International Journal of Commerce and Management

Financial performance analysis of mergers and acquisitions: evidence from India

Neelam Rani Surendra S Yadav P K Jain
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Neelam Rani Surendra S Yadav P K Jain , (2015),"Financial performance analysis of mergers and
acquisitions: evidence from India", International Journal of Commerce and Management, Vol. 25 Iss 4
pp. 402 - 423
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Satish Kumar, Lalit K. Bansal, (2008),"The impact of mergers and acquisitions on corporate
performance in India", Management Decision, Vol. 46 Iss 10 pp. 1531-1543 http://
dx.doi.org/10.1108/00251740810920029
Moshfique Uddin, Agyenim Boateng, (2009),"An analysis of short-run performance of cross-border
mergers and acquisitions: Evidence from the UK acquiring firms", Review of Accounting and Finance,
Vol. 8 Iss 4 pp. 431-453 http://dx.doi.org/10.1108/14757700911006967
K. Srinivasa Reddy, Vinay Kumar Nangia, Rajat Agrawal, (2013),"Corporate mergers and financial
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IJCOMA
25,4
402
Received 30 November 2012
Revised 11 April 2013
Accepted 21 April 2013
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International Journal of Commerce
and Management
Vol. 25 No. 4, 2015
pp. 402-423
© Emerald Group Publishing Limited
1056-9219
DOI 10.1108/IJCoMA-11-2012-0075
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1056-9219.htm
Financial performance analysis
of mergers and acquisitions:
evidence from India
Neelam Rani, Surendra S. Yadav and P.K. Jain
Department of Management Studies, Indian Institute of Technology Delhi,
New Delhi, India
Abstract
Purpose – The purpose of this paper is to investigate the impact of mergers and acquisitions (M&A)
on corporate performance. It addresses the major question related to the long-term performance of the
acquiring firm.
Design/methodology/approach – The paper uses the long-term pre- and post-merger financial data
to investigate the long-term performance. It compares performance of the acquiring firms before and
after M&A. The present work conducts a comprehensive ratio analysis of 14 major ratios related to
profitability, efficiency, leverage and liquidity. To ascertain the sources of the better long-term
post-M&A returns, the present work decomposes the measure of operating performance into its
constituents in terms of Du Pont analysis.
Findings – Taking a sample of 305 M&As during the period of January 2003 to December 2008, it has
been observed that there is significant improvement in the profitability of the acquiring companies
involved in M&A. The results pertaining to profitability, efficiency (in terms of utilization of fixed
assets), expense and liquidity ratios show that there is an improvement in performance of the acquiring
firms in the post-M&A period. The analysis in terms of Du Pont shows improvement in the long-term
operating profit margin of the acquiring firms. This means higher profit is generated per unit net sales
by the acquiring firms after the M&A. The higher profits (profit before interest and taxes and
non-operating income) are generated primarily due to the better operating margins. The improved
operating cash flows are on account of the improvement in the post-M&A operating margins of the
acquirers, not due to the efficient utilization of the assets turnover to generate higher sales.
Originality/value – The paper contributes to the existing literature by comparing operating
performance and profitability of acquirers before and after M&A using a comprehensive set of 14 ratios
for a substantially large sample.
Keywords Synergy, Financial performance, Operating performance, Leverage, Liquidity,
Merger and Acquisition, Return on equity
Paper type Research paper
1. Introduction
Mergers and acquisitions (M&A) have been an important component of corporate
strategy and represent an important alternative for strategic expansion. But, does the
financial performance of the acquiring firm (in long term) really improve following
M&A? The present paper addresses this basic question related to performance of
acquiring firms. It intends to measure the impact of M&A on long-term performance of
the acquiring firms. It investigates profitability as well as operating performance. This
study uses long-term pre- and post-M&A financial data to assess firm operating
performance. A sufficiently long period is required to analyze and understand the
 impact of M&A, as efficiency improves over a long time horizon. Hence, a framework of Financial
a period of 10 years has been selected for financial analysis. Financial performance of performance
five years prior to and subsequent to the M&A has been compared. analysis
If the motive for M&A is anticipation of synergies, then benefit of expected synergies
always leads to improvement in performance and profitability following M&A. Thus,
examining the post-M&A profitability of acquirers to determine whether the expected
synergies are realized is the appropriate way to test the hypothesis. The present study 403
focuses on four major aspects of change in performance, namely, profitability,
efficiency, leverage and liquidity.
The present study provides evidence that in the long run, M&A appear financially
beneficial for the acquiring companies. The present work suggests that profitability of
acquiring firms improves during the post-M&A phase. Enhanced efficiency in
utilization of fixed assets by the acquiring firms appears to generate higher operating
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profits. Acquirers seem to realize synergistic benefits of M&A by controlling expenses,

specially selling, general and administration. Liquidity performance during the post-
M&A period are also improved. The analysis in terms of Du Pont shows improvement
in the long-term operating profit margin of the acquiring firms. However, assets
turnover of the acquiring firms do not seem to be improved after M&A.
For better exposition, the remainder of the paper has been organized in four sections.
Section 2 reviews select relevant existing empirical works on the subject. Section 3
delineates sources of data and research methodology; it also describes the variables and
empirical method used in analysis of pre-merger and post-merger corporate
performance; Section 4 documents the empirical findings. Finally, Section 5 discusses
concluding observations and implications.

2. Literature review
The performance of M&A has been an ongoing debate. Voluminous literature exists to
support the debate on whether mergers are wealth-enhancing or value-reducing events.
Empirical work on the issue has adopted two major approaches, share price analysis
and accounting measure analysis, to investigate the issues related to mergers
profitability. Investigations based on share price analysis use event studies to examine
the abnormal returns to shareholders during the period surrounding announcement of
merger deals. These studies have not been able to investigate the long-term economic
gains of mergers. Accounting studies examined the reported financial results to assess
post-merger performance of corporates.
These studies have focused on the accounting statements of the acquirers pre-merger
and post-merger to observe how financial performance changes. The present section
briefly describes the survey of relevant studies in this context.
Ravenscraft and Scherer (1989) examined financial performance of target firms
during 1957-1977 in the USA. They investigated 2,732 lines of business by US
manufacturing companies. They observed that mergers have a substantial negative
impact of 13.34 per cent on post-merger profitability and concluded that mergers
destroy value in respect of profitability.
Healy et al. (1992) investigated the 50 largest US acquisitions during the period of
January 1979 to June 1984. They analyzed the post-merger operating performance of the
combined firms using industry median as a benchmark. They observed that operating
 IJCOMA performance improves significantly after merger; however, the study has been criticized
25,4 for using industry median firms as a benchmark.
Switzer (1996) extended the Healy et al. (1992) study to analyze the operating
performance of a larger sample of 327 merged firms during a larger period, 1967-1987, in
the USA. She criticized Healy et al. (1992) for analyzing the large 50 mergers and dealing
with the time period categorized as “merger mania”. She documented the improved
404 post-merger operating efficiency for a substantially large sample, involving a larger
period. She also observed a positive association between abnormal return surrounding
the announcement and the long-term performance of the merged firms.
Ramaswamy and Waegelein (2003) examined the financial performance of the target
and acquiring firms over a five years post-merger period using a sample of 162 US firms
during the period of 1975-1990. They used industry adjusted cash flow returns on
market value of assets as a measure of performance in a similar manner as Healy et al.
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(1992). They also observed a significant improvement in post-merger financial

