RESEARCH

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Long-term Post-merger Performance of Firms in India

K Ramakrishnan

Executive Summary

KEY WORDS Mergers Long-term Operating Performance Post-merger Performance Efficiency

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

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ergers are important corporate strategy actions that, among other things, aid the firms in external growth and provide competitive advantage. This area has spawned a vast amount of literature over the past half a century, especially in the developed economies of the world. India too has been seeing a growth in the number of mergers over the past one-and-a-half decades since economic liberalization and financial reforms were introduced in 1991. While domestic firms have resorted to merger activity for consolidation of their positions in order to face higher competition, multinational companies (MNC) have used it as a tool to enhance corporate control in India (Basant, 2000). A merger means any transaction that forms one economic unit from two or more previous ones (Weston, Chung and Hoag, 2000). The term performance used in the remainder of this paper, for brevity and convenience, refers to the long-term post-merger operating performance.

LITERATURE REVIEW
The presence of diverse and varied merger motives serves to highlight the inherent contradictions in any discourse on the performance of merged firms. Almost every aspect of successful performance stands a chance of contraindication by a negative outcome associated with the merger under scrutiny. For instance, a merger supposedly intended to deliver economies of scale through a much larger size of the merged entity, may come under the scrutiny of market regulators who might apprehend breach of antitrust laws due to the newer, bigger firm now possessing excess market power. The performance of merging firms has hence, for long, been an area of study, research and debate. In spite of a substantial volume of literature, this debate about whether mergers are wealth-creating or wealth-reducing events for the firms that undertake them is an ongoing one. Several papers published by scholars in the fields of financial economics, industrial organization economics and strategic management have attempted to shed light on this topic. It is important to understand whether mergers of firms have led to a better performance, since only such an improvement can justify the use of mergers as an important tool of corporate strategy. But why is it important to measure the performance of merged firms? Measuring the performance of merged

firms helps in developing strategic plans and in evaluating the extent of achievement of the objectives of the organization. If mergers do not lead to the combined firms being better off post-merger as compared to before the merger, resorting to them cannot be justified. An important related issue is the motive guiding the merger. Assessing only financial performance may not be an accurate yardstick to determine whether a merged firm is better off. For, the motivation for the merger might have been related to social and community gains and not only to improved financial performance. Even though I have earlier mentioned the presence of diverse motives for mergers, I am of the opinion that it is imperative for us to ascertain how mergers have performed financially. Successful performance, at the primarily financial level, at least, justifies the utilization of mergers as an appropriate means of implementing corporate-level strategy. Else, resorting to this tool may not be very effective. Managers might then also need to consider alternatives such as strategic alliances or the setting up of greenfield ventures instead of concentrating on mergers. Of course, if the motives guiding the merger were not purely driven by enhanced financial success, our understanding of only the financial performance would be an inadequate measure of the overall performance of mergers. From this backdrop thus emerges one main question that invites research in the Indian context and, that is How have merging firms performed in the long term in India? As mentioned above, the debates inherent to mergers due to the presence of conflicting motives and claims about their impact ensure that the measurement of postmerger performance still holds potential for further development. This is especially true for emerging markets which are grossly under-represented in scholarly literature in this area. Theories that have been generated in the context of the developed Western markets may not be applicable to or appropriate for the emerging economies (Hoskisson, et. al., 2000). Unlike the developed world, the emerging economies have only recently opened up (or are still in the process of doing so) to the global markets. They are still at various stages of achieving complete market-orientation. Privatization of stateowned enterprises is taking place. Domestic markets are now becoming more competitive. But such a transition is not smooth. There are various environmental, financial, and other constraints. Acquisitions and mergers are
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a means to enter and grow in such emerging economies. It would thus be interesting to gauge the results of mergers in the emerging markets, as it would help to further our understanding of the working of this instrument of corporate strategy in a different context as compared to the developed world. The performance of merging firms has been assessed using various measures and methods. The traditional studies have used financial measures such as profits and accounting returns. Market-based financial measures such as stock returns have also been extensively used. A significant portion of the studies published till date on this topic of merger performance deals only with announcement period abnormal stock price returns to both the bidder and target firms, using a window comprising of a few days before and after the first date of announcement of the merger. An increasing number of studies are now attempting to understand the long-term performance of the firm over a few years post-merger, as such studies with longer horizons may provide us with better insights on whether mergers are serving the intended purpose. The rationale behind studying a longer time horizon post-merger, and not just the immediate period surrounding merger announcement, is that stock price movements around the latter period are only indicative of the capital markets expectations of the mergers performance. They are speculative in character and by no means stand for the actual performance of the merger. This real or actual performance is reflected in, among other things, the financial reports of the combination for a few years after the merger. A careful analysis of these financial statements is indicative of the true level of post-merger performance. The term post-merger here means subsequent to the consummation of the merger that has been previously announced. The effective date for this has generally been taken as the date of delisting of the merged firm from public exchanges, or the announcement in the business press of board/management approval of the merger. The different ways of measuring performance of mergers can lead to disparate and contradictory findings on whether any merger has lead to the firms being better off. In keeping with my argument about the primacy of financial performance, in this paper, I would be concentrating on the use of accounting data to measure the performance of merging firms. It is an educative exercise to review the literature on the performance of merging firms, as it will provide us with pointers on
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how far we have arrived in this important area of corporate strategy. The next few sub-sections link the discussion to the Indian context of mergers and put forward my hypothesis that is intended to concretize the scope set forth as part of the research question mentioned above.

