RESEARCH

includes research articles that Long-term Post-merger

Performance of Firms in India
focus on the analysis and
resolution of managerial and
academic issues based on
analytical and empirical or
case research
K Ramakrishnan

Executive Mergers are important corporate strategy actions that, among other things, aid the firm in exter-
nal growth and provide it competitive advantage. This area has spawned a vast amount of
Summary literature over the past half a century, especially in the developed economies of the world. India
too has been seeing a growth in the number of mergers over the past one-and-a-half decades
since economic liberalization and financial reforms were introduced in 1991. Studies on the
post-merger long-term performance of firms in both the developed and the developing markets
have not been able to come to a definite and convincing conclusion about whether mergers have
helped or hindered firm performance. Our literature review shows that mergers do not appear
to be resulting in favourable financial performance of firms in the long-term in the markets
where they are a fairly recent phenomenon.
The economic liberalization and reforms initiated in 1991 in India have served to trigger
corporate restructuring through M&As. The removal of industrial licensing, lifting of monopoly
provisions under the MRTP Act, easing of foreign investment, encouraging the import of raw
materials, capital goods, and technology have increased the competition in Indian industry.
Firms are free to fix their capacity, technology, location, etc., to enhance their efficiency. The
amendment of the MRTPA has made it possible for group companies to consolidate through
mergers eliminating duplication of resources and bringing down costs. M&A has now become
a viable strategy for growth in India.
Immediately after liberalization, Indian industry added capacity since it expected a rapidly
expanding market due to the perceived latent demands of the vast middle class. But the lower
income groups could not participate in the consumer goods market. The economy began to
slow down from 1996. This squeezed the profit margins of local firms that now had excess
capacities. Industry saw a spate of restructuring in the form of shedding non-core activities in
favour of core competencies and expansion through M&As, in a bid for survival. According to
market reformers, growth is the result of efficient utilization of resources on the supply side. In
a free market economy, utilization becomes more efficient due to competition. It is thus hypoth-
esized that -- Mergers in India have resulted in improved long-term post-merger firm operating
performance through enhanced efficiency.
Statistically analysed cash flow accounting measures were used to study whether firm per-
formance improved in the long-term post-merger. This research, on a sample of 87 domestic
mergers, validates the hypothesis:
• Efficiency appears to have improved post-merger lending synergistic benefits to the merged
KEY WORDS entities.
• Synergistic benefits appear to have accrued due to the transformation of the hitherto un-
Mergers competitive, fragmented nature of Indian firms before merger, into consolidated and opera-
tionally more viable business units. This improved operating cash flow return is on account
Long-term Operating
of improvements in the post-merger operating margins of the firms, though not of the effi-
Performance cient utilization of the assets to generate higher sales.
Post-merger Performance What this study thus indicates is that in the long run, mergers appear to have been finan-
cially beneficial for firms in the Indian industry. It also renews confidence in the Indian manage-
Efficiency
rial fraternity to adopt M&As as fruitful instruments of corporate strategy for growth.

