IMPACT OF MERGERS AND ACQUISITIONS ON LONG TERM …shodhganga.inflibnet.ac.in/bitstream/10603/12642/9/09_chapter 5.pdf · (RONW), the two important parameters of profitability from

Chapter Five

IMPACT OF MERGERS AND

ACQUISITIONS ON LONG TERM

OPERATING AND FINANCIAL

PERFORMANCE OF ACQUIRERS

IMPACT OF MERGERS AND ACQUISITIONS ON LONG TERM 124 OPERATING AND FINANCIAL PERFORMANCE OF ACQUIRERS

CHAPTER FIVE

IMPACT OF MERGERS AND ACQUISITIONS ON LONG TERM OPERATING AND FINANCIAL PERFORMANCE OF ACQUIRERS

The analysis of trends in mergers and acquisitions in India given in

chapter three earlier provides a clear evidence of significant rise in quantum of

M&A activity in Indian corporate sector. Any such corporate strategy is supposed

to bring about significant operational advantages to the firms and subsequently

translate into positive net present value and thus create positive shareholder

wealth. The global evidence as on impact of M&As on operating and financial

performance however, does not provide much support to the theory of synergic

benefits and shareholder wealth creation through M&As. In the light of the

above, in this chapter we present the analysis of impact of M&As on Indian

corporate firms.

The implications of M&As on Indian companies have been studied by

applying the methodology of paired t-test (Pawaskar, 2001; Vanitha and Selvam,

2007; Ramakrishnan, 2008; Saboo and Gopi, 2009) on pre-merger and post-

merger financial ratios of 70 sample acquirers across various sectors of Indian

economy. One important objective of this analysis is to determine if there exist

any significant variations in the impact of mergers and acquisitions in different

sectors of Indian economy. This is done by analyzing sub-samples representing

various sectors, specifically, manufacturing, financial services, chemicals, textile,

drugs and pharmaceuticals- and food and beverage sectors. The trend analysis

has indicated that these sectors have collectively accounted for significant

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proportion of aggregate mergers and acquisitions in India during the study period

1995-96 to 2006-07. The pre-merger (three years prior to merger) and post-

merger (three years after the merger) averages of financial ratios within the

categories of profitability, solvency and efficiency and asset utilization are

compared, and tested for differences, using paired "t" test for two samples. For

the purpose of examining post merger performance of acquirer firms, two sets of

information is analysed. Firstly we look at the changes (increase or decrease)

that have taken place in given ratio for sample of acquirer firms under a given

sector, alongwith the statistical significance of t test values for such change upto

10% level. Secondly, we also examine the paired samples coefficient of

correlations for pre merger and post merger financial ratios along with its

statistical significance upto 10% level. The coefficients of paired samples

correlations are useful in drawing conclusions on persistence of observed

increase or decline in given ratio across the sample firms. A significant paired

samples coefficient of correlation indicates that the mean difference in given ratio

during post merger period is observed across all or majority of acquirer firms in

given sample.

5.1 Long Term Pre-Merger and Post-Merger Operating and Financial Performance of Acquirers in Manufacturing Sector

Firstly, we undertake aggregate analysis of manufacturing sector in India

by analysing financial ratios of 50 sample acquirers. The results of paired t-test

for various pre-merger and post-merger financial ratios for these acquirers in

manufacturing sector are presented in Table 5.1 and Table 5.2.

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IMPACT OF MERGERS AND ACQUISITIONS ON LONG TERM

126 OPERATING AND FINANCIAL PERFORMANCE OF ACQUIRERS

Table 5.1: Mean Pre-Merger and Post-Merger Financial Ratios of Acquirers in Manufacturing Sector

Ratio Pre-Merger Average

Post-Merger Average

Mean Difference

t- statistics

p-value

Profitability PBDIT Margin (%) 15.87 15.32 -0.55 0.248 0.805 PBIT Margin (%) 12.51 11.62 -0.89 0.374 0.710 Net Profit Margin (%)

5.78 5.45 -0.33 0.146 0.885

ROCE (%) 16.90 16.61 -0.29 0.151 0.880 RONW (%) 13.70 13.10 -0.60 0.282 0.779 Solvency Debt Equity 1.25 1.78 0.53 0.984 0.330 Current Ratio 1.94 1.77 -0.17 1.123 0.267 Efficiency/Asset Utilization Fixed Asset Turnover

3.27 2.32 -0.95 1.874 0.067*

Inventory Turnover

7.60 7.70 0.10 0.156 0.877

Operating Return on Assets (%)

0.19 0.20 0.01 0.329 0.743

Note: * represents significance at 10% level.

Table 5.2: Paired Samples Correlations for Pre and Post Merger Financial Ratios of Acquirers in Manufacturing Sector

I Ratio Correlation Sig. Pair 1

Pair 2 Pair 3

Pair 4 Pair 5 Pair 6 Pair 7 Pair 8

Pair 9

Pair 10

PBDIT Margin (Pre and Post Merger) PBIT Margin (Pre and Post Merger) Net Profit Margin (Pre and Post Merger) ROCE (Pre and Post Merger) RONW (Pre and Post Merger) Debt Equity (Pre and Post Merger) Current Ratio (Pre and Post Merger) Fixed Asset Turnover (Pre and Post Merger) Inventory Turnover (Pre and Post Merger) Operating Return on Assets (Pre and Post Merger)

0.247 0.126

0.030

0.528 0.376 0.309 0.714

0.353

0.554

0.584

0.084* 0.383

0.835

0.000*** 0.008*** 0.029** 0.000***

0.012**

0.000***

0.000***

Note: * **, *** represents significance at 10%, 5% and 1% respectively

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The following important observations can be made from Table 5.1 and

Table 5.2 above:

(a) Profitability analysis:

(i) Aggregate analysis of Manufacturing Sector given in Table 5.1

reveals that all the profitability ratios of acquirers have declined

during the post merger period. The average PBDIT margin has

declined by -0.55% (from 15.87% to 15.32%). Similarly, PBIT

margin has declined by -0.89% (from 12.51% to 11.62%). The

mean net profit margin of acquirers, however, has seen very

marginal decrease (-0.33%) in post-merger period (from 5.78% to

5.45%).

(ii) Return on capital employed (ROCE) and return on networth

(RONW), the two important parameters of profitability from

shareholders point of view have also seen a decline of -0.29% and

-0.60% during post merger period.

(iii) None of the declines observed in profitability ratios are found to be

statistically significant as indicated by low t-values for mean

differences. However, the absence of any positive change in the

post merger period clearly indicates that M&As have not

contributed in improving the profitability of acquiring firms in India

during the study period. The paired sample coefficient of

correlation for ROCE and RONW are low but significant at 1%

indicating decline in these ratios across large number of firms in

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the sample. The results are consistent with Beena (2004) who did

not find any evidence of improvement in financial performance of

corporate firms in India during the post merger period.

(b) Liquidity and Solvency

(i) The mean current ratio of sample acquirer firms in manufacturing

sector has marginally declined by -0.17 times from 1.94:1 to 1.77:1

during post merger period though this decline is not statistically

significant (t-statistic 1.123 with p-value of 0.267). The Pearson

paired sample correlation coefficient is however high (0.71) and

significant at 1% level for the current ratio indicating consistency in

fall in current ratio post-merger with respect to large number of

acquiring firms.

(ii) On the other hand the mean debt-equity ratio of acquirer firms in

manufacturing sector has increased marginally (by 0.53) from 1.25

to 1.78 post-merger. However, the increase is not statistically

significant (t-statistics 0.984 with p-value of 0.330).

(iii) Thus, for the acquirers in the manufacturing sector, the positive

ratio, i.e. current ratio has declined during post merger period while

the ratio that can have negative effect on the firm, i.e. debt — equity

ratio has actually increased. Although the decline is not statistically

significant, the direction of the effect of M&A on these ratios is not

encouraging.

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(c) Operational Efficiency and Asset Utilization

(I)

The mean fixed asset turnover ratio for acquirers in manufacturing

sector has declined from 3.27 times to 2.32 times and the decline

is found to be statistically significant at 10% level (t-statistics of

1.874). The decline in this ratio indicates of low efficiency and

repudiates the argument of synergic benefits on account of

mergers and acquisitions.

(ii) The mean inventory turnover ratio has improved marginally from

7.60 times to 7/0. It is, however, not statistically significant

(significance value of 0.877).

(iii) The mean operating return on assets has marginally increased

from 0.19% to 0.20% and this increase is found to be statistically

insignificant (t-statistics of 0.329). The high coefficient of paired

sample correlation for this ratio (0.58) which is significant at 1%

level however indicates that increase is across large number of the

sample acquirer firms.

We further analysed yearwise post-merger operating and financial

performance of acquirers in manufacturing sector vis-a-vis the pre-merger

average of various financial ratios. The initial years of post-merger period may

pose integration issues to the acquirers and thus affect the average performance

during the three year post-merger period. Yearwise analysis would give a fair

evaluation of post-merger performance by identifying the year that might have

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130

negated the positive effect of merger during later part of post-merger period.

