MUKESH PATEL SCHOOL OF TECHNOLOGY

MANAGEMENT & ENGINEERING, NMIMS

SVKM’S NMIMS

A Study of Financial & Workforce Implications for

Mergers & Acquisitions

A Research Project submitted in partial fulfillment

of the requirements for the degree of 

MBA (Tech)

By
Vidhi Naik N040
Shrey Sakhuja N047
Raghav Tikku N055
Zelina Wankadiya N059

Under the Supervision of

Dr Sudarsana Sarkar
2020
 DECLARATION

We hereby declare that the research project titled, “A Study on Financial &
Workforce Implications for Mergers & Acquisitions”, submitted by us is based
on original work carried out by us. We certify that it has not been submitted
anywhere else. We further declare that Mukesh Patel School of Technology
Management and Engineering NMIMS (deemed-to- be-university) will have the
copyright on the project report submitted by me to the college (MPSTME).

Thanking You

Vidhi Naik N040

Shrey Sakhuja N047
Raghav Tikku N055
Zelina Wankadiya N059

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 Acknowledgement

We would like to extend our sincerest thanks to Dr.Sudarsana Sarkar, Research

Project Mentor, for her constant guidance, support and encouragement to
accomplish this project. Without her invaluable inputs, comments and suggestions,
we would not have been able to complete the research project.

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 Table of Contents

1. Introduction ................................................................................................................ ..5

1.1. Background Study .............................................................................................. ..5
1.2. Research Problem .............................................................................................. ..8
1.2. Research Objective ............................................................................................ ..9
1.2. Hypothesis Statements ....................................................................................... ..9

2. Literature Review ......................................................................................................... ..11

3. Research Methodology ................................................................................................. ..17

3.1. Research Methodology Definition ...................................................................... 17

3.2.1Research Design ........................................................................................ 17

3.2.2 Sample Design .......................................................................................... 18

3.2.3 Technique for Sampling............................................................................. 18

3.2.4 Data Collection.......................................................................................... 19

3.2.5 Variable Chosen ...................................................................................... 29

3.2.6Sample Size................................................................................................ 23

3.2.7 Data Analysis ........................................................................................... 23

3.2.8Data Analysis & Research Findings ............................................................ 24

4. Summary & Conclusion ................................................................................................ 31

4.1. Restatement of Problem ..................................................................................... 31
4.2. Description of Procedure .................................................................................... 31

4.3. Major Findings................................................................................................... 31

4.4 Conclusion & Implications ................................................................................. 32

4.5 Recommendations .............................................................................................. 32

4.5 Limitations......................................................................................................... 32

4.5 Scope for Future Research .................................................................................. 33

6. References .................................................................................................................... 34

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 List of Tables

Table 1 Sample for Analysis ............................................................................................. 12

Table 2 SPSS Output for Paired Sample t-test.................................................................... 18

Table 3 SPSS Output of Paired Sample t-test of No of Employees ..................................... 18

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 Abstract

The term Mergers and Acquisitions refers to the consolidation of companies or assets through
different types of financial transactions. In today’s globalized economy, mergers and acquisitions
are being increasingly used the world over for improving competitiveness of companies.
Restructuring of a business is an integral part of the new economic paradigm. This research
paper attempts to analyze the financial and workforce implications of mergers and acquisitions
on companies. Tests are performed on six different financial ratios namely, Earnings per Share,
Net Profit Margin, Return on Capital Employed, Debt/Equity Ratio, Current Ratio and Inventory
Turnover Ratio to conclude the financial implications post an M&A. For HR implications, the
number of employees and their morale has been analyzed.

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I. Introduction
Background of the Study

I.1. Defining Mergers & Acquisitions

Mergers and acquisitions (M&A) is a term that refers to the consolidation of companies or
assets through different types of financial transactions. M&A is an umbrella term that
comprises of a number of different transactions, such as mergers, acquisitions,
consolidations, tender offers, purchase of assets and management acquisitions. Merger &
acquisition refers to a situation where two or more firms come together, go through re-
structuring and combine into one to avail the benefits of the combination. Firms undergo
merger and acquisition to combat the increasing competition and to achieve synergy in
business operations.

I.2. Motives for M&A

Due to an increase in competition and free trade, restructuring and reorganization become
essential. Restructuring usually involves major organizational change such as shift in
corporate strategies to meet increased competition or changed market conditions making it an
integral part of the new economic paradigm. All mergers and acquisitions are meant to create
synergies such as enhancement in revenue, cost savings, workforce and financial synergy,
that make the value of the combined companies greater than the sum of the two parts. The
success of a merger or acquisition depends on whether this synergy is achieved.

Kemal (2011), in today’s globalized economy, mergers and acquisitions (M&A) are being
increasingly used for improving competitiveness of companies through gaining greater
market share, broadening the portfolio to reduce business risk, for entering new markets and
geographies, and capitalizing on economies of scale among other. The motives behind
mergers and acquisitions are economy of scale, economy of scope, increase market share and
revenues, taxation, synergy, geographical and other diversification.