VIKALPA • VOLUME 33 • NO 2 • APRIL – JUNE 2008 47

M
ergers are important corporate strategy ac-
tions that, among other things, aid the firms
in external growth and provide competitive
advantage. This area has spawned a vast amount of lit-
erature over the past half a century, especially in the
developed economies of the world. India too has been
seeing a growth in the number of mergers over the past
one-and-a-half decades since economic liberalization
and financial reforms were introduced in 1991. While
domestic firms have resorted to merger activity for con-
solidation of their positions in order to face higher com-
petition, multinational companies (MNC) have used it
as a tool to enhance corporate control in India (Basant,
2000).
A merger means any transaction that forms one eco-
nomic unit from two or more previous ones (Weston,
Chung and Hoag, 2000). The term ‘performance’ used
in the remainder of this paper, for brevity and conven-
ience, refers to the long-term post-merger operating
performance.
LITERATURE REVIEW
The presence of diverse and varied merger motives
serves to highlight the inherent contradictions in any
discourse on the performance of merged firms. Almost
every aspect of successful performance stands a chance
of contraindication by a negative outcome associated
with the merger under scrutiny. For instance, a merger
supposedly intended to deliver economies of scale
through a much larger size of the merged entity, may
come under the scrutiny of market regulators who might
apprehend breach of antitrust laws due to the newer,
bigger firm now possessing excess market power.
The performance of merging firms has hence, for
long, been an area of study, research and debate. In spite
of a substantial volume of literature, this debate about
whether mergers are wealth-creating or wealth-reduc-
ing events for the firms that undertake them is an ongo-
ing one. Several papers published by scholars in the
fields of financial economics, industrial organization
economics and strategic management have attempted
to shed light on this topic. It is important to understand
whether mergers of firms have led to a better perform-
ance, since only such an improvement can justify the
use of mergers as an important tool of corporate strat-
egy.
But why is it important to measure the performance
of merged firms? Measuring the performance of merged
48
firms helps in developing strategic plans and in evalu-
ating the extent of achievement of the objectives of the
organization. If mergers do not lead to the combined
firms being better off post-merger as compared to be-
fore the merger, resorting to them cannot be justified.
An important related issue is the motive guiding the
merger. Assessing only financial performance may not
be an accurate yardstick to determine whether a merged
firm is better off. For, the motivation for the merger
might have been related to social and community gains
and not only to improved financial performance.
Even though I have earlier mentioned the presence
of diverse motives for mergers, I am of the opinion that
it is imperative for us to ascertain how mergers have
performed financially. Successful performance, at the
primarily financial level, at least, justifies the utilization
of mergers as an appropriate means of implementing
corporate-level strategy. Else, resorting to this tool may
not be very effective. Managers might then also need to
consider alternatives such as strategic alliances or the
setting up of greenfield ventures instead of concentrat-
ing on mergers. Of course, if the motives guiding the
merger were not purely driven by enhanced financial
success, our understanding of only the financial perform-
ance would be an inadequate measure of the overall per-
formance of mergers.
From this backdrop thus emerges one main question
that invites research in the Indian context and, that is —
How have merging firms performed in the long term in
India?
As mentioned above, the debates inherent to merg-
ers due to the presence of conflicting motives and claims
about their impact ensure that the measurement of post-
merger performance still holds potential for further de-
velopment. This is especially true for emerging markets
which are grossly under-represented in scholarly litera-
ture in this area. Theories that have been generated in
the context of the developed Western markets may not
be applicable to or appropriate for the emerging econo-
mies (Hoskisson, et. al., 2000). Unlike the developed
world, the emerging economies have only recently
opened up (or are still in the process of doing so) to the
global markets. They are still at various stages of achiev-
ing complete market-orientation. Privatization of state-
owned enterprises is taking place. Domestic markets are
now becoming more competitive. But such a transition
is not smooth. There are various environmental, finan-
cial, and other constraints. Acquisitions and mergers are
LONG-TERM POST-MERGER PERFORMANCE OF FIRMS IN INDIA
a means to enter and grow in such emerging economies.
It would thus be interesting to gauge the results of merg-
ers in the emerging markets, as it would help to further
our understanding of the working of this instrument of
corporate strategy in a different context as compared to
the developed world.
The performance of merging firms has been assessed
using various measures and methods. The traditional
studies have used financial measures such as profits and
accounting returns. Market-based financial measures
such as stock returns have also been extensively used.
A significant portion of the studies published till date
on this topic of merger performance deals only with
announcement period abnormal stock price returns to
both the bidder and target firms, using a window com-
prising of a few days before and after the first date of
announcement of the merger. An increasing number of
studies are now attempting to understand the long-term
performance of the firm over a few years post-merger,
as such studies with longer horizons may provide us
with better insights on whether mergers are serving the
intended purpose. The rationale behind studying a
longer time horizon post-merger, and not just the im-
mediate period surrounding merger announcement, is
that stock price movements around the latter period are
only indicative of the capital market’s expectations of
the merger’s performance. They are speculative in char-
acter and by no means stand for the actual performance
of the merger. This ‘real’ or actual performance is re-
flected in, among other things, the financial reports of
the combination for a few years after the merger. A care-
ful analysis of these financial statements is indicative of
the true level of post-merger performance. The term
‘post-merger’ here means subsequent to the consumma-
tion of the merger that has been previously announced.
The effective date for this has generally been taken as
the date of delisting of the merged firm from public ex-
changes, or the announcement in the business press of
board/management approval of the merger.
The different ways of measuring performance of
mergers can lead to disparate and contradictory find-
ings on whether any merger has lead to the firms being
better off. In keeping with my argument about the pri-
macy of financial performance, in this paper, I would be
concentrating on the use of accounting data to measure
the performance of merging firms. It is an educative ex-
ercise to review the literature on the performance of
merging firms, as it will provide us with pointers on
VIKALPA • VOLUME 33 • NO 2 • APRIL – JUNE 2008
how far we have arrived in this important area of cor-
porate strategy. The next few sub-sections link the dis-
cussion to the Indian context of mergers and put forward
my hypothesis that is intended to concretize the scope
set forth as part of the research question mentioned
above.
Research on Performance of Mergers
Numerous scholars have carried out research on the
performance of the merged firm. The focus of this re-
search has been on whether performance, after the
merger, has been announced/completed, has been en-
hanced or has deteriorated as compared to before the
event, and what the magnitude of this change is. Sev-
eral key papers from the areas of financial economics
and strategic management that have empirically meas-
ured performance, have been reviewed and studied. The
salient features of these studies are highlighted here in
an attempt to provide a snapshot of the developments
in this area of research. This literature review does not
claim to be an exhaustive one. Some relevant academic
articles may have inadvertently got left out. But the ef-
fort has been to make this study as comprehensive as
possible by including the significant papers to provide
us with some directions.
As already indicated, two primary means have been
utilized by researchers to operationalize the perform-
ance of merged firms – a) Accounting measures based
on objective data such as cash flow returns and other
financial ratios, b) Share price returns, again based on
objective data, that are related to the capital market. In
this paper, the discussion of literature and methodology
of the research are restricted to the accounting meas-
ures of post-merger performance.
Merger Performance Studied using Accounting Measures
One of the trend-setting studies in this genre of measur-
ing the success of mergers is by Ravenscraft and Scherer
(1989). They tested the hypothesis that other variables
maintained equal, if mergers result in economies of scale
or scope, the post-merger profits should be higher than
the pre-merger profits and/or their industry averages.
Their study of 2,732 lines of business for the years 1975-
77 did not find any improvement in the post-merger
operating performance. In fact, with no control for the
merger accounting methods (purchase vs pooling), there
was a significant negative impact of 13.34 per cent on
the post-merger profitability. One important shortcom-
49
ing of the Ravenscraft and Scherer study was the non-
alignment of the post-acquisition period with the acqui-
sition event, leading to non-validity of the results.
Traditional stock price performance studies have
been unable to determine whether mergers lead to long-
term economic gains, resulting in a gap in our under-
standing of post-merger firm performance. Healy,
Palepu and Ruback (1992) addressed this issue of
whether mergers improved performance, and if they did
so, what the sources of economic gain were. They also
tried to improve upon the methodology of the earlier
work by Ravenscraft and Scherer (1989). A sample of
the 50 largest mergers of public industrial firms in the
US, completed between 1979 and mid-1984, were used.
Cash flow measures were used to study the post-merger
performance. According to them, cash flows are repre-
sentative of the actual economic benefits generated by
the assets. Pre-tax operating cash flow returns on assets
were used to measure the improvements in operating
performance. Their definition of operating cash flow was
sales, minus cost of goods sold and selling and adminis-
trative expenses, plus depreciation and goodwill ex-
penses. This measure was deflated by the market value
of assets (market value of equity plus book value of net
debt) to make it comparable across time and firms. This
measure was unaffected by depreciation, goodwill, in-
terest expense and income, and taxes. The aggregate
industry-adjusted pre-merger and post-merger perform-
ance measures were calculated, five years prior to and
subsequent to the merger, and then these two were com-
pared to study the change in post-merger performance.
The firm-specific, economy, and industry factors that
might influence post-merger performance, were thus
controlled for. An increase in the post-merger operat-
ing cash flow returns vis-à-vis the firms’ industries was
observed. The increase was 2.8 per cent per year, after
controlling for the pre-merger performance. The im-
provements in operating cash flows after merger were
due to enhancement of asset productivity post-merger.
Healy, Palepu and Ruback also correlated their post-
merger cash flow performance and merger-announce-
ment related stock market performance and found a
significant positive correlation between these two meas-
ures indicating that the stock market correctly revalues
the merging firms at announcement in expectation of
the improvements in operating performance in the fu-
ture. Since this study sampled the 50 largest acquisitions
in the US, its results may not be generalizable across the
50
entire gamut of mergers which might present quite a
mix of organizations in terms of size and motives for
mergers. This is especially true for the Indian context
where most of the acquisitions are relatively small.
Healy, Palepu and Ruback (1992) stated that the eco-
nomic gains from a takeover “are most likely to be de-
tected when the target firm is large.” This leaves the
question of why small mergers, like the ones in India,
also take place, still unanswered, since economic feasi-
bility would be an important driver for such an activity.
It thus becomes necessary to study such small mergers
too in a bid to understand whether they lead to economic
gains.
Another study in the same genre is by Cornett and
Tehranian (1992) who studied the post-acquisition per-
formance of 30 large banks in the United States. These
acquisitions took place between 1982 and 1987. Each of
these acquisitions had a purchase price exceeding $ 100
million. They measured economic performance related
to the mergers in a manner similar to Healy, Pa1epu and
Ruback (1992). Operating cash flows divided by the
market value of assets were used for performance evalu-
ation. The pre-merger performance was computed for
years –1 to –3 before the merger, whereas post-merger
performance was studied over the years +1 to +3 after
the merger. Comparing the latter with the former is in-
dicative of the impact of the merger on firm perform-
ance. The industry mean data was subtracted from the
raw sample-firm data to provide the industry-adjusted
performance, prior to the comparison between the pre-
and post-merger figures. This was done to ensure that
the influence of economy-wide or industry factors on
the performance data calculated was avoided. The mean
annual industry-adjusted cash flow return before the
merger was –0.2 per cent for the entire sample and 1 per
cent post-merger. This means that, before the merger,
the sample banks underperformed as compared to their
industry by 0.2 per cent, but outperformed by 1 per cent
post-merger. There was a significant (at the 1% level)
increase of 1.2 per cent in performance post-merger as
compared to before the merger. This study pertained
specifically to the US banking industry and hence its
results may not be generalizable across other industries.
Also, like in the Healy, Palepu and Ruback’s (1992) pa-
per, selecting only the largest mergers may lead to re-
sults that cannot be generalized across all sizes of
mergers, such as the ones taking place in India. Never-
theless, the methodology adopted here serves as a guid-
LONG-TERM POST-MERGER PERFORMANCE OF FIRMS IN INDIA
ing post for future studies of the same kind.
Switzer (1996), using the methodology followed by
Healy, Palepu and Ruback (1992), focused on analysing
the post-merger changes in operating performance. Her