Such analysis is undertaken with the same methodology of paired sample t-test.

However, here the pre-merger mean performance parameters are compared

with post-merger performance parameters for each of the year in post-merger

period. The results of this analysis are presented in Table 5.3 below.

Table 5.3: Yearwise Analysis of Impact of M&A on Operating and Financial Performance of Acquirers in Manufacturing Sector


1-Year Post- Merger Mean

Difference


Difference


Difference Profitability

PBDIT Margin (%) 15.87 -2.10 0.33 -0.84 (0.975) (-0.124) (0.366)

PBIT Margin (%) 12.51 -2.43 -0.04 -1.13 (1.034) (0.014) (0.465)

Net Profit Margin 5.78 -2.00 0.62 -0.26 (%) (0.892) (-0.240) (0.118) ROCE (%) 16.90 -0.24 -1.50 -0.30

(0.124) (0.875) (0.135) RONW (%) 13.70 -2.24 -70.16 -1.08

(0.824) (1.015) (0.510) Solvency

Debt Equity 1.25 0.40 0.64 0.11 (-0.783) (-1.111) (-0.535)

Current Ratio 1.94 -0.08 -0.22 -0.24 (0.508) (1.306) (1.436)

Efficiency/Asset Utilization Fixed Asset 3.27 -0.93 -1.05 -0.91 Turnover (1.716) (2.067) (1.827) Inventory 7.60 -0.10 -0.03 0.28 Turnover (0.151) (0.050) (-0.363)

ote: (i) *, **, *** represents significance at 10%, 5% and 1% level respectively. (ii) Figures in parenthesis are t-statistics

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Following observations can be made from Table 5.3 above:

(a) Profitability

(i) The mean PBIDT margin has shown a marginal increase of 0.33%

in year 2 following merger in comparison to pre-merger average of

15.87%. As can be seen from the above table, the decline in

PBIDT margin is of higher magnitude (2.10%) in year 1 following

the merger and has subsequently reduced to a decline of 0.84% in

the third year following merger. Thus in 2 out of 3 years of post-

merger period, the PBIDT margin has registered a decline. Though

in none of the years the decline is statistically significant, the

direction of movement in this profitability ratio is not favourable

towards the acquirers in manufacturing sector.

(ii) Similar observations can be made with respect to PBIT margin

where mean difference in the ratio in comparison to pre-merger

average of 12.51%, has decline by 2.43% in first year, 0.04% in

second year and - 1.13% in the third year following merger. Here

again it can be observed that the decline is of higher magnitude in

first year following the merger transaction. All the yearwise declines

are however not statistically significant. The net profit margin has

also shown a higher decline of 2.00% in the first year following the

merger and the third year has registered a decline of 0.26% in

comparison to pre-merger average.

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(iii) The important profitability parameters of ROCE and RONW have

also shown a consistent decline during each of the 3 years,

although, here also the decline in none of the 3 years is found to be

statistically significant.


(i) It can be observed from Table 5.3 that the long term solvency

parameter of Debt-Equity ratio has shown consistent increase

during each of the 3 years of post-merger period. On the other

hand the short term solvency parameter of current ratio has shown

consistent decline over the 3 year period. In fact it can be observed

that the decline in current ratio was just 0.08 in first year following

the merger which rose to 0.22 in second year and subsequently to

0.24 in the third year.

(c) Operational Efficiency ad Asset Utilization

(i) An important observation that can be made from Table 5.3 above

is that the an important parameter of fixed asset turnover ratio has

declined by 0.93 in the first year which is statistically significant at

10% level. In the subsequent year again the ratio shows a decline

of 1.05 which again is statistically significant at 5% level and finally

in the third year the ratio registered a decline of 0.91 with statistical

significance at 10% level. The statistically significant decline in this

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ratio indeed show that increased quantum of assets acquired

through merger transactions have not been of significant benefit to

the acquiring firm thus questioning the synergy benefit argument of

merger transactions.

(ii) The inventory turnover, however is found to register an increase of

0.28 in the third year after consistent decline for first two years

following merger; although, neither the increase nor the decline is

found to be significantly different from zero.

5.1.1 Long Term Pre-Merger and Post-Merger Operating and Financial Performance of Acquirers in Chemical Sector

Mergers and acquisitions in Chemical sector have focused on vertical

integrations in order to obtain the advantage of synergic benefits. The

companies have also focused on acquisition of established firms in the industry

with diverse portfolios to counter competition and earn revenues. The mergers

and acquisitions in this industry should thus ideally provide the benefits of

improvement in profitability due to cost reduction and control and also improve

asset utilization rates and provide economies of scale. We analyse the financial

ratios of 15 sample acquirer firms in the chemical industry, the results of which

are presented in Table 5.4 and Table 5.5 below.

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I Ratio Correlation Sig.

Pair 1 PBDIT Margin (Pre and Post Merger) Pair 2 PBIT Margin (Pre and Post Merger) Pair 3 Net Profit Margin (Pre and Post

Merger) Pair 4 ROCE (Pre and Post Merger) Pair 5 RONW (Pre and Post Merger) Pair 6 Debt Equity (Pre and Post Merger) Pair 7 Current Ratio (Pre and Post Merger) Pair 8 Fixed Asset Turnover (Pre and Post

Merger) Pair 9

Inventory Turnover (Pre and Post Merger)

Pair Operating Return on Assets (Pre and 10 Post Merger)

-0.151 -0.223

-0.065

0.736 0.633 0.555 0.988

0.213

0.065

0.777

0.591 0.424

0.817

0.002*** 0.011** 0.032** 0.000***

0.447

0.819

0.001***



Table 5.4: Mean Pre-Merger and Post-Merger Financial Ratios of Acquirers in Chemical Sector


Post-Merger Average

Mean Difference

t- statistics

p-value

Profitability PBDIT Margin (%) 11.84 11.63 -0.21 -0.080 0.937 PBIT Margin (%) 8.68 8.72 0.04 0.013 0.989 Net Profit Margin (%)

2.95 3.39 0.42 0.182 0.858

ROCE (%) 17.23 15.03 -2.20 -0.841 0.415 RONW (%) 11.98 9.55 -2.43 -0.830 0.421 Solvency Debt Equity 0.96 0.93 -0.03 -0.150 0.883 Current Ratio 2.19 2.04 -0.15 -0.980 0.344 Efficiency/Asset Utilization Fixed Asset Turnover 4.60 2.36 -2.23 -1.476 0.162 Inventory Turnover

7.90 7.72 -0.18 -0.129 0.899 Operating Return on Assets (%) 0.22 0.20 -0.02 -0.892 0.388 Note: * **, *** represents significance at 10%, 5% and 1% level respectively.

Table 5.5: Paired Samples Correlations for Pre and Post Merger Financial Ratios of Acquirers in Chemical Sector

Note: *, ** ** * represents significance at 10%, 5% and 1% respectively

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135

Table 5.4 and Table 5.5 above provides the following insights into

implications of M&A on acquirers in chemical sector:

(a) Profitability

(i) The results of analysis of financial ratios of acquirers in chemical

sector presented in Table 5.4 above reveals that some of the

profitability ratios of acquirers have increased marginally during the

post merger period. Specifically, the average PBIT margin of

acquirers has increased by 0.04% (from 8.68% to 8.72%).

Similarly, the mean net profit margin of acquirers has seen

marginal increase of 0.44% in post-merger period (from 2.95% to

3.39%). This increase, however, is not statistically significant as

seen from very low value of t-statistics (0.013 and 0.182 for PBIT

margin and Net Profit margin respectively). The PBIDT margin has

seen a statistically insignificant decline of 0.21% during post

merger period from 11.84% to 11.63%.

(ii) Return on capital employed (ROCE) and return on networth

(RONW), have shown a mean decline of higher magnitude (-2.20%

and -2.43%) during post merger period although this decline is not

statistically significant. The paired sample coefficient of correlation

is found to be statistically significant for both ROCE and RONW at

1% and 5% level which is indicative of consistency in decline

across the sample firms.

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(iii) Here again we did not find any statistically significant positive

change in the post merger period which indicates that M&As have

not contributed in improving the profitability of acquiring firms in

chemical sector in India during the study period.


(i) The mean current ratio of sample acquirer firms in chemical sector

has marginally declined by 0.15 times from 2.19:1 to 2.04:1 during

post merger period though this decline is not statistically significant

(t-statistic 0.980 with p-value of 0.344). The Pearson paired sample

correlation coefficient is however very high (0.99) and significant at

1% level for the current ratio indicating consistency in fall in current

ratio during post-merger period across the sample firms.