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In India, the concept of mergers and acquisition was initiated by the government bodies. The
increased competition in the global market has prompted the Indian companies to go for
mergers and acquisitions as an important strategic choice. The trends of mergers and
acquisitions in India have changed over the years. The immediate effects of the mergers and
acquisitions have also been diverse across the various sectors of the Indian economy. Among
the different Indian sectors that have resorted to mergers and acquisitions in recent times,
telecom, finance, FMCG, construction materials, automobile industry and steel industry are
worth mentioning. With the increasing number of Indian companies opting for merger and
acquisition, India is now one of the leading nations in the world in terms of mergers and
acquisition. There are different factors that played their parts in facilitating the mergers and
acquisitions in India. Favourable government policies, buoyancy in economy, additional
liquidity in the corporate sector, and dynamic attitudes of the Indian entrepreneurs are the
key factors behind the changing trends of mergers and acquisitions in India. The India IT and
ITES sectors have already proved their potential in the global market. The other Indian
sectors are also following the same trend. The increased participation of the Indian
companies in the global corporate sector has further facilitated the merger and acquisition
activities in India.

I.3. Valuating a M&A

I.3.1. Financial Performance

Operating performance studies attempt to identify the sources of gains from mergers
and to determine whether the expected gains at announcement are ever actually
realized. If mergers truly create value for shareholders, the gains should eventually
show up in the firms’ cash flows. These studies generally focus on accounting
measures of profitability, such as return on assets and operating margins(Andrade,
Mitchell, & Stafford 2001).

Financial performance can be described as a measurement of how well a firm uses

its assets from its primary mode of business to generate revenue. It is also used as

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general measure of a firms overall financial health over a given period of time and
can be used to compare industries as sectors in aggregation. According to
Subramanyam and John (2009), financial performance of a company is measured
through financial analysis in the context of the goals and strategy of the company.
This can be achieved through usage of two principal tools of the financial analysis
that are usually used are the ratio analysis and cash flow analysis.
Ratio analysis of a company’s present and past performance provides the foundation
of making forecast of future performance. The objective of ratio analysis is to
evaluate the effectiveness of the firm’s policies in the four levers of management
also referred to as the drivers of a firms’ profitability and growth that the managers
use in order to achieve the growth and profit targets of the company.
Cash flow analysis is the evaluation of how a company is obtaining and deploying
its funds. This analysis provides insights into a company's future financing
implications. A company that funds new projects from internally generated cash
(profits) is likely to achieve better future performance than a company that either
borrows heavily to finance its projects or, worse, borrows to meet current losses.
Cash flow analysis supplements ratio analysis in examining a firm’s operating
activities, investment management and financial risks. It is used to evaluate on the
strength of the firms internal cash flow generation; the ability of the firm to meet its
short term financial obligations such as interests rates from its operation; the amount
of cash used by the firm in investment and finding out the consistency in
investments with regard to the business strategy; how the dividends have been paid,
if from internal cash flow or for external financing; types of external financing used
by the firm and finally to evaluate the excess cash flow after making capital
investment. The challenge in evaluating the workforce implications is translating the
factors into measurable targets.

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 I.3.2. Human Resource Perspective

Alongside the Financial KPIs or metrics used by the organizations to measure a deal
success for an M&A, there are factors pertaining to the employees & the human
resource that are also critical to a M&A deal. Synergy realization, a smooth
integration process & continuity of key management personnel are some of the key
factors that help in evaluating the merger deal. M&A deals may not allow for long
adjustment periods, however, so the best approach for the organization is to plan.
The overall organizational plan should include all areas which are bound to impact
the workforce, including staffing, communication, training etc. for ensuring a
smooth integration of the firms.

I.4. Research Problem

M & A activity taking place in India is not limited to corporate mergers alone as there are
number of other activities like takeover, spin offs, management buyouts, demerger etc. In
fact internationally the term M & A is now used to cover all transactions relating to sale and
purchase of subsidiaries, divisions, brands, assets and entire company hence, research in all
these associated areas is a lengthy process. There are various aspects involved in M&A
activity apart from a sound financial performance evaluation like, return to shareholders,
human resource management of companies, impact on employees etc. But all the aspects
taken together will hamper the research to reach to a conclusion. The current literature on
M&A assesses the success or failure of mergers and acquisitions in financial terms.
Numerous studies have been recalled and briefly discussed in various research studies which
are pertaining to the financial and economics perspectives, this reaffirms the need for a
viewpoint that takes in account the implications on the workforce which the existing
literature does not reflect. A study providing detail insights into the reasons and patterns of
post-merger corporate performance across the types of mergers and industry and a
consolidated research that takes in consideration both the financial implications and
workforce implications is needed.

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 I.5. Research Objectives

The purpose of this study is to attempt to check the financial performance of merger and
acquisitions deals with respect to some selected Industries in India by considering the
following objectives:
(a) To see the impact of merger and acquisitions on operating performance of selected
companies
(b) To compare and analyze the pre and post-merger of Liquidity position and
Profitability of bidders companies (Acquirer) selected in the present study
(c) To study the workforce implications & identify the KPIs to measure the workforce
implications arising out of a M&A Activity

I.6. Hypothesis Statements

• H01: There is no significant difference between the Earnings per Share(EPS) of the
acquiring firm post the merger.
• Ha1: There is a significant difference between the Earnings per Share(EPS) of the
acquiring firm post the merger.