Research on Performance of Mergers

Numerous scholars have carried out research on the performance of the merged firm. The focus of this research has been on whether performance, after the merger, has been announced/completed, has been enhanced or has deteriorated as compared to before the event, and what the magnitude of this change is. Several key papers from the areas of financial economics and strategic management that have empirically measured performance, have been reviewed and studied. The salient features of these studies are highlighted here in an attempt to provide a snapshot of the developments in this area of research. This literature review does not claim to be an exhaustive one. Some relevant academic articles may have inadvertently got left out. But the effort has been to make this study as comprehensive as possible by including the significant papers to provide us with some directions. As already indicated, two primary means have been utilized by researchers to operationalize the performance of merged firms a) Accounting measures based on objective data such as cash flow returns and other financial ratios, b) Share price returns, again based on objective data, that are related to the capital market. In this paper, the discussion of literature and methodology of the research are restricted to the accounting measures of post-merger performance. Merger Performance Studied using Accounting Measures One of the trend-setting studies in this genre of measuring the success of mergers is by Ravenscraft and Scherer (1989). They tested the hypothesis that other variables maintained equal, if mergers result in economies of scale or scope, the post-merger profits should be higher than the pre-merger profits and/or their industry averages. Their study of 2,732 lines of business for the years 197577 did not find any improvement in the post-merger operating performance. In fact, with no control for the merger accounting methods (purchase vs pooling), there was a significant negative impact of 13.34 per cent on the post-merger profitability. One important shortcom-

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ing of the Ravenscraft and Scherer study was the nonalignment of the post-acquisition period with the acquisition event, leading to non-validity of the results. Traditional stock price performance studies have been unable to determine whether mergers lead to longterm economic gains, resulting in a gap in our understanding of post-merger firm performance. Healy, Palepu and Ruback (1992) addressed this issue of whether mergers improved performance, and if they did so, what the sources of economic gain were. They also tried to improve upon the methodology of the earlier work by Ravenscraft and Scherer (1989). A sample of the 50 largest mergers of public industrial firms in the US, completed between 1979 and mid-1984, were used. Cash flow measures were used to study the post-merger performance. According to them, cash flows are representative of the actual economic benefits generated by the assets. Pre-tax operating cash flow returns on assets were used to measure the improvements in operating performance. Their definition of operating cash flow was sales, minus cost of goods sold and selling and administrative expenses, plus depreciation and goodwill expenses. This measure was deflated by the market value of assets (market value of equity plus book value of net debt) to make it comparable across time and firms. This measure was unaffected by depreciation, goodwill, interest expense and income, and taxes. The aggregate industry-adjusted pre-merger and post-merger performance measures were calculated, five years prior to and subsequent to the merger, and then these two were compared to study the change in post-merger performance. The firm-specific, economy, and industry factors that might influence post-merger performance, were thus controlled for. An increase in the post-merger operating cash flow returns vis--vis the firms industries was observed. The increase was 2.8 per cent per year, after controlling for the pre-merger performance. The improvements in operating cash flows after merger were due to enhancement of asset productivity post-merger. Healy, Palepu and Ruback also correlated their postmerger cash flow performance and merger-announcement related stock market performance and found a significant positive correlation between these two measures indicating that the stock market correctly revalues the merging firms at announcement in expectation of the improvements in operating performance in the future. Since this study sampled the 50 largest acquisitions in the US, its results may not be generalizable across the