performance.
Ghosh (2001) investigated performance of 315 US mergers completed during the
period of 1981-1995. He used control firms as a benchmark instead of industry median
firms unlike Healy et al. (1992). He selected the control firms matched on performance
and total asset size from pre-merger years to use as a benchmark. The study also
replicated the methodology used by Healy et al. (1992). He did not observe a better
operating performance.
Parrino and Harris (1999) examined the operating performance of 197 mergers
during 1982-1987. They observed a significant increase of 2.1 per cent in acquirers’
operating cash flow return post-merger. The study defined the cash flow return as
operating cash flow divided by market value of assets.
Manson et al. (2000) further investigated a sample of 44 takeovers in the UK during
1985-1987 by using the similar cash flow variables and methodology used by Healy et al.
(1992). They observed significant operating as well as non-operating gains resulting
from the takeovers in the UK.
Sharma and Ho (2002) also replicated the methodology used by Healy et al. (1992).
They used a sample of 36 manufacturing firms during 1986-1991 in Australia to
investigate the improvement in post-acquisition operating efficiency. They used
matched samples based on assets size and industry to control for industry and economic
factors. However, they did not observe significant improvement in post-acquisition
operating performance.
Yeh and Hoshino (2000) investigated the impact of M&A on both the acquiring firms’
stock prices and financial performance by using a sample of 20 Taiwanese corporations
during 1987-1992. They used accounting measures to examine post-merger
profitability, financial health and growth of the acquirers. They observed that the stock
market reacts positively to the announcements of M&A, but profitability shows a
downward change from pre-merger to post-merger periods. Unlike previous studies,
they did not observe any significant correlation between stock returns and the change in
accounting performance.
Rahman and Limmack (2004) investigated operating performance of an
industry-matched control sample of 94 listed and 113 private Malaysian companies
during 1988-1992. Their findings reveal that post-merger operating performance
improved to the extent of 3.75 per cent per year.
 Gugler et al. (2003) analyzed the effects of mergers around the world by using a large Financial
panel of data over 15 years. They examined effects of mergers by comparing the performance
performance of profitability and sales of the merging firms with control groups of
non-merging firms. Their findings show that mergers result in significant increases in
analysis
profits but reduce the sales of the merging firms. They observed similar post-merger
patterns across countries. They did not trace differences between mergers in the
manufacturing and the service sectors and between domestic and cross-border mergers. 405
The study also reports that conglomerate mergers decreased sales more than horizontal
mergers.
Ghosh and Jain (2000) investigated whether merging firms increase their financial
leverage after mergers on the basis of a sample of 239 mergers during 1978 and 1987 in
the USA. Their results show that the mean financial leverage increases by 17 per cent
compared to the pre-merger financial leverage of the combined firms.
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Studies of mergers in India are very few. Moreover, these empirical investigations
focused on comparing pre-merger and post-merger performance on a case-to-case basis.
Pawaskar (2001) conducted an investigation in India by using the methodology
developed by Cosh et al. (1998) and Mueller (1986) to analyze the pre- and post-merger
operating performance of acquiring firm. He also identified the sources of
merger-induced changes by using a sample of 36 mergers during 1992-1995. The
findings of his study reveal that there is no significant improvement in corporate
performance post-merger. The study has certain limitations related to control group
used and the small size of the sample.
Ramakrishnan (2008) studied a sample of 87 domestic mergers of Indian companies
during the period of 1996-2002 to study the long-term performance of merged
companies. The study reveals improvement in the post-merger operating performance
of merging firms.
In an empirical survey of 152 companies, Rani et al. (2010) observed that the primary
motive of mergers in India during 2003-2008 has been to take advantage of synergies.
Operating economies, increased market share and financial economies have been
indicated in order of importance as the desired synergies to be gained through corporate
merger in India.
In a review paper, Bruner (2002) reported that out of fifteen studies he reviewed on
acquiring firms’ financial performance post-merger and acquisition, four studies
reported negative performance post-acquisition and three studies reported significantly
positive performance, eight studies reported non-significant change.
Mueller (1980) did not notice any consistent pattern of either improved or
deteriorated profitability in a review of studies across seven nations (Belgium, German,
France, The Netherlands, Sweden, the UK and the USA). In an Indian Context, Selvam
et al. (2009); Kumar and Bansal (2008); Leepsa and Mishra (2012); Kumar (2009); and
Sinha et al. (2010) observed mixed results in terms of post-M&A profitability and
liquidity. However, these studies examined the performance of small samples.
Table I summarizes the studies that analyze financial performance post-M&A. It is
evident from the findings of various studies that empirical research on post-merger
long-term performance throughout the world has not converged to a conclusion of
whether mergers are wealth-enhancing or value-destroying. In the present study, an
attempt has been made to examine post-M&A performance by utilizing operating
performance, as well as profitability measures. The study focuses on analysis of
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M&A
25,4

406

Table I.
IJCOMA

performance post-
analyzing financial
Summary of studies
Author Sample period Country Sample size Major finding Impact

Ravenscraft and Scherer 1950-1977 USA 2,732 Acquired firms do not earn positive abnormal Negative
(1989) returns compared to their control in the post-
merger period
Healy et al. (1992) 1979-1984 USA 50 Merged firms show significant improvements Positive
in operating performance
Switzer (1996) 1967-1987 USA 324 Merged firms show significant improvements Positive
in operating performance
Ghosh (2001) 1981-1995 USA 315 Acquisitions fail to achieve synergy gains. No difference on return on assets
Acquirers do not experience difference in Positive on cash flows
return from control sample following
acquisitions. Improvement in cash flows
Ramaswamy and 1975-1990 USA 162 Merged firms show significant improvement Positive
Waegelein (2003) in operating cash flow
Meeks (1977) 1964-1972 UK 233 ROA for acquiring firms declined in post- Negative
merger period
Chatterjee and Meeks 1977-1990 UK 144 UK mergers do not exhibit any increase in No difference before 1985
(1996) profitability after merger before 1985 But Positive during 1985-1990
significant improvement in profitability
during 1985-1990
Manson et al. (2000) 1985-1987 UK 44 Acquirers experience significant operating as Positive
well as non-operating gains
Sharma and Ho (2002) 1986-1991 Australia 36 Operating performance does not improve Negative
post-merger
Rahman and Limmack 1986-1991 Malaysia 94 Operating performance improve post-merger Positive
(2004)
Yeh and Hoshino (2000) 1987-1992 Taiwan 20 No improvement in post-merger performance No difference
Pawaskar (2001) 1992-1995 India 36 Post-merger profitability does not increase No difference
Ramakrishnan (2008) 1996-2002 India 82 Merged firms realize synergy benefits Improvement in post-merger
post-merger operating returns
 changes in operating performance as well as profitability. The change is examined by Financial
comparing operating performance and profitability before and after merger. The study performance
contributes to the existing literature by comparing operating performance and
profitability of acquirers before and after M&A using a comprehensive set of 14 ratios
analysis
for a substantially large sample.