contention was that the latter study covered the “merger
mania” period in the US and not mergers in general. It
thus made sense, according to Switzer, to take up a
longer period of mergers in the US, in order to be cer-
tain about the applicability of the results of such a study
to periods not witness to a merger wave. The study was
of 324 acquisitions occurring between 1967 and 1987 in
the US, using the cash flow-based measure of operating
performance as in Healy, Palepu and Ruback (1992). It
concluded that mergers led to synergistic gains and bet-
ter performance in the long-term, the median improve-
ment over five years post-merger being a significant 1.97
per cent..
A study in the United States that also focused on
merging firms’ operating performance after corporate
acquisitions was by Ghosh (2001). The sample consisted
of 315 pairs of target and acquiring firms for which merg-
ers were completed between 1981 and 1995. The per-
formance measure used was operating cash flows, both
pre- and post-merger, defined as sales minus cost of
goods sold, minus selling and administrative expenses,
plus depreciation and goodwill amortization expenses.
The study compared the pre- and post-acquisition per-
formance of merging firms using control firms as bench-
marks, instead of using industry-median benchmarks
as used in Healy, Palepu and Ruback (1992). Ghosh con-
tended that using industry-median benchmarks could
lead to non-random measurement errors since firms
undertake acquisitions following a period of superior
performance. The control firms were matched on the
basis of similar operating cash flow performance and
total asset size before the acquisition. Both size and pre-
acquisition performance were thus accounted for. Us-
ing a methodology similar to Healy, Palepu and Ruback
(1992), the study found that the cash flows of merging
firms increased significantly by 2.4 per cent every year.
The median increase in cash flows post-merger by 0.26
per cent per year was statistically insignificant, when
the sample firms were compared with matched firms.
This paper assumed that only large-sized and well-per-
forming firms generally go in for mergers. This assump-
tion may not be valid in the Indian M&A context where
we have even small and under-performing firms adopt-
ing the merger route to growth and to satisfy other mo-
VIKALPA • VOLUME 33 • NO 2 • APRIL – JUNE 2008
tives. Moreover, it may be difficult to get control firms
that are well-matched to the sample under study due to
the highly fragmented and volatile nature of the Indian
industry in many sectors. Hence, the use of an industry-
median benchmark would better serve the purpose for
Indian data.
Ramaswamy and Waegelein (2003) studied the post-
merger financial performance of 162 merging firms that
occurred during 1975-1990 in the US. They used indus-
try-adjusted operating cash flow returns on market value
of assets as the measure of performance, which was simi-
lar to the one used by Healy, Palepu and Ruback (1992).
Even their methodology was the same as in the latter,
except that they used only firms that had not gone in for
any merger during the study period as part of their con-
trol sample, since they felt that only that would make
the data incorruptible and the results more robust. The
study found a significant increase of 12.7 per cent in firm
performance after the merger had taken place.
Research on takeovers in the UK has not been able to
come to any definitive conclusion about the operating
gains from such activity. Manson et. al. (2000) studied
44 takeovers in the UK completed between January 1,
1985 and December 31, 1987, wherein the total market
value of each of the acquired firms was over £ 5 million,
in a re-examination of the issue of whether UK takeo-
vers resulted in operating gains for the merging firms.
They used the cash-flow based measure of operating
performance as also the research methodology inno-
vated and introduced by Healy, Palepu and Ruback
(1992) and Cornett and Tehranian (1992). Regressing
post-takeover operating performance on pre-takeover
operating performance using eight variants of the meas-
ure, they found that takeovers had led to operating gains
ranging from 2 per cent to 14 per cent per year post-
merger. This study also provided evidence for non-op-
erating gains resulting from takeovers.
A replication study that attempted to determine
whether post-merger synergy is created leading to im-
proved corporate operating performance was by Sharma
and Ho (2002). Since literature on merger motivations
indicates that acquisitions lead to gains, they hypoth-
esize that operating performance post-acquisition is
greater than in the pre-acquisition period. They studied
36 Australian acquisitions occurring between 1986 and
1991, using matched firms to control for industry and
economy-wide factors. This match is on the basis of in-
dustry and size of the assets. Data three years prior and
51
subsequent to the merger were used for the analysis.
Financial ratios, both accrual (return-on-assets (ROA),
return-on-equity (ROE), profit margin and earnings-per-
share (EPS)) and cash flow (ROA, return-on-sales (ROS),
ROE, number of ordinary shares) pertaining to operat-
ing efficiency and returns to shareholders were used
since the study investigated synergistic gains from merg-
ers. Operating cash flow before tax was used as the main
post-merger performance measure. No significant post-
acquisition improvement in corporate operating per-
formance was observed. The study used both earnings
and cash flow measures of operating performance to rule
out the possibility of the result being an artifact of meas-
urement. But it suffered from the problem of lack of
generalizability of the results since it studied only the
manufacturing sector in Australia.
Rahman and Limmack (2004) analysed the operat-
ing performance of 94 listed acquiring and 113 private
target companies in Malaysia that were involved in ac-
quisitions between January 1, 1988 and December 31,
1992. They attempted to find out whether operating ef-
ficiency improvements took place after mergers. Their
hypothesis was that such gains, if any, would be more
due to sources such as synergy, rather than through dis-
ciplining of inefficient management. They carried out
analysis of the ratio of operating cash flow to operating
assets of the companies pertaining to two years before
and five years after the merger. Industry-matched con-
trol companies were used in their analysis. Improve-
ments in operating cash flows after the merger were to
the tune of 3.75 per cent per year post-merger. Also, the
combined firms appeared to be using resources more
efficiently post-merger. The improvement in performance
did not come at the cost of long-term investments. Also,
the takeovers did not seem to be disciplinary in nature.
The results of the study, consisting of a sample of only
privately-owned targets and control group companies,
may not be generalizable to publicly-held organizations.
Tsung-Ming and Hoshino (2000) attempted to find
out whether value was created in Taiwanese mergers
through tapping of economies of scale. Their sample
consisted of 20 firms that acquired other firms between
1987 and 1992. Both stock market-based and account-
ing-based measures were used to assess shareholder
wealth gains and improvements in corporate perform-
ance post-merger. Accounting measures were used to
determine the profitability, financial health, and growth
of the acquirers post-merger. Profitability was assessed
52
using ROA and ROE. The financial health was meas-
ured using financial leverage, liquidity, and operating
expenses. Growth was measured as the sales growth.
Industry medians were computed for each year corre-
sponding to the merging firms. The industry median
pertained to all the publicly-listed firms of the same in-
dustry as per the sample and year. These control firm
values/industry medians were then subtracted from the
pre- and post-merger values obtained for each firm.
These pre- and post-acquisition adjusted values were
compared to arrive at the performance of the merged
firm. They found no profitability improvements post-
merger for the acquirers. In fact, there was deteriora-
tion in some profitability indicators. To gauge the
financial health of the acquirers post-acquisition, finan-
cial leverage was calculated as the long-term liabilities
to total assets. The debt-equity ratio was also calculated
as total liabilities divided by equity. Current ratio com-
puted as current assets divided by current liabilities was
used. Also, operating expenses ratio was calculated as
operating expenses divided by sales. There was no sig-
nificant difference in the pre- and post-merger values
for leverage and debt equity while the current ratio fell
significantly in the first year after the merger while not
being significantly different in the later years. They cal-
culated sales growth as (sales of current year/sales of
previous year) – 1). The acquirers significantly under-
performed on this measure post-merger. The study had
taken into account only the acquiring company. Most of
the targets were privately-owned companies. In most
cases, the merger was a result of government interven-
tion since the healthy acquirer was forced into taking
over the distressed and financially weak acquired firm.
This might have led to the deterioration in the condition
of the acquiring firm leading to a downturn in profit-
ability post-merger. The results of this study are hence
not generalizable.
Pawaskar (2001) studied 36 mergers that had taken
place in India between 1992 and 1995. Using accrual
measures of accounting spread over three years before
and after the merger, the study found that the profit-
ability of the merged firms was impacted negatively due
to the merger, i.e., corporate performance did not im-
prove significantly post-merger. A majority of the merg-
ers studied in this paper were between companies
belonging to the same business group, carried out as
part of corporate restructuring. This might make the
result quite specific and not generalizable. In addition,
LONG-TERM POST-MERGER PERFORMANCE OF FIRMS IN INDIA
the study used matched companies as controls for both
the acquiring and acquired companies. But, when a
majority of the mergers studied are within-business
group mergers, it is imperative that even the control pairs
be from similar groups. This would ensure similarity in
terms of their situation within the industrial and eco-
nomic context, as also a modicum of overlap in the
merger motivations. Since, this had not been considered
in the paper, along with the fact that getting such con-
trol companies may be well nigh impossible, the study
had serious limitations in terms of validity and genera-
lizability of the results.
Out of the eleven studies reviewed here (summarized
in Table 1), that use accounting measures to study post-
merger performance, we find that six of them have indi-
cated improved performance. The rest show that
mergers have made the combined firms worse off. Since
almost one-half of the studies show deterioration in post-
merger performance, and especially due to the fact that
three of these five studies are from Australia and Asia,
it is not very clear whether mergers, overall, have led to
betterment. At least mergers do not appear to be result-
ing in favourable financial performance in the long term
in these markets where they are a fairly recent pheno-
menon.
The accounting measures used in these studies are
based on objective data obtained from financial state-
ments of the firms being studied. According to Bromiley
(1986), in many cases, accounting performance measures
are better than market-based measures because they are
used more frequently by managers to make strategic
decisions. Long-term accounting-based performance
measures also accurately represent the realization of
synergies as these effects are obtained only over a pe-
riod of time post-merger (Harrison, et. al.,1991). But, ac-
counting data possess certain limitations. They are not
perfect in measuring economic performance. Traditional
accounting measures, such as return on book assets, are
affected by the method of merger accounting (purchase
or pooling) followed, and the method of financing of
the merger (cash, debt or equity). Hence, using such
measures, we cannot compare the merged firm over time
and with other firms. Cash flow measures can help over-
come these limitations as already described above.
The Indian Context
M&As need to be regulated in order to prevent unfair
practices, market dominance or concentration of eco-
VIKALPA • VOLUME 33 • NO 2 • APRIL – JUNE 2008
nomic power. Regulation can ensure a level playing field
and thriving competition. The Monopolies and Restric-
tive Trade Practices Act (MRTPA), 1969, has been a major
institutional mechanism to regulate M&A activity in
India. According to this Act, the Union Government
could prevent an acquisition if it apprehended concen-
tration of economic power that would be detrimental to
the common good. Amendments to it were made in 1984
and 1991 (Singh, 2000). There are four parts to this Act
that deal with – (i) Monopolistic practices, (ii) Restric-
tive trade practices, (iii) Unfair trade practices, and (iv)
Controlling concentration of economic power. The
MRTP Act is designed to “ensure that the operation of
the economic system does not result in the concentra-
tion of economic power to the common detriment, and
to prohibit such monopolistic and restrictive trade prac-
tices as are prejudicial to public interest”(Rao, 1998).
Industrial markets tend to be highly concentrated de-
spite there being anti-monopoly policies such as the
MRTP Act or the industrial licensing policy. High con-
centration leads to higher prices being charged and also
the absence of any motivation for improvements in tech-
nology. A large number of big firms used these policies
for deterring and preventing the entry of new competi-
tors into the industries where they dominated. Hence,
changes were made in the MRTPA in the New Indus-
trial Policy. The New Industrial Policy Statement (NIPS)
repealed certain specific provisions of the MRTP Act
(namely, the sections 21, 22 and 23) which dealt with:
(a) the growth of an existing undertaking; (b) the estab-
lishment of a new undertaking; and (c) the merger, amal-
gamation and takeover of firms (Mani, 1995). The
emphasis is now on controlling and regulating monopo-
listic, restrictive, and unfair trade practices rather than
making it necessary for the monopoly houses to obtain
prior approval of central government for expansion, es-
tablishment of new undertakings, merger, amalgama-
tion and takeover, and appointment of certain directors.
The thrust of the policy is more on controlling unfair or
restrictive business practices (Ray, 1992).This dilution
of the MRTPA has increased competition from the
smaller firms, now no longer under the purview of the
Act. Both firm-level investments and growth have been
unfettered (Basant, 2000).
Indian Industry before 1991
M&As were not a common occurrence in India before
the reforms of 1991. M&As and corporate takeovers were
53
Table 1: A Summary of Studies that have used Accounting Measures to Ascertain Post-merger Performance
Study Sample Size Sample Country Accounting Statistics Findings
Experimental Control Period Measure Used