entire gamut of mergers which might present quite a mix of organizations in terms of size and motives for mergers. This is especially true for the Indian context where most of the acquisitions are relatively small. Healy, Palepu and Ruback (1992) stated that the economic gains from a takeover are most likely to be detected when the target firm is large. This leaves the question of why small mergers, like the ones in India, also take place, still unanswered, since economic feasibility would be an important driver for such an activity. It thus becomes necessary to study such small mergers too in a bid to understand whether they lead to economic gains. Another study in the same genre is by Cornett and Tehranian (1992) who studied the post-acquisition performance of 30 large banks in the United States. These acquisitions took place between 1982 and 1987. Each of these acquisitions had a purchase price exceeding $ 100 million. They measured economic performance related to the mergers in a manner similar to Healy, Pa1epu and Ruback (1992). Operating cash flows divided by the market value of assets were used for performance evaluation. The pre-merger performance was computed for years 1 to 3 before the merger, whereas post-merger performance was studied over the years +1 to +3 after the merger. Comparing the latter with the former is indicative of the impact of the merger on firm performance. The industry mean data was subtracted from the raw sample-firm data to provide the industry-adjusted performance, prior to the comparison between the preand post-merger figures. This was done to ensure that the influence of economy-wide or industry factors on the performance data calculated was avoided. The mean annual industry-adjusted cash flow return before the merger was 0.2 per cent for the entire sample and 1 per cent post-merger. This means that, before the merger, the sample banks underperformed as compared to their industry by 0.2 per cent, but outperformed by 1 per cent post-merger. There was a significant (at the 1% level) increase of 1.2 per cent in performance post-merger as compared to before the merger. This study pertained specifically to the US banking industry and hence its results may not be generalizable across other industries. Also, like in the Healy, Palepu and Rubacks (1992) paper, selecting only the largest mergers may lead to results that cannot be generalized across all sizes of mergers, such as the ones taking place in India. Nevertheless, the methodology adopted here serves as a guidLONG-TERM POST-MERGER PERFORMANCE OF FIRMS IN INDIA

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ing post for future studies of the same kind. Switzer (1996), using the methodology followed by Healy, Palepu and Ruback (1992), focused on analysing the post-merger changes in operating performance. Her contention was that the latter study covered the merger mania period in the US and not mergers in general. It thus made sense, according to Switzer, to take up a longer period of mergers in the US, in order to be certain about the applicability of the results of such a study to periods not witness to a merger wave. The study was of 324 acquisitions occurring between 1967 and 1987 in the US, using the cash flow-based measure of operating performance as in Healy, Palepu and Ruback (1992). It concluded that mergers led to synergistic gains and better performance in the long-term, the median improvement over five years post-merger being a significant 1.97 per cent.. A study in the United States that also focused on merging firms operating performance after corporate acquisitions was by Ghosh (2001). The sample consisted of 315 pairs of target and acquiring firms for which mergers were completed between 1981 and 1995. The performance measure used was operating cash flows, both pre- and post-merger, defined as sales minus cost of goods sold, minus selling and administrative expenses, plus depreciation and goodwill amortization expenses. The study compared the pre- and post-acquisition performance of merging firms using control firms as benchmarks, instead of using industry-median benchmarks as used in Healy, Palepu and Ruback (1992). Ghosh contended that using industry-median benchmarks could lead to non-random measurement errors since firms undertake acquisitions following a period of superior performance. The control firms were matched on the basis of similar operating cash flow performance and total asset size before the acquisition. Both size and preacquisition performance were thus accounted for. Using a methodology similar to Healy, Palepu and Ruback (1992), the study found that the cash flows of merging firms increased significantly by 2.4 per cent every year. The median increase in cash flows post-merger by 0.26 per cent per year was statistically insignificant, when the sample firms were compared with matched firms. This paper assumed that only large-sized and well-performing firms generally go in for mergers. This assumption may not be valid in the Indian M&A context where we have even small and under-performing firms adopting the merger route to growth and to satisfy other moVIKALPA VOLUME 33 NO 2 APRIL JUNE 2008

