Financial Performance of Firms Pre- and Post-M&A: A Study of Selected Indian Acquirers

Abstract

The objective of the study is to analyse and compare the pre- and post-acquisitions financial performance of 50 Indian acquirers. The selected acquirers are publicly listed companies. The study has used the secondary data obtained from the financial statements.

The M&A for acquiring firms become questionable if the financial performance of the acquirers does not improve in the long run. This research study analyses the financial performance of M&A deals in respect of the publicly listed Indian acquirers using accounting ratios at three different levels: all deals, manufacturing industry and service industry. The deals taken for this study constitute 85% of the value of the M&A market for the period chosen between 2010 to 2014. The financial analysis has been compared for three years pre-and-post the deal. The data has been obtained from companies’ annual reports and online databases available in the public domain. The study leads to the conclusion that the acquirers failed to gain financially even after three years of the deal.

Keywords

Mergers Acquisitions Share Price Return Financial Performance Accounting Ratios

Background of the Study: An Introduction to M&A

Mergers and Acquisitions (M&A) is a strategic move to gain a competitive advantage in the industry with the aim to achieve financial and operational synergies through diversification, tax advantages or market share and profit increase (Trautwein, 1990). Such inorganic strategies have been opted by the companies for growth and expansion. Research have suggested that over-optimism did not prove to be as efficient as deemed for organizational growth, especially for an acquirer suggesting that 50–80% of the deals have failed to achieve the targets (Healy et al., 1992; Homburg & Bucerius, 2005; Papadakis, 2007; Somers & Bird, 1990).

Importantly, M&A focuses on maximizing the wealth of the shareholders. M&A has been studied across varied countries and continents from many centuries, with initial deals across developed nations like United States of America (USA) and Europe in 1895 and 1920, respectively (Agrawal et al., 1992).

Hartford (2003) described that the history of M&A is divided in seven stages or ‘waves’ presented in Table 1.

Table 1.

M&A Wave

Period	Name	Facet
1893–1904	First wave	Horizontal mergers, leading to monopolies.
1919–1929	Second wave	Vertical mergers, leading to oligopolies but soon the period ended with the Great Depression.
1955–1970	Third wave	Conglomerate mergers and acquisitions, leading to expansion and diversification. However, the period was followed by crash in share prices due to oil crisis.
1974–1989	Fourth wave	Hostile takeovers and congeneric mergers, leading to the rise of investment banks. The period ended with the stock market crash.
1993–2000	Fifth wave	Mega deals and cross-border mergers, leading to a more suitable mode of entry to international business.
2003–2008	Sixth wave	Leverage buyouts (LBOs), marking the recovery from the dotcom bubble.
2011–onwards	Seventh wave	Corporate mergers, often considered as ‘Biggest mistake in corporate merger history’.

Source: The authors.

M&A activity has accelerated over the last few years with increased valuations. Long phase of volatility has led to the growth of businesses only through organic means. M&A activity increased globally with the value of deals across the globe dropping to USD384 trillion in 2016 from USD466 trillion in 2015 (Dealogic, 2016).

There is a deep division that exists in the world economy in the form of emerging and mature markets. The recent trends of the buyers from the emerging markets diving into the mature market is securing a dynamic place across M&A space. In a free market economy, efficiency and improved performance witnessed through M&A act as a benchmark for efficient utilization of resources.

M&A in India

The phenomenon of M&A is recent in the emerging nations. As for Asian markets, a report by Euromoney Institutional Investor Company (EMIS) in 2016 suggested that M&A deals surged in India, with 712 deals with highest number of deals in terms of volume in the IT and Internet and the Finance and Insurance sectors in terms of value.

In India, the major catalyst for progress in the market was considered after the post-economic reforms of 1991. The changes in Monopolistic and Restrictive Trade Practices Act (MRTPA) of 1969 promoted healthy competition in Indian industry (Ramakrishnan, 2008). M&A in India paced after the recession in 2008–2009 due to the optimistic investment sentiment of the companies to expand, grow and stay competitive in the global market. The phenomenon has been of great significance for growth and diversification in the Western nations, and studies suggest that it was adopted in India after the liberalization and economic reforms (Pawaskar, 2001). The value, volume and frequency of M&A deals in India have increased in the last many years (Anandan et al., 1998, pp. 64–75).

Recently, the Indian economy has progressed through improvement in digitalization, and the patterns of deals as observed in past years is expected to continue in 2022 with the quest for transactions across M&A and divestitures. The outlook for the deals may demonstrate positive sentiments but capital and appetite would not be sufficient for successful deals. Higher valuation of assets can be witnessed by the acquirers, thus increasing the significance of unlocking meaningful value (Siebecker & Lozano, 2020). M&A activity in India witnessed a high with $90.4 billion with transactions that was 35.1% higher than the year before. The count also grew by 10.1%. Seventeen deals worth $1 billion were announced, which cumulatively reached $38.8 billion. The first-time acquirers demonstrated more than 80% of deals in 2020 and 2021 (Kooli & Lock Son, 2021).

