitions of Australian four majors
banks. The empirical results demonstrate that for the time being mergers
among the four major banks may result in much poorer efficiency
performance in the merging banks and the banking sector.
Loughran and Vijh (1997): According to a study done by them for a period
1970 to 1989, five year buy and hold return for sample was 88.2% compared
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to 94.7% for their matching firms. This has a t-statistic of 0.96, which was not
significant.
Baird L (1997) examined the relationship between industrial structure on the
one hand and competitive behavior and performance on the other. The original
explanations were based on the view that concentration facilitates collusive
behavior, and adherents to the Monopoly Power view naturally attributed the
relationship to the existence of monopoly profits in concentrated industries.
The counterargument proposed by Demsetz (1973) views concentration as the
result of active competition by which firms are motivated to improve
efficiency. In the presence of scale economies, larger firms are more efficient
and, hence, more profitable than their smaller rivals. Since their larger market
shares produce higher concentration, a positive relationship between industry
concentration and profitability is observed. In the Efficient Structure (ES)
view, concentration reflects intra-industry efficiency differences; in the
Monopoly Power (MP) view, concentration reflects collusive behavior.
Importantly, the empirical distinction between these theories and, hence, their
empirical validity as competing alternative hypotheses remains unclear.
Anslinger and Copeland (1996): studied returns to shareholders in unrelated
acquisition covering the 1985 to 1995 and they found that in two third cases
companies were failed to earn their cost of acquisition.
Vin and Schwert (1996): conducted an event study for a period of forty days
prior merger to 40 days post-merger and concluded that Merged firms were
under performing than their industry counterparts.
Berkovitch and Narayanan (1993): conducted a study on the gain and
concluded that total gains from M&A are always positive and thus can say
that synergy appears.
Jensen (1993) proposes that most merger activity since the mid-1970s has
been caused by technological and supply shocks, which resulted in excess
productive capacity in many industries. He argues that mergers are the
principal way of removing this excess capacity, as faulty internal governance
mechanisms prevent firms from „„shrinking‟‟ themselves.
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Weber and Schweiger (1992) examined the impact of top management
culture clash on the commitment of the acquired team to the new organization
and on its cooperation with the acquiring team. It suggests that three factors
are influential, namely the degree of cultural differences, the nature of the
contact between the teams, and the intended level of integration between the
companies. The paper generates numerous propositions for predicting the
impact of the culture clash. It also offers suggestions for further theoretical
and empirical study, and presents some of the model's practical implications.
Agarwal, Jaffe and Mandelkar (1992): studied post-merger performance of
the companies with a different perspective. They adjusted data for size effect
and beta weighted market return and found that shareholders of the acquiring
firms experienced a wealth loss of about 10% over the period of five years
following the merger completion.
Hay & Morris (1991): have done a thorough review of the causes and
consequences of mergers and acquisitions. According to them, motives for
mergers exist even under ideal conditions. They define ideal (or pure)
conditions as those in which - 1) firms are fully efficient, 2) there is no
divergence between motives of managers and shareholders and, 3) when
shares are valued correctly in the stock market. Under ideal (or pure)
conditions too firms indulge in mergers and acquisitions since it provides the
acquiring firm benefits such as increase in market power, reduction in
advertising and other promotional expenditures, efficiency gains like
production economies, better utilization of indivisible or spare resources,
economies in R&D, economies in obtaining finance and elimination of
transaction costs.
Raghunathan. V. et.al (1991): The study entitled, „The New Economic
Package and the Agenda for Restructuring the Financial Sector‟ by
Raghunathan.V. et.al (1991) discusses the emerging issues relating to new
economic policy in the financial sector. This article strongly argues that
agenda for restructuring the financial sector includes the integration of
various financial markets, new instruments required for hedging risk,
63
measures for investor protection, appropriate legislation, relevant tax reforms,
development of financial infrastructure and the role of regulatory agencies.
Odagiri and Hase (1989): found a growing number of Japanese firms
engaging in mergers and acquisitions. However they found no evidence that in
general profitability or growth improved significantly.