(ii) The leverage represented by way of mean debt-equity ratio of

acquirer firms in chemical sector seems to have remained almost

unchanged during post-merger period indicated by extremely

marginal decline of by 0.03 from 0.96 to 0.93 post-merger. The

decline is also not statistically significant (t-statistics 0.150 with p-

value of 0.883).


(I )

The mean fixed asset turnover ratio for acquirers in chemical

sector has declined from 4.60 times to 2.36 times representing real

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137

decline of 48.70% although statistically it is not found to be

significantly different from zero (t-statistics of 1.476). The decline in

this ratio indicates of low efficiency and repudiates the argument of

synergic benefits on account of mergers and acquisitions.

(ii) The mean inventory turnover ratio has declined from 7.90 times to

7.72. It is, however, not statistically significant (significance value of

0.129).

(iii) The mean operating return on assets has marginally declined from

pre-merger average of 0.22% to 0.20% with no statistical

significance. The Pearson coefficient of paired sample correlation

for this ratio is however high at 0.78 and is also statistically

significant at 1% level.

We further undertake year on year analysis of the above financial ratios

for acquirers in chemical industry to determine significant variations, if any,

during each of the year of post-merger period. The results of yearwise analysis

of ratios are presented in Table 5.6 below.

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OPERATING AND FINANCIAL PERFORMANCE OF ACQUIRERS IMPACT OF MERGERS AND ACQUISITIONS ON LONG TERM

138

Table 5.6: Yearwise Analysis of Impact of M&A on Operating and Financial Performance of Acquirers in Chemical Sector



Difference


Difference



PBDIT Margin (%) 11.84 -1.84 1.27 -1.60 (-0.649) (0.310) (-1.110)

PBIT Margin (%) 8.68 -0.71 1.55 -1.27 (-0.595) (3.66) (-0.920)

Net Profit Margin 2.95 -1.39 1.98 0.32 (%) (-0.449) (0.590) (0.237) ROCE (%) 17.23 -1.93 -3.33 -3.19

(-0.677) (-1.162) (-1.547) RONW (%) 11.98 -0.68 -4.67 -3.65

(-0.228) (-1.151) (-1.386) Solvency

Debt Equity 0.96 -0.11 0.07 0.03 (-0.844) (0.277) (0.170)

Current Ratio 2.19 0.10 -0.29 -0.41 (0.996) (-1.381) (-1.364)

Efficiency/Asset Utilization Fixed Asset -2.35 -2.32 • -2.09 Turnover 4.60 (-1.449) (-1.525) (-1.489) Inventory 7.90 -0.98 0.08 -0.26 Turnover (0.724) (0.048) (-0.175)

ote: (i) *, **, *** represents significance at 10%, 5% and 1% level respectively. (ii) Figures in parenthesis are t-statistics

Following important observations can be made from Table 5.6 above:

(a) Profitability

(i )

The acquirers in chemicals sector observed a high real but

statistically insignificant mean decline of 1.84% in PBDIT margin in

the first year following merger. In the second year following merger,

the acquirer did find a positive change in this ratio as depicted by

1.27% positive mean difference for post merger period. However,

this further declined to mean difference of negative 1.60% in

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139

comparison to pre-merger average but again without any statistical

significance. Similar behaviour is observed in case of other

profitability ratios such as PBIT margin (mean difference of 1.55%)

and net profit margin (mean difference of 1.98%).

(ii) Importantly, it can be observed that the real mean difference

between crucial ratios of ROCE and RONW have shown consistent

decline of high magnitude. Mean difference in ROCE has

increased from -1.93% in first year following merger to -3.33% in

the second year representing an increase of 72.54% and

subsequently to 3.19% in the third year. Similarly, the mean decline

in RONW has been mere -0.68% in year 1, which increased to -

4.67% in year 2 and finally 3.65% in year 3 post merger.


(I) It can be observed from Table 5.6 that the long term solvency

measure of Debt — Equity ratio of acquirers in chemicals sector has

increased, though insignificantly, from pre and post merger mean

difference of -0.11 in the first year following merger to 0.07 in the

second year and 0.03 in the third year following merger.

(ii) The mean difference of pre and post merger short term liquidity

measure of current ratio, on the other hand, has declined to 0.29 in

the second and 0.41 in the third year after positive response in the

first year with an increase of 0.10.

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(iii) Here again, neither the increase nor the decrease in the ratios are

found to be statistically different from zero, thus providing no clear

evidence of improvement following merger. Based on the real

increase and decrease in the above ratios, it can be concluded that

the measures of solvency and liquidity have improved only in the

first year following merger.


(i) The mean fixed asset turnover ratio indicates a mean difference of

2.34 in comparison to pre-merger average ratio in the first year

following merger, 2.32 in year 2 and 2.09 in ye6r 3 following

merger.

(ii) The mean difference for inventory turnover has shown a marginal

and statistically insignificant increase of 0.08 in the second year

following merger. However, barring this increase, for the remaining

two years, the results for these ratios are negative growth.

5.1.2 Long Term Pre-Merger and Post-Merger Operating and Financial Performance of Acquirers in Textile Sector

Mergers and acquisitions in textile sector again have aimed at

consolidations to counter competition. One important objective has thus been to

ensure survival of units by way of consolidations. In such cases, financial gains

are of utmost importance for acquirers, particularly in the light of the fact that the

target companies may not be financially strong. The existence of outdated fixed

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assets was one common feature among companies in textile sector with results

of low profitability. The implications on acquirers in such case could be of less or

no gains from acquisitions.

The results of statistical tests performed on financial ratios of acquirers in

textile sector are presented in Table 5.7 and Table 5.8 below.

Table 5.7: Mean Pre-Merger and Post-Merger Financial Ratios of Acquirers in Textile Sector


Post-Merger Average

Mean Difference

t- statistics

p-value

Profitability PBDIT Margin (%) 23.39 15.09 -8.30 -1.01 0.337 PBIT Margin (%) 18.99 9.13 -9.85 -1.07 0.313 Net Profit Margin (%)

11.63 2.07 -9.57 -1.13 0.289

ROCE (%) 11.73 9.26 -2.46 -2.55 0.031** RONW (%) 12.69 6.78 -5.91 -1.91 0.088* Solvency Debt Equity 2.25 1.62 -0.63 -0.76 0.466 Current Ratio 1.80 1.57 -0.23 -0.65 0.532 Efficiency/Asset Utilization Fixed Asset Turnover

2.79 1.64 -1.15 -1.37 0.204

Inventory Turnover

6.25 5.47 -0.78 -0.57 0.585

Operating Return on Assets (%) 0.15

0.14 -0.01 -0.65 0.533

Note: *, **, *** represents significance at 10%, 5% and 1% respectively

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Table 5.8: Paired Samples Correlations for Pre and Post Merger Financial Ratios of Acquirers in Textile Sector

Ratio Correlation Sig. Pair 1 PBDIT Margin (Pre and Post Merger) Pair 2 PBIT Margin (Pre and Post Merger) Pair 3 Net Profit Margin (Pre and Post

Merger) Pair 4 ROCE (Pre and Post Merger) Pair 5 RONW (Pre and Post Merger) Pair 6 Debt Equity (Pre and Post Merger) Pair 7 Current Ratio (Pre and Post Merger) Pair 8 Fixed Asset Turnover (Pre and Post

Merger) Pair 9

Inventory Turnover (Pre and Post Merger)


-0.107 -0.526

-0.648

0.839 0.121 0.607 -0.391

0.679

0.157

0.434

0.768 0.119

0.043**

0.002*** 0.738 0.062* 0.263

0.031 **

0.664

0.210

Note: *, ** *** represents significance at 10%, 5% and 1% respectively

The following observations can be made from Table 5.7 and Table 5.8

above:

(a) Profitability

(i)

The results of analysis of financial ratios of acquirers in textile

sector reveals that all the profitability ratios of acquirers have

declined during the post merger period. The average PBIDT

margin of acquirers has declined from 23.39% to 15.09%,

representing a real decline of 35.49%, although not statistically

significant. Similarly, the mean PBIT has reduced from 18.99% to

9.14%, a real decline of about 50% again without any statistical

significance (t-statistics 1.07). The net profit margin of acquirers

has seen substantial magnitude of real decline (82.20%) from

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11.63% to just 2.07%. The decline is however, statistically

insignificant. Out of all the sectors selected for the study, the real

decline observed in profitability ratios of acquirers is highest in

textile sector.

(ii) Another interesting thing observed in respect of acquirers in textile

sector are the statistically significant decline in Return on capital

employed (ROCE) and return on networth (RONW), the two

important ratios in profitability analysis. The mean ROCE has

decreased from 11.73% to 9.26% with decline being statistically

significant at 5% level. The mean RONW ratio has also declined

from 12.69% to 6.78% during post-merger period, a decline of

46.57% which is statistically significant at 10%. A high magnitude

statistically significant decline in these important ratios indicates

that textile sector is the worst performer in terms of post merger

profitability parameters.