Ravenscraft 251 for pre- Industry 1950- US Operating income Univariate; Acquired firms earn positive abnormal
and Scherer merger profita- 1977 over end of year Regression returns compared to their control
(1989) bility; 2,732 for assets; Operating group during the pre-merger period
post-merger income over sales; but not in the post-merger period.
performance Cash flow over sales
Healy, 50 Industry 1979- US Operating cash Univariate; Merged firms show significant impro-
Palepu and 1984 flow returns on Regression vements in operating performance,
Ruback assets; Stock especially for related firms. The
(1992) returns at post-merger increase in operating
acquisition cash flow is strongly positively
announcement linked to the abnormal stock returns
at acquisition announcement.
Cornett and 30 Industry 1982- US Operating cash Univariate; Merged firms show significant
Tehranian 1987 flow returns on Regression improvements in operating perfor-
(1992) assets; Stock mance. The post-merger increase in
returns at operating cash flow is strongly
acquisition positively linked to the abnormal stock
announcement returns at acquisition announcement.
Switzer 324 Industry 1967- US Operating cash Univariate; Merged firms show significant impro-
(1996) 1987 flow returns on Regression vements in operating performance.
assets; Stock The post-merger increase in operating
returns at cash flow is strongly positively linked
acquisition to the abnormal stock returns at acqui-
announcement sition announcement. Factors such
as the offer size, relatedness and
bidder leverage don’t affect the results.
Ghosh 315 Industry; 1981- US Operating cash Univariate; Merged firms show significant impro-
(2001) Matched 1995 flow returns on Regression vements in operating performance
assets and on using the Healy, Palepu and Ruback
sales (1992) methodology, but not when
the control group is made up of
matched firms. Cash acquisitions
positively impact cash flows
whereas stock acquisitions lead to
poorer performance. Acquisitions
fail to achieve synergy gains. Announ-
cement-related abnormal share price
returns are not correlated with cash
flow returns.
Ramaswamy 162 Industry 1975- US Operating cash Univariate; Merged firms show significant impro-
and 1990 flow returns on Regression vements in operating performance.
Waegelein assets Unrelated mergers and larger relative
(2003) size are positively associated with
post-merger performance.
Manson et al 44 Industry 1985- UK Operating cash Regression Both operating and non-
(2000) 1987 flow returns on operating gains exist for UK
total market value takeovers.
Sharma and 36 Matched 1986- Australia Earnings and cash Univariate; Operating performance does not
Ho (2002) 1991 flow Regression improve post-merger. Factors such as
relatedness, form of financing, size
of the acquisition do not affect post-
merger performance.
Rahman and 94 Matched 1988- Malaysia Operating cash Univariate; Operating performance
Limmack 1992 flow returns on Regression improves post-merger.
(2004) assets
Tsung-Ming 20 Industry 1987- Taiwan Accrual measures; Univariate; Stock market reaction to acquisition
and Hoshino 1992 Share price returns Regression announcement is positive. There are
(2000) no improvements in post-merger
performance. The stock market
reaction is not correlated to post-
merger performance.
Pawaskar 36 Matched 1992- India Operating cash Univariate; Post-merger profitability does not
(2001) 1995 flow returns Regression increase.
on assets