David C. Cheng, et.al (1989) in their paper, “Financial Determinants of
Bank Takeovers” found that several studies have examined the determinants
of bank merger pricing. Those studies focused on the characteristics of the
target, and to downplay the characteristics of the acquirer. Their study found
that the purchase price is a negative function of the target‟s capital- to- asset
ratio. The only variable used in their model is the ratio of acquirer-to-target
assets. This study is different from earlier studies of bank mergers pricing in
the sense that it provided greater consideration of bidder related variables,
used multiple proxies for certain theoretical determinants of merger pricing,
and used principal components regression to control potential multicollinearity
problems.
Porter (1987): attempted to study this relationship in a slightly different way.
He took rate of divestment of new acquisitions by companies within a few
years as an indicator of success or failure. He found that about 75 percent of
all unrelated acquisition in the sample was divested after few years and 60
percent of acquisitions in entirely new industry.
Hall and Norburn (1987) examined theoretical development and empirical
investigation into the performance of mergers and acquisitions. In parallel,
recent research which links the performance of organizations to the presence
of an appropriate corporate culture is discussed. From these two theoretical
platforms, it is argued that the performance of acquisitions is determined by a
match of culture and those organizational expectations which avoid post-
acquisition managerial indigestion. Finally, a program of research is proposed
to measure the performance of acquisitions against the criteria laid down by
the acquiring management, and to determine the impact of culture clashes on
those acquisitions perceived to have failed.
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Revenscraft and scherer (1986): found that on average Mergers and
acquisitions made by over 450 US companies during 60-70s did not lead to an
increase of market shares and profitability but instead they found declining
performance for most companies. They also found that mergers did slightly
worse than their industry peers at the time of acquisition, but results were
clearly poorer after about 10 years from acquisitions.
Shrivastava. P (1986) examined that while mergers may be a good way to
grow rapidly, can one sustain growth and performance for long periods? The
answer lies in how well one integrates the business after the merger.
Berg, Duncan and Friedman (1982): conducted a comprehensive cross-firm
and cross industry analysis to measure the effect of joint venture activities on
the performance of the companies and found ambiguous but positive short-
term gains and insignificant long-term impact on profitability. They further
noted that even short-term gains were negative for technological or
knowledge-oriented acquisitions and were positive for production and
marketing oriented acquisitions, because of increased market power leading to
Singh (1975): in a subsequent study studied Mergers in UK over 1967-70
period. He found results similar to his earlier study, that of size being the main
deterrent to takeover bids. In another study conducted in UK Kuehn (1975)
found results similar to Singh‟s study. His study looked more specifically at
the valuation ratio and the financial and other performance variables that
underlie it. Although he too found a big difference in valuation ratios between
victim firms and the rest taken as a whole, it was a weak discriminant between
the two groups. Disaggregation to the underlying financial variables – profit
rate before tax, growth rate of assets, retention ratio, and liquidity ratio - gave
still weaker results.