tives. Moreover, it may be difficult to get control firms that are well-matched to the sample under study due to the highly fragmented and volatile nature of the Indian industry in many sectors. Hence, the use of an industrymedian benchmark would better serve the purpose for Indian data. Ramaswamy and Waegelein (2003) studied the postmerger financial performance of 162 merging firms that occurred during 1975-1990 in the US. They used industry-adjusted operating cash flow returns on market value of assets as the measure of performance, which was similar to the one used by Healy, Palepu and Ruback (1992). Even their methodology was the same as in the latter, except that they used only firms that had not gone in for any merger during the study period as part of their control sample, since they felt that only that would make the data incorruptible and the results more robust. The study found a significant increase of 12.7 per cent in firm performance after the merger had taken place. Research on takeovers in the UK has not been able to come to any definitive conclusion about the operating gains from such activity. Manson et. al. (2000) studied 44 takeovers in the UK completed between January 1, 1985 and December 31, 1987, wherein the total market value of each of the acquired firms was over 5 million, in a re-examination of the issue of whether UK takeovers resulted in operating gains for the merging firms. They used the cash-flow based measure of operating performance as also the research methodology innovated and introduced by Healy, Palepu and Ruback (1992) and Cornett and Tehranian (1992). Regressing post-takeover operating performance on pre-takeover operating performance using eight variants of the measure, they found that takeovers had led to operating gains ranging from 2 per cent to 14 per cent per year postmerger. This study also provided evidence for non-operating gains resulting from takeovers. A replication study that attempted to determine whether post-merger synergy is created leading to improved corporate operating performance was by Sharma and Ho (2002). Since literature on merger motivations indicates that acquisitions lead to gains, they hypothesize that operating performance post-acquisition is greater than in the pre-acquisition period. They studied 36 Australian acquisitions occurring between 1986 and 1991, using matched firms to control for industry and economy-wide factors. This match is on the basis of industry and size of the assets. Data three years prior and

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subsequent to the merger were used for the analysis. Financial ratios, both accrual (return-on-assets (ROA), return-on-equity (ROE), profit margin and earnings-pershare (EPS)) and cash flow (ROA, return-on-sales (ROS), ROE, number of ordinary shares) pertaining to operating efficiency and returns to shareholders were used since the study investigated synergistic gains from mergers. Operating cash flow before tax was used as the main post-merger performance measure. No significant postacquisition improvement in corporate operating performance was observed. The study used both earnings and cash flow measures of operating performance to rule out the possibility of the result being an artifact of measurement. But it suffered from the problem of lack of generalizability of the results since it studied only the manufacturing sector in Australia. Rahman and Limmack (2004) analysed the operating performance of 94 listed acquiring and 113 private target companies in Malaysia that were involved in acquisitions between January 1, 1988 and December 31, 1992. They attempted to find out whether operating efficiency improvements took place after mergers. Their hypothesis was that such gains, if any, would be more due to sources such as synergy, rather than through disciplining of inefficient management. They carried out analysis of the ratio of operating cash flow to operating assets of the companies pertaining to two years before and five years after the merger. Industry-matched control companies were used in their analysis. Improvements in operating cash flows after the merger were to the tune of 3.75 per cent per year post-merger. Also, the combined firms appeared to be using resources more efficiently post-merger. The improvement in performance did not come at the cost of long-term investments. Also, the takeovers did not seem to be disciplinary in nature. The results of the study, consisting of a sample of only privately-owned targets and control group companies, may not be generalizable to publicly-held organizations. Tsung-Ming and Hoshino (2000) attempted to find out whether value was created in Taiwanese mergers through tapping of economies of scale. Their sample consisted of 20 firms that acquired other firms between 1987 and 1992. Both stock market-based and accounting-based measures were used to assess shareholder wealth gains and improvements in corporate performance post-merger. Accounting measures were used to determine the profitability, financial health, and growth of the acquirers post-merger. Profitability was assessed