Rationale of the Study

Corporate managers have been blamed by the investors for indulging in managerial hubris to serve their interests such that most of these deals do not result in attaining the objectives and the projected synergies (Zeitoun et al., 2019). Though M&A proposals are approved by the Securities Exchange Board of India, Competition Commission of India and High Court, the outcome is hardly desirable. Previous studies have been focused on understanding the short-term performance of acquirers after the acquisition investigating the shareholders’ wealth (Mehrotra & Sahay, 2018). A deeper understanding of the effect of acquisitions on the financial performance of the companies can be beneficial for researchers and practitioners in the market. The results of this study can be useful for making better investment decisions. It will also enable authorities to understand the impact of inorganic corporate strategies with a focus on the major acquisitions in India for the period between 2010 and 2014. The period marks the economic recovery post the recission after the low point observed in 2009. M&A was modest in recovery from 2010 until 2012, a dynamic phase between two cycles as a waiting period. The upward trend paced up in 2013 with strong surge in 2014 of a good ‘mid-cycle’ year (Cretin et al., 2015). These years demonstrated renewed confidence across industries with the motive to undertake external growth strategies as a road to recovery.

Research Gaps

Based on the review of articles in the study, the following research gaps are identified:

Performance of acquiring companies has been researched in developed countries but only limited evidence is available in Indian context.

Most of the studies in India are announcement based. Few studies have focused on long-term performance, especially in India.

Earlier studies have been on individual companies or sector specific. No single study dealt with all M&As in a country.

Research Questions

Based on the research gaps derived from the review of the past literature, the following research questions are formulated for the study. These research questions are used to formulate research hypotheses that are tested in this research.

How are the significant financial variables affected in the long term due to M&A in India?

What is the degree of dependence of short-term returns on long-term accounting variables?

Review of Literature

Theoretical Underpinning

The theory underlying this study basis the financial synergy because of acquisition is covered under the Transaction Cost Theory. Acquisitions are driven by the motive of financial synergy. This aims at combining companies with different cash flow streams and varied investment opportunities that may result in the synergy lowering the overall cost of capital (Hennart, 2001). According to Williamson (1981), companies can enter external or internal transactions driven by market and bureaucratic motives. These transactions incur expenses in the buying process, which is aimed to be covered with the profitability and expected returns. Tax-saving, enhanced debt capacity with greater cashflows to the acquirer are assumed to be benefits of acquisitions (Ahsan et al., 2021).

Critical Review

M&A is a well-researched domain especially across the Western countries for ‘productivity’ and ‘creativity’ as the major reasons for the deals. However, much research has focused on the negative impact on the financials of the companies involved in the deal (Ahuja, 1999, pp. 1948–1954). Financial synergy is a significant motive to increase the value of assets because of their combination (Good & Campbell, 1998). This is dependent on the assumption that the cash flow and profitability of the acquirer are greater than that of the target company. The capital on account of the deal is re-allocated to the acquirer, thus increasing the prospect of investment opportunities. Comparison of significant accounting ratios in the pre- and post-deal test the outcome on growth and efficiency (Ranju & Mallikarjunappa, 2019). The impact of acquisitions was investigated with the statistical analysis using Wilcoxon signed rank test that resulted in no significant difference in return on equity and in debt-to-equity ratios ##(Zuhri et al., 2020). The literature selection is based on inclusion and exclusion criteria adopted from Mehrotra and Sahay (2018) included in Table 2.

Table 2.

Inclusion and Exclusion Criteria

Inclusion	Exclusion
Focus on M&A	Books, conference proceedings
Journal articles	Reviews, commentaries, editorials
Contribution directly related to M&A	Opinion pieces, viewpoints
Full Text available	No abstract available
Focus on financial analysis with short- and long-term perspective	Non-English articles

Source: The authors.

Studies strongly suggest that target shareholders tend to gain much higher as compared to the acquirers in the long run. This holds true even when ‘less highly rated companies are acquired by highly rated acquirers’. In the long-term window, the deals financed by equity led to negative returns, with diversifying acquiring companies displaying worse performance after the deal (Rani et al., 2020). Agency-motivated deals displayed bad financial performance as compared to the deals motivated by strong synergies. Positive returns and higher buy and hold returns (BHAR) was experienced by the major acquisitions that were motivated by achieving higher economies of scale, contrary to the deals motivated by economies of scope. On the contrary to these studies, recent research on the IT sector in India by Kar et al. (2020) reported that the acquisitions have a positive impact on return on net worth and revenues. Further, the findings by Howe and Morillon (2020) for acquisitions with the target (private companies) facilitated through all-cash mode stated that the magnitude of changes related to information asymmetry are reduced as a result of acquisitions. The impact of acquisitions on the manufacturing enterprises were studied by Li (2021) who reported that the acquisitions render uncertain results. The analysis showed that the acquisitions do not offer significant positive impact on the performance.