3. Methodology, data and scope of the study 407

The methodology aims at examining whether the financial performance of the acquiring
firm really improves following M&A. The secondary sources of data have been used for
the present study. The major sources are the Prowess database of Center for Monitoring
Indian Economy (CMIE), Capitaline, the National Stock Exchange (NSE) Web site and
the Bombay Stock Exchange (BSE). The study is performed on the database that
includes the ten-year data of the acquiring company.
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The sample for this study consists of acquiring companies involved in M&A during
January 2003 to December 2008. The sample period was selected to have sufficient data
to show post-M&A performance. The period was chosen keeping in mind the
availability of five-year post-M&A data of the acquiring firms. The reference period for
the study includes the five years before and five years after the M&A, that is January 1,
1998-June 30, 2012.
The initial announcements of M&A by public-listed Indian companies were
identified from the CMIE database Prowess. Various filters as stated below were used to
select the final sample:
• M&A made by financial companies.
• Denials of news of deal by subsequent companies.
• Mergers which were not approved by the government.
• Announcements of M&A which were withdrawn subsequently.
• Acquisitions of business, assets, divisions and brands.
• Acquisitions of less than controlling stake were excluded from the sample.
Information regarding completion of a merger were obtained from Web sites of BSE,
NSE and annual reports of the companies. These exclusions left us finally with a sample
of 383 M&A. Hence, the study was limited to the performance of acquiring firms only.
The final sample consists 383 M&A. Table II describes the distribution of the sample
across years. It is evident from the table that the maximum 38 per cent of M&A took
place in 2007. Extreme values were excluded from the data to avoid the influence of

Year No. of merger and acquisition studied No. of merger and acquisition analyzed

2003 23 (6%) 19 (6.2%)

2004 21 (5.4%) 17 (5.6%)
2005 37 (9.6%) 30 (9.8%)
2006 87 (22.7%) 77 (25.2%) Table II.
2007 144 (37.6%) 112 (36.7%) Distribution of
2008 71 (18.4%) 50 (16.4%) sample across years,
Total 383 (100%) 305 (100%) 2003-2008
 IJCOMA outliers. After analyzing data for outliers, the values beyond three standard deviations
25,4 were dropped from the analysis. Only those firms were retained in analysis for which
data is available in pairs of before and after M&A. The mean of following pairs were
analyzed:
• One year before and after M&A (⫺1, 1).
408 • One year before and two years after M&A (⫺1, 2).
• One year before and three year after M&A (⫺1, 3).
• One year before and four years after M&A (⫺1, 4).
• One year before and five years mean after M&A (⫺1, 5).
• Two years before and after M&A (⫺2, 2).
• Three years before and after M&A (⫺3, 3).
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• Four years before and after M&A (⫺4, 4).

• Five years before and after M&A (⫺5, 5).

Owing to these inconsistencies, the number of firms utilized for long-term analysis of
financial performance (ratio analysis) varied, that is 305 firms for one year before and
after M&A, 295 firms for one year before and two years mean after M&A (⫺1, 2), 260
firms for one year before and three years mean after M&A (⫺1, 3), 230 firms for one year
before and four years mean after M&A (⫺1, 4), 133 firms for one year before and five
years mean after M&A (⫺1, 5), the mean of two years before and after M&A (⫺2, 2) of
285 firms, the mean of three years before and after M&A (⫺3, 3) of 259 firms, the mean
of four years before and after M&A (⫺4, 4) of 214 firms, the mean of five years before
and after M&A(⫺5, 5) of 124 firms were analyzed. The final sample consists of 63.3 per
cent firms in the manufacturing sector, 31.15 per cent firms in the services sector, 4.92
per cent in construction and real estate, 1.3 per cent in mining, electricity and diversified
sector (Figure 1).
The study used the long-term pre- and post-merger financial data to investigate the
long-term performance. We used data for five years prior to and subsequent to the
merger. Year 0, that is the year of merger, is excluded from the calculation, as its
inclusion may result in distortion due to changes in reporting because of M&A. Hence,
the reference period of financial performance analysis is January 1, 1998-June 30, 2012.
We reported the financial performance of the companies for ten years, that is segregated
five years before and five years after the event. Pre-merger (period ⫺5 to ⫺1) and

(2, 0.7%) (1, 0.3%)(1, 0.3%)

(15, 4.92%)
Manufacturing

Services

(95, 31.15%) Costrucon and real

estate
Electricity
Figure 1. (191, 63.3%)
Sector-wise Mining
distribution of
sample Diversified
 post-merger (period 1 to 5) performances were calculated for the acquiring company. To Financial
provide a holistic view of the long-term profitability and performance of mergers and performance
acquisition, various accounting measures were investigated in the study.
Ratio analysis was carried out to examine long-term financial performance of
analysis
acquirer firms. The study measured and compared the pre- and post-M&A financial
performance of acquiring companies in terms of profitability, operating efficiency,
leverage and liquidity. The improvement in profitability in the post-M&A period can 409
arise from various sources, such as better operating margins, higher assets productivity,
reduced costs, enhanced market power, etc. Hence, 14 ratios primarily pertaining to
profitability, efficiency, leverage and liquidity were used in the study. The 14 ratios,
namely, return on capital employed (ROCE), returns on equity funds (ROE), operating
profit margin based on sales (OPMS) net profit margin (NPM), operating profit ratio
based on assets (OPMA), cost of goods sold ratio (COGR), labor-related expense ratio
(LRE), selling, general and administration expense ratio (SRE) and research and
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development expense ratio (RDE), total assets turnover ratio (TATR), fixed assets
turnover ratio (FATR) and current assets turnover ratio (CATR), total debt over total
assets ratio (DA) and current ratio (CR) were calculated. The detailed methodological
description of these ratios is given in Appendix 1.
To determine the significant differences over pre- and post-M&A, a two-sample
paired t-test was conducted for each measure used in the study. The null hypothesis for
each test is that the mean level for the post-M&A period is not significantly different
from the mean of pre-M&A period. A positive t-value indicates a higher mean value for
post-M&A period and vice-versa.

4. Empirical results
The objective of the present paper was to compare the financial performance of
acquirers before and after M&A in terms of profitability, efficiency, expenses, liquidity
and leverage. It was hypothesized that acquirers show better post-M&A financial
performance vis-à-vis pre-M&A performance. The financial performance is based on the
four major groups of ratios, namely, profitability, efficiency, leverage and liquidity.

4.1 Profitability ratios

4.1.1 Profitability ratios related to investments. It is hypothesized that profitability
positions of acquirers improve during the post-M&A period. The paired samples t-test
for comparison of means of profitability ratio based on investment (ROE and ROCE)
before and after M&A are presented in Table III. The relevant data contained in the table
show that mean profitability in terms of rate of return on investment (ROCE and ROE)
shows improvement in the post-M&A period. The paired samples t-test for comparison
of means (⫺5,5) reveals that ROE exhibits an impressive increase of 4.6 per cent
(significant at 1 per cent) during the post-M&A period. Positive mean difference in ROE
is observed for majority (66 per cent) of acquirers.
As expected, the profitability of the acquirers increases over the post-M&A period. It
is evident from Table III that ROCE improves to the extent of more than 7 per cent after
M&A. Paired t-test identifies the significant positive difference in mean ROCE after and
before M&A for all the pairs compared. The percentage increase is 7.2, 5.5, 5.1, 7.5 and
6.9 per cent during one, two, three, four and five years, respectively. Positive mean
 IJCOMA Paired sample Mean ratio Mean ratio Mean Positive:
25,4 (before, after) after-M&A before-M&A difference Negative t-value df Significance

Return on equity (ROE)