• H02: There is no significant difference between the Net Profit Margin(NPM) of the
acquiring firm post the merger.
• Ha2: There is a significant difference between the Net Profit Margin(NPM) of the
acquiring firm post the merger.

• H03: There is no significant difference between the Return on Capital Employed(ROCE)

of the acquiring firm post the merger.
• Ha3: There is a significant difference between the Return on Capital Employed(ROCE) of
the acquiring firm post the merger.

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• H04: There is no significant difference between the Debt-Equity ratio of the acquiring
firm post the merger
• Ha4: There is a significant difference between the Debt-Equity ratio of the acquiring firm
post the merger

• H05: There is no significant difference between the Current Ratio of the acquiring firm
post the merger
• Ha5: There is a significant difference between the Current Ratio of the acquiring firm post
the merger

• H06: There is no significant difference between the Inventory Turnover Ratio(ITOR) of

the acquiring firm post the merger
• Ha6: There is a significant difference between the Inventory Turnover Ratio(ITOR) of the
acquiring firm post the merger

• H07: There is no significant difference in the number of employees of the acquiring firm
post the merger.
• Ha7: There is a significant difference in the number of employees of the acquiring firm
post the merger.

The hypothesis was tested at 0.05 level of significance.

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 II. Literature Review

In accordance to Manne (1965) as the most cited definition, merger and acquisition can be
defined as the collision of two business entities in order to obtain a specific business objective
(Yanan et al., 2016).
Merger and acquisition can be defined as two or more organization join together to constitute
one organization, which is stated by Copeland, Weston and Shastri (1983).
Based on Healy and Ruback (1992), financial performance refers to the measure of how
companies utilize their assets from its primary mode of doing business in order to generate
income. In Mergers and Acquisitions, the firm’s financial performance is gauged by assessing
the liquidity, Profitability, and solvency (Saboo and Gopi, 2009).
There are various theories that are related to merger and acquisition phenomena and one of them
is synergy. Sirower (2006) states that synergy has the type of reactions that happen when two or
more factors consolidate to create a noteworthy impact together (Ficery et al., 2007).
Authors like Alexandritis, Petmezas and Travlos (2010) state the main aim of mergers and
acquisitions is to build shareholder wealth through expanded synergies. Takeovers that are
propelled by accomplishing synergy will produce positive total gains. There are three types of
synergies and these are the cost of production related that leads to operational synergy, cost of
capital related that leads to financial synergy and price related that leads to collusive synergy.
This theory explains merger and acquisition transactions that are undertaken with the aim of
realizing synergies that will boost future cash flows thereby enhancing the firm’s value (Ogada
et al., 2016).
Operational synergies can be originated from the combination of operations of separate units;
such as joint sales force and the transfer of knowledge (Hellgren et al., 2011).
On the other hand, the financial synergy theory is based on the proposition that nontrivial
transaction costs associated with raising capital externally as well as the differential tax treatment
of dividends; may constitute a condition for more efficient allocation of capital through mergers
from low to high marginal returns, production activities and possibly offer a rationale for the
pursuit of conglomerate mergers (Ogada et al., 2016).
Thus synergy theory plays an important role to elude the mergers, which can effect, the firm’s
performance. Furthermore, there are a number of pieces of literature on merger and acquisition

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which support the view that market for corporate takeover is undertaken to obtain a number of
objectives including to achieve operational efficiency or financial improvement through synergy
either in the form of revenue, cost or financial synergy. Most often cited objective for merger and
acquisition is to achieve synergy through the combination of operation of both target and
acquiring the company (Ashfaq, 2014).
The Valuation theory contends that directors have better information about the objectives value
in acquisition than stock markets or shrouded interests in other organizations and the procured
organization is used to gain ownership in other organizations as stated by Holderness and
Sheehan (1985). The ambiguity of private data makes it difficult to value the advantages
involved. Through this private data, the net gains can be accomplished (Trautwein, 1990).
This net gains can be accomplished, when inside information gives an organization more value
than the market has valued it to have. Indeed, even productive markets can't draw an image of an
organization's actual value if one buyer possesses inside information (Dilshad, 2013). Empire
building implies that directors may have incentives to grow their firm past its optimal size. In
accordance with Amihud and Lev (1981), a greater firm gives more status than a smaller one
and managerial pay is emphatically related to the span of the firm which effects on total firm
performance. On the other hand, Tong (2012) states bigger and more aggregate firms empower
managers to differentiate their wealth and to enhance their job security since the cash flows of
the objective firms are not exactly perfectly linked with their own firm. Moreover, in the lance of
firm performance, Walsh (1988) reported that consolidating organizations have a higher
executive turnover than non-merging organizations, which bolsters a clarification of mergers in
terms of managers’ quest for opportunities as per cite by Noren and Jonsson (2005).

Kanahalli&Jayaram (2014) in their research study, “Effect of Merger and Acquisitions on

Financial Performance: A study of Tata group”, attempted to determine the success of
mergers and its impact on post-merger financial performance of acquired companies in India by
studying Tata two groups companies. Study depended on secondary data as financial statements
collected from various articles, books, magazines & money control websites. To evaluate the
collected data financial ratios, paired “t” test used in the study that revealed no significant
difference between the financial performance of companies before & after the merger.