The indecisiveness for the choice of accounting methodology (‘Purchase vs Pooling Method’) to treat the changes in financial statements led to negative performance of the companies after the deal. Change was significant when ‘firm level data on the multi-unit companies were included in regression analysis’ (McGuckin et al., 1995). Leverage measures did not witness much change after the deal, while the short-term measure for assets and liabilities reduced after a year of the deal. These factors along with the financing mode for the deals did not show much impact on the performance of the acquirers in Australia. Performance of the companies had improved after the deal, especially for hostile takeovers in the United Kingdom. Likewise, the premium payment for acquisitions of the companies also did not show evident influence on the financial performance. As for the companies in Japan, the long-term operating performance of the companies was negative with insignificant values, however, they had displayed strong and positive correlation between the pre- and post-deal scenario (Reddy et al., 2013).

Measurement of the long-term performance of the acquirers and target companies with the data from financial statements can gauge the impact of the deal (Aggarwal & Garg, 2019). Accounting measures, event studies and stock returns are widely used to analyse the short-term impact of the acquisition on the acquirers (Agrawal et al., 1992). The objectives and reasons for the deals could be questioned if the financial performance of the acquirers does not improve in the long run (Reddy et al., 2013). Different methodologies used for financial analysis used in the past research are described in Table 3.

Table 3.

Methods Used in Research Papers for Financial Analysis

Methods Used	No. of Research Papers Using the Techniques
Event Study Method and Regression	54
Accounting Ratios and Regression	63
Accounting Ratios with stock returns with regression and Correlation	39
Factor Analysis and Accounting Ratios + Stock Returns	5
Total	161

Source: The authors.

Many researchers suggest that despite adequate strategic and financial intent, 55–70% of the deals fail in the long run (Healy et al., 1997). Ravenscraft and Scherer (1989) studied various business lines of the companies post deal and concluded negative performance. Similarly, post-merger cash flows for 50 deals in the United States were measured by Healy et al. (1992) to investigate the return on assets before tax, which was improved by 2.8% after the deal due to the increased productivity of the combining companies. Cornett and Tehranian (1992) recorded negative returns before the deal and an improvement of 1% post-deal using industry-adjusted cash flow. The ‘productivity decomposition’ was used by McGuckin et al. (1995) on the financial statements of the combining companies in the United States for the period between 1977 and 1987. Through regression analysis, positive results were evident for ‘external component-targets’ and negative for ‘internal component-acquirers’ (Mackenzie & Knipe, 2006).’ Liquidity, profitability and investment ratios were calculated for the banks in Pakistan, which reported an increase in these performance metrics while solvency position of the companies indicating long-term financial position witnessed a negative impact as the acquirers had to experience greater debt burden in comparison of pre with post acquisitions (Muhammad et al., 2019).

Kukalis (2007) researched that the financial performance of acquirers was partially better in the pre-acquisition than in the post-acquisition scenario. Similarly, Tambi (2005) stated that acquisitions did not provide any returns through economies of scale or synergy and that the deals have failed to demonstrate any positive contribution towards the capital employed. Healy et al. (1992), Heron and Lie (2002), and Rahman and Limmack (2004) have also reported an increase in operating performance. Return on assets, return on sales, pre-tax operating cash-flow, and the earnings before interest, taxes, depreciation and amortization (EBIDTA) demonstrated lower performance than the industry benchmarks. However, these measures were not significant (Angwin, 2020). Acquisitions do not result in value creation in Chinese as well as Indian markets, as per Reddy et al. (2019). Authors used mean, market and OLS-adjusted return models to capture the variance; however, no improvement in performance reported for acquisitions.

Singh and Mogla (2010) studied that 55% of the acquirers demonstrated a decline in their profitability while only 29% showed some improvements. The authors used DuPont analysis and inferred that poor asset utilization led to the decline in profitability, irrespective of the acquisition of profitable or loss-making entities. Meeks (1977), Cosh et al. (1989), Clark and Ofek (1994), Kruse et al. (2007) and Yeh and Yasuo (2002) concluded that takeovers reduce the value of acquiring firm in the long run. Similarly, Pawaskar (2001) compared the profitability in pre and post-deal, which resulted in no significant improvement in performance. But the positive impact was witnessed in the size and leverage position of the acquiring companies.

Major studies indicated no significant increase in the financial performance in the post-acquisition period across different nations (Powell & Stark, 2005; Sharma & Ho, 2002). Ikeda and Doi (1983) investigated the financial performance for 49 Japanese manufacturing companies between 1964 and 1971 for periods of three and five years, providing evidence for an increase in performance for five years than in three years. As evident acquisitions fail to create value for shareholders in the long run.

The research framework of the study is presented in Figure 1.