54 LONG-TERM POST-MERGER PERFORMANCE OF FIRMS IN INDIA

very rare (Rao, 1998). For over a quarter century, pro-
duction capacities in India were restrained under the
MRTP Act. This kept Indian firms small and globally
uncompetitive. The market economy was virtually stran-
gulated due to the economic power of the government
such as industrial licensing and other regulations. In-
dustrial licensing and other controls led to severe entry
and exit barriers and encouraged rent-seeking and lob-
bying. The industrial policy pre-1991, instead of promot-
ing competition, lead to inefficiencies. Bureaucracy
determined plant capacity, product-mix, and location.
Trade in scarce materials became more lucrative than
efficient manufacturing. Licensing and product reser-
vation for small-scale sector inhibited firms from reap-
ing economies of scale (Ray, 1992; Basant, 2000). During
the regime of controls, capacity expansion was gener-
ally not possible. So, product diversification rather than
specialization became the preferred option for firms
(Siddharthan and Lal, 2003).
In 1985-86, the government prescribed the ‘minimum
economic scale capacity scheme’ in about 72 industries.
This acted as a capital barrier to entry especially in in-
dustries where economies of scale were not significant.
Many sectors of Indian industry were fragmented due
to these restrictions on capacity through industrial li-
censing and reservation for small and public sector or-
ganizations. Licensing was used as a tool to break-up
the small domestic market among producers so that eco-
nomic power could be curtailed. This led to total capa-
city being fragmented into uneconomic plant sizes. Thus
industrial licensing and the MRTP policies restricted the
setting up of adequately large plants that could provide
scale economies (Patibandla, 1992; Venkiteswaran, 1993;
Khanna, 1999). Direct controls over investment, produc-
tion, prices, imports, foreign capital and even exports
played havoc with efficiency and, therefore, with growth
(Patel, 1992). Inefficient management was not threatened
by loss of control (Rao, 1998). The policies of industrial
licensing, protective foreign trade, control of among oth-
ers, entry into industry, capacity expansion, technology,
output mix and import content, concentration of eco-
nomic power, and regulation of foreign investment in
India, “grossly underemphasized the importance of ef-
ficient use of resources, particularly labour and capital.”
A protected domestic market did not encourage private
enterprises to improve either their efficiency or prod-
uct-quality (Neogi and Ghosh, 1998).
To sum up, according to Venkiteswaran (1993), some
VIKALPA • VOLUME 33 • NO 2 • APRIL – JUNE 2008
of the reasons for mergers and acquisitions not being in
vogue before the economic liberalization in 1991 were:
a) Ownership pattern of Indian industry: Most companies
were tightly held by promoters and government-
owned financial institutions. They resisted any at-
tempts at takeovers.
b) Exercise of voting power by the public financial institu-
tions: Voting by stakeholding public financial insti-
tutions was guided more by reasons of power and
pelf than by any objective criteria to enhance share-
holder wealth.
c) Tight regulatory environment: MRTPA, Foreign Ex-
change Regulation Act (FERA), and other such regu-
lations looked at any attempt to grow through M&As
as a precursor to the dawn of a monopoly. Hence,
such a regulatory environment made it difficult to
use M&As as a corporate-level strategy.
d) High entry and exit barriers: Several mandatory gov-
ernment approvals such as licensing requirements
and clearances served as high entry barriers to in-
dulging in M&As. Similarly, legislations making it
almost impossible to redeploy surplus or under-per-
forming assets or labour served as high exit barriers
that dissuaded companies from using M&As.
M&As in India after the Reforms
The economic liberalization and reforms initiated in 1991
in India have served to trigger corporate restructuring
through M&As. The complex system of industrial licens-
ing has been abolished as per the New Industrial Policy
Statement (NIPS). The economic reforms, through the
relaxation of controls and regulations on production,
trade and investment, were aimed at increasing compe-
tition, improving efficiency and growth (Chaudhuri,
2002). “… the reforms have the potential of altering the
structure of Indian industries, subjecting them to com-
petition from both internal and external sources and
thereby making them more efficient” Mani (1995). The
removal of industrial licensing, lifting of monopoly pro-
visions under the MRTP Act, easing of foreign invest-
ment, import of raw materials, capital goods, and
technology have increased the competition in Indian
industry. Firms are free to fix their capacity, technology,
location, etc., to enhance their efficiency (Rao, 1998;
Basant, 2000). The amendment of the MRTPA has made
it possible for group companies to consolidate through
mergers eliminating duplication of resources and in
bringing down costs (Mehta and Samanta, 1997). M&A
55
has become a viable strategy for growth in India due to
a) easing of regulation, b) restructuring of family-owned
conglomerates, c) sale of state-owned companies, d)
overcapacity, and e) deregulation of fragmented indus-
tries (Anandan, et. al., 1998).
Immediately after liberalization, the Indian industry
added capacity since it expected a rapidly expanding
market due to the perceived latent demands of the vast
middle class. But the lower income groups could not
participate in the consumer goods market (Chandra and
Shukla, 1994). The economy began to slow down from
1996 after an average gross domestic product (GDP)
growth rate of 6.5 per cent for five successive years from
1991-92. This squeezed the profit margins of local firms
that now had excess capacities. The industry saw a spate
of restructuring in the form of shedding non-core ac-
tivities in favour of core competencies and expansion
through M&As, in a bid for survival. M&As were re-
sorted to in order to expand in size to face the MNC
onslaught (Nayar, 1998). Due to the ease of foreign firms
also participating in M&As in India, inefficient firms are
more likely to be the targets of takeovers (Rao, 1998).
According to the market reformers, growth is the result
of efficient utilization of resources on the supply side.
In a free market economy, utilization becomes more ef-
ficient due to competition (Patibandla and Mallikarjun,
1996; Ahuja, 1999). It is thus my hypothesis that:
H0: Mergers in India have resulted in im-
proved long-term post-merger firm operating
performance through enhanced efficiency.
The next section outlines the research methodology
that was adopted to test the hypothesis.
RESEARCH METHODOLOGY
There appears to be little published research work on
M&As in India and we are yet to understand whether
mergers here have led to long-term financial benefits to
the merging firms. The raison de etre of Indian mergers
can be questioned if financial performance does not show
any improvement in the long run. It is imperative for us
to have a reasonable understanding of whether M&As
in India at least make financial sense. Hence, I am at-
tempting to understand, through this paper, whether
Indian mergers have been successful where success is
regarded as the long-term, post-merger financial success.
This research is designed to collect essentially objec-
tive data on Indian mergers and to carry out quantita-
56
tive, statistical analyses with a view to understanding
financial performance in the long run, post-merger.
Sample
The data for this study has been extracted from second-
ary sources. The main sources are Prowess database
of Centre for Monitoring Indian Economy (CMIE),
Capitaline, ISI Emerging Markets, India Business Insight,
and web sites of Securities and Exchange Board of India
(SEBI), Bombay Stock Exchange (BSE), and National
Stock Exchange (NSE). Mergers and acquisitions are
fairly recent in India and have been resorted to by
corporates mainly after the economic liberalization and
financial reforms of 1991 were initiated. They were al-
most negligible in the early 1990s and hence there is a
dearth of data pertaining to this early period of Indian
M&As.
We initially identified 414 mergers between 1993 and
2005. Mergers taking place in the financial sector were
dropped due to differing accounting standards applica-
ble to them that make comparison with other firms dif-
ficult. Only the period January 1996 to March 2002 was
considered for selection of merger pairs of target and
bidder firms. All mergers in India occurring between
January 1, 1996 and March 31, 2002 were identified. This
period has been chosen, as it is relatively recent. It also
helps obtain three years of financial data for companies
both before and after the merger, for the purpose of the
analyses.
Only domestic mergers taking place in India were
selected. Cross-border mergers, i.e., in which either the
bidder or the target was based outside India, were
dropped. This was done to ensure homogeneity of the
economic and industrial environment so that
generalizability of the results could be achieved for In-
dian M&As. Firms for which three years of data, both
prior to and after the merger, were not available, were
dropped from the list. Pairs, for which data was una-
vailable for both the target and the bidder, and for which
complete information was not obtainable, were also
dropped.
The final sample size used for analyses was thus 87
pairs of mergers consisting of 174 firms (87 each of tar-
gets and bidders). The distribution of mergers across the
years is presented in Table 2.
The average relative size of the target to the bidder
firm is 0.59, where size is measured as the total assets of
the firm. This high relative size indicates that the target
LONG-TERM POST-MERGER PERFORMANCE OF FIRMS IN INDIA
Table 2: Distribution of Sample Mergers across Years
Year Number of Mergers Studied
1996 1
1997 11
1998 17
1999 8
2000 8 merger operating cash flows scaled by the operating
2001 26
2002 16
Total 87
might be playing an important role in determining the
extent of post-merger success of the entity.
Data Analyses Method
For about two decades, from the early 1970s to the early
1990s, wealth effects of M&A activities were gauged
using standard event study methodologies that calcu-
lated cumulative abnormal share price returns over a
window period around the date of the announcement
of the acquisition bid. However, such stock price returns
around the time of merger / acquisition announcement
are not indicative of the long-term performance post-
merger of the combination. Such studies only reflect
market expectations from the event and not the actual
economic gains or losses that actually result over a pe-
riod of time. Also, the real sources of such economic gains
cannot be identified using share price returns (Cornett
and Tehranian, 1992; Healy, Palepu and Ruback, 1992;
Rahman and Limmack, 2004).
This study thus uses long-term pre- and post-merger
financial data to assess firm operating performance. A
sufficiently long period is needed to analyse and under-
stand the impact of a merger since efficiency improves
over a long time horizon and not within short periods
(Ghosh, 2001; Healy, Palepu and Ruback,1992; Manson,
et al., 2000; Rahman and Limmack, 2004). Hence, we use
data three years prior to and subsequent to the merger
in line with Franks, Harris, and Titman (1991), Ghosh
(2001), Magenheim and Mueller (1988), and Rau and
Vermaelen (1998). Year 0, i.e., the year of the merger is
excluded from our analyses since its inclusion may cause
distortions due to changes in financial reporting caused
due to adjustments in accounting necessitated due to
the merger (Healy, Palepu and Ruback, 1992).
Pre-tax operating cash flow returns scaled by the op-
erating assets of the sample firms are used to measure
VIKALPA • VOLUME 33 • NO 2 • APRIL – JUNE 2008
the change in performance post-merger (Cornett
and Tehranian, 1992; Ghosh, 2001; Healy, Palepu and
Ruback, 1992; Rahman and Limmack, 2004). Actual eco-
nomic gains from assets are captured by cash flow meas-
ures. The change in operating performance attributable
to the merger is the comparison of the post- and pre-
assets. The pre-merger calculation done for both the tar-
get and the bidder for the period (-3 to -1) years, is the
sum of their operating cash flows for each year scaled
by the sum of their operating assets at the beginning of
the relevant year. This provides an idea of their perform-
ance if they had not merged and had continued as sepa-
rate entities.
Every firm operates in a particular industry and is
affected by the rules and regulations applicable, as also
the economic factors impinging on that specific indus-
try. It is thus necessary to take into account the effects of
the economy and industry in which each firm operates,
in order to make the comparison possible across firms
(Cornett and Tehranian, 1992; Ghosh, 2001; Healy,
Palepu and Ruback, 1992; Rahman and Limmack, 2004).
This factoring out of the external environmental impact
makes the comparisons across firms and industries
meaningful. The raw operating performance figures
obtained using the procedure outlined in the previous
paragraph are thus adjusted for industry and economic
effects by subtracting the median industry operating
performance.
Paired samples t-test is carried out to assess the dif-
ference in performance between AIACF I, POST and
AIACFI, PRE, where AIACF denotes the aggregate indus-
try-adjusted cash flows and the subscripts POST and PRE
refer to the period after and before the merger, the sub-
script I referring to the pair of merging firms. The paired
samples t-test compares the means of two variables from
the same group. It determines whether the difference
between the means of the two variables is significantly
different from zero. In our case, the two variables are
the aggregate industry-adjusted operating performance
of each pair of merged firms both before and after the
merger. Merger can be considered as an intervention that
takes place in our set of sample firms. The paired sam-
ples t-test thus determines whether there is a significant
change in the ‘before/after merger’ performance and
allows us to attribute the result to the merger.
The following cross-sectional linear regression model
is also estimated:
57
 AIACF I, POST = α + β.AIACF I, PRE + εI merger years. The results are depicted in Table 4.