(iii) The Pearson paired sample coefficient of correlation fro net profit

margin and ROCE are found to be significant at 5% and 1%

respectively confirming consistency in fall in these ratios across

larger number of acquirers in textile sector.


(i )

The mean current ratio of sample acquirer firms in textile sector

has marginally declined from 1.80:1 to 1.57:1 during post merger

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period though this decline is not statistically significant (t-statistic

0.65 with p-value of 0.532).


acquirer firms in textile sector however, has declined during post-

merger period from 2.26 to 1.62. The decline is though is not

statistically significant (t-statistics 0.76 with p-value of 0.466).


(i) The mean fixed asset turnover ratio for acquirers in textile sector

has declined from 2.79 times to 1.64 times representing real

decline of 70.12% although statistically it is not found to be

significantly different from zero (t-statistics of 1.37). The Pearson

coefficient of correlation is found to be significant at 5% level for

fixed asset turnover ratio indicating decline across several firms in

the textile sector. The evidence of no improvement in this ratio

therefore indicates that the objectives of mergers and acquisition in

textile sector to make the best of acquired assets are not

accomplished. Existence of outdated assets among target firms

may be one reason for low profitability and operational efficiency in

this sector.

(ii) The mean inventory turnover ratio has declined from 6.25 times to

5.47. It is, however, not statistically significant (significance value of

0.57).

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(iii) The mean operating return on assets has marginally declined from

pre-merger average of 0.15% to 0.14% with no statistical

significance.

The yearwise analysis of movements in mean differences of various

financial ratios of acquirers in textile sector are disclosed in Table 5.9.

Table 5.9: Yearwise Analysis of Impact of M&A on Operating and Financial Performance of Acquirers in Textile Sector



Difference


Difference



PBDIT Margin (%) 23.39 -6.95 -8.11 -10.70 (-0.825) (-0.970) (-1.372)

PBIT Margin (%) 18.99 -8.64 -9.63 -12.24 (-0.892) (-1.020) (-1.437)

Net Profit Margin 11.63 -8.09 -9.58 -12.25 (%) (-0.876) (-1.089) (-1.611) ROCE (%) 11.73 -1.09 -3.08*** -3.90**

(-0.900) (-2.770) (-2.129) RONW (%) 12.69 -6.52 -5.15 -7.70**

(-1.102) (-1.629) (-2.386) Solvency

Debt Equity 2.25 -0.86 -0.56 -0.29 (-0.993) (-0.697) (-0.403)

Current Ratio 1.80 -0.23 -0.24 -0.24 (-0.640) (-0.664) (-0.699)

Efficiency/Asset Utilization Fixed Asset 2.79 -0.94 -1.24 -1.36 Turnover (-1.144) (-1.420) (-1.587) Inventory 6.25 -0.79 -0.82 -0.69 Turnover (-0.609) (-0.563) (-0.492) Note: (i) *, ** *** represents significance at 10%, 5% and 1% level respectively.

(ii) Figures in parenthesis are t-statistics

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Following are the analytical observations from Table 5.9:

(a) Profitability

(i) Mean PBIDT margin has declined on consistent basis during the

three year post merger period. The mean difference was -6.95% in

the first year following merger which increased to -8.12% in the

second year and subsequently more to -10.70% in the third year

following merger. Similarly, the decline in the mean PBITM margin

has increased from -8.64% in the first year to -12.24% in the

third year following merger. The decline, however, is not

statistically significant in any of the year.

(ii) On the other hand, we observe that the mean difference in pre and

post merger ROCE of acquirers in this sector has increased from

statistically insignificant -1.09% in the first year following merger to

-3.08% in the second year following merger which is also

statistically significant at 1% level. It has further increased on the

negative side to -3.89% in the third year following the mergers,

which is also statistically significant at 5% level. Another important

ratio, i.e. RONW has also seen an increase in mean difference on

negative side from statistically insignificant -6.52% in the first year

to statistically significant (at 5% level) -7.70% in the third year

following mergers. Thus, there is no contrary variations observed in

the direction of changes in profitability ratios during post merger

period. The have consistently decline and in some cases with

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statistical significance. The observations are thus not favourable for

acquirers in textile sector with respect to achievements of any

operational synergies from mergers and acquisitions.


(i) The mean difference of leverage ratio of debt — equity is negative

on consistent basis in all the three years following merger, though

in none of the year the effect is statistically significant. The mean

difference of pre and post merger Debt-equity ratio is changed from

-0.86 in the first year following merger to -0.56 and -0.29 in the

second and third year respectively. It may be observed that the

quantum of mean difference has decline over the years, thus

indicating that the advantage of low debt-equity ratio benefits

during post merger period is diminishing over the years.

(ii) The mean difference in the pre and post merger current ratio on

the other hand has remained almost unchanged over the 3 year

period of post merger at around 0.24 each year. Here, again the

mean difference observed is not statistically significant.


(I )

The quantum of real change observed in fixed asset turnover ratio

shows a continuous increase in negative effect of merger. The

mean difference in this ratio has increased from -0.94 in the first

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year following merger to -1.24 in the second year and -1.36 in

the third year following merger. None of these increases is found to

be statistically significant. The general trend of mean difference in

this ratio, however, indicates that the acquirers have increasingly

found it difficult to put the fixed assets to profitable use.

(ii) The mean difference in inventory turnover ratio, however, has

declined from -0.79 in the first year to -0.69 in the second year

following merger.

5.1.3 Long Term Pre-Merger and Post-Merger Operating and Financial Performance of Acquirers in Drugs and Pharmaceuticals Sector

The M&As in drugs and pharmaceutical sector have focussed on vertical

integration and exploiting complimentary skill sets of acquirers and target

companies. There has been a lot of focus on supply chain integration. This

should essentially translate into healthy financial variables. The results of paired

t-test on financial ratios of acquirers in drugs and pharmaceuticals sector are

presented in Table 5.10 and Table 5.11.

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Table 5.10: Mean Pre-Merger and Post-Merger Financial Ratios of Acquirers in Drugs and Pharmaceuticals Sector


Post-Merger Average

Mean Difference

t- statistics

p-value


11.05 11.82 0.77 0.671 0.519

ROCE (%) 24.93 23.65 -1.28 -0.602 0.562 RONW (%) 21.39 21.71 0.32 0.095 0.926 Solvency Debt Equity 0.57 0.57 0.00 0.068 0.948 Current Ratio 2.60 1.99 -0.61 -2.199 0.055** Efficiency/Asset Utilization Fixed Asset Turnover

3.31 2.75 -0.56 -1.639 0.136

Inventory Turnover

5.91 6.27 0.36 0.449 0.664

Operating Return on Assets (%)

0.25 0.26 0.01 0.099 0.923

Note: *, ** ' represents significance at 10%, 5% and 1% level respectively.

Table 5.11: Paired Samples Correlations for Pre and Post Merger Financial Ratios of Acquirers in Drugs and Pharmaceuticals Sector

I Ratio Correlation Sig. Pair 1 Pair 2 Pair 3

Pair 4 Pair 5 Pair 6 Pair 7 Pair 8

Pair 9

Pair 10

PBDIT Margin (Pre and Post Merger) PBIT Margin (Pre and Post Merger) Net Profit Margin (Pre and Post Merger) ROCE (Pre and Post Merger) RONW (Pre and Post Merger) Debt Equity (Pre and Post Merger) Current Ratio (Pre and Post Merger) Fixed Asset Turnover (Pre and Post Merger) Inventory Turnover (Pre and Post Merger) Operating Return on Assets (Pre and Post Merger)

0.575 0.623

0.573

0.790 0.057 0.826 0.612

0.854

0.144

0.808

0.082* 0.055*

0.084*

0.007*** 0.876

0.003*** 0.060*

0.002***

0.691

0.005***

Note: *, **, *** represents significance at 10%, 5% and 1% respectively

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Following are the analytical observations that can be made from Table

5.10 and Table 5.11:

(a) Profitability

(i) The results of analysis of financial ratios of acquirers in drugs and

pharmaceuticals sector provides a mixed evidence of impact of

mergers and acquisitions on the profitability of acquirers. The

average PBIDT margin of acquirers has marginally declined from

21.48% to 21.16%, which is also not statistically significant.

Similarly, the mean PBIT has also marginally reduced from 18.69%

to 18.25%, again without any statistical significance (t-statistics

0.426). The mean net profit margin, however, has shown a real

increase of 0.77% from pre merger average of 11.05% to post

merger average of 11.82%. The increase is however, statistically

insignificant.