Methodology

The research is based on epistemological and ontological assumptions. The term epistemology implies a general set of assumptions for inquiring into the nature of the world and thereby contributing to the existing knowledge through the investigation into the research questions (Collis & Hussey, 2014). The positivist epistemology is evident with knowledge contribution to the existing M&A domain with analytical techniques applied within the limitations of the research (Swanson & Holton, 2005). Event study methodology, accounting returns with ratio analysis and the case study method have been widely applied approaches for gauging the impact (Halpern, 1973). The present research study used accounting ratios as the performance metrics for analysing and comparing the financial performance of the acquirers. Positivist epistemology demonstrates the worldview of the researcher based on numbers and facts, which has determined the choice of quantitative methods with deductive approach. The objectives of the study are fulfilled by investigating the secondary data. The study required precise procedures and data source specifications, and therefore it was classified as a formal, quantitative study. Qualitative studies such as clinical studies and surveys of executives were not conducted. Quantitative research design is more structured and suitable and is less time-consuming than alternative qualitative methods for this research.

Empirical Tools

A paired sample t-test was used to evaluate the significant impact of M&A on financial ratios to compare the financial performance for pre- and post-deal periods Selected financial ratios were used as performance metrics. Multiple regression is applied to analyse the interdependency of stock returns with accounting variables. The performance of acquisition is found to be significant at a 5% confidence level (Ramakrishnan, 2008).

Sample for the Study

Fifty M&A deals (2010 to 2014) for all companies registered in India are taken for analysis and comparison with respect to 3 years pre- and post-acquisition. For instance, the deals for the year 2010 are analysed for 2007–2009 (3 years before) and 2011–2013 (3 years after). The year of the deal is excluded from the analysis. Thus, 200 companies constituted the population with the valuation of USD105.52 billion. Fifty leading M&As constituting 85% in terms of value in the M&A market are taken for the study. The remaining 15% constituted by value, though a large number, has an insignificant impact on the study. The data used for the analysis in the study is collected from secondary sources and the annual reports of the acquirers listed in India.

The analysis of the data is done at three levels: all deals, deals in Manufacturing and Service sector, and deals in various business sectors. The classifications of deals are described in Table 4 (a, b and c).

Table 4.

Classification of Deals

Level 1: All Deals by Indian Acquirers
Sample	No. of Deals	Value (USD in Millions)
All Deals	50	89,914
Level 2: Manufacturing and Service Industry
Manufacturing Industry	29	63,939
Service Industry	21	25,975
Total	50	89,914
Level 3: Different Business Sectors of India*
Automobile	5	5,403.50
Cement and Steel	5	2,071.74
Financial Services	7	5,383.92
Infrastructure	5	3,038
Oil and Gas	4	22,394.71
Pharmaceuticals	8	8,929
Power	6	23,686.13
Telecommunication	7	18,331
Total	47	89,238.01

Table 4(a).

Levels of Classification of Deals.

Mode of Payment	Domestic Deals	Cross Border Deals	Total no. of Deals	Value (USD in Millions)
Cash	7	10	17	21,126
Stock	9	3	12	25,221
Mix	9	7	16	15,774
Debt	0	5	5	27,793
Total	25	25	50	89,914

Table 4(b).

Classification of Deals Based on Mode of Payment.

Target’s Location	Total	Value (USD in Millions)
Domestic Deals	25	38,366
Cross Border Deals	25	51,548
Total	50	89,914

Table 4(c).

Classification of Deals Based on Geography of the Deals.

Source: The authors.

Note: *Three deals, two from Gems and Jewellery and one from Travel Tourism, which could not be segregated into any sector, are omitted from Level-3 analysis with total deal value USD675.2 million.

Results and Discussions

Financial analysis is based on accounting measures, and t-test is used for statistical comparison.

Companies’ performances are assessed by gauging their profitability using profit before tax margin (PBTM), net profit margin (NPM), return on net worth (RONW) and return on capital employed (ROCE) for three years pre- and post-deal. With different modes of payment taken by the companies, it is essential to examine the impact on cash earnings and retention; thus, the significant variables are cash earnings per share (CEPS) and cash earnings retained (CER). The significant variable that immediately reflects the impact of M&A is the valuation of the companies— enterprise value to the operating revenue (EVOR). Earnings yield (EY) is also used to reflect the significance of the deal on the earnings and valuation of the companies. The financial metrics identified in the study for comparison and analysis are explained in Table 5, as adopted from Reddy et al. (2013).

The p-value for the two-tailed test is less than .05 for all the variables, indicating a significant change in the mean of financial variables compared for three years pre- and post-acquisition period. The valuation of Indian acquirers has shown a significant increase, with the positive change in EVOR from 34.22 to 54.57 indicating the positive synergies and benefits expected at the time of the event, and thereby indicating positive effects on the financial figures. The profitability indicators PBTM and NPM for the manufacturing companies undergoing M&A have shown positive changes, while the cash flow indicators, CEPS and CER, demonstrated significant negative changes after the deal through less cash retention and earnings, indicating more outflows due to the adjustments in the organization induced through the deal (Table 6).

Table 5.