This equation predicts the aggregate post-merger op- Table 4: Paired Samples t-test of Aggregate IACFI
erating performance of the merged entities using data between Specific Years Before/After Merger
pertaining to the aggregate pre-merger performance. The
Pair (years before/ Mean t-statistic Significance
y-intercept ‘α’ represents the change in annual control- after merger) (2-tailed)
adjusted performance due to the merger and is inde-
(-3,+1) 0.07 1.79 0.078 *
pendent of the pre-merger performance as its value is
(-3,+2) 0.10 2.46 0.016 **
obtained when the value of AIACFI, PRE is 0. The slope (-3,+3) 0.12 2.19 0.032 **
‘β’ represents the correlation between the cash flow re- (-2,+1) -0.01 -0.53 0.595
turns in the years prior to and subsequent to the merger. (-2,+2) 0.01 0.47 0.643
It depicts how much each unit change of AIACFI, PRE (-2,+3) 0.02 0.66 0.514
changes the value of AIACFI, POST. ‘εI’ is the error term, (-1,+1) -0.02 -0.87 0.385
i.e., the random disturbances from the regression line. (-1,+2) 0.01 0.30 0.763
The ‘β.AIACFI, PRE’ value is the effect of pre-merger per- (-1,+3) 0.01 0.35 0.729
formance on post-merger returns (Cornett and ** Significant at 5% level.
Tehranian, 1992; Ghosh, 2001; Healy, Palepu and * Significant at 10% level.
Ruback, 1992; Rahman and Limmack, 2004).
The firm performance appears to have improved sig-
nificantly in each of the three post-merger years in com-
EMPIRICAL RESULTS
parison to the third year before the merger. The
As already stated, the hypothesis is that mergers in In- improvement seems to be higher as the years progress
dia have resulted in improved long-term post-merger post-merger – the average IACFI in the first year after
firm operating performance. The paired samples t-test the merger is 0.07 (significant at the 10% level), increas-
for comparison of means provides a test statistic of 1.873 ing to 0.10 (significant at the 5% level), and 0.12 (signifi-
that is found significant at the 10 per cent confidence cant at the 5% level) in post-merger years two and three.
level, as shown in Table 3. The change in post-merger performance in each of the
three subsequent years compared to two years and one
Table 3: Paired Samples t-test for Before/After Merger year before the merger is not significant.
Performance Comparison
The paired samples t-test just described is one of the
Value Statistic Significance (2-tailed) techniques for determining any significant change in
Mean 0.028 1.873 (t-statistic) 0.064* firm performance, post-merger. A cross-sectional regres-
*Significant at 10% level. sion model is developed, after controlling for the effect
of the pre-merger average industry-adjusted cash flow
This indicates that the positive mean difference of on the post-merger performance. This helps in deter-
0.028 between AIACFI, POST and AIACFI, PRE is not due to mining whether post-merger firm performance im-
chance, and that merger has led to a significant improve- proves irrespective of the possible impact of the
ment in firm performance. This validates our hypoth- performance before the merger. This second technique
esis that mergers in India have resulted in improved has thus been adopted to act as a confirmatory tool for
long-term post-merger firm operating performance. This the previous findings.
result is the same as found by Cornett and Tehranian This model takes the form:
(1992), Ghosh (2001), Healy et al. (1992), Manson et. al.
(2000), and Rahman and Limmack (2004), but is contrary AIACF I, = 0.043 + 0.678.AIACF I, PRE
POST
to the findings of negative post-merger returns found (3.034)*** (8.628) ***
by Clark and Ofek (1994), and Ravenscraft and Scherer R2 = 0.467, F = 74.446***, N = 87, t-statistic in parentheses
(1987), among others. ***Significant at 1% level, using a 2-tailed test.
Paired samples t-test is also carried out comparing
the aggregate industry-adjusted cash flow of each of the The F-ratio, with a value of 74.446, is significant in
three post-merger years against each of the three pre- this model, which indicates that the regression is sig-