using ROA and ROE. The financial health was measured using financial leverage, liquidity, and operating expenses. Growth was measured as the sales growth. Industry medians were computed for each year corresponding to the merging firms. The industry median pertained to all the publicly-listed firms of the same industry as per the sample and year. These control firm values/industry medians were then subtracted from the pre- and post-merger values obtained for each firm. These pre- and post-acquisition adjusted values were compared to arrive at the performance of the merged firm. They found no profitability improvements postmerger for the acquirers. In fact, there was deterioration in some profitability indicators. To gauge the financial health of the acquirers post-acquisition, financial leverage was calculated as the long-term liabilities to total assets. The debt-equity ratio was also calculated as total liabilities divided by equity. Current ratio computed as current assets divided by current liabilities was used. Also, operating expenses ratio was calculated as operating expenses divided by sales. There was no significant difference in the pre- and post-merger values for leverage and debt equity while the current ratio fell significantly in the first year after the merger while not being significantly different in the later years. They calculated sales growth as (sales of current year/sales of previous year) 1). The acquirers significantly underperformed on this measure post-merger. The study had taken into account only the acquiring company. Most of the targets were privately-owned companies. In most cases, the merger was a result of government intervention since the healthy acquirer was forced into taking over the distressed and financially weak acquired firm. This might have led to the deterioration in the condition of the acquiring firm leading to a downturn in profitability post-merger. The results of this study are hence not generalizable. Pawaskar (2001) studied 36 mergers that had taken place in India between 1992 and 1995. Using accrual measures of accounting spread over three years before and after the merger, the study found that the profitability of the merged firms was impacted negatively due to the merger, i.e., corporate performance did not improve significantly post-merger. A majority of the mergers studied in this paper were between companies belonging to the same business group, carried out as part of corporate restructuring. This might make the result quite specific and not generalizable. In addition,
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the study used matched companies as controls for both the acquiring and acquired companies. But, when a majority of the mergers studied are within-business group mergers, it is imperative that even the control pairs be from similar groups. This would ensure similarity in terms of their situation within the industrial and economic context, as also a modicum of overlap in the merger motivations. Since, this had not been considered in the paper, along with the fact that getting such control companies may be well nigh impossible, the study had serious limitations in terms of validity and generalizability of the results. Out of the eleven studies reviewed here (summarized in Table 1), that use accounting measures to study postmerger performance, we find that six of them have indicated improved performance. The rest show that mergers have made the combined firms worse off. Since almost one-half of the studies show deterioration in postmerger performance, and especially due to the fact that three of these five studies are from Australia and Asia, it is not very clear whether mergers, overall, have led to betterment. At least mergers do not appear to be resulting in favourable financial performance in the long term in these markets where they are a fairly recent phenomenon. The accounting measures used in these studies are based on objective data obtained from financial statements of the firms being studied. According to Bromiley (1986), in many cases, accounting performance measures are better than market-based measures because they are used more frequently by managers to make strategic decisions. Long-term accounting-based performance measures also accurately represent the realization of synergies as these effects are obtained only over a period of time post-merger (Harrison, et. al.,1991). But, accounting data possess certain limitations. They are not perfect in measuring economic performance. Traditional accounting measures, such as return on book assets, are affected by the method of merger accounting (purchase or pooling) followed, and the method of financing of the merger (cash, debt or equity). Hence, using such measures, we cannot compare the merged firm over time and with other firms. Cash flow measures can help overcome these limitations as already described above.

nomic power. Regulation can ensure a level playing field and thriving competition. The Monopolies and Restrictive Trade Practices Act (MRTPA), 1969, has been a major institutional mechanism to regulate M&A activity in India. According to this Act, the Union Government could prevent an acquisition if it apprehended concentration of economic power that would be detrimental to the common good. Amendments to it were made in 1984 and 1991 (Singh, 2000). There are four parts to this Act that deal with (i) Monopolistic practices, (ii) Restrictive trade practices, (iii) Unfair trade practices, and (iv) Controlling concentration of economic power. The MRTP Act is designed to ensure that the operation of the economic system does not result in the concentration of economic power to the common detriment, and to prohibit such monopolistic and restrictive trade practices as are prejudicial to public interest(Rao, 1998). Industrial markets tend to be highly concentrated despite there being anti-monopoly policies such as the MRTP Act or the industrial licensing policy. High concentration leads to higher prices being charged and also the absence of any motivation for improvements in technology. A large number of big firms used these policies for deterring and preventing the entry of new competitors into the industries where they dominated. Hence, changes were made in the MRTPA in the New Industrial Policy. The New Industrial Policy Statement (NIPS) repealed certain specific provisions of the MRTP Act (namely, the sections 21, 22 and 23) which dealt with: (a) the growth of an existing undertaking; (b) the establishment of a new undertaking; and (c) the merger, amalgamation and takeover of firms (Mani, 1995). The emphasis is now on controlling and regulating monopolistic, restrictive, and unfair trade practices rather than making it necessary for the monopoly houses to obtain prior approval of central government for expansion, establishment of new undertakings, merger, amalgamation and takeover, and appointment of certain directors. The thrust of the policy is more on controlling unfair or restrictive business practices (Ray, 1992).This dilution of the MRTPA has increased competition from the smaller firms, now no longer under the purview of the Act. Both firm-level investments and growth have been unfettered (Basant, 2000). Indian Industry before 1991 M&As were not a common occurrence in India before the reforms of 1991. M&As and corporate takeovers were