(ii) The mean ROCE has decreased from pre merger average of

24.93% to 23.65% in post merger period, with decline being

statistically insignificant. The mean RONW ratio on the other hand

has increased from pre-merger average of 21.39% to 23.65%

during post-merger period, an increase of 10.57% which is

however, not statistically significant. The Pearson paired sample

coefficient of correlation for ROCE is 0.79 which is significant at 1%

level implying that the decrease in ROCE is consistent across

larger firms in the sector. On the other hand increase in mean

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RONW observed is not so consistent across acquirer firms as is

indicated by a very weak paired sample coefficient of correlation

which is statistically insignificant


(i) The mean current ratio of sample acquirer firms in drugs and

pharmaceuticals sector has declined from pre merger average of

2.60:1 to 1.99:1 during post merger period. This mean decline of

0.61 is also found to be statistically significant at 10% level. The

Pearson paired sample coefficient of correlation for this ratio

(0.612) is also significant at 10% level. Thus the decline is more

widespread across the acquirer firms in this sector.


acquirer firms in the sector however, has virtually remained

unchanged during post-merger period. The decline of meagre 0.01

is observed for this ratio.


(i)

The mean fixed asset turnover ratio for acquirers in drugs and

pharmaceuticals sector has declined from pre merger average of

3.31 times to average of 2.75 times during post merger period

representing decline in real terms of 20.36% although statistically it

is not found to be significantly different from zero (t-statistics of

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1.64). The Pearson coefficient of correlation is however found to be

significant at 1% level for fixed asset turnover ratio indicating

decline across several firms in the sector.

(ii) The mean inventory turnover ratio on the other hand has increased

from pre merger average of 5.91 times to 6.27 during post merger

period. It is, however, not statistically significant (a high

significance value of 0.664). Besides the paired s ample coefficient

of correlation is very weak and also not statistically significant

indicating that the increase is not observed across majority of the

sample acquirer firms in the sector.

(iii) The mean operating return on assets has remained almost

unchanged during the post merger period.

Thus, there is very weak evidence of some improvement in select

parameters of profitability among acquirers in drugs and pharmaceuticals sector.

A further analysis of year on year changes in mean performance parameters

during post merger period is given in Table 5.12.

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Table 5.12: Yearwise Analysis of Impact of M&A on Operating and Financial Performance of Acquirers in Drugs and Pharmaceuticals Sector



Difference


Difference



PBDIT Margin (%) 21.48 -2.10 -0.69 1.53 (-1.192) (-0.493) (0.927)

PBIT Margin (%) 18.69 -2.19 -0.68 1.56 (-1.414) (-0.621) (1.173)

Net Profit Margin 11.05 -0.79 -0.02 3.28** (%) (-0.518) (-0.018) (2.163) ROCE (%) 24.93 -3.02*** -2.15 1.16

(-2.581) (-0.758) (0.350) RONW (%) 21.39 -1.71 -0.82 3.34

(-0.622) (-0.218) (0.716) Solvency

Debt Equity 0.57 0.03 0.04 -0.12 (0.260) (0.430) (-1.698)

Current Ratio 2.60 -0.55* -0.69*** 0.45 (-1.750) (-2.708) (1.543)

Efficiency/Asset Utilization Fixed Asset 3.31 -0.59* -0.59 -0.44 Turnover (-1.834) (-1.635) (-1.122) Inventory 5.91 -0.32 0.64 0.66 Turnover (-0.518) (0.670) (0.696) Note: (i) *, **, *** represents significance at 10%, 5% and 1% level respectively.

(ii) Figures in parenthesis are t-statistics

Following are the important observations from Table 5.12:

(a) Profitability

(i)

The analysis of yearwise mean difference in pre and post merger

profitability ratios indicate a distinct pattern. All the profitability

ratios have shown a higher magnitude of real mean difference in

the first year following merger, which is also negative. This

negative effect has subsequently declined in the following years

and turned positive in the third year following merger. The mean

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154

PBIDT margin has declined with pre and post merger mean

difference of -2.10% in first year following merger, which reduced

to 0.70% in second year and subsequently turned positive to

1.53% in the third year. Similarly, mean PBIT margin has declined

with pre and post merger mean difference of -2.19% in first year

following merger, which reduced to 0.68% in second year and

subsequently turned positive to 1.56% in the third year. The mean

net profit margin has declined with pre and post merger mean

difference of -0.79% in first year following merger, which

reduced to 0.02% in second year and subsequently turned positive

to 3.28% in the third year. In fact, this positive change in mean

difference of net profit margin in the third year is statistically

significant at 5%. The behaviour observed in average pre and post

merger profitability ratios in Table 5.10 is thus explained by year on

year changes in the same ratios. In the first year following merger,

the operating and gross profitability has reduced with higher

magnitude while the second and third year has seen improvement

which has translated in high magnitude and statistically significant

increase in mean net profit margin in the third year following

merger. The first years impact has resulted in overall decline in

PBIDT and PBIT margins as given in Table 5.10.

(ii) The negative effect of merger observed in mean ROCE has also

reduced over the years during post merger period. The first year

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following merger has seen a high negative effect with mean

difference of pre and post merger ROCE being -3.02% which is

also statistically significant at 1% level. This negative effect

however, reduced to -2.15% in the second year. In the third year

there is positive mean difference observed in the ratio of 1.16%

although not statistically significant. Similarly, the real mean

difference in pre and post merger RONW ratio is -1.71% in the first

year of merger which improved to 3.34% in the third year of

merger. None of these improvements observed are statistically

significant, and therefore provides extremely weak evidence of

comparative improvement in profitability of acquirers in drugs and

pharmaceutical sector over the years during post merger period.


(i) The mean difference of leverage ratio of debt — equity is 0.03 and

0.04 in the first and second year of merger respectively implying

increase in the ratio during these two years of post merger period.

In the third year however, the mean difference in the ratio declined

to 0.12, though not statistically significant.

(ii) The mean difference in the pre and post merger current ratio on

the other hand has remained negative through out the three year

period of post merger. In fact the decline in post merger current

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156

ratio during second year of merger (0.69) is also statistically

significant at 1%.


(i) The real change observed in fixed asset turnover ratio shows a

continuous negative effect of merger. The mean difference in this

ratio has been -0.59 in the first year following merger which is

significant at 10% level. In the third year it has marginally declined

to -0.45% but not statistically significant.

(ii) The mean difference in inventory turnover ratio, however, has

shown some improvement in real term though not statistically. In

the first year of merger the mean inventory turnover ratio declined

by a difference of 0.32% and subsequently improved with positive

mean difference of 0.64% in second year and 0.66% in the third

year. The difference between pre merger average ratio and post

merger average ratio has been thus marginal during these two

years but positive.

The results for drugs and pharmaceuticals sector thus provide a weak

evidence of improved operating and financial performance over the years during

post merger period.

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5.1.4 Long Term Pre-Merger and Post-Merger Operating and Financial Performance of Acquirers in Food and Beverage Sector

Food and beverage sector has seen mergers and acquisitions to establish

bigger Organizations to counter competition from foreign food chains and

companies that entered India post economic reforms. Creating financially strong

enterprises has thus been an important objective for consolidations in this sector.

We study the financial health of acquirers in food and beverage sector during pre

and post merger. The results of paired t-test on financial ratios of acquirers in

this sector are presented in Table 5.13 and Table 5.14.

Table 5.13: Mean Pre-Merger and Post-Merger Financial Ratios of Acquirers in Food and Beverage Sector


Post-Merger Average

Mean Difference

t- statistics

p-value


-0.54 0.46 1.00 0.230 0.822

ROCE (%) 14.51 10.34 -4.17 -2.048 0.068** RONW (%) 9.40 7.59 -1.81 -0.358 .0.729 Solvency Debt Equity 1.36 4.68 3.32 1.515 0.161 Current Ratio 1.29 1.05 -0.25 -3.271 0.008*** Efficiency/Asset Utilization Fixed Asset Turnover

2.48 2.59 0.11 0.230 0.823

Inventory Turnover

9.45 10.09 0.64 0.358 0.728

Operating Return on Assets (%) 0.14 0.12 -0.02 -0.591 0.568 Note: *, **, * represents significance at 10%, 5% and 1% level respectively.

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Table 5.14: Paired Samples Correlations for Pre and Post Merger Financial Ratios of Acquirers in Food and Beverage Sector

Ratio Correlation Sig. Pair 1 PBDIT Margin (Pre and Post Merger) 0.538 0.088* Pair 2 PBIT Margin (Pre and Post Merger) 0.559 0.074* Pair 3 Net Profit Margin (Pre and Post

Merger) 0.415 0.204

Pair 4 ROCE (Pre and Post Merger) 0.637 0.035** Pair 5 RONW (Pre and Post Merger) 0.306 0.390 Pair 6 Debt Equity (Pre and Post Merger) 0.687 0.019** Pair 7 Current Ratio (Pre and Post Merger) 0.757 0.007*** Pair 8 Fixed Asset Turnover (Pre and Post

Merger) 0.720 0.012**

Pair 9 Inventory Turnover (Pre and Post Merger) 0.758 0.007***


0.404 0.218

Note: *, ** *** represents significance at 10%, 5% and 1% respectively

Following are the analytical observations that can be made from Table

5.13 and Table 5.14:

(a) Profitability

(i)

The mean PBIDT margin has declined from pre merger average of

8.82% to 7.97% during post merger period. Similarly, the PBIT

margin reduced from 6.17% to 5.37%. Both the declines are

however, statistically insignificant. The net profit margin however,

was found to be increasing from pre merger average of -0.54% to

0.46% in post merger period indicating marginal increase in real

short term profitability; though the increase is not found to be

statistically significant. Besides, low coefficient of paired correlation

(0.415) for this ratio which is also statistically insignificant (sig.