Definition of Financial Metrics Used in the Study

Variable	Definition
PBTM	Profit before tax margin is defined as a firm’s earnings before tax as a percentage of total sales.
NPM	Net profit is the total profit left after all the expenses like taxes, interest, and depreciation has been deducted and it’s the percentage over sales is the net profit margin.
RONW	Measuring the profitability as a ratio of profit after taxes with the rate of return on stockholder’s equity. Also called Return on Equity, also defined as ‘net income/shareholder’s equity’.
ROCE	Measures the relation between earnings before interest and taxes (EBIT) with capital employed in a company. Capital Employed is defined as current liabilities deducted from total assets.
EVOR	Measure of valuation. It defines the relationship between the enterprise value to the operating revenue of the firm. It also acts as a measure to understand if the stock is priced well.
EY	Measure the ratio between earning per share and market price per share. It is an investment evaluation metric that is used to understand the rate of return on investment. Investments with strong valuations may lead to greater earnings over time, leading to increased earnings yield.
CEPS	Used as a cash flow indicator by measuring cash flow generated on a per-share basis.
CER	Indicates the percentage of a company’s cash earnings that are retained for business growth and expansion. It is defined as (1-dividend payout ratio).
Stock Return	The appreciation in the price plus any dividends paid, divided by the original price of the stock.

Source: As adopted from Reddy et al. (2013).

The p-value for the two-tailed test is less than .05 for all the variables indicating a significant change in the mean of financial variables compared for three years pre- and post-acquisition period. The valuation of acquirers in the service industry has shown a significant increase with a positive change in EVOR from 23.62 to 38.22, indicating the positive synergies and benefits expected at the time of the event, and thereby indicating positive effects on the financial figures (Table 7). Unlike the manufacturing industry, the financial performance for all the companies in the service industry has shown a decrease with a fall in the figures for profitability, valuations, and cash earnings and retentions. The profits for the companies before and after taxes have shown a decrease along with the returns on capital employed and net worth, while the cash flow indicator, CEPS, has shown a relative increase in cash flows concerning earnings per share of the companies, with a decrease in CER indicating more outflows due to the adjustments in the organization induced through the deal.

Table 6.

Manufacturing: Pre- and Post-Deal Period

Financial Variables	Mean (pre)	Mean (Post)	t-Stat	Significance (Two-tailed)*
PBTM	55.77	97.92	2.49	0.03
NPM	42.83	93.35	2.59	0.03
RONW	19.46	12.54	2.26	0.03
ROCE	15.83	10.50	2.10	0.05
CEPS	52.19	44.44	2.61	0.04
CER	36.98	19.87	2.43	0.03
EVOR	34.22	54.57	2.09	0.03
EY	0.09	0.12	2.14	0.02

Source: The authors.

Note: *Significance at 5% level; t-critical = 2.07.

Table 7.

Service: Pre- and Post-Deal Period

Financial Variables	Mean (Pre)	Mean (Post)	t-Stat	Significance (Two-tailed)*
PBTM	29.95	20.15	2.85	0.04
NPM	23.10	13.14	2.82	0.04
RONW	14.67	10.45	2.22	0.04
ROCE	10.76	9.50	2.12	0.02
CEPS	19.95	21.11	2.26	0.03
CER	73.48	68.64	2.17	0.03
EVOR	23.62	38.22	2.80	0.03
EY	0.11	0.13	2.18	0.03

Source: The authors.

Note: *Significance at 5% level; t-critical = 2.07.

Performance of Acquirers Across Business Sectors

M&A deals across varied business sectors in India—Automobile, Financial Services, Cement and Steel, Infrastructure, Oil and Gas, Pharmaceuticals, Power and Telecom has been compared (see Tables 8 to 15 for performance across different sectors in India). The p-value for the two-tailed test is less than .05 for all the variables, indicating a significant change in the mean of financial variables compared for three years pre- and post-acquisition period.

Table 8.

Automobile

Financial Variables	Mean (Pre)	Mean (Post)	t-Stat (t Critical–3.18)	Significance (5% Level)
PBTM	14.10	4.30	4.28	0.03
NPM	10.48	3.38	5.36	0.05
RONW	25.98	18.42	3.28	0.41
ROCE	20.56	16.86	4.61	0.02
CEPS	44.58	58.85	4.07	0.04
CER	52.46	43.98	4.46	0.04
EVOR	22.33	30.40	4.00	0.04
EY	0.06	0.41	4.71	0.05

Source: The authors.

Table 9.

Cement and Steel

Financial Variables	Mean (Pre)	Mean (Post)	t-Stat (t Critical–3.18)	Significance (5% Level)
PBTM	74.59	51.18	4.29	0.05
NPM	54.42	37.47	4.26	0.01
RONW	17.91	10.93	4.09	0.04
ROCE	13.9	7.78	4.24	0.03
CEPS	73.20	83.32	4.86	0.05
CER	47.60	18.00	4.02	0.04
EVOR	3.56	22.84	4.95	0.04
EY	0.11	0.45	4.24	0.03

Source: The authors.

Table 10.

Financial Services

Financial Variables	Mean (Pre)	Mean (Post)	t-Stat (t Critical–2.57)	Significance (5% Level)
PBTM	27.25	20.29	3.22	0.04
NPM	18.01	6.99	3.34	0.05
RONW	4.88	−0.67	3.86	0.04
ROCE	1.39	1.20	3.11	0.02
CEPS	11.21	5.36	3.81	0.05
CER	61.34	32.22	3.59	0.02
EVOR	26.15	43.98	3.67	0.03
EY	0.44	0.49	3.08	0.04

Source: The authors.