The Indian Context

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Table 1: A Summary of Studies that have used Accounting Measures to Ascertain Post-merger Performance
Study Ravenscraft and Scherer (1989) Sample Size Experimental Control 251 for preIndustry merger profitability; 2,732 for post-merger performance 50 Industry Sample Period 19501977 Country US Accounting Measure Operating income over end of year assets; Operating income over sales; Cash flow over sales Operating cash flow returns on assets; Stock returns at acquisition announcement Operating cash flow returns on assets; Stock returns at acquisition announcement Operating cash flow returns on assets; Stock returns at acquisition announcement Statistics Used Univariate; Regression Findings Acquired firms earn positive abnormal returns compared to their control group during the pre-merger period but not in the post-merger period. Merged firms show significant improvements in operating performance, especially for related firms. The post-merger increase in operating cash flow is strongly positively linked to the abnormal stock returns at acquisition announcement. Merged firms show significant improvements in operating performance. The post-merger increase in operating cash flow is strongly positively linked to the abnormal stock returns at acquisition announcement. Merged firms show significant improvements in operating performance. The post-merger increase in operating cash flow is strongly positively linked to the abnormal stock returns at acquisition announcement. Factors such as the offer size, relatedness and bidder leverage dont affect the results. Merged firms show significant improvements in operating performance using the Healy, Palepu and Ruback (1992) methodology, but not when the control group is made up of matched firms. Cash acquisitions positively impact cash flows whereas stock acquisitions lead to poorer performance. Acquisitions fail to achieve synergy gains. Announcement-related abnormal share price returns are not correlated with cash flow returns. Merged firms show significant improvements in operating performance. Unrelated mergers and larger relative size are positively associated with post-merger performance. Both operating and nonoperating gains exist for UK takeovers. Operating performance does not improve post-merger. Factors such as relatedness, form of financing, size of the acquisition do not affect postmerger performance. Operating performance improves post-merger. Stock market reaction to acquisition announcement is positive. There are no improvements in post-merger performance. The stock market reaction is not correlated to postmerger performance. Post-merger profitability does not increase.

Healy, Palepu and Ruback (1992)

19791984

US

Univariate; Regression

Cornett and Tehranian (1992)

30

Industry

19821987

US

Univariate; Regression

Switzer (1996)

324

Industry

19671987

US

Univariate; Regression

Ghosh (2001)

315

Industry; Matched

19811995

US

Operating cash flow returns on assets and on sales

Univariate; Regression

Ramaswamy and Waegelein (2003) Manson et al (2000) Sharma and Ho (2002)

162

Industry

19751990

US

Operating cash flow returns on assets

Univariate; Regression

44

Industry

19851987 19861991

UK

36

Matched

Australia

Operating cash flow returns on total market value Earnings and cash flow

Regression

Univariate; Regression

Rahman and Limmack (2004) Tsung-Ming and Hoshino (2000)

94

Matched

19881992 19871992

Malaysia

20

Industry

Taiwan

Operating cash flow returns on assets Accrual measures; Share price returns

Univariate; Regression Univariate; Regression

Pawaskar (2001)