(⫺1,⫹1) 20.1 18.4 1.7 166:139 2.103* 304 0.036
(⫺1,⫹2) 18.5 16.1 2.4 155:140 4.17** 294 0
410 (⫺1,⫹3) 17 16.2 0.8 124:138 1.06 261 0.287
(⫺1,⫹4) 17.8 15.5 2.3 118:112 2.89** 229 0.005
(⫺1,⫹5) 18.1 17.4 0.7 73:60 0.65 132 0.647
(⫺2,⫹2) 18.7 18.1 0.6 145:140 0.72 284 0.471
(⫺3,⫹3) 17.7 16.9 0.8 127:132 0.95 258 0.345
(⫺4,⫹4) 17.8 14.1 3.7 131:83 4.21** 213 0
(⫺5,⫹5) 17.4 12.8 4.6 82:42 4.44** 123 0
Return on capital employed (ROCE)
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(⫺1,⫹1) 28.1 20.9 7.19 203:102 2.383** 304 0.018

(⫺1,⫹2) 24.3 20.5 3.8 179:116 2.03* 294 0.04
(⫺1,⫹3) 22.8 19.7 3.2 164:98 3.79** 261 0
(⫺1,⫹4) 24.4 20.7 3.7 142:89 2.04* 229 0.42
(⫺1,⫹5) 26.3 18.5 7.9 82:51 2.16* 132 0.031
Table III. (⫺2,⫹2) 25.5 19.9 5.5 184:101 2.499** 284 0.013
Paired sample t-test (⫺3,⫹3) 24.5 19.5 5.1 168:91 5.38** 258 0
of profitability ratios (⫺4,⫹4) 26.1 18.6 7.5 144:70 4.89** 213 0
(related to (⫺5,⫹5) 24.8 17.9 6.9 85:39 5.727** 123 0
investment) before
and after M&A Notes: * and ** significance at 5 and 1%, respectively

difference in ROCE is observed in the case of more than two-third acquirers for all the
pairs.
Table IV presents the paired samples t-test for comparison of means of profitability
ratio based on sales (OPMS and NPM) before and after M&A. OPMA is also presented in
the table.
The relevant data contained in the table show that NPM exhibits impressive
improvement for all the pairs. Mean NPM increased by 8.4 per cent (statistically
significant) during one year before and after M&A. The positive mean difference is also
statistically significant for the five-year average. An impressive positive mean
difference is observed in NPM in each of the five years post-M&A in comparison to one
year before M&A. Positive mean difference is found in the case of 63 per cent acquirers.
The positive mean difference of 8.5 and 10.4 per cent is observed in OPM based on
sales for one and two year before and after M&A, respectively. One significant finding
may be noted from the relevant data presented in Table IV that OPMA shows only
marginal improvement (up to one per cent). The findings may be attributed to the advent
of recessionary conditions in vogue since 2008.
4.1.2 Profitability ratios related to expenses. Other profitability ratios related to sales
are expense ratios; they are computed as expenses divided by sales. Four expense ratios,
namely, COGR, LRE, SGR and RDE have also been calculated to assess the impact of
M&A on profitability of acquirers. The empirical results of expense ratios are presented
in Table V.
 Paired sample Mean ratio Mean ratio Mean Positive:
Financial
(before, after) after-M&A before-M&A difference Negative t-value df Significance performance
analysis
Operating profit margin based on sales (OPMS)
(⫺1,⫹1) 21.5 13 8.5 199:106 1.85 304 0.066
(⫺1,⫹2) 20.8 14.9 5.9 143:152 1.28 294 0.202
(⫺1,⫹3) 18.7 13.2 5.4 150:112 1.25 261 0.213
(⫺1,⫹4) 15.5 13.3 2.2 140:90 1.05 229 0.262
411
(⫺1,⫹5) 14.2 12 2.2 82:41 2.93** 132 0.004
(⫺2,⫹2) 16.2 5.8 10.4 179:106 1.75 284 0.08
(⫺3,⫹3) 14.7 10.9 3.8 164:95 1.36 258 0.174
(⫺4,⫹4) 15 12.9 2.1 139:75 0.84 213 0.401
(⫺5,⫹5) 13.2 11.3 1.8 79:45 1.407 123 0.162
Operating profit margin based on assets (OPMA)
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(⫺1,⫹1) 12 11.5 0.5 171:134 1.09 304 0.276

(⫺1,⫹2) 11.5 11.4 0.18 144:151 0.63 294 0.717
(⫺1,⫹3) 9.9 9.1 0.08 139:123 0.09 261 0.927
(⫺1,⫹4) 11.4 10.4 1 138:92 1.87 229 0.06
(⫺1,⫹5) 11.1 11 0.1 67:66 0.27 132 0.85
(⫺2,⫹2) 11.5 11.1 0.4 146:139 0.65 284 0.516
(⫺3,⫹3) 11.2 10.6 0.6 138:121 1.21 258 0.228
(⫺4,⫹4) 10.9 10 0.1 114:100 1.82 213 0.07
(⫺5,⫹5) 10.8 9.9 1 72:52 1.62 123 0.108
Net profit margin (NPM)
(⫺1,⫹1) 19.8 11.4 8.4 193:112 1.98* 304 0.049
(⫺1,⫹2) 19.5 11.3 8.2 167:128 1.77 294 0.076
(⫺1,⫹3) 16.3 10.11 6.4 144:118 1.6 261 0.111
(⫺1,⫹4) 14.5 10.9 3.6 135:95 1.52 229 0.131
(⫺1,⫹5) 10.4 8.7 1.6 82:41 2* 132 0.047
(⫺2,⫹2) 16.4 10 6.4 171:114 1.68 284 0.116 Table IV.
(⫺3,⫹3) 14.4 9.04 5.3 163:96 1.66 258 0.098 Paired sample t-test
(⫺4,⫹4) 14.6 8.3 6.2 144:70 2.1* 213 0.037 of profitability ratios
(⫺5,⫹5) 10.3 7.8 2.5 85:39 3.4** 123 0.001 (related to sales)
before and after
Note: * and ** significance at 5 and 1%, respectively M&A

The significant finding as revealed by expense ratios is that nearly two-third (65 per
cent) acquirers achieved economy in their selling, general and administrative expenses
in the fourth and fifth year post-M&A, as reflected in the significant negative difference
of SGR. The significant negative difference in SGR may be due to the marketing
economies realized post-M&A. Higher volume of sales, avoidance of duplication of
distribution and advertising expenses may be the reason.
Acquirers also seem to have achieved operational economies in their
manufacturing expenses in the fourth and fifth year post-M&A in comparison to one
year before M&A, as reflected in the significant negative difference of COGR. The
significant negative difference in COGR may be due to the economies of scale
realized post-M&A. Higher volume of raw material and large scale of economies
post-M&A may be the reason.
 IJCOMA Paired sample Mean ratio Mean ratio Mean Positive:
25,4 (before, after) after-M&A before-M&A difference Negative t-value df Significance

Cost of goods sold ratio (COGR)

(⫺1,⫹1) 69.8 69.1 0.7 152:153 0.5 304 0.62
(⫺1,⫹2) 71.8 69.3 2.5 111:184 1.62 294 0.106
412 (⫺1,⫹3) 71.6 70.7 1 108:154 0.34 261 0.738
(⫺1,⫹4) 73.4 75.1 ⫺1.06 109:121 ⫺0.495 229 0.62
(⫺1,⫹5) 71.5 72 ⫺0.6 68:65 ⫺0.749 132 0.45
(⫺2,⫹2) 71.8 69.1 2.7 156:129 1.43 284 0.154
(⫺3,⫹3) 69.8 71.9 ⫺2.1 130:129 ⫺1.811 258 0.071
(⫺4,⫹4) 71.8 71.3 0.5 113:101 0.38 213 0.702
(⫺5,⫹5) 71 70.8 0.2 69:55 0.25 123 0.803
Labor related expense ratio (LRE)
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(⫺1,⫹1) 21 20.6 0.4 117:188 0.654 304 0.513