Christina Oberg & Johan Holtstrom: Are mergers and acquisitions
contagious? - Conceptualising parallel M&As among customers and
suppliers – Mapping the number of completed mergers and acquisitions
(M&As) over the past few decades would produce a line roughly following the
fluctuations of the business cycle. The most recent peak was marked by the
numerous M&As occurring in the late 1990s and in early 2000 (Bengtsson and
65
Skarvad 2001; Weston and Weaver 2001), followed by the recession starting
in late 2000 (Sevenius 2003; Lundell 2002; KPMG Corporate Finance 2003;
Forvarv & fusioner 2004). Weston and Weaver (2001) describe this
development as M&A waves, and refer to the most recent peak of mergers and
acquisitions as the fifth M&A wave. Different peaks in the history of M&A
have had different foci. In the 1960s and 1970s, diversification and the
creation of conglomerates were common reasons for merging with or
acquiring other companies (Shleifer & Vishny, in Rumelt, Schendel and Teece
1994; Weston and Weaver 2001). In the age of economic globalisation, the
M&As of the late 1990s and early 2000 were more international in scope,
involving companies from more than one country; they were also more
focused on bringing intra-industry companies together (Bengtsson and
Skarvad 2001; Sevenius 2003). The intra-industry focus on M&As could stand
as a description for the concentration e.g. the automotive industry and the IT-
sector in the late 1990s. But is this all we see? This paper focuses on M&As as
a driving force for other M&As. More specifically, our focus is on how M&As
among customers lead to M&As among suppliers, and reverse, in a network
perspective. We launch the concept of parallel M&As to describe this
phenomenon. The purpose of this paper is to discuss parallel M&As, asking:
In what ways are M&As among customers and suppliers a driving force for
M&As? In contrast to the argument in e.g. Halinen, Salmi and Havila (1999)
and Havila and Salmi (2000), we argue that M&As are not only a trigger to
change, but also a response to change, and further, that these changes need not
be directly dyadic ally connected (cf. Hertz 1998; Havila and Salmi 2000), but
appear parallel to each other. Contrary to the motives presented in most
traditional M&A literature, this further means challenging M&As as only
being the result of strategies within the acquiring company. Instead we point at
M&As as contextually driven. Built on the six case studies, matching,
dependence and keeping a “power balance” between customers and suppliers
are referred to as key explanations for parallel M&As.
Healy, Palepu, and Ruback 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
66
improved significantly following acquisitions, when compared to their
respective industries.
J. Fred Weston and Samual C. Weaver: A study done by J. Fred Weston
and Samual C. Weaver shows that around 50% mergers are successful in
terms of creation of values for shareholders.
Jarrod McDonald, Max Coulthard, and Paul de Lange: “Planning for a
Successful Merger and Acquisition: Lessons from an Australian Study” –
This study used semi-structured interviews to: identify the link between
corporate strategic planning and M&A strategy; examine the due diligence
process in screening a merger or acquisition; and evaluate previous experience
in successful M&As. The study found that there was a clear alignment
between corporate and M&A strategic objectives but that each organization
had a different emphasis on individual criterion. Due diligence was also
critical to success; its particular value was removing managerial ego and
justifying the business case. Finally, there was mixed evidence on the value of
experience, with improved results from using a flexible framework of
assessment.
Katsuhiko Ikeda and Noriyuki Doi: studied the financial performances of
43 merging firms in Japanese manufacturing industry and found that the
rate of return on equity increased in more than half the cases, but rate of return
on total assets was improved in about half the cases. However, both profit
rates showed improvement in more than half the cases in the five-year test,
suggesting that firm performances after mergers began to be improved along
with the internal adjustment of the merging firms: there was a necessary
gestation period during which merging firms learnt how to manage their new
organizations.
Kruse, Park and Suzuki 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
67
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.
M Jayadev & Rudra Sensarma: Mergers in Indian Banking: An Analysis –
This paper analyzes some critical issues of consolidation in Indian banking
with particular emphasis on the views of two important stake-holders viz.
shareholders and managers. First we review the trends in consolidation in
global and Indian banking. Then to ascertain the shareholders views, we
conduct an event study analysis of bank stock returns which reveals that in the
case of forced mergers, neither the bidder nor the target banks shareholders
have benefitted. But in the case of voluntary mergers, the bidder banks
shareholders have gained more than those of the target banks. In spite of
absence of any gains to shareholders of bidder banks, a survey of bank
managers strongly favors mergers and identifies the critical issues in a
successful merger as the valuation of loan portfolio, integration of IT
platforms, and issues of human resource management. Finally we support the
view of the need for large banks by arguing that imminent challenges to banks
such as those posed by full convertibility, Basel-II environment, financial
inclusion, and need for large investment banks are the primary factors for
driving further consolidation in the banking sector in India and other Asian
economies .