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value 0.204) indicate's that the increase is very arbitrary and not

across the firms.

(ii) The mean ROCE has decreased considerably from pre merger

average of 14.51% to 10.34% (mean difference of 4.17%) in post

merger period, with decline also being statistically 5% level.

Besides, the Pearson coefficient of paired sample correlation is

also significant at 5% level indicating that decline is suffered by

many acquirers in the sample. The mean RONW ratio has also

declined from pre-merger average of 9.40% to 7.59% during post-

merger period, a decrease of 19.26% which is however, statistically

insignificant.


(i) The mean current ratio of sample acquirer firms in food and

beverage sector has declined from pre merger average of 1.29:1 to

1.05:1 during post merger period. This mean decline of 0.25 is also

found to be statistically significant at 1% level. The Pearson paired

sample coefficient of correlation for this ratio (0.757) is also

significant at 5% level. Thus the decline is more widespread across

the sample acquirer firms in this sector.


acquirer firms in the sector has increased from pre merger average

of 1.36 to 4.68 during the post merger period, which registers an

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160

increase by 3.44 times the pre merger average, though the

increase is statistically not different from zero.


(I)

The mean fixed asset turnover ratio for acquirers in food and

beverage sector has marginally increased from pre merger

average of 2.48 times to average of 2.59 times during post merger

period.

(ii) The mean inventory turnover ratio on the other hand has increased

from pre merger average of 9.45 to 10.09 during post merger

period. It is, however, not statistically significant (a high

significance value of 0.728). However, the paired sample

coefficient of correlation is high at 0.758 and also statistically

significant at 1% indicating that the increase is observed across

several of the sample acquirer firms in the sector.

(iii) No significant changes are observed in mean operating return on

assets for acquirers in food and beverage sector.

A further analysis of year on year changes in mean performance

parameters of acquirers in food and beverage sector during post merger period

is given in Table 5.15.



Table 5.15: Yearwise Analysis of Impact of M&A on Operating and Financial Performance of Acquirers in Food and Beverage Sector


1-Year Post- Merger. Mean

Difference


Difference



PBDIT Margin (%) 8.82 -5.08* 1.63 -0.01 (-1.865) (0.247) (-0.002)

PBIT Margin (%) 6.17 -5.09** 1.63 0.27 (-2.094) (0.251) (0.049)

Net Profit Margin -0.54 -4.39* 4.25 2.87 (%) (-1.956) (0.636) (0.513) ROCE (%) 14.51 -5.26** -4.66** -3.93

(-2.236) (-2.378) (-1.299) RONW (%) 9.19 -10.95 1.91 -1.86

(-1.448) (0.527) (-0.471) Solvency

Debt Equity 1.36 2.96 3.60 1.26*** (1.452) (1.512) (2.818)

Current Ratio 1.29 -0.18** -0.27*** -0.28' (-2.395) (-3.591) (-3.058)

Efficiency/Asset Utilization Fixed Asset 2.48 0.23 -0.03 0.22 Turnover (0.378) (-0.079) (0.430) Inventory 9.45 1.24 -0.17 1.23 Turnover (0.620) (-0.137) (0.495)

Note: (i) *, **, *** represents significance at 10%, 5% and 1% level respectively. (ii) Figures in parenthesis are t-statistics

Following are the important observations from Table 5.15:

(a) Profitability

(I)

The analysis of yearwise mean difference in pre and post merger

profitability ratios indicate that all the profitability ratios have shown

a higher magnitude of real mean difference in the first year

following merger, which is also negative. And as in case of drugs

and pharmaceuticals sector, this negative effect has subsequently

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declined in the following years although not essentially turned

positive in the third year following merger. The mean PBIDT margin

has declined with pre and post merger mean difference of -5.08%

in first year following merger, which improved to 1.63% in second

year and subsequently turned negative to -0.01% in the third year.

In the first year, the decline is also found to be statistically

significant at 10% level. Similarly, mean PBIT margin has declined

with pre and post merger mean difference of -5.09% in first year

following merger with statistical significance at 5% level, and

improved to 1.63% in second year and subsequently again

declining to (though positive) to 0.23% in the third year. However,

the improvements observed are not statistically significant. The

mean net profit margin has declined with pre and post merger

mean difference of -4.39% in first year following merger and this

decline is statistically significant at 10% level. The mean difference

improved in real terms in the second year to 4.25% and 2.87% in

the third year. The improvements again in this ratio are not

statistically significant. In the first year following merger, therefore,

a significant drop in profitability ratios is observed and

improvements thereafter do not have strong evidence.

(ii) The negative effect of merger observed in mean ROCE has

reduced marginally each year during post merger period. The first

year following merger has seen a high negative effect with mean

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difference of pre and post merger ROCE being -5.26% which is

also statistically significant at 5% level. This negative effect

however, reduced to -4.65% in the second year again statistically

significant at 5% level. In the third year again the real mean

difference observed in the ratio is 3.93% although not statistically

significant. Similarly, the real mean difference in pre and post

merger RONW ratio is -10.95% in the first year of merger which

improved to -1.86% in the third year of merger. The improvements

observed in RONW are not statistically significant.


(i) The mean difference of debt — equity is consistently negative over

the post merger period. It was -2.96 in the first year following

merger and subsequently reduced to -1.26 in the third year which

is also statistically significant at 1%. However, it may be observed

that the negative effect on debt — equity ratio has reduced over the

three year period in real terms.

(ii) The mean difference in the pre and post merger current ratio also

has remained negative through out the three year period of post

merger. The quantum of negative effect has shown marginal

increase in each of the three years and is also statistically

significant in all the years. While decline in mean current ratio

(0.18) is significant at 5% in first year of merger, it is significant at

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1% level in second (0.27) and third (0.28) year following the

merger.


(i) The real change observed in fixed asset turnover ratio shows

volatile behaviour with mean increase of 0.23% in first year, mean

decline of 0.03% in second year and again increase in mean post

merger ratio of 0.22%. None of the increase or decrease is

hoWever, found to be statistically significant.

(ii) Exactly similar behaviour is observed in the mean difference in

inventory turnover ratio of acquirers in this sector. The mean

inventory turnover ratio registered improvement of 1.24 in first year,

then decline of 0.17 in second year and improvement of 1.23 in the

third year. Again no statistical significance is observed for decline

or improvement in the ratio.

5.2 Evaluation of Significant Financial Variables of Acquirers During Post Merger Period

Besides the above discussed ratios we examine some of the significant

financial variables from the financial statements of acquires in Chemicals,

Textile, Drugs and Pharmaceuticals and Food and Beverage sectors. This

examination of financial variables will provide further robustness to the analysis

and results obtained using financial ratios. Given the fact that some of the

important business motives of mergers and acquisitions are to improve sales,

reduce costs, improve working capital and cash flow position as well as improve

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the pace of profit growth, it is necessary to identify whether such an

improvement has taken place on account of mergers or not. Besides, the

interplay observed between various financial variables will provide an insight into

causes for evidence of no or minimal post merger operating performance

improvement observed using ratio analysis.

The important financial variables analysed are: Net sales along with the

rate of growth of net sales (ROG Net Sales), Cost of Production, Net working

capital, Profit after tax along with the rate of growth (ROG PAT) of profit after tax,

Cash flow from operating activities, asset size, operating profits and market

capitalization. The results and analysis of these variables for various sectors

under study are presented below:

(a) Chemicals sector

The results of changes in various financial variable for acquirers in

chemicals sector are given in Table 5.16.

Table 5.16: Pre-Merger and Post-Merger Changes in Select Financial Variables of Acquirers in Chemicals Sector

Financial Variable Pre-Merger Average (Cr.)

Post-Merger Average

(Cr.)

Increase / (Decrease)

(Cr.)