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Agarwal & Singh (2015) conducted a case study on “Effect of merger on the financial
performance of Kingfisher Airlines” objective of the study was to analyze the pre & post-
merger of the financial performance of KFA (Kingfisher Airlines).Study used accounting ratios
in terms of profitability, liquidity, earning per share, leverage to evaluate the data. With a
statistical technique as paired t-test used to conclude the result which found no improvement and
benefit in acquiring firm (KFA) after the merger, as well no significant result shown in return on
equity and earnings per share.

Daddikar& Shaikh (2014) in their article, “Impact of Merger & Acquisitions on Surviving
Firm’s Financial Performance: A case study of Jet Airways Ltd”, examined the impact of
merger and acquisitions on financial profitability during the post-merger period. To perform the
study Jet Airways Ltd selected as the sample, of which financial data collected from investment
websites, NSE & BSE websites & various journals. Study used different financial ratios such as
Profitability ratios, Liquid ratios, financial standards to compare pre & post-merger situations
and statistical tools such as paired t-test employed to determine the results that exhibit that there
is no significant difference on financial efficiency or performance after merger. The study found
no relevant improvement in the return on investment and net profit margin of acquiring
company.

Verma& Sharma (2014) reviewed the “Impact of merger on financial performance of

Indian telecom sectors involved in M&A during 2001-2008”. A Sample size of 59 companies
under gone merger and acquisitions deal from 2001-02 to 2007-08 have been selected.
Secondary data extracted for six years from CMIE database PROWESS. The study used
regression model and various financial ratios to analyze the data that depicted the acquirer firms
have leverage synergies but eventually lead to decrease the Return on Equity(ROE) after merger
and acquisitions. Overall financial performance insignificantly improved in post-merger period.

Azhagaiah (2014) highlighted the “Impact of merger and acquisitions on operating

performance of Indian manufacturing firms”. A sample size of 39 manufacturing firms under
gone merger from 2006-07 considered in the study. To attain the objectives secondary data
collected from capital market data base for period five years pre-post- merger. To test prediction

15
various statistical tool as Factor analysis, correlation matrix, multiple regression and Chow test
applied to study that concluded a significant positive effect on operating performance of Indian
manufacturing firms under the study.

Pandey &Verma (2012) undertook a “Study on the merger and acquisitions in steel
industries specially Tata Corus Deal” to analyze the feasibility of merger and implication of
take over from the view of financial aspect. Mainly based upon secondary data consists of
financial reports collected from the Tata & Corus websites to conduct the study. Various
financial ratios & statistical tools as time series, coefficient of variation used to interpret the
results that the merger was good for the Tata steel industry though it was able to manage the
liability and cross cultural diversification.

Devarajappa (2012) explored the “Pre and post-merger financial performance of Indian
merger banks namely HDFC merger with Centurion bank of Punjab”. For the study
secondary data collected from annual banks reports. To analyze the pre and post-merger,
financial parameters as Gross Profit margin, Net Profit ratios, Return on Equity as well as
statistical technique Independent T test used to compare the results. Study highlighted that
financial performance of bidder bank (HDFC Bank Ltd.) positively improved after merger

Smita (2011) undertook an inquiry on “Impact of merger and acquisitions on financial

performance of 10 industries”, secondary data collected from 2005-2007 consists of annual
financials of companies across 10 industries. Researcher used financial ratios and statistical
techniques as Chi-square & T - test to attain the objectives. The study concludes there is no
positively significant effect of merger & acquisition on financial health of selected companies.
For few years firms confront difficulty in liquidity position but it ensures good return in long
period.

Kumar (2009) analyzed the “Post-merger corporate performance with the Indian
perspective” and looked for synergies is the post-merger company. The research here compared
the employee centric operational performance as a standard of corporate performance. It was

16
found that the post-merger profitability, assets turnover and solvency of the acquiring companies,
on average, show no improvement when compared with pre-merger values.

Islam Sengupta et al. (2012) researched and wrote the following “The Behavioral Aspect Of
Mergers And Acquisitions: A Case Study From India” It was in the Context, Process and
Consequences of the merger of State Bank of Indore with the largest nationalized banking firm,
State Bank of India. Due to inadequate emphasis on the human resource aspect, employee
resistance acted as impediment to merger of these two banks and delayed the process. This paper
developed a model, which can help the industry achieve smooth changes without employee
resistance.

Arora & Kumar (2012) in their research “A Study on Mergers and Acquisitions – Its impact
on Management and Employees” tried to find out the major issues associated with pre and post
merging situations with special emphasis on the human aspect. They studied 50 companies and
details of their past Mergers and Acquisitions. Further they suggested certain strategies which
would to lead successful mergers and growth of the overall human resources involved.

Studies in India related to mergers are few and with some studies particularly focusing on
comparing pre-merger and post-merger performance using a case by case approach (Kumar and
Parchure, 1990). Other studies have well documented the response of the Indian corporate
sector to the corporate restructuring (Khanna, 1998 and Basant, 2000). There were no
significant differences in the financial characteristics of the two firms involved in merger when
pre- and post-merger operating performance was compared (Pawaskar, 2001).

