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Post-Merger performance of companies: Special reference to cross

border merger


Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and
management dealing with the buying, selling and combining of different companies that can aid,
finance, or help a growing company in a given industry grow rapidly without having to create
another business entity. Merger is a tool used by companies for the purpose of expanding their
operations often aiming at an increase of their long term profitability. The world economy is
divided between mature and emerging markets. The recent trend of an increase in buyers from
emerging markets investing in mature markets can have a dynamic effect on the deals space. Due
to the monetary easing policies of developed countries, banks and corporates have more funds
which are deployed towards M&A activities. The ownership advantage, location advantage and
internalization advantage, factors such as the search for market power, efficiency gains through synergies,
size, diversification, and financial motivations affect the decision of firms to undertake cross-border
M&As. Organizations which aspire to expand across geographies are funding their cross-border
acquisitions through a mix of local and foreign financing.

Indian Scenario

M&As have become an integral part of the Indian economy and daily headlines. Based on
macroeconomic indicators, India is on a growth trajectory, with the M&A trend likely to
continue. Indian acquisitions are in cash, rather than stock, this raises questions in terms of
ability to finance acquisition, the route taken to do so and the impact of additional leverage on
the balance sheets of Indian Acquirers. The Indian Companies Act section 372A requires
shareholder approval for investments above 60% of net worth, however many large acquisitions
such as Tata Steel - Corus, Bharti - Zain deal have been routed via Special Purpose Vehicles in
which case the shareholders of acquiring companies are not required to give their consent. This
raises questions on protection of share holder interests and their say in large cross border
acquisitions undertaken by Indian firms.

Literature review

Roy and Prasad (2004) found that there is no major improvement on expenses to income, return
to equity or dividend per share once the merger takes place particularly in Indian airline
companies. He also took a t-test and concluded that there is insignificant difference on financial
performance before merger and post merger on airline companies. When it comes to airline
industry he noticed that there is no or very little benefit of merger on the liquidity or capital
market standards of the surviving company. The P/E ratio of the companies declined heavily and
shareholders lost confidence post merger. Also he noticed that most mergers that took place in
airline industry lost their market value and shareholders started to pool out their money from the
new merger entity.

Saboo and Gopi (2009) conducted the study to uncover the conjecture that cross border merger
is better in terms of liquidity or profitability than mergers which take place within the country.
He unveiled that firms which acquire domestic firms have better financial ratios and are
performing better that the firms which are crossing the border to acquire other firm. He also
explained that the type of merger i.e. cross border or domestic merger plays an important role
when it comes to evaluating a merger and it has significant impact. Also his findings show that
Return on net worth and return on capital employed declines significantly in the case of cross
border merger but has a positive impact when it comes to domestic merger. He also deduced that
most of the cross border merger uses both equity and debt to finance their merger because of
which debt to equity ratio remain constant.

Gupta and Sinha (2011) concluded that merger positively hits the Profit Before Interest, Tax,
Depreciation and Amortization but has a reverse impact on the liquidity position condition of the
company. He stated that companies have been deficient in managing their capital structure but
overall merger has benefited them. When it comes to risk most of the companies in his study
showed a great decline. He also stated that company’s debt responsibility is an important factor
and plays a crucial role in generating profit post merger and act as a major factor for
management while taking decisions. Diversification according to them is the main element that
helps to lower down the non- systematic risk thus enabling a company to bring down its overall

Kaushik and Chaudhary(2010) found out the financial efficiency of the companies post and
pre merger using two approaches i.e. ratios approach and the Rank approach. They came out
with some interesting findings and deduced that earing per share along with debt to equity ratio
change very significantly once the merger takes place while the liquidity position of the company
doesn’t show any major changes. Returns on net worth and profit before tax did not have any
substantial value when compared before the merger and post merger. They finally concluded that
merger benefits cannot be realized in the short term and company in order to capture the market
or increase their cash pile need to look for long term perspective. Profit before tax has shown a
progressive trend ain all the companies they took for their research.