Percentage Increase/

(Decrease) Net Sales 200.68 282.27 81.59 40.66 Cost of Production 151.15 218.20 67.05 44.36 Net Working Capital 48.10 62.28 14.18 29.48 Profit After Tax 16.84 17.10 0.26 1.54 Cash Flow from Operating Activities

15.81 27.86 12.05 76.22

Total Assets 163.81 242.73 78.92 48.18 Operating Profit 28.31 31.89 3.58 12.65 Market Capitalization 334.72 324.68 (10.04) (3.00) ROG Net Sales (%) 9.36 14.23 4.87 52.03 ROG PAT (%) 6.76 -7.26 (14.02) (207.40)

Source: Own calculations using acquirers' financial statements from Capitaline Database

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166

It can be observed from Table 5.16 that the average net sales of acquirers

in chemicals sector have increased by 40.66% from Rs.200.68 Cr. to Rs.282.27

Cr. during post merger period. The ROG of net sales has also increased from

9.36% to 14.23% during the same period. However, on the other hand, the

increase in mean cost of production during post merger period is more than the

increase in mean net sales during the same period. The mean cost of production

for acquirers in this sector has increased by 44.36% from pre merger average of

Rs.151.15 Cr. to Rs.218.20 Cr. in post merger period. Thus the scope for

exploiting profit opportunities from increased net sales is nullified due to rising

cost of production in post merger period. The net working capital position as well

as asset size have increased during post merger period but the ROG of profit

after tax has declined considerable by -207.40% during the post merger period.

There is average of 3% decline observed in market capitalization of acquirers in

chemicals sector. On the positive side, the cash flow position has shown

improvement of average of 76.22% during the post merger period.

Thus, cost of production seems to be a major reason for no strong

performance of acquirers in chemical sector. Given the fact that mergers and

acquisitions in this sector focus on vertical integration to manage cost of

production, the benefits of these transactions do not seem to have materialized

for acquirers.

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(b) Textile Sector

The results of changes in various financial variable for acquirers in textile

sector are given in Table 5.17.

Table 5.17: Pre-Merger and Post-Merger Changes in Select Financial Variables of Acquirers in Textile Sector

Financial Variable Pre-Merger Average

(Cr.)

Post-Merger Average

(Cr.)


(Cr.)


(Decrease) Net Sales 200.76 556.80 356.04 177.35 Cost of Production 171.04 491.49 320.45 187.35 Net Working Capital 76.93 239.28 162.35 211.04 Profit After Tax 11.16 14.43 3.27 29.30 Cash Flow from Operating Activities

22.22 35.69 13.47 60.62

Total Assets 251.85 848.11 596.26 236.75 Operating Profit 24.26 55.24 30.98 127.70 Market Capitalization 104.83 224.44 119.61 114.10 ROG Net Sales (%) 41.68 25.24 (16.44) (39.44) ROG PAT (%) 81.91 1.44 (80.47) (98.24)

ource: Own calculations using acquirers' financial statements from Capitalise Database

The acquirers in textile sector have seen a real increase in net sale of

average of 177.35% during post merger period. However, the ROG of net sales

has declined considerably by average of 39.44% during the post merger period.

Here again we observe that the cost of production has increased (by 187.35%)

more than the increase in net sales indicating that the even after merger

transactions, the control on this factors is limited. Profit after tax has shown an

absolute increase of average of Rs.3.27 Cr. during post merger period. But the

ROG of profit after tax has declined considerably by 98.24% during post merger

period. The cash flow position has shown a positive change of 60.62%. The

market capitalization of acquirers has also seen a positive change from average

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of Rs.104.83 cr. in pre merger period to Rs.224.44 cr. in post merger period

representing a mean increase of 114.10% during the period. This is contradictory

given the fact that the important ratios of ROCE and RONW have declined

significantly for the acquirers in textile sector during post merger period. The

finding thus points to existing market inefficiency with respect to textile sector.

One explanation could also be that the market expects merger transactions in

textile sector to bring about positive changes as the sector suffers from inherent

problems.

(c) Drugs and Pharmaceuticals Sector

The results of changes in various financial variable for acquirers in drugs

and pharmaceuticals sector are given in Table 5.18.

Table 5.18: Pre-Merger and Post-Merger Changes in Select Financial Variables of Acquirers in Drugs and Pharmaceuticals Sector


(Cr.)

Post-Merger Average

(Cr.)

Increase/ (Decrease)

(Cr.)


(Decrease) 124.09 Net Sales 326.79 732.30 405.51

Cost of Production 205.58 441.90 236.32 114.95 Net Working Capital 116.35 257.60 141.25 121.40 Profit After Tax 31.22 83.72 52.5 168.16 Cash Flow from Operating Activities

15.82 89.08 73.26 463.08

Total Assets 397.75 886.14 488.39 122.79 Operating Profit 63.66 144.71 81.05 127.32 Market Capitalization 554.30 1749.38 1195.08 215.60 ROG Net Sales (%) 21.83 12.95 (8.88)

4.51 (40.68) 12.00 ROG PAT (%) 37.58 42.09

ource: Own calculations using acquirers' financial statements from Capitalise Database

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With reference to drugs and pharmaceuticals sector it can be observed

that the net sales of the acquirers have increase from Rs.326.79 cr. in pre

merger period to Rs.732.30 in post merger period, representing an absolute

increase of Rs.405.51 cr. and percentage increase of 124.09%. More

importantly, though the cost of production of acquirers in this sector has

increased during the post merger period by Rs.236.32 cr., this increase is less

than the increase in net sales during the same period. It can also be observed

that the rate of growth of profit after tax of acquirers in this sector has registered

a positive 12% increase during post merger period. The average percentage

increase in absolute profit after tax and cash flow position is also considerably

higher. These positive changes are possibly the reasons for relatively better post

merger performance of acquirers in drugs and pharmaceuticals sector. The

market capitalization of acquirers in drugs and pharmaceuticals sector has

increased considerably from mean of Rs.554.30 cr. in pre merger period to

Rs.1749.38 cr. during post merger period registering mean growth of 215.60%.

(d) Food and Beverage Sector

The results of changes in various financial variable for acquirers in food

and beverage sector are given in Table 5.19.

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Table 5.19: Pre-Merger and Post-Merger Changes in Select Financial Variables of Acquirers in Food and Beverage Sector


Post-Merger Average



(Decrease) Net Sales 201.88 492.48 290.06 143.95

Cost of Production 165.98 409.84 243.86 146.92

Net Working Capital 69.15 106.28 37.13 53.69

Profit After Tax 9.88 3.68 -6.2 -62.75

Cash Flow from Operating Activities

-0.64 26.05 26.69 4170.31

Total Assets 213.58 489.22 275.64 129.06

Operating Profit 26.76 34.53 7.77 29.04

Market Capitalization

163.79 171.72 7.93 4.84

ROG Net Sales (%) 22.08 33.81 11.73 53.13

ROG PAT (%) 32.22 -99.54 -131.76 -408.94

Source: Own calculations using acquirers' financial statements from Capitaline Database

The acquirers in food and beverage sector have witnessed increase in net

sales of 143.95% from pre merger average of Rs.201.88 cr. to Rs.492.48 cr. in

post merger period. The increase in cost of production is also close but

marginally higher at 146.92% during the post merger period. While the rate of

growth of net sales has increased during the post merger period by 53.13%, it is

not translated into profit growth as indicated by a fall in mean net profits from

mean of Rs.9.88 cr. in pre merger period to mean of Rs.3.68 cr. in post merger

period. The rate of growth of profit after tax of acquirers has fallen drastically by

408.94% during the post merger period. The cash flow position however, has

registered an impressive growth during post merger period.

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Thus, the overall observation for manufacturing sector indicates that the

mergers and acquisitions have not brought about significant changes for the

acquirers in the sector. The observations do not deviate significantly for any of

the sub sectors, except in case of drugs and pharmaceuticals sector where weak

evidence of relatively better performance is visible in terms of profitability.

Comparatively, the textile sector is found to be the worst performer among all the

sectors under study.

5.3 Long Term Pre-Merger and Post-Merger Operating and Financial Performance of Acquirers in Financial Services Sector

The mergers and acquisitions in Indian financial services sector have

involved transaction between varied parties including bank to bank mergers,

banking companies acquiring NBFCs, mergers between NBFCs, and other

financial services firms. In our sample we have excluded the cases of bank to

bank mergers for it can constitute a separate study in itself focussing on several

macroeconomic variables. The analysis presented here therefore pertains to

banking companies acquiring financial services firms other than other banking

companies. These we refer to as "Banking Acquirers" and deals between other

financial services firms which we refer to as "Non-Banking Acquirers".

5.3.1 Operating Performance of Banking Acquirers:

Table 5.20 provides presents results of paired t-test on various financial

ratios of banking companies for pre and post merger.

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Table 5.20 : Mean Pre-Merger and Post-Merger Financial Ratios of Acquirers in Financial Services Sector (Banking Acquirers)


Post-Merger Average

Mean Difference

t- statistics

p-value

OETI (%) 23.58 22.58 -1.00 -0.743 0.482

IITF (%) 11.70 10.95 -0.75 -1.283 0.240

NITF (%) 2.83 2.73 -0.10 -0.444 0.671

OETF (%) 2.53 2.34 -0.19 -0.822 0.438

NPTF (%) 0.84 0.95 0.12 0.413 0.692

RONW (%) 18.78 19.69 0.91 0.140 0.892

Following important observations can be made from Table 5.20 :

(i) The mean operating expenses to total income ratio has declined

from pre merger average of 23.58% to 22.58% during post merger

period. A marginal decline in operating expenses to total funds is

also observed, where the mean ratio has declined from pre merger

average of 2.53% to 2.34% during post merger period. While it is

good that the expense ratio has declined, none of these declines

are found to be statistically significant.