The reasons for the mixed evidence amongst various notable authors above is the lag between
completion of the merger process, realization of benefits of mergers, selection of sample and the
methods adopted in financing the mergers and acquisitions. Further, financial ratios can be
misleading indicators of performance because they do not cater to the product mix or input
prices.
According to Karim and Bansal, (2008) merger and acquisitions help the firm acquire valuable
capabilities possessed by the acquired organizations.

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Basant (2000) suggests that economic reform in the Indian economy has significantly reduced
micro-economic rigidities and enhanced competitive pressures. In response, firms have
undertaken corporate restructuring activity in order to retain competitiveness and increase their
value.

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III. Research Methodology

Introduction
This session shows the procedure followed to complete the study. It involves details on the
data collection, measurement and data. It is an overall scheme, plan or structure conceived to
aid the researcher in answering the raised research question. In this stage, most decisions
about how research was executed and how respondents were approached, as well as when,
where and how the research was to be completed. Therefore in this section the research
identified the procedures and techniques that were used in the collection, processing and
analysis of data.

Research Design
The research design is a very useful step in the entire research process. The
research design is an entire framework by which the researcher would decide the
way in which the research would be conducted and the tools and techniques
which would be employed. There are three types of research design which have
been listed below:
• Exploratory Research Design
• Descriptive Research Design
• Causal Research Design
The study used a descriptive style of research design. The reason for choosing this
type of the research design is so that the data collected is concise & structured
making the analysis factual and simple. This study also took on a causal research
design. Causal research designs are used to determine the causal relationship between
one variable and another; in this case, the cause and effect relationship between
merger and acquisition on the financial performance on the selected companies in
India that have undergone a merger activity. Causal research design is consistent with
the study’s objective which is to determine the effect of mergers and acquisition on
liquidity, leverage, long-run profitability and efficiency of the selected Indian
companies.

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Sample Design
For the purpose of the study we have chosen a sample of ten major M&A deals
that have taken place from 2007 to 2015 in India. The data was collected for the
acquirer companies that belong to different industries. This research is purely
dependent on the secondary data. The financial information of the respective
acquirer company was collected through secondary mediums such as annual
reports, www.moneycontrol.com, Capitaline Database etc. Financial Information
over a period of time would be studied which involves collection of financial
information for three years before the merger and three years after the merger.

Target Population: For this study on M&A, the target population is all those
listed Indian companies which have entered into M&A between 2007 to 2015.

Technique for Sampling

There are two important techniques of Sampling i.e Probability Sampling
Technique & Non-probability Sampling Technique. This research does not use
probability sampling technique since the number of mergers happened in the
Indian context over the years is high. The process of listing all the mergers and
acquisition that have taken place in India ever since 2007 to 2015 has been would
be time consuming. Therefore, the research has taken the non-probability
sampling technique approach wherein the sample would be chosen purely on
basis of convenience rather than involving any statistical tool. Convenience
sampling is used to choose the major merger and acquisition deals in India based
on the ease of availability of all the financial information. The advantage of using
convenience sampling is that different mergers and acquisitions deals can be
found and used to represent the entire population on the basis of the researcher’s
requirement.

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Data Collection
The study has used secondary data gathered from financial statements of the
various companies involved in merger and acquisition process ranging from three
years before the M&A to three years after the M&A process so as to help the
researcher achieve the research objective stated. The study also refers to a
secondary data in form of a interview gathered from the research paper- ‘The
effect of mergers and acquisitions: ‘Focus on Employee Job Satisfaction of
Former Employees of Smartcom in Vodacom SA’.
During the interviews with the former Smartcom employees all candidates were
asked the same questions, allowing open-ended responses so that candidates can
express themselves during the interview. A total of ten employees were
interviewed in order to get some understanding or clarity on the questionnaire
responses received from them.

Variables Chosen for Analysis

1. Earnings Per Share
Earnings per share (EPS) is the portion of a company's profit allocated to each
share of common stock. Earnings per share serves as an indicator of a company's
profitability. As per Chatfield, Dalbor, & Willie (2008) shareholder value for the
firm is sturdily influenced by analysis appraisals of the firm’s future earnings per
share (EPS). Examples from mergers and acquisitions where EPS may change
without conclusive value relevance are whether the transaction is accounted for
by the amount of asset step-ups (Bergquist&Vesterberg, 2015).

2. Net Profit Margin

This is the profit which is obtain from when interest and taxes is been deducted
from the gross profit in other words it’s the profit generated from all the phrases
of the venture. Therefore according to Thomson (2011) and organization with a
consistently high net margin shows that the firm with one or more competitive
advantages to their competitors and also provide the firm with a cushion in the
event of downturns (Zollo& Kerrigan, 2012).

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3. Return on Capital Employed
Return on Capital Employed (ROCE) is a profitability ratio that helps determine
the profit that a company earns for the capital it employs.ROCE is a useful metric
for comparing profitability across companies based on the amount of capital they
use. For a company, the ROCE trend over the years is also an important
indicator of performance. Investors tend to favour companies with stable and
rising ROCE numbers over companies where ROCE is volatile.