58 LONG-TERM POST-MERGER PERFORMANCE OF FIRMS IN INDIA

nificant. Further an R2 value of 0.467 shows that about
47 per cent of the variation in the dependent variable is
explained by the independent variable. We find that both
the intercept and AIACFI, PRE are significant at the 1 per
cent level. This shows that the pre-merger firm perform-
ance has a positive effect (0.678) on the post-merger re-
turns, i.e., for every unit change in this explanatory
variable, the dependent variable AIACFI, POST increases
by 0.678 units. Even after controlling for the effects of
pre-merger performance (AIACFI, PRE), the firms still
show increasing cash flow returns post-merger, at an
annual rate of 4.3 per cent, depicted by the intercept
value of 0.043. This means that firm performance after
the merger has improved significantly irrespective of
the impact of the pre-merger performance.
SOURCES OF ECONOMIC GAIN ON MERGER
We now decompose our measure of operating perform-
ance into its constituents, in order to ascertain the source
of the better long-term post-merger returns. Operating
cash flow scaled by the operating assets is the product
of the operating margin and the sales turnover. Thus,
CF/A = (CF/S) x (S/A)
Here, CF = Operating cash flow
S = Net sales
A = Operating assets
CF/A = My operating cash flow performance
measure
CF/S = Operating margin
S/A = Sales turnover
The operating margin depicts the cash flow return
obtained through each rupee of sales. The sales turno-
ver ratio provides me the unit sales generated through
investment in every rupee of assets, i.e., it connotes the
efficiency with which assets are utilized to generate sales.
The performance of the merging firms on each of these
measures is studied next.
Post-merger Long-term Operating Margin
Performance
This section examines the operating margin perform-
ance of the combined firms after the merger. The attempt
is to determine whether this performance is better as
compared to the pre-merger performance of these same
firms that had not merged.
Two pairs of merging firms—Sun Pharmaceuticals
and M J Pharmaceuticals, and Usha Ispat and Usha
Udyog—are dropped from this analysis, since on ana-
lysing for outliers, it was found that the values pertain-
ing to these pairs lie beyond three standard deviations.
Data on three pairs of merging firms could not be ob-
tained. The new sample size is thus 82 pairs of merging
firms.
From Table 5, it is found that the aggregate post- and
pre-merger industry-adjusted operating margins
(AIAOMI, POST and AIAOMI, PRE) are 5.17 per cent and -
1.82 per cent across the sample of 82 merging pairs of
firms. The average operating margin appears to have
increased after the merger.
We find that the firms have not been faring signifi-
cantly differently from the industry before the merger.
Except for the year -2 before the merger, the industry-
adjusted operating margins are insignificant in every
year pre-merger, with the aggregate across the three
years also being insignificant. But, we find that the in-
dustry-adjusted operating margin is significantly posi-
tive every year after the merger, except in year +3 where
it is positive though not significant, and the aggregate
across the three years post-merger is also significantly
positive.
We have used paired t-test to ascertain whether there
is an improvement in firm operating margins, post-
merger.
Table 5: Comparative Pre- and Post-merger Industry-
adjusted Operating Margin Performance of
the Combined Firms, N=82
Year Relative to Merger Industry-adjusted Average
Operating Margin of the
Combined Firm (%)
-3 -9.70 (-0.505)
-2 18.53 (1.868) *
-1 -14.69 (-0.719)
Aggregate pre- merger -1.82 (-0.23)
performance for years -3 to -1
+1 5.91 (3.829) ***
+2 6.78 (2.967) ***
+3 2.82 (1.447)
Aggregate post-merger 5.17 (4.672) ***
performance for years +1 to +3
t -values in parentheses
*** Significant at 1% level, using a two-tailed test.
* Significant at 10% level, using a two-tailed test.