(⫺1,⫹2) 20.6 20.4 0.2 133:162 0.389 294 0.698
(⫺1,⫹3) 18.7 18.8 ⫺0.01 112:150 ⫺0.6 261 0.921
(⫺1,⫹4) 19.7 19.9 ⫺0.02 119:111 ⫺0.11 229 0.913
(⫺1,⫹5) 18.7 18.9 ⫺0.02 66:67 ⫺0.39 132 0.7
(⫺2,⫹2) 20.3 19.9 0.4 120:165 0.716 284 0.475
(⫺3,⫹3) 20.1 7.9 12.2 183:76 6.425** 258 0
(⫺4,⫹4) 20.4 9.4 0.110 142:72 6.37** 213 0
(⫺5,⫹5) 19.6 18.7 0.1 59:69 1.278 123 0.204
Selling, general and administration expense ratio (SRE)
(⫺1,⫹1) 8.3 6.1 2.2 83:222 0.815 304 0.415
(⫺1,⫹2) 8.3 5.8 2.1 95:200 0.792 294 0.429
(⫺1,⫹3) 8.08 5.04 2.6 72:190 0.837 261 0.403
(⫺1,⫹4) 8.2 9.1 ⫺0.9 109:121 1.97** 229 0.05
(⫺1,⫹5) 7.7 8.8 ⫺1.1 43:80 ⫺2.01** 132 0.05
(⫺2,⫹2) 7.9 6 1.8 130:155 0.693 284 0.489
(⫺3,⫹3) 7.7 8 ⫺0.003 88:171 ⫺0.269 258 0.788
(⫺4,⫹4) 8 9.2 ⫺0.012 76:138 ⫺2.83** 213 0.005
(⫺5,⫹5) 8.1 8.9 ⫺0.008 45:79 ⫺1.809 123 0.073
Research and development expense ratio (RDE)
(⫺1,⫹1) 0.75 0.78 ⫺0.033 30:275 ⫺0.27 304 0.786
(⫺1,⫹2) 0.76 0.81 ⫺0.051 30:265 ⫺0.43 294 0.666
(⫺1,⫹3) 0.08 0.083 ⫺0.033 38:224 ⫺0.248 261 0.804
(⫺1,⫹4) 0.09 0.093 ⫺0.034 42:188 ⫺0.127 229 0.899
(⫺1,⫹5) 0.065 0.073 ⫺0.007 52:81 ⫺0.354 132 0.724
(⫺2,⫹2) 0.79 0.75 0.046 34:251 0.387 284 0.699
Table V. (⫺3,⫹3) 0.7 0.8 ⫺0.1 39:220 ⫺0.846 258 0.399
Paired sample t-test (⫺4,⫹4) 0.9 0.7 0.2 36:178 1.57 213 0.119
of expense ratios (⫺5,⫹5) 0.8 0.6 0.2 22:102 0.956 123 0.341
before and after
M&A Note: * and ** significance at 5 and 1%, respectively
 The relevant data in Table V also reveal that the acquirers have also been able to gain Financial
economy in RDE in post-M&A period (reflected in negative mean difference); perhaps, performance
this has been achieved due to the elimination of duplicate efforts in research and
development at the level of each firm (acquirer and target firm) during pre-M&A.
analysis
There is a negative difference in the labor expense ratio in the third year post-M&A.
Labor cost seems to have reduced after three to five years post-M&A in comparison to
one year prior to M&A. 413
Paired t-test has also identified any significant difference in terms of other expense
ratios, that is COGR, LRE and SGR, in one year before and after M&A. However,
negative mean difference in expense ratio is observed in the case of 50, 62 and 73 per cent
in COGR, LRE and SGR, respectively. There is a positive difference (significant at 1 per
cent) in the labor expense ratio three years before and after M&A. Labor cost increased
after three and four years of M&A.
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4.2 Efficiency ratios

Efficiency ratios assess the operational performance of acquirers before and after M&A.
Analysis has been carried out primarily on the basis of assets turnover ratios (total,
current and fixed). It is hypothesized that efficiency of acquirers has shown
improvement in utilization of resources after M&A.
The relevant data contained in Table VI suggests that the TATR and CATR of both
periods (before and after M&A) is less than one for the entire period of study (ten years).
Evidently, the TATR and CATR, prima-facie, do not seem to be satisfactory and are
indicative of under-utilization of resources, before as well as after the M&A. The test
statistic related to TATR is insignificant. This indicates that the mean difference in
TATR post- and pre-M&A is by chance and it cannot be inferred that M&A has led to a
significant improvement in acquirers’ TATR. Perhaps, a longer time for larger assets
base following M&A is required to generate expected returns.
In contrast, FATR has presented a better picture of efficiency in utilization of fixed
assets before as well as after M&A. There is an improvement, duly corroborated by
paired t-test showing significant positive difference in FATR for all the pairs. Moreover,
the positive mean difference in FATR has been observed in the case of the majority
(58 per cent) of acquiring firms.

4.3 Liquidity ratios

A comparison has been made between liquidity position before and after M&A,
prima-facie, Indian acquiring firms seem to have an adequate and satisfactory level of
liquidity position before as well as after M&A as reflected in the mean current ratio.
Corporate firms in India have access to short-term borrowings in the form of bank
borrowings, overdrafts and cash credit limits from banks (Jain and Yadav, 2000). These
facilities enable management to operate on a lesser margin of working capital reflected
in lower current ratio. The mean current ratio is quite high, that is 2.21, 2.56, 2.38, 2.51
and 2.68 before one, two, three, four and five years, respectively. The acquirer firms
seem to have excessive inventories for the current requirements before M&A. High
current ratio is indicative of slack management practices and poor credit management in
terms of over-extended accounts receivable.
In light of these viewpoints, acquiring firms have managed liquidity better during the
post-M&A phase, as reflected in the significant negative difference implying decrease in CR,
 IJCOMA Paired sample Mean ratio Mean ratio Mean Positive:
25,4 (before, after) after-M&A before-M&A difference Negative t-value df Significance

Fixed assets turnover ratio (FATR)

(⫺1,⫹1) 3.86 3.62 0.24 175:130 1.98* 304 0.049
(⫺1,⫹2) 3.51 3.01 0.50 161:134 2.74** 294 0.007
414 (⫺1,⫹3) 3.64 3.22 0.42 170:92 0.896 261 0.372
(⫺1,⫹4) 3.73 3.30 0.42 120:110 0.341 229 0.733
(⫺1,⫹5) 4.3 3.35 0.95 70:63 0.561 132 0.572
(⫺2,⫹2) 4.03 3.73 0.30 165:119 2.13* 284 0.034
(⫺3,⫹3) 4.14 3.71 0.43 151:108 2.94** 258 0.004
(⫺4,⫹4) 4.24 3.60 0.64 129:85 3.7** 213 0
(⫺5,⫹5) 4.39 3.82 0.57 77:47 2.57** 123 0.012
Total assets turnover ratio (TATR)
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(⫺1,⫹1) 0.943 0.963 ⫺0.018 141:164 ⫺1.06 304 0.29