4. Debt-Equity Ratio
Debt equity ratio, is one of the most important ratios in the financial markets
when it comes to analysing the capital structure of a firm., it is defined as a ratio
of debts to equity. It is often calculated to have an idea about the long-term
financial solvency of a business. A business is said to be financially solvent till it
is able to honour its obligations viz. interest payments, daily expenses, salaries,
taxes, loan instalments etc. Hence, post a merger while the acquiring company
takes on the debt as well as the equity of the acquired firm, the analysis of the
post-merger ratio is extremely critical.

5. Current Ratio
The current ratio is a critical liquidity ratio utilized extensively to measure a
firm’s ability to meet its current liabilities with the help of the available current
assets. This is an important ratio because it measures the liquidity stand of a firm.
Normally, it is assumed that higher the ratio, higher is the liquidity and vice versa.
When we talk about mergers the short term assets, liabilities, working capital
amongst other long term debts and equity are also brought in for the acquirer firm.
Hence analyzing the post-merger state of current assets and current liabilities
becomes extremely important as a certain basic liquidity ratio needs to be
maintained.

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6. Inventory Turnover Ratio
Inventory turnover ratio determines the number of times the inventory is
purchased and sold during the entire fiscal year. This ratio is important to both the
company and the investors as it clearly reflects the company’s effectiveness in
converting the inventory purchases to final sales and revenue. Companies always
prefer a higher inventory turnover ratio. A lower ratio indicates that the company
does more stocking than is required. The merger of two companies also means the
merger of their inventories. Studying the ITOR post-merger becomes extremely
important to understand the new Inventory turnaround pattern and if there is a
significant change in the same post the merger. The newly acquired brand image
could work in favour to attract new customers or vice versa. In either case
analyzing the ITOR becomes a crucial part.

7. Number of Employees
Mergers cause redundancies in organisations leading to layoffs or shifting of
employees’ roles in the organisation. Employees may also fear losing their jobs
and it can adversely affect their productivity. This is one of the most important
factors that affect organisations post a merger. For the very same reason we have
taken’ Number of Employees’ as a dependent variable in our research.

8. Employee Morale
Mergers and Acquisitions lead to significant changes in organizational culture
since two different organizations come together. This can affect the employee
morale especially if the reorganization of the business s not handled properly. To
analyze these changes on workforce we have considered ‘Employee Morale’ as an
important variable.

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 Earnings Per Share

Net Profit Margin

Pre-
Merger

Financial Return on Capital

Performance Employed

Merger & Debt-Equity Ratio

Acquisition

Current Ratio

Post- Workforce Inventory Turnover

Merger Implications Ratio

Number of
Employees

Employee Morale

Figure 1 : Variables for Analysis

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 Sample Size

Sr No Acquirer Company Acquired Company Year of

Merger/Acquisition
1 Tata Chemicals British Salts 2010
2 Hindalco Novelis 2007
3 Tata Motors Jaguar Land Rover 2008
4 Apollo Hospital Nova Specialty 2015
5 Sun Pharma Ranbaxy 2015
6 TCS CMC 2014
7 Sterlite Asarco 2008
8 Tata Steel Corus 2007
9 RIL RPL 2008
10 ONGC Imperial Energy 2008
Table 1: Sample for Analysis

Data Analysis
The secondary data collected was processed, analyzed, interpreted and
presented in such a manner that it was clear, precise, concise and explicit.
This data was quantified and coded using descriptive statistics. The
Statistical package for social sciences (SPSS) was used to describe the
collected data, sort and examine through and analyze it. Measures of
central tendency, the mean in particular, were used in data analysis
together with tests of significance. The statistical method used for the
research is Paired Sample T-test. The Paired Samples t Test compares two
means that are from the same object, or related units. The two means
typically represent two different times (e.g., pre-merger or post-merger) or
two different but related conditions or units. The purpose of the test is to
determine whether there is statistical evidence that the mean difference

25
 between paired observations on a particular outcome is significantly
different from zero. The Paired Samples t Test is a parametric test.

Data Analysis& Presentation of Findings

Ratios Type Mean Std t Significance (2 Null

Mean statistic tailed) hypothesis

Earnings Per Share Pre 39.05 5.75 0.573 0.581 Accept

Post 44.80

Net Profit Margin Pre 11.25 1.02 1.057 0.318 Accept

Post 12.27

Return on Capital Pre 10.90 4.39 2.279 0.049 Reject

Employed
Post 15.29

Total Debt/Equity Pre 0.49 -0.06 -0.717 0.492 Accept

Post 0.43

Current Ratio Pre 1.67 -0.13 -0.326 0.752 Accept

Post 1.54

Inventory Turnover Pre 672.77 84.68 0.992 0.347 Accept

Ratio
Post 757.45

Table 2: SPSS Output for Paired Sample t-test

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H01: Earnings per Share

According to the descriptive statistics, taking into consideration the pre-merger and post-merger
mean values, there was an increase in the mean EPS post the merger. In accordance with the
SPSS output of our model, the standardized mean of EPS variable is recorded as 5.75 with a T-
stat of 0.573 and a significance value of 0.581, which is much greater than the scale of 0.05
significant level. At 5% significance level, the t-critical value is found to be 2.262, which is
greater than the t-stat derived from the t-test. Thus, we fail to reject the null hypothesis H01,
meaning there is no significant difference in the EPS before and after the merger.