Table 11.

Infrastructure

Financial Variables	Mean (Pre)	Mean (Post)	t-Stat (t Critical–3.18)	Significance (5% Level)
PBTM	44.85	54.40	4.21	0.05
NPM	39.41	49.75	4.21	0.04
RONW	12.85	−0.47	4.48	0.02
ROCE	5.68	1.92	4.01	0.04
CEPS	4.12	1.47	4.41	0.03
CER	87.39	210.14	4.63	0.05
EVOR	68.40	150.315	4.66	0.05
EY	0.018	0.004	4.41	0.04

Source: The authors.

Table 12.

Oil and Gas

Financial Variables	Mean (Pre)	Mean (Post)	t-Stat (t Critical–3.18)	Significance (5% Level)
PBTM	27.88	27.68	4.07	0.05
NPM	19.21	18.28	4.68	0.04
RONW	16.76	12.30	5.03	0.02
ROCE	10.75	8.57	4.68	0.05
CEPS	61.71	49.62	4.63	0.02
CER	64.82	49.09	4.87	0.04
EVOR	2.96	2.31	4.04	0.01
EY	0.08	0.08	4.51	0.04

Source: The authors,

Table 13.

Pharmaceuticals

Financial Variables	Mean (Pre)	Mean (Post)	t-Stat (t Critical–2.36)	Significance (5% Level)
PBTM	101.49	14.41	3.01	0.03
NPM	79.87	9.83	3.01	0.03
RONW	21.52	12.87	3.04	0.03
ROCE	19.05	10.89	3.17	0.03
CEPS	66.74	35.77	2.88	0.04
CER	30.90	−5.58	3.19	0.03
EVOR	4.78	10.15	3.11	0.03
EY	0.13	0.03	3.18	0.03

Source: The authors.

Automobile sector: The profitability indicators have shown a sharp decline. The valuation of acquirers in the automobile sector has shown a significant increase with a positive change in EVOR from 22.33 to 30.40 and in EY from 0.06 to 0.41, indicating the positive synergies and benefits expected at the time of the event and thereby reflecting positive effects on the financial figures. The cash flow indicator, CEPS, has shown a relative increase in cash flows concerning earnings per share of the companies, with a decrease in CER indicating more outflows due to the adjustments in the organization induced through the deal.

Cement and Steel sector: The profitability indicators have shown a sharp decline. The valuation indicators for this sector have shown a significant increase with a positive change in EVOR from 3.56 to 22.84 and in EY from 0.11 to 0.45, indicating the positive synergies and benefits expected at the time of the event and thereby reflecting positive effects on the financial figures. The cash flow indicator, CEPS, has shown a relative increase in cash flows to earnings per share of the companies, with a decrease in CER indicating more outflows due to the adjustments in the organization induced through the deal.

Financial Services sector: The profitability and cash flow indicators with relation to earning per share and retention have decreased significantly. However, the valuation indicators for this sector have also shown a significant increase with a positive change in EVOR from 26.15 to 43.98 and in EY from 0.44 to 0.49, indicating the positive synergies and benefits expected at the time of the event and thereby reflecting positive effects on the financial figures.

Infrastructure sector: The profitability indicators have shown a sharp decline in all the figures and the change is significant like in all other sectors. However, cash earnings retention and enterprise value over operating revenue have shown a sharp increase in value.

Oil and Gas sector: The profitability, valuation and cash flow indicators have shown a sharp decline in all the figures and the change is significant. Unlike all the other sectors, Oil and Gas has performed badly after the deal gauged through varied measures.

Pharmaceuticals sector: The profitability indicators have shown a sharp decline. The valuation indicators for this sector have shown a significant increase with a positive change in EVOR from 4.78 to 10.15 and a decrease in EY from 0.13 to 0.03, indicating the positive synergies and benefits expected at the time of the event and thereby reflecting positive effects on the financial figures. The cash flow indicators, CEPS and CER, have shown a sharp decrease indicating more outflows due to the adjustments in the organization induced through the deal.

Power sector: As compared to other sectors, the power sector has performed better for the major financial indicators. Positive changes are shown in profit before taxes and net profits’ margins with improvements in enterprise value ratio calculated and recorded in Table 14.

Table 14.

Power

Financial Variables	Mean (Pre)	Mean (Post)	t-Stat (t Critical–2.57)	Significance (5% Level)
PBTM	42.68	50.37	3.85	0.04
NPM	35.35	98.86	3.83	0.02
RONW	6.39	2.42	3.81	0.01
ROCE	3.81	2.43	3.93	0.01
CEPS	7.73	5.47	3.63	0.05
CER	54.38	35.58	3.05	0.04
EVOR	32.55	57.59	3.89	0.04
EY	0.03	0.02	3.72	0.03

Source: The authors.