(⫺1,⫹2) 0.92 0.98 ⫺0.06 173:122 ⫺2.63** 294 0.009
(⫺1,⫹3) 0.89 0.96 ⫺0.07 168:94 ⫺2.86** 261 0.005
(⫺1,⫹4) 0.89 0.95 ⫺0.56 101:129 ⫺2.13* 229 0.03
(⫺1,⫹5) 0.96 1.08 ⫺0.13 51:81 ⫺2.78** 132 0.006
(⫺2,⫹2) 0.92 0.972 ⫺0.052 114:171 ⫺1.86 284 0.07
(⫺3,⫹3) 0.901 0.942 ⫺0.042 105:154 ⫺1.76 258 0.079
(⫺4,⫹4) 0.89 0.91 ⫺0.025 92:122 ⫺0.941 213 0.348
(⫺5,⫹5) 0.934 0.969 ⫺0.035 59:65 ⫺1.09 123 0.066
Current assets turnover ratio (CATR)
(⫺1,⫹1) 1.00 0.97 ⫺0.03 152:153 ⫺1.35 304 0.178
(⫺1,⫹2) 1.02 0.98 ⫺0.04 157:139 ⫺1.59 294 0.113
(⫺1,⫹3) 0.99 0.95 ⫺0.05 162:90 ⫺2.02* 261 0.044
(⫺1,⫹4) 1.02 0.97 ⫺0.05 112:118 ⫺1.78 229 0.08
(⫺1,⫹5) 1.01 1.12 ⫺0.11 67:66 ⫺2.73** 132 0.007
(⫺2,⫹2) 1.04 0.98 ⫺0.06 122:163 ⫺2.2* 284 0.029
Table VI. (⫺3,⫹3) 1.04 0.97 ⫺0.07 109:150 ⫺2.49* 258 0.013
Paired sample t-test (⫺4,⫹4) 1.02 0.97 ⫺0.04 99:115 ⫺1.32 213 0.189
of efficiency ratios (⫺5,⫹5) 1.05 1.00 ⫺0.05 57:67 ⫺1.29 123 0.2
before and after
M&A Notes: * and ** significance at 5 and 1%, respectively

which seems to be in order/desirable given the fact that the current ratio is higher than the
normative norm of 2:1. The mean current ratio of five years before M&A is 2.7, which is quite
high; It was reduced to 2.1 in the fifth year after M&A (Table VII). The negative difference is
significant; three-fourth (75 per cent) of firms have negative current ratio. The t-test also reveals
significant negative difference for four, three and two years mean current ratio (Table VII). On the
basis of empirical results, it may be concluded that liquidity and credit management practices
have improved significantly after M&A.

4.4 Leverage ratios

Total debt constitutes a significant source of financing total assets of acquiring firms as
corroborated by debt to total assets ratio presented in Table VIII; evidently, DA, prima-facie,
seems to be satisfactory before as well as after M&A. As expected, there is no change in the
 Paired sample Mean ratio Mean ratio Mean Positive:
Financial
(before, after) after-M&A before-M&A difference Negative t-value df Significance performance
analysis
(⫺1,⫹1) 2.18 2.21 ⫺0.03 129:176 ⫺0.41 304 0.686
(⫺1,⫹2) 2.09 2.25 ⫺0.17 119:176 ⫺1.16 294 0.247
(⫺1,⫹3) 2.13 2.29 ⫺0.16 105:157 ⫺1.79 161 0.075
(⫺1,⫹4) 2.08 2.85 ⫺0.77 93:137 ⫺1.24 229 0.216
(⫺1,⫹5) 2.58 2.61 ⫺0.03 56:77 ⫺0.233 132 0.816
415
(⫺2,⫹2) 2.38 2.56 ⫺0.176 114:171 ⫺2.60** 284 0.01
(⫺3,⫹3) 2.32 2.38 ⫺0.223 99:160 ⫺3.17** 258 0.002 Table VII.
(⫺4,⫹4) 2.26 2.51 ⫺0.256 72:142 ⫺3.38** 213 0.001 Paired sample t-test
(⫺5,⫹5) 2.14 2.68 ⫺0.544 31:93 ⫺5.44** 123 0 of liquidity ratios
before and after
Note: ** significance at 1%, respectively M&A
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Paired sample Mean ratio Mean ratio Mean Positive:

(before, after) after-M&A before-M&A difference Negative t-value df Significance

(⫺1,⫹1) 0.514 0.501 0.134 173:132 1.51 304 0.131

(⫺1,⫹2) 0.517 0.506 0.106 165:130 1.35 294 0.257
(⫺1,⫹3) 0.520 0.512 0.007 150:112 0.55 262 0.587
(⫺1,⫹4) 0.514 0.501 0.01 126:104 1.16 229 0.248
(⫺1,⫹5) 0.535 0.532 0.003 77:58 0.217 132 0.829 Table VIII.
(⫺2,⫹2) 0.518 0.503 0.015 164:121 1.624 284 0.106 Paired sample t-test
(⫺3,⫹3) 0.526 0.511 0.015 147:122 1.486 258 0.138 of leverage ratios
(⫺4,⫹4) 0.521 0.508 0.013 118:96 1.12 213 0.264 before and after
(⫺5,⫹5) 0.524 0.5 0.023 72:52 1.794 123 0.075 M&A

leverage of the acquirers over the post-M&A period. Paired t-test has not identified any
significant change in leverage (DA) post-M&A. Based on these results, it may be concluded that
M&A has no impact on the leverage of acquiring firms before and after M&A.

4.5 Analysis of sources of performance

The improvement in the period following M&A can arise from various sources, such as
better operating margins, greater assets productivity, lower labor costs or higher
volume or higher sales. To ascertain the sources of better long-term post-M&A returns,
the measure of operating performance has been decomposed into its constituents in
terms of Du Pont analysis. Du Pont analysis indicates that the profitability is improved
either by improving profit margin per rupees of sales or by generating more sales
revenue per rupee of investment. The operating profit margin, based on assets, can be
decomposed into operating profit margin based on sales and total assets turnover ratio.
The OPMA calculated as operating profit (OP) divided by average total assets. OPMA
may be decomposed into the OPMs and the total assets turnover ratio. The OPMS depicts
the operating profit obtained through each rupee of sales. Total assets turnover
indicates the efficiency with which the firm uses its assets to generate sales. The detailed
methodological description of Du Pont analysis is presented in Appendix 2.
 IJCOMA The relevant data contained in Table IX show that the OPMS has improved
25,4 post-M&A. As we have divided the operating profit of the acquirer with the net sales of
the acquirer, the significant post-M&A operating margin indicates that the acquirers
appear to have generated higher operating profit per unit net sales, post-M&A. The
analysis indicates the possible increase in market power due to M&A in India. The
better operating margins seem to be because of the lowering of costs as a result of
416 economies of scale. Negative t-values identified by paired sample t-test on expense ratio
also corroborate this finding. Further, the evidence of increase in the operating profit
margin based on assets also supports these results.
The efficiency of utilization of assets to generate higher sales does not appear to have
improved as revealed by total assets turnover ratio post-M&A. It cannot be inferred that
acquirers’ total assets turnover after M&A is significantly different from pre-M&A
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Paired sample Mean ratio Mean ratio Mean Positive:

(before, after) after-M&A before-M&A difference Negative t-value df Significance

Operating profit margin based on assets (OPMA)