Duggal (2015) conducted the study to find out the impact of mergers on while taking the time
factor in pharmaceutical industry. He did his study by taking 8 firms into consideration between
the period 2000-2006. According to him merger create a great synergy but its effect can be
realized only after a year i.e. the year suceeding the merger. According to him merger benefit last
only for a year or so and in long term overall there is no major advantage of merger post that
period. Ratios like Net profit margin and Profit before interest and tax improves significantly but
the effect only lasted for a year. Also he noticed that the liquidity position of the company
improves significantly after merger but only after a year.

Inoti, Onyuma and Muiru (2014) conducted the research to find post merger impact on
companies in India. His main area of interest was to examine the effect of merger on the asset
utilization of the acquiring company. In order to conduct his study, he took 3 years of data and
concluded that there is no significant difference in the financial ratios post and pre merger. The
net profit ratio along with the earning per share decreased significantly.

Ravichandran, Nor & Said (2010), in their paper, have tried to evaluate the efficiency and
performance for selected public and private banks before and after the merger, as a result of
market forces. After doing a factor analysis, they narrow down the variables for their study to
Profit Margin, Current Ratio, Ratio of Advances to Total Assets, Cost Efficiency (ratio of cost to
total assets) and Interest Cover and thereafter a regression is run to identify the relationship
between these factors and return on shareholders‟ funds. The results indicate that cost efficiency,
advances to total assets and interest cover are significant during both the pre and post-merger
phases. Also the returns on shareholders‟ funds is negatively related to cost efficiency and
interest cover but is positively related to ratio of advances to total assets.

Rani, Yadav and Jain (2008) where they examine the short run abnormal returns to India based
mergers by using event study methodology. The short term effects are of interest because of the
immediate trading opportunities that they create. They start by discussing the present state of the
Indian Pharmaceutical Industry and go on to explore some specific cases of acquisitions of
foreign companies by Indian pharma majors. The calculate the abnormal returns and cumulative
abnormal returns for foreign based acquisitions, mergers and Indian based acquisitions separately
and conclude that abnormal returns are highest in case of foreign based acquisitions and
lowest(negative) for India based mergers.

Kumar &Bansal (2008), in their study, try to find out whether the claims made by the corporate
sector while going for M&As to generate synergy, are being achieved or not in Indian context.
They do so by studying the impact of M&As on the financial performance of the outcomes in the
long run and compare and contrast the results of merger deals with acquisition deals. This
empirical study is based on secondary financial data and tabulation. Ratio analysis and
correlation are used for analysis. The results indicate that in many cases of M&As, the acquiring
firms were able to generate synergy in long run, that may be in the form of higher cash flow,
more business, diversification, cost cuttings etc. A limitation of their research is that it shows that
management cannot take it for granted that synergy can be generated and profits can be increased
simply by going for mergers and acquisitions.

Anand & Singh (2008) study the effect of five specific mergers in the Indian banking sector on
the shareholder’s wealth. These are mergers of the Times Bank with the HDFC Bank, the Bank
of Madura with the ICICI Bank, the ICICI Ltd. with the ICICI Bank, the Global Trust Bank with
the Oriental Bank of Commerce, and the Bank of Punjab with the Centurion Bank. The merger
announcements in the have positive and significant shareholder wealth effect both for bidder and
target banks. The market value weighted CAR of the combined bank portfolio as a result of
merger announcement is 4.29 per cent in a three day period (-1, 1) window and 9.71 per cent in a
11-day period (-5, 5) event window. The findings of the study are in agreement with the
European and the US bank mergers and acquisitions except for the fact that the value to the
shareholders of bidder banks has been destroyed in the US context.


 To know the effect of merger on shareholders

 To evaluate the pre and post-merger financial performance of selected
 To know the impact of post merger on the cash flows of the company.


H0:Financial performance of companies has not improved after the cross border
merger and acquisition.

H1:Financial performance of companies has improved after the cross border

merger and acquisition

H0:There is no positive impact of merger on shareholders.

H1:There is a positive impact of merger on shareholders.

H0:Cash flows of the company has not significantly improve after the merger.

H1:Financial ratios of the company improves post merger.

Statement of problem

This research has been conducted to to see if the merger actually helps the company to grow and
expand along with which merger has more impact i.e. cross border merger or domestic merger.

Since mergers and acquisition is a vast topic and there is plethora of information available our
study will be limited to five mergers which are either inbound merger or outbound merger that
took place in India or abroad.