Telecom sector: The profitability indicators have shown a sharp decline as tabulated in Table 15. The valuation indicators for this sector have also shown a significant decrease in EVOR from 9.53 to 5.26 and in EY from 0.04 to −0.08. The cash flow indicator, CEPS, has shown a relative increase in cash flows with respect to earnings per share of the companies with an increase in CER indicating more outflows due to the adjustments in the organization induced through the deal.

Table 15.

Telecom

Financial Variables	Mean (Pre)	Mean (Post)	t-Stat (t Critical–2.78)	Significance (5% Level)
PBTM	13.87	4.34	3.83	0.05
NPM	7.92	4.34	3.38	0.03
RONW	17.83	14.17	3.79	0.05
ROCE	17.19	16.72	3.25	0.01
CEPS	26.80	42.20	3.01	0.04
CER	61.96	54.24	4.30	0.03
EVOR	9.53	5.26	3.08	0.03
EY	0.04	−0.08	3.96	0.04

Source: The authors.

The Dependency of Stock Returns on Long-term Financial Variables

Regression analysis is applied to solve for the second research objective, which is to investigate the relationship between the stock returns of acquiring companies and the financial ratios in the pre- and post-acquisition period.

Regression Model

Y = β 0 + β 1 x 1 + β 2 x 2 + β 3 x 3 + \dots, β n x n

All Deals

Multi-variate regression is applied to understand the level of dependency of short-term measure, stock returns. The results demonstrate that for Indian acquirers, the correlation and dependency of short-term performance with financial variables is decreased from 51.3% to 13.4%. Further, the coefficient of determination is measured by R-square, defining the strength of the relationship of a dependent variable (stock returns) on the independent variables (PBTM, NPM, ROCE, RONW, CER, CEPS, EVOR and EY), which decreased from 0.264 to 0.118 for the Indian acquirers as tabulated in Table 16.

Table 16.

Regression for Acquirers in All Deals

Regression Statistics	Multiple R	R-Square	Adjusted R-Square	Standard Error
All deals—Pre	0.513	0.264	0.200	0.091
All deals—Post	0.134	0.118	0.174	0.036

Source: The authors.

Manufacturing Industry

The dependency of stock returns on the financial variables is increased in manufacturing companies. The increase in the coefficient of determination after the deal explains the enhanced dependency of stock returns on profitability, valuation and cash flows (Table 17).

Table 17.

Regression for Acquirers in the Manufacturing Industry

Regression Statistics	Multiple R	R Square	Adjusted R Square	Standard Error
Manufacturing—Pre	0.506	0.256	0.169	0.008
Manufacturing—Post	0.603	0.363	0.234	0.002

Source: The authors.

Service Industry

In the case of the service industry, the dependency of stock returns on the financial variables is decreased after the deal. The decrease in coefficient of determination after the deal explains the reduced dependency of stock returns on profitability, valuation and cash flows. Allozi and Obeidat (2016) suggested that financial measures have a strong impact on stock returns. But as evident in regression model, there exists a negative relation with stock returns (Table 18).

Table 18.

Regression for Acquirers in Service Industry

Regression Statistics	Multiple R	R Square	Adjusted R Square	Standard Error
Service—Pre	0.705	0.497	0.374	0.112
Service—Post	0.251	0.063	0.035	0.052

Source: The authors.

Discussion

The findings demonstrate that M&A results in a significant decrease in profitability after the deal. For different levels of analysis in the study, this would guide practitioners to understand the worst affected variables and, thus, focus on the parameters that shall help acquirers attain positive returns after the deals.

In the Manufacturing sector, improved valuations with negative profitability and cash flow indicators reflect the gap in the strategic perspective of choosing and valuing the target companies. Despite the underperformance of the acquirers, a lot of cash or underleveraged positions enable them to expand through inorganic modes (Basu et al., 2008). Acquirers from the service industry have shown decreased profitability after the deal. For the different sectors under study, the major financial measures have shown negative performance.

The performance of acquirers from automobile has improved in terms of valuation and cash flows; however, the profitability of acquirer has not shown much improvement and rather a decrease is visible for a profit before taxes, net profit and return on net worth. The Financial Services sector has shown a significant difference in performance, with decrease in cash flows and return on net worth. While the valuations for the company have shown an increase in the long term, the profitability and cash flows have demonstrated a negative change. The empirical findings of the research is aligned with the findings of (Aik et al., 2015; Kalra et al., 2013). The profitability of the companies in the Cement and Steel sector has further decreased, with a major decline in cash retention. While other sectors witnessed a negative performance, companies from the Infrastructure sector have shown a positive response to the acquisitions. This is evident with improved profit before taxes, net profit, cash flow for earnings per share and retention of cash earnings. The acquirers in the Oil and Gas sector have witnessed a sharp decrease in profitability and cash flow. Similarly, pharmaceuticals have shown a decrease in profitability after the deal. Profitability has increased for companies in the Power sector, with an increase in enterprise value with net operating revenue of the acquirers. Acquirers from the Telecom sector have also shown a significant decrease in performance after the deal.