(⫺1,⫹1) 12 11.5 0.5 171:134 1.09 304 0.276
(⫺1,⫹2) 11.5 11.4 0.18 144:151 0.63 294 0.717
(⫺1,⫹3) 9.9 9.1 0.08 139:123 0.09 261 0.927
(⫺1,⫹4) 11.4 10.4 1 138:92 1.87 229 0.06
(⫺1,⫹5) 11.1 11 0.1 67:66 0.27 132 0.85
(⫺2,⫹2) 11.5 11.1 0.3 146:139 0.65 284 0.516
(⫺3,⫹3) 11.2 10.6 0.6 138:121 1.21 258 0.228
(⫺4,⫹4) 10.9 10 0.1 114:100 1.82 213 0.07
(⫺5,⫹5) 10.8 9.9 1 72:52 1.62 123 0.108
Operating profit margin based on sales (OPMS)
(⫺1,⫹1) 21.5 13 8.5 199:106 1.85 304 0.066
(⫺1,⫹2) 20.8 14.9 5.9 143:152 1.28 294 0.202
(⫺1,⫹3) 18.7 13.2 5.4 150:112 1.25 261 0.213
(⫺1,⫹4) 15.5 13.3 2.2 140:90 1.05 229 0.262
(⫺1,⫹5) 14.2 12 2.2 82:41 2.93** 132 0.004
(⫺2,⫹2) 16.2 5.8 10.4 179:106 1.75 284 0.08
(⫺3,⫹3) 14.7 10.9 3.8 164:95 1.36 258 0.174
(⫺4,⫹4) 15 12.9 2.1 139:75 0.84 213 0.401
(⫺5,⫹5) 13.2 11.3 1.8 79:45 1.407 123 0.162
Total assets turnover ratio
(⫺1,⫹1) 0.943 0.963 ⫺0.018 141:164 ⫺1.06 304 0.29
(⫺1,⫹2) 0.92 0.98 ⫺0.06 173:122 ⫺2.63** 294 0.009
(⫺1,⫹3) 0.89 0.96 ⫺0.07 168:94 ⫺2.86** 261 0.005
(⫺1,⫹4) 0.89 0.95 ⫺0.56 101:129 ⫺2.13* 229 0.03
(⫺1,⫹5) 0.96 1.08 ⫺0.13 51:81 ⫺2.78** 132 0.006
Table IX. (⫺2,⫹2) 0.92 0.972 ⫺0.052 114:171 ⫺1.86 284 0.07
Paired sample t-test (⫺3,⫹3) 0.901 0.942 ⫺0.042 105:154 ⫺1.76 258 0.079
of constituent ratios (⫺4,⫹4) 0.89 0.91 ⫺0.025 92:122 ⫺0.941 213 0.348
in terms of Du Pont (⫺5,⫹5) 0.934 0.969 ⫺0.035 59:65 ⫺1.09 123 0.066
before and after
M&A Note: * and ** significance at 5 and 1%, respectively
 levels. Thus, we cannot conclude that M&A have led to higher total assets turnover, Financial
which indicates that it is unlikely that acquirer firms have generated higher incremental performance
sales utilizing their assets more efficiently.
analysis
5. Conclusions
The objective of this paper is to analyze the long-term financial performance of
companies involved in M&A in India. The major hypothesis is that acquiring firms have 417
improved post-M&A performance. The empirical evidence validates the hypothesis that
Indian acquirers have performed financially better after M&A, compared to their
performance in the pre-M&A period.
The study indicates that in the long run, M&A appear financially beneficial for the
acquiring companies. The findings suggest that profitability of acquiring firms
improves during the post-M&A phase. This improvement in performance can be
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attributed to M&A. Enhanced efficiency in utilization of fixed assets by the acquiring

firms appears to generate higher operating profits. Acquirers seem to realize synergistic
benefits of M&A by controlling expenses, especially cost of goods sold, labor-related,
selling, general and administration expenses as identified by negative t-value
(statistically significant) of paired sample test. Better management of liquidity position
during the post-M&A period has also been observed. These findings are in sync with the
findings of Healy et al. (1992), Switzer (1996) and Ghosh (2001), internationally, and with
Ramakrishnan (2008), Pawaskar (2001), Selvam et al. (2009), Kumar and Bansal (2008),
Leepsa and Mishra (2012) and Sinha et al. (2010), in an Indian context. However, these
findings are in contrast to the findings of Kumar (2009).
M&A have not resulted in improvement in all assets turnover ratios. A reason for
assets utilization may be that additional assets generate additional capacities. Initially,
it may not be possible to achieve 100 per cent capacity utilization. Therefore, assets
turnover ratio improves slowly. It appears that the recession in 2008 resulted in low
asset turnovers of acquiring firms.
Further, the Du Pont analysis in terms of two constituents of the measure of
operating profits (OPMS and total assets turnover based on sales) provides insights into
sources of the economic performance. The long-term operating profit margin of the
acquiring firms, on average, appears to have improved. This means higher profit is
generated per unit net sales by the acquiring firm after the M&A.
The higher profits (profit before interest and taxes and non-operating income) are
generated through the better margins. This might be due to the economies of scale
obtained by the acquired firms’ larger size after M&A.
The analysis indicates the possible increase in market power due to M&A in India.
Survey findings by Rani et al. (2010) on motives of M&A also corroborates this finding.
Further, the evidence of significant increase in the operating profit margin also supports
these results.
On the basis of empirical results, it is reasonable to conclude that on average,
acquiring firms in India appear to perform better financially after M&A, compared to
their performance in the pre-M&A period. However, assets turnover of the acquiring
firms do not seem to be improved after M&A (also revealed by paired samples t-test); net
sales per unit of asset invested do not increase after M&A.
However, in operational terms, the efficiency/utilization of assets does not manifest in
generating higher net sales after M&A, which may be partly due to recessionary conditions
 IJCOMA in the global economy after 2008. The observation of increasing profitability but not a
25,4 significant change in net sales per unit of asset invested is consistent with the improvement
in corporate performance following M&A in some cases. These specific cases are if the
acquirers shut down unprofitable divisions after M&A. This decreases sales but the
operating profit margins improve. Also, acquirers from emerging markets like India are in a
position to exploit the low cost, especially wages in their own countries by cutting the labor
418 cost in overseas markets after M&A.
Several important implications can be drawn from the findings of this study.
First, it confirms the findings of previous studies that subscribe to the viewpoint
that acquired firms in India appear to have performed better financially after M&A.
Second, policy implications of the study are that the regulators should promote
developing an efficient market for corporate control. In the post-liberalization period, the
strategy of M&A is highly relevant in the process of corporate restructuring. The study
contributes to the empirical research on M&A corporate strategy. Acquiring companies can
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help preserve economic capital by acquiring the ailing target companies on the verge of
closure. Third, the release of entrepreneurial capital is tied up in the acquired company,
which can lead to significant capital creation and multiplier effect on the local and national
economy. Fourth, the study finds evidence in support of the synergy hypothesis. M&A
generates synergy in the long run with the efficient usage of resources. However, the
management cannot take it for granted that profits will increase and synergy will be
generated by adopting the strategy of M&A.
Finally, the implication of the study is that recession in current times cannot be
repudiated, and hence, provisions and better planning is required so as not to enhance
the assets base beyond a reasonable limit.

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Further reading
Parrino, J.D. and Harris, R.S. (2001), “Business linkages and post-merger operating performance”,
420 Working Paper, Darden Graduate School of Business, University of Virginia,
Charlottesville, VA.