(ii) The mean interest income to total funds ratio as well as mean net

income to total funds ratio have declined by 6.41% and 3.53%

during the post merger period, the declines again being only in real

terms and statistically insignificant. However, the direction of

change observed in these positively influencing ratios is against the

fulfilment of merger objectives of increasing interest income

through diverse product portfolios of target firms.

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(iii) The profitability parameters have, however, registered a marginal

increase in real terms during post merger period. The mean net

profit to total funds ratio has increased from 0.84% to 0.95% (mean

increase of 0.12%); while RONW has improved from pre merger

average of 18.78% to 19.69% (mean increase of 0.91%) during

post merger period. But even this increase is not found to be

significantly different from zero statistically.

5.3.2 Operating Performance of Non-Banking Acquirers:

The results of paired t-test on various financial ratios of non-banking

acquirers are presented in Table 5.21 below.

Table 5.21 : Mean Pre-Merger and Post-Merger Financial Ratios of Acquirers in Financial Services Sector (Non-Banking Acquirers)


Post-Merger Average

Mean Difference

t- statistics

p-value

PAT (%) -9.87 16.38 26.25 1.363 0.203 DE 1.75 1.70 -0.05 -0.139 0.892 CR 5.22 6.37 1.15 0.750 0.469

ASTO 24.89 14.37 -10.52 -1.164 0.269 RONW (%) 4.72 9.43 4.71 0.899 0.388

Following important analytical observations can be made from the Table 5.21:

(i) The mean profitability parameters have shown increase only in real

terms. The net profit margin has increased from pre merger

average of -9.87% to average of 16.38% during post merger period

that represents a mean difference of 26.25%. The t-statistics

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174

(1.363) however, entails it statistically insignificant. Likewise, the

return on networth increased from pre merger average of 4.72% to

average of 9.43% during post merger period, an increase of 4.71%

but again statistically insignificant (t-statistics of 0.899).

(ii) The liquidity and solvency parameters also show marginal positive

change but only in real terms. The debt — equity ratio of non-

banking acquirers has declined from pre merger average of 1.75 to

1.70 which is found to be statistically insignificant. Similarly, the

current ratio has improved from pre merger average of 5.22 to 6.37

during post merger period which again is statistically insignificant.

(iii) The asset turnover has however shown a substantial decline in real

term from 24.89% in pre merger period to 14.37% in post merger

period, a mean difference of 10.52% though statistically

insignificant (t-statistics 1.164).

With reference to Financial Services Sector, the acquirers in banking

business have thus, seen a very marginal increase in profitability ratios (mean

increase of Net Profit to Total Funds of 0.12% and mean increase of RONW

0.91%). Acquirers in other Financial Services business have seen visible gains

in profitability ratios (mean increase of 26.25% in Profit After Tax and mean

increase of 4.71% in RONW post merger). However, in both cases the mean

difference in various ratios for pre and post merger period is found to be

statistically insignificant.

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5.4 Long Term Performance of Share Prices of Acquirers

The effect of mergers and acquisitions on shareholder wealth has been

studied in the literature using buy and hold abnormal returns (BHAR) which is yet

another important tool within the event study methodology. BHAR essentially

indicates the excess returns over the industry average that an investor buying

the shares of the acquiring firm will be enjoying if he made the purchases those

shares after merger. Barber and Lyon (1997) and Mitchell and Stafford (2000)

argue that the BHAR is the appropriate estimator because it "precisely measures

investor experience" and capture the risk preferences and the investment goals

of the investors. They believed this was an important feature of the model as the

investors' views towards the acquirer and the benchmark companies depended

crucially on such goals and their preferences. We therefore compute the long

term buy and hold abnormal returns (BHAR) by applying the computational

methodology for the same as discussed in chapter two. The results of

computations of buy and hold returns for various sector are presented in Table

5.22 below:

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Table 5.22: Percentage Long Term Buy and Hold Abnormal Returns to Shareholders of Acquirers During Post Merger Period

(Aggregate Analysis)

1 Yr BHAR 2 Yr BHAR 3 Yr BHAR

Chemicals Sector

Mean -3.51 14.62 -7.47

Median 6.01 12.02 -41.02

Textile Sector

Mean 61.42** 66.01* 42.36

Median 55.75** 31.52 16.27

Drugs and Pharmaceuticals Sector

Mean 10.45 3.43 54.83

Median -9.09 -5.52 -18.70

Food and Beverage Sector

Mean -3.98 45.14 352.38

Median -17.77 -3.03 21.37

Manufacturing Sector

Mean 17.95 30.33 35.64

Median 6.19 7.61 -25.65

Financial Services Sector

Mean 19.63 73.33 -16.05

Median 9.11 41.64 -53.29

Source: Own computations with share price data from CMIE Prowess Note: A, **, *** represents significance at 10%, 5% and 1% level respectively

Following analytical observations can be made from the Table 5.23

above:

(i) In the chemical sector, the mean BHAR for 1 year period was found to be

-3.51% which improved to 14.62% for 2 year holding period but not

statistically significant. However, this further declined to -7.47% for 3 year

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177

holding period. The percentage of acquirers with negative mean BHAR

increase from 41.67% for 1 year holding period to 83.33% for 3 year

holding period.

(ii) In case of Textile sector the mean BHAR is 61.42% and 66.01% for 1 and

2 year holding period respectively which is also statistically significant.

This however is reduced to 42.36% for 3 year holding period which is not

statistically different from zero.

(iii) For Drugs and Pharmaceuticals Sector, the mean BHAR is found to be

positive for all the holding periods whereas the median BHAR is negative

and ranges between -9.09% for 1 year holding period to -18.70% for 3

year period. However, none of the mean/median return observations is

statistically significant.

(iv) The mean BHAR in Food and Beverage sector for 1 year holding period is

-3.98% which has shown substantial real gain in the 3 year holding period

with 352.28%. However, the high percentage mean BHAR in third year is

on account of exceptional observation of sample acquirer Rajshree

Sugars and Chemicals that has registered an remarkable growth in buy

and hold returns. If we exclude this observation from the sample, then the

actual mean BHAR for 1 year, 2 year and 3 year holding period (not

reported) is -23.92%, -13.10% and 106.65% respectively. None of the

mean return observations are however, statistically significant. Besides,

the median BHAR for 1 year holding period for acquirers in this sector is

17.77%, which improved to -3.03% for 2 year holding period and

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subsequently to 21.37% for 3 year holding period. But here again the

statistical significance could not be established and therefore, the real

increase provides only extremely weak evidence of improvement in long

term returns to shareholders of acquirer firms.

(v) The mean and median returns for manufacturing sector as a whole as

well as for financial services sector are positive for 1 year and 2 year

holding period. However, in both the cases the median buy and hold

returns become negative for 3 year holding period. Again, there is no

evidence of statistically significant positive returns for shareholders of

acquirer firms in these two broad sectors.

The movements in buy and hold abnormal returns in shares of acquirers

in select sectors under study are presented graphically in stacked chart formats

from Fig.5.1 to Fig.5.4. It may be observed that the positive movements in BHAR

are prominently recorded in shares of acquirers in drugs and pharmaceuticals

sector for 3 year holding period (although none of the changes in BHAR are

found to be statistically significant). For other sectors the absolute BHAR returns

for 3 year holding period is skewed negatively.

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300.00

200.00

100.00

0.00

-100.00

-200.00

-300.00

-400.00

1 2

800.00

700.00

600.00

500.00

400.00

300.00

200.00

100.00

0.00

-100.00


Fig.5.1 BHAR Movements in Shares of Acquirers in Chemicals Sector (I year, 2 Year and 3 Year Holding Period)

Fig.5.2 BHAR Movements in Shares of Acquirers in Textile Sector (I year, 2 Year and 3 Year Holding Period)

179

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600.00

500.00

400.00

300.00

200.00

100.00

0.00

-100.00

-200.00



Fig.5.3 BHAR Movements in Shares of Acquirers in Drugs and Pharmaceuticals Sector (I year, 2 Year and 3 Year Holding Period)

Fig.5.4 BHAR Movements in Shares of Acquirers in Financial Services Sector

(I year, 2 Year and 3 Year Holding Period)

1200.00

1000.00

800.00

600.00

400.00

200.00

0.00

-200.00

-400.00

-600.00

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IMPACT OF MERGERS AND ACQUISITIONS ON LONG TERM …shodhganga.inflibnet.ac.in/bitstream/10603/12642/9/09_chapter 5.pdf · (RONW), the two important parameters of profitability from