Mahesh Kumar Tambi: “Impact of Merger and Amalgamation on the
Performance of Indian Companies” – This research is an attempt to evaluate
the impact of Mergers on the performance of the companies. Theoretically it is
assumed that Mergers improves the performance of the company due to
increased market power, Synergy impact and various other qualitative and
quantitative factors, although the various studies done in the past showed
totally opposite results. These studies were done mostly in the US and other
European countries. I evaluate the impact of Mergers on Indian companies
through a database of 40 Companies selected from CMIE’s PROWESS, using
paired t-test for mean difference for four parameters; Total performance
improvement, Economies of scale, Operating Synergy and Financial Synergy.
68
This study shows that Indian companies are no different than the companies in
other parts of the world and mergers failed to contribute positively in the
performance improvement.
Marina Martynova, Sjoerd Oosting and Luc Renneboog: investigated the
long-term profitability of corporate takeovers in Europe, and found that both
acquiring and target companies significantly outperformed the median peers
in their industry prior to the takeovers, but the profitability of the combined
firm decreased significantly following the takeover. However, the decrease
became insignificant after controlling for the performance of the control
sample of peer companies.
Pawaskar analyzed the pre-merger and post-merger operating performance of
36 acquiring firms during 1992-95, using 5 ratios 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.
Rabi Narayan Kar & Amit Soni: MERGERS AND ACQUISITIONS IN
INDIA: A STRATEGIC IMPACT ANALYSIS FOR THE CORPORATE
ENTERPRISES IN THE POST LIBERALISATION PERIOD – The total
M&As from 1990-91 to 2000-01 have been analyzed under this caption. There
are thirteen hundred and eighty six M&As identified during the period of the
study using the methodology given earlier. The maximum number of M&As is
reported in the year 1999-2000, and the lowest found out in the year 1991-
92.The momentum of M&As built up from the year 1995-96 in which thirty
three M&As are found during the span of the study. In 1996-97, the number of
M&As increased to 124 which is 275.75 percent growth in M&As activity.
Further, there is a 100 percent increase of M&As in 1997-98 amounting to
248. There has been an increase in M&As in 1998-99 amounting 269 (8.46 %
increase). Subsequently, the year 1999-2000 has reported the maximum that is
387 numbers of M&As which is 43.86 percent above the previous year. This
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period is followed by a reduction in M&As activity in 2000-01 which stands at
290 (negative growth rate of 25.06).
The study entitled, ‘LBOs, Corporate Restructuring and The Incentive-
Intensity Hypothesis’ investigated the argument that corporate restructuring is
an intended outcome of LBO transactions directly. Using a detailed database
on corporate operations, the study investigated four aspects of corporate
restructuring, namely, corporate downsizing, corporate refocusing, portfolio
reorganization and changes in the industry characteristics of portfolio
business. The results of this study strongly suggest that the governance
structure of LBO firms enables the managers to forge growth more effectively
than the governance structure of public firms. This study analyzed the effects
of LBOs on corporate restructuring activity by analyzing differences in
restructuring activity between 33 large LBO firms and 33 closely matched
public corporations. The evidences presented in the study show that certain
types of corporate restructuring are more prevalent and extensive in LBO
firms than similar ones in public firms.
Weston and Mansingka: 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.
Ghosh examined the question of whether operating cash flow performance
improves following corporate acquisitions, using a design that accounted for
superior pre-acquisition performance, and found that merging firms did not
show evidence of improvements in the operating performance following
acquisitions.
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SUMMERY
To sum up the review of literature, many contributions have offered different
perspectives of merger in different industries worldwide and explained the valuation
techniques followed by merging companies, and shareholders wealth effect due to
merger. From the review of many excellent research papers analyzing the pre and
post-merger performance of merged companies, it is inferred that majority of the
studies strongly support the concept of enhanced post-merger performance due to
merger and it is beneficial to the acquirer companies. Also very few research papers
are these on Indian manufacturing industry but no one did the research on specific
sector like Metals & Metal Products and Machinery Companies. Therefore
researcher examining the pre & post-merger financial performance of Selected Indian
Metals & Metal Products and Machinery companies during the 2005 to 2010. Also
this review of literature helped the researcher to set objectives & hypotheses for this
study.