Similar research was conducted by Hu (2009) on the Chinese acquirers for the post-acquisition period and inferred that no significant gains were received by these companies for a period of one to two years. However, the results were contradictory with higher returns three years after the acquisition. Authors found an increase in profitability when the result of acquisition was cumulatively studied for different industries in India. Banking, Finance, and Pharmaceutical sectors witnessed positive results in profitability (Mantravadi & Reddy, 2008).

Acquisitions in the Service sector yielded higher returns as compared to the Manufacturing sector (Ray & Gubbi, 2009). Studies in the past have evidenced that the acquisitions is an expensive investment that comes at a heavy cost with vast application of resources, with the motive to fit in with strategic scale often leading to post integration issues (Ray & Gubbi, 2009; Singh & Montgomery, 1987). As seen in the study for manufacturing companies, the acquirer can strengthen its finances by acquiring the target firm, but the latter may report weak profitability as a part of larger company that can be taken as a future scope of research (Ravenscraft & Scherer, 1989). Although this study focused on analysing and comparing the financial ratios of acquiring companies, it is assumed that diverse factors influence acquirers’ performance. Financial studies for investigating the acquisitions, as evident in this research, have shown conflicting results because of the differences in the scope and measures of the companies consummating the deal. Interestingly, such differences are measured across different sectors such as in the steel and construction industry (Ismail et al., 2011).

As evident, the diverse financial results can also be attributed to many other events that can make separating the acquisitions’ impact difficult. The findings of this study based on the analysis of the secondary data can be extended in future by administering questionnaires to the managers of the acquiring company (Datta & Grant, 1990; Hambrick et al., 1996; Reus & Lamont, 2009). Research in this study is aligned with various metrics as suggested by Capasso and Meglio (2007) to measure acquisition performance covering market returns and accounting-based measures: revenue, net income and operating income.

It is difficult to compare accounting returns for companies from different geographical regions across the globe due to differences in regulation and accounting practices (Hitt et al., 1991). The study gives deeper details about the performance of variables across different business sectors. The variables as described in the study demonstrate the measure for profitability, cash flow and valuations. There is negative or no improvement in the financial performance of acquirers after the deal. This is in line with the findings by Clark and Ofek (1994) and Ravenscraft and Scherer (1987), among others. However, the result is contradictory to the findings of Cornett and Tehranian (1992) and Rahman and Limmack (2004). The results suggest that the manufacturing industry in India has performed better in the post-acquisition scenario as compared to the service industry. The stock returns are well-explained by the long-term financial variables. The results of the study for overall scenario of acquisitions deal confirm with Andre ’et al. (2004), emphasizing that the acquisitions results in a decline in performance.

Limitations of the Study

The study was a comprehensive attempt to understand the gaps in the existing literature and to contribute with new findings. Though the research has significantly contributed to the financial analysis, it had certain broad limitations—only the ‘listed Indian acquirers’ are selected for the study; the study is for a specific time-frame, that is, deals between the periods 2010 to 2014; the economic, political, technological or any other external factors that may affect the financial performance of acquirers could not be considered; and the implications of multi-business on financial performance after the transaction are not covered.

Conclusion

The research contributes towards the knowledge for making viable investment decisions by the acquirers in India. The analysis suggests that business enterprises that undertake acquisitions cannot be assured about the success of the deals. The highest valued deals taken for this research have failed to perform well financially in the long-term period. Further research provides an exhaustive understanding to the academicians as well as practitioners about the financial viability of this corporate strategy to the Indian acquirers. The output of the study will assist the regulatory authorities who approve M&A deals in India such as the Securities Exchange Board of India, Competition Commission of India and other regulatory bodies in framing policies.

Future Research Directions

Many acquisitions are indeed undertaken with non-value maximizing objectives (Seth et al., 2000). Due to managerial hubris, the targets are often overvalued, leading to the deals motivated by ‘value creation opportunities’. Thus, future research can focus on the acquisitions with self-gain motives rather than the value maximization of the companies. The survey response could be collected from managers of both the targets and the acquiring companies. This would help in a better understanding of M&A concepts. Further, the triangulation of secondary and primary data will solidify the understanding of M&A with better insights into financial behaviour and motivations. Issues of M&A that will be of specific interest to the practitioners and the regulatory authorities can be studied as these aspects have immense impact on the M&A performance. Economic factors could be taken into consideration to understand their influence on M&A . The target companies post acquisition can function independently rather than merging completely with the acquirer. This impacts the multi-business companies as compared with the pure play acquirers.

The macro-economic outlook that was eliminated from this study could be considered under review by future researchers while analysing M&A deals as liberalized policies of the government to induce reforms, especially for big-ticket investments that influence the M&A scenario for the fast-emerging nation like India. However, as research suggests, acquirers should look for optimal valuations and realizable synergies before finalizing M&A deals. It is expected that M&A would continue to catalyse future practice and inter-disciplinary research.

Footnotes

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The authors received no financial support for the research, authorship and/or publication of this article.

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