H02: Net Profit Margin

Comparing the pre and post-merger NPM means, we can see that it has increased marginally,
having little significance in M&A scenarios. This could be due to high fixed business cost,
devaluation of inventory or increment in the price of goods.

The standardized mean of EPS variable is recorded as 1.02 with a t- stat of 1.057 and a
significance value of 0.318, which is greater than the scale of 0.05 significant level. At 5%
significance level, the t-critical value is found to be 2.262, which is greater than the T-statistic
derived from the t-test. Thus, we fail to reject the null hypothesis H02. This concludes that there is
no significant difference in the NPM before and after a merger has taken place.

H03: Return on Capital Employed

We can observe that the mean ROCE pre-merger was less than the mean ROCE post-merger,
indicated by the positive value of the standardized mean of 4.39. The t- stat obtained on running
the t-test was 2.279 with a significance value of 0.049, which is less than the scale of 0.05
significant level. At 5% significance level, the t-critical value is found to be 2.262, which is less
than the T-statistic 2.279, derived from the t-test. Thus, we reject the null hypothesisH03. This
concludes that there is a significant difference in the ROCE post the merger.

27
H04: Debt/Equity Ratio

From the negative value of standardised mean of -0.06, we can say that the Debt Equity Ratio
actually decreased post the merger, but by a insignificantly small amount. The T- stat obtained
on running the t-test was -0.717 with a significance value of 0.492, which is greater than the
scale of 0.05 significant level. At 5% significance level, the t-critical value is found to be 2.262.
Thus, we fail to reject the null hypothesisH04, meaning there is no significant difference in the
Debt/Equity ratio before and after a merger has taken place.

H05: Current Ratio

There has been a small decrease in Mean Current Ratio post the merger. This can be observed
from the value of standardised mean being -0.13. The t- stat obtained on running the t-test was -
0.326 with a significance value of 0.752, which is much greater than the scale of 0.05 significant
level. At 5% significance level, the t-critical value is found to be 2.262. Thus we fail to reject the
null hypothesisH05, meaning there is no significant difference in the Current ratio before and
after a merger has taken place.

H06: Inventory Turnover Ratio

There has been significantly large increase in mean of Inventory Turnover Ratio post the merger.
The standardized mean of Inventory Turnover Ratio variable is recorded as 8468 with a T- stat of
0.992 and a significance value of 0.347, which is greater than the scale of 0.05 significant
level. At 5% significance level, the t-critical value is found to be 2.262, which is greater than the
T-statistic derived from the t-test. Thus we fail to reject the null hypothesisH05. This concludes
that there is no significant difference in the Inventory Turnover Ratio before and after a merger
has taken place.

28
Research Findings for Workforce Implications

H07: Number of Employees

Paired Sample t-test for Number of Employees

Measure Type Mean t-statistic Significance(2-tail)

Mean No. of Employees Pre- Merger 52,157 -1.497 0.169

Post-Merger 57,629

Table 3: SPSS Output of Paired Sample t-test for Number of Employees

From the above table we can observe that there was in fact an increase in the mean number of
employees of the 10 sample companies. On performing the paired sample t-test, the t-stat was
found to be -1.497 with a significance value of 0.169. At 5% significance level, the t-critical
value is found to be 2.262. Thus we fail to reject the null hypothesisH07. From this we conclude
that there is no significant difference in the number of employees before and after a merger.

Following were the observations-

• The acquisition was communicated to the employees, but this communication had not

been clear.

• The move was very quick and they were not prepared for it. Their customers were

also not prepared for the sudden change.

• They were concerned that only a one-day orientation was provided, which in essence

was not sufficient for them.

• They were not happy with the way the implementation was handled.

• There was very little involvement of HR and other relevant managers.

29
 • There was a lack of communication from HR with regard to issues that were raised by

employees.

• Some employees feel uncertain and threatened about the new environment.

• They suffered from lack of support from colleagues with regard to practices such as

systems implementations.

The findings from the study can be summarised as follows:

(a) Inefficient Communication

The acquisition of Smartcom by Vodacom was communicated to these employees, but it

was not communicated clearly. Therefore there was a lot of confusion and uncertainty

among former Smartcom employees regarding their new role at Vodacom. Most mergers

and acquisitions fail, not because the change was not communicated, but because the

right channels fail to communicate the change clearly to employees most affected by it.

This was evident from several quotations from interviews that illustrate that there was a

communication breakdown with regards to roles and responsibilities of the respondents.

(b) Quick and Sudden Change

The employees felt that the change was very quick and sudden; it was done with no

warning. Existing Vodacom employees also did not expect people to join them so

suddenly, and some of Vodacom employees were not even aware of the acquisition of

Smartcom.

30
(c) Relocation Issues

Most employees were able to adapt to the new environment and believed that the first
five

months were the most difficult, as they had to relocate from Rosebank to Midrand, move
to

the new department, learn new policies and procedures and build new working

relationships.