VIKALPA • VOLUME 33 • NO 2 • APRIL – JUNE 2008 59

Table 6: Do Operating Margins Change Post-merger?
(N=82)
Test Used Test Statistic
Paired t-test for equality of the means of the t = -0.901
aggregate industry-adjusted operating margin
post- and pre-merger
The test statistic, -0.901, is insignificant as shown in
Table 6.
Even though the test for equality of means shows an
insignificant t-statistic, we see from Table 5, that the in-
dustry-adjusted aggregate operating margin in the pre-
merger period is insignificant, whereas it is significant
in the post-merger period. This indicates an absolute
improvement in the operating margin performance of
the merging firms in the post-merger period compared
to their industries, though statistically, this performance
does not appear to be significantly better than in the pre-
merger period.
We have constructed a cross-sectional regression
model controlling for the effect of the aggregate indus-
try-adjusted operating margin pre-merger (AIAOMI, PRE)
on the aggregate industry-adjusted operating margin
post-merger (AIAOMI, POST). This helps in determining
whether post-merger firm operating margin perform-
ance improves irrespective of the possible impact of the
performance before the merger.
The model takes the form:
AIAOM I, = 0.052 + 0.027.AIAOM I, PRE
POST
(4.773) *** (1.741) *
R2 = 0.037, F = 3.032*, N = 82, t-values in parentheses
*** Significant at the 1% level, using a two-tailed test.
* Significant at the 10% level, using a two-tailed test.
We find that both the intercept and the aggregate
industry-adjusted operating margin pre-merger
(AIAOMI, PRE) are significant. This shows that for every
unit change in the pre-merger firm operating margin per-
formance, the dependent variable, the aggregate indus-
try-adjusted operating margin post-merger (AIAOMI,
POST), increases by 0.027 units. Thus, it indicates persist-
ence of pre-merger operating margin performance in the
post-merger period considered.
Even after controlling for the effect of the aggregate
industry-adjusted operating margin pre-merger
(AIAOM I, PRE) , the firms still show increasing operat-
ing margin post-merger, at an annual rate of 5.2 per cent,
60
depicted by the intercept value of 0.052. This means that
firm operating margin after the merger is significantly
positive irrespective of the impact of the pre-merger per-
formance. It is not zero or negative.
Since we have scaled the operating cash flow meas-
ure by the net sales of the merging firm, the significant
post-merger operating margin reported above, indicates
that the merged firms appear to have generated higher
operating cash flows per unit net sales, after the merger.
This is especially obvious since the pre-merger firm raw
operating margin performance is not better than the
corresponding industry performance. This means that
the merger has led to better operating margins. The bet-
ter operating margin might reflect the lowering of fixed
costs due to the merger, which in turn might indicate
the growth in the economies of scale. My earlier obser-
vation that the industry in India has been fragmented
for historical reasons, with economic liberalization lead-
ing firms on a quest to derive higher economies of scale
through M&A activity, thus appears to be vindicated
through this improvement in post-merger firm operat-
ing margins.
Post-merger Long-term Sales Turnover Performance
We now study, in a similar manner, the sales turnover
performance of the combined firms after the merger
takes place.
One pair of merging firms—India Foils and Light
Metal Industries—has been dropped from this analysis,
since on analysing for outliers, the values pertaining to
this pair was found to lie beyond three standard devia-
tions. Even data on three pairs of merging firms could
not be obtained. The new sample size is thus 83 pairs of
merging firms.
From Table 7, we find that the aggregate post-
and pre-merger industry-adjusted sales turnovers
(AIASTI,POST and AIAST I, PRE) are 25.91 per cent and 19.33
per cent across the sample of 83 pairs of merging firms.
The average sales turnover appears to have increased
after the merger.
We find that the merging firms have not been faring
significantly differently from the industry before the
merger. The industry-adjusted sales turnovers are in-
significant in every year pre-merger, with the aggregate
across the three pre-merger years also being insignifi-
cant. But, we find that the industry-adjusted sales turno-
ver is significantly positive every year after the merger,
LONG-TERM POST-MERGER PERFORMANCE OF FIRMS IN INDIA
Table 7: Comparative Pre- and Post-merger Industry- AIASTI, = 0.120 + 0.720.AIASTI, PRE
POST
adjusted Sales Turnover Performance of the (1.257) (8.163) ***
Combined Firms, N=83 2 ***
R = 0.451, F = 66.634 , N = 83, t-values in parentheses
Year Relative to Merger Industry-adjusted Average *** Significant at 1% level, using a two-tailed test.
Sales Turnover for the
Combined Firm (%)
We find that the aggregate industry-adjusted sales
-3 27.94 (1.562) turnover pre-merger (AIASTI, PRE) is significant. This
-2 16.94 (1.252) shows that for every unit change in the pre-merger firm
-1 15.3 (1.397) sales turnover performance, the dependent variable, the
Aggregate Pre- merger 19.33 (1.645)
aggregate industry-adjusted sales turnover post-merger
Performance for years -3 to -1
(AIAST I, POST), increases by 0.72 units. Thus, it indicates
+1 29.04 (2.122) **
persistence of pre-merger sales turnover performance
+2 20.17 (1.412)
+3 28.52 (2.256) **
in the post-merger period considered.
Aggregate Post-merger 25.91 (2.057) **
However, the intercept, 0.120, is not significant. This
Performance for Years +1 to +3 means that we cannot infer that firm sales turnover af-
t -values in parentheses ter the merger is significantly different from pre-merger
*** Significant at 1% level, using a two-tailed test.
levels. We cannot thus conclude that mergers have led
** Significant at 5% level, using a two-tailed test.
to a higher sales turnover, which indicates that it is rather
unlikely that merged firms have generated higher in-
except in year +2, and the aggregate across the three
cremental sales utilizing their assets more efficiently.
years post-merger is also significantly positive.
The analyses indicate the possible increase in mar-
We have used paired t-test, as before, to ascertain
ket power due to mergers in India. This is supported by
whether there is an improvement in the firm sales turno-
the finding of a significant increase in the operating mar-
ver performance, post-merger.
gins after the merger, though the effect on the output
has not been studied in order to be able to make con-
Table 8: Does Sales Turnover Change Post-merger?
(N=83) firmatory comments. However, the efficiency of utiliza-
tion of assets to generate higher sales does not appear to
Test Used Test Statistic have increased as shown by the insignificant change in
Paired t-test for equality of the means of the t = -0.665 sales turnover post-merger.
aggregate industry-adjusted sales turnover
post- and pre-merger
CONCLUSION
The test statistic, -0.665, is insignificant as shown in The objective of this paper was to test the hypothesis
Table 8. This indicates that the mean difference between that mergers in India have helped firms perform better
the aggregate industry-adjusted sales turnover post- in the long-term. A comprehensive understanding and
merger (AIAST I, POST) and the aggregate industry-ad- an analysis of the Indian industrial and economic con-
justed sales turnover pre-merger (AIAST I, PRE) is due to text, juxtaposed with studies carried out in the other
chance, and it cannot be inferred that merger has led to markets, assisted in my arriving at this hypothesis, as is
a significant improvement in firm sales turnovers. evident from the section on the review of extant empiri-
A cross-sectional regression model has also been con- cal literature. My hypothesis that mergers in India have
structed, controlling for the effect of the aggregate in- resulted in improved long-term post-merger firm oper-
dustry-adjusted sales turnover pre-merger (AIAST I, PRE) ating performance stands validated through this study.
on the aggregate industry-adjusted sales turnover post- We are in a position to conclude that, on an average,
merger (AIAST I, POST ). This helps in determining merging firms in India appear to have performed better
whether post-merger firm performance improves irre- financially after the merger, as compared to their per-
spective of the possible impact of the performance be- formance in the pre-merger period. This improvement
fore the merger. in performance can be attributed to the merger. En-
The model takes the form: hanced efficiency of utilization of their assets by the

VIKALPA • VOLUME 33 • NO 2 • APRIL – JUNE 2008 61

merged firms appears to have led to the generation of
higher operating cash flows. Synergistic benefits appear
to have accrued to the merged entities due to the trans-
formation of the uncompetitive, fragmented nature of
Indian firms before merger, into consolidated and op-
erationally more viable business units. What this study
thus indicates is that in the long run, mergers appear to
have been financially beneficial for firms in Indian in-
dustry.
On studying the long-term post-merger performance
of firms by the two constituents of the measure of per-
formance (operating cash flow scaled by the assets) –
operating margin and sales turnover – we are able to
obtain some insights into the sources of economic gains.
The long-term post-merger operating margin of firms,
on an average, appears to have improved. This means
that higher incremental operating cash flows are being
Acknowledgment. The author would like to thank Prof. Sushil
Khanna, Indian Institute of Management, Calcutta, for his com-
ments on an earlier draft of this paper.
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