Appendix 1. Ratios used in the study

Profitability ratios
Profitability is measured in terms of rate of return (ROR) on investment and sales. The two major
concepts of investment, namely, ROCE and ROE were used. These rates were computed based on
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average capital used and average equity funds; the average is based on their respective values at
the beginning and end of the year.
ROCE also determines how efficiently financial resources are deployed by acquiring
companies. ROCE indicates how efficiently the long-term funds of the owners and lenders are
being used and focuses directly on operating efficiency. ROE indicates the return for the equity
owners.
ROCE is calculated as:

Profit before interset and taxes

ROCE ⫽
Average long-term assets used ⫹ net working capital

Capital work in progress has been excluded, as it does not generate operating profit.
ROE is calculated as:

Profit after taxes ⫺ preference dividend

ROE ⫽
Average equity funds

Equity funds ⫽ paid-up equity capital ⫹ reserves and surpluses ⫹ retained profit ⫺ accumulated
losses.
Return on the basis of sales was computed in terms of operating profit margin (OPM) and
NPM. OPMS indicates the magnitude of operating profit in terms of sales. NPM determines
the relationship of reported net profit to sales. Better margin in post-M&A period indicates
the managerial ability to realize the expected synergies and better profitability. The level of
economic benefits generated by assets is represented by operating profits. In addition to
operating profit margin on sales, OPMA was also calculated. Operating profit ratio was
calculated by dividing pre-tax operating profits with average operating assets to measure
change in post-M&A performance. This measure can be compared across time and firms.
Total assets used net of preliminary expenses, fictitious assets and miscellaneous expenses.
The change in operating performance attributable to M&A is the comparison of the post- and
pre-M&A OPM.
OPMS is calculated as:

Profit before interset and taxes ⫺ non-operating income

OPMS ⫽
Net sales

OPMA is calculated as:

 OPMA Financial
Profit before interset and taxes ⫺ non-operating income performance
⫽
Average of ( total assets ⫺ preliminery expenses ⫺ fictitious assets ⫺ miscellaneous expenses )
analysis
NPM is calculated as:

Profit after taxes

NPM ⫽ 421
Net sales

In addition to the above profitability ratios based on investment, four expense ratios were
calculated to measure various operating economies expected from M&A. The source of operating
economies could be realized through reduced manufacturing, selling, general and administrative
costs owing to economies of large scale (reflected in lower labor expenses, marketing expenses and
research and development expenses). Hence, for the purpose of analysis, four expense ratios,
namely, COGR, LRE, SRE and RDE were computed. In the case of expense ratios, a negative
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t-value indicates a lower mean value for post-merger and acquisition period. In other words, a
lower mean value of expense ratio in post-M&A period reveals that M&A generated expected
economies.
COGR is calculated as:

Cost of goods sold

CGSR ⫽
Net sales

LRE is calculated as:

Labor related expenses

LRE ⫽
Net sales

SRE is calculated as:

Selling, general and administration expenses

SGR ⫽
Net sales

RDE is calculated as:

R&D expenses
RDE ⫽
Net sales
Efficiency ratios
Efficiency ratios assess the operational performance of acquirers before and after M&A. Efficiency in
utilization of resources were determined on the basis of three dimensions, namely, TATR, FATR
and CATR. High turnover ratio in post-merger and acquisition period is indicative of better
utilization of available resources, whereas low turnover ratio in post-M&A period shows presence
of idle capacity and under-utilization of available resources.
Total assets turnover indicates the efficiency with which the firm uses its assets to generate
sales. This measure is probably of greatest interest to management because it indicates whether
firm’s operations are financially efficient (Gitman, 2009, p. 82). Accordingly, TATR was computed
by dividing net sales to average total assets. Preliminary expenses, fictitious assets and
miscellaneous expenses were deducted from total assets to obtain a better measure of total assets.
FATR was computed by dividing net sales to average fixed assets. CATR was computed by
dividing net sales to average current assets.
FATR is calculated as:
 IJCOMA FATR ⫽
Net sales
25,4 Average fixed assets
CATR is calculated as:

Net sales
CATR ⫽
Average current assets
422
TATR is calculated as:

TATR
Net sales
⫽
Average of ( total assets ⫺ preliminery expenses ⫺ fictitious assets ⫺ miscell. expenses)
Leverage ratio
Leverage ratios are based on comprehensive measure of total external obligations (long-term debt
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plus current liabilities) to total assets. The total debt to assets ratio shows the proportion of a
company’s assets, which are financed through external borrowing.
DA is calculated as:

Total debt
DA ⫽
Total assets
Liquidity ratio
Liquidity was assessed by CR that is current assets divided by current liabilities.
CR is calculated as:

Current assets
CR ⫽
Current liability
Appendix 2. Du Pont analysis
Du Pont analysis indicates that the profitability is improved either by improving profit margin per
rupees of sales or by generating more sales revenue per rupee of investment. The operating profit
margin, based on assets, can be decomposed into operating profit margin based on sales and total
assets turnover ratio.
The OPMA calculated as operating profit (OP) divided by average total assets. OPMA may be
decomposed into the OPMs and the total assets turnover ratio as:

Profit before interset and taxes ⫺ non-operating income

OPMA ⫽ (A1)
Average total assets
or:

Profit before interset and taxes ⫺ non-operating income Net sales

OPMA ⫽ ⫻
Net sales Average total assets
(A2)

Where:

Profit before interset and taxes ⫺ non-operating income

Net sales
⫽ operating profit margin based on sales( OPMS )

and:
 Net sales
⫽ total assets turnover ratio (TATR) Financial
Average total assets performance
In Du Pont terms: analysis
OPMA ⫽ OPMS ⫻ TATR (A3)

The operating profit margin based on sales depicts the operating profit obtained through each 423
rupee of sales. Total assets turnover indicates the efficiency with which the firm uses its assets to
generate sales.

About the authors

Neelam Rani is an Assistant Professor at the Rajiv Gandhi Indian Institute of Management Shillong. A
PhD from the Indian Institute of Technology Delhi, she has been a Fulbright visiting scholar at Rutgers
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Business School, The State University of New Jersey, Newark. Her research focuses on Mergers and
Acquisitions, Cross-border Mergers and Acquisitions, and Corporate Governance. She has also
presented papers in international conferences held in the USA, Japan, and Austria. She has contributed
more than 27 papers to journals such as Journal of Financial Management and Analysis, Vision, GIFT
Journal, and financial/economic newspapers and magazines such as Economic Dateline, Facts for You.
One of her papers has been awarded “Best Academician Research Paper” at International Business
Summit and Research Conference, held at Amity International Business School Noida. Neelam Rani is
the corresponding author and can be contacted at: neelam.iitd@gmail.com
Surendra S. Yadav is a Professor of Finance in the Department of Management Studies at the
Indian Institute of Technology Delhi, India. He teaches Corporate Finance, International Finance,
International Business and Security Analysis, and Portfolio Management. He has been a Visiting
Professor at University of Paris, Paris School of Management, INSEEC, Paris, and the University
of Tampa, USA. His nine books have been published and he has contributed more than 115 papers
to research journals and conferences. Some of them are Journal of Derivatives and Hedge Funds,
Journal of Advances in Management Research, Vikalpa, IIMB Management Review, Journal of
Financial Management and Analysis, Vision, and GIFT Journal. He has also contributed more
than 30 papers to financial/economic newspapers.
P.K. Jain is a Professor of Finance in the Department of Management Studies at the Indian Institute
of Technology Delhi, India. He has more than 30 years of teaching experience in subjects related to
Management Accounting, Financial Accounting and Financial Analysis, Cost Analysis, and Cost
Control. His books have been published and he has contributed more than 140 research papers in
journals such as Long Range Planning, Journal of Derivatives and Hedge Funds, Journal of Advances
in Management Research, Vikalpa, IIMB Management Review, Journal of Financial Management and
Analysis, Vision, GIFT Journal. He has also contributed more than 30 papers to financial/economic
newspapers.

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