(d) Opportunities

Most respondents believed that there were more opportunities within Vodacom because it

is a big organisation compared to a small organisation such Smartcom.

(e) New Roles and Responsibilities

The environment at Smartcom was a small autocratic organisation. Because it was

relatively small, there was no clear defined delegation of responsibilities. When

respondents were asked what their previous roles were, they could not give clear answers.

(f) Excessive Reporting and Scheduling

These employees felt that at Vodacom there is too much reporting required, e.g. weekly

sales / finance reports, and this is something that they were not used to. Individuals

working at the call centre mentioned that they did not like the fact that simple things,
such

as when to take lunch, are scheduled for them.

31
(g) Policies and Procedures

Policies and procedures are not very effective as there is a lot of red tape and no
flexibility.Some respondents suggested that managers hide behind the policies when they
fear that they might be challenged by employees.

(h) Varying Levels of Independence

Employees who work for the call centre, retention and credit controller’s department feel

that there is no independence within their department. On the other hand, employees in

the sales and finance department feel that they are given the chance by their management

to be more independent. In general, however, all respondents expressed that:

• There was not enough support from HR during the change intervention; and

• Not enough job responsibility had been given to them.

(i) Lack of Management Support

Respondents felt a lack of management support. This is because only a few agreed that

management had assisted them to adjust to the new environment. Most agreed and said

that management had given no support and lacked understanding of what interventions to

implement for their employees.

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Summary & Conclusion

Restatement of Problem
The report attempts to analyze the financial and workforce implications of mergers and
acquisitions on companies.

Description of Procedures
In our research we used the paired sample t-test to find the significance of the impact of
mergers and acquisitions on Earnings per Share, Net Profit Margin, Return on Capital
Employed, Debt/Equity Ratio, Current Ratio and Inventory Turnover Ratio. From this
we concluded whether there is any significant financial implications on companies that
have undergone a merger or acquisition.
Further to measure the workforce implications of an M&A, we performed a paired
sample t-test on the Number of Employees pre and post the merger or acquisition.
We also studied the morale of an employee post-merger by doing secondary research on
employee interviews from a company called Smartcom.

Major Findings
On performing the paired sample t-test we concluded that there was no significant
difference in the Earnings per Share, Net Profit Margin, Debt/Equity Ratio, Current
Ratio and Inventory Turnover Ratio. However a significant difference of Return on
Capital Employed was observed post the merger/acquisition.
As for the number of employees, there was no significant difference pre and the merger/
acquisition.
It was also observed that there was a negative impact on employee morale post the
merger/ acquisition due to various factors.

33
Conclusion & Implications
Mergers & Acquisitions is a useful tool for growth and expansion of the companies in
the corporate world. This study was undertaken to test the financial and workforce
implications of mergers and acquisitions. The results were derived from the analysis of
pre- and post-merger key financial ratios of 10 of the biggest M&As from 2007 to 2015.
The research findings show that the management cannot generalize that synergy will be
generated and profits will increase simply by going for mergers and acquisitions. The
result and analysis of the key financial ratios of the acquiring firms shows that there is
no significant effect on the profitability and the financial performance of the firms
following acquisitions except for the Return on Capital Employed which showed a
significant rise. The result and analysis of the workforce implications also show no
significant difference in the employment status of the firms which went for mergers &
acquisitions in these years. Although, the impact of mergers has had a notable impact on
organizational culture which indirectly affects the employee morale leading to discontent
amongst them.

Recommendations
The study recommends that the merging/acquiring firm to internally generate income to
facilitate the merging/acquiring and have less borrowing. This is to enable the firm to
have better liquidity and solvency.
The study recommends that the management should instill discipline upon itself by
ensuring good corporate governance, promote technological progress and increase its
paid-up capital regardless of the statutory requirements so that the continued existence of
the firm is not jeopardized after undergoing mergers and acquisition. Management
should put into consideration the degree of transferability and marketability of assets
invested in so that these assets can provide liquidity to the firm with ease. In order to
ensure a smooth integration, the management should be able to communicate efficiently
to the employees, should plan beforehand about creating workforce synergies.

34
Limitations
The appearance of limitations is a commonality in every study and thisstudy also has
certain limits. The first limitation of our study is our small sample size of companies that
have undergone a merger is small. Further, the study has analyzed Pre and Post merger
& acquisition performance results for only three years, which may not provide the true
picture of improvements in financial performance.Also, while taking into consideration
the financial performance we have not considered the change in the capital structure of
the acquirer firm, if any, post the merger.The challenge to study the workforce
implications is to translate the variables into measurable targets. In this study we have
considered limited factors such as number of employees & employee morale, although
there are many more factors that should be taken into consideration while studying the
workforce implications of a M&A transaction. Every M&A transaction brings its own
set of complications and there is no simple recipe for integration.

Scope for Future Research

Research that is done using a standard metric such as a base rate company or using the
industry results for comparison purposes is needed. This would help in determining
significant variables that have an impact on the financial performance of a firm post the
merger/acquisition. Significant amount of research needs to be to draw a relation
between creating financial as well as workforce synergies. For future research, the
sample size of companies can be extended. It is also advisable to have a wider approach
by concentrating on a selected sector in order to have more significant results.

35
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