36

Matched

19921995

India

Operating cash flow returns on assets

Univariate; Regression

54

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very rare (Rao, 1998). For over a quarter century, production capacities in India were restrained under the MRTP Act. This kept Indian firms small and globally uncompetitive. The market economy was virtually strangulated due to the economic power of the government such as industrial licensing and other regulations. Industrial licensing and other controls led to severe entry and exit barriers and encouraged rent-seeking and lobbying. The industrial policy pre-1991, instead of promoting competition, lead to inefficiencies. Bureaucracy determined plant capacity, product-mix, and location. Trade in scarce materials became more lucrative than efficient manufacturing. Licensing and product reservation for small-scale sector inhibited firms from reaping economies of scale (Ray, 1992; Basant, 2000). During the regime of controls, capacity expansion was generally not possible. So, product diversification rather than specialization became the preferred option for firms (Siddharthan and Lal, 2003). In 1985-86, the government prescribed the minimum economic scale capacity scheme in about 72 industries. This acted as a capital barrier to entry especially in industries where economies of scale were not significant. Many sectors of Indian industry were fragmented due to these restrictions on capacity through industrial licensing and reservation for small and public sector organizations. Licensing was used as a tool to break-up the small domestic market among producers so that economic power could be curtailed. This led to total capacity being fragmented into uneconomic plant sizes. Thus industrial licensing and the MRTP policies restricted the setting up of adequately large plants that could provide scale economies (Patibandla, 1992; Venkiteswaran, 1993; Khanna, 1999). Direct controls over investment, production, prices, imports, foreign capital and even exports played havoc with efficiency and, therefore, with growth (Patel, 1992). Inefficient management was not threatened by loss of control (Rao, 1998). The policies of industrial licensing, protective foreign trade, control of among others, entry into industry, capacity expansion, technology, output mix and import content, concentration of economic power, and regulation of foreign investment in India, grossly underemphasized the importance of efficient use of resources, particularly labour and capital. A protected domestic market did not encourage private enterprises to improve either their efficiency or product-quality (Neogi and Ghosh, 1998). To sum up, according to Venkiteswaran (1993), some
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of the reasons for mergers and acquisitions not being in vogue before the economic liberalization in 1991 were: a) Ownership pattern of Indian industry: Most companies were tightly held by promoters and governmentowned financial institutions. They resisted any attempts at takeovers. b) Exercise of voting power by the public financial institutions: Voting by stakeholding public financial institutions was guided more by reasons of power and pelf than by any objective criteria to enhance shareholder wealth. c) Tight regulatory environment: MRTPA, Foreign Exchange Regulation Act (FERA), and other such regulations looked at any attempt to grow through M&As as a precursor to the dawn of a monopoly. Hence, such a regulatory environment made it difficult to use M&As as a corporate-level strategy. d) High entry and exit barriers: Several mandatory government approvals such as licensing requirements and clearances served as high entry barriers to indulging in M&As. Similarly, legislations making it almost impossible to redeploy surplus or under-performing assets or labour served as high exit barriers that dissuaded companies from using M&As. M&As in India after the Reforms The economic liberalization and reforms initiated in 1991 in India have served to trigger corporate restructuring through M&As. The complex system of industrial licensing has been abolished as per the New Industrial Policy Statement (NIPS). The economic reforms, through the relaxation of controls and regulations on production, trade and investment, were aimed at increasing competition, improving efficiency and growth (Chaudhuri, 2002). the reforms have the potential of altering the structure of Indian industries, subjecting them to competition from both internal and external sources and thereby making them more efficient Mani (1995). The removal of industrial licensing, lifting of monopoly provisions under the MRTP Act, easing of foreign investment, import of raw materials, capital goods, and technology have increased the competition in Indian industry. Firms are free to fix their capacity, technology, location, etc., to enhance their efficiency (Rao, 1998; Basant, 2000). The amendment of the MRTPA has made it possible for group companies to consolidate through mergers eliminating duplication of resources and in bringing down costs (Mehta and Samanta, 1997). M&A

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has become a viable strategy for growth in India due to a) easing of regulation, b) restructuring of family-owned conglomerates, c) sale of state-owned companies, d) overcapacity, and e) deregulation of fragmented industries (Anandan, et. al., 1998). Immediately after liberalization, the Indian industry added capacity since it expected a rapidly expanding market due to the perceived latent demands of the vast middle class. But the lower income groups could not participate in the consumer goods market (Chandra and Shukla, 1994). The economy began to slow down from 1996 after an average gross domestic product (GDP) growth rate of 6.5 per cent for five successive years from 1991-92. This squeezed the profit margins of local firms that now had excess capacities. The industry saw a spate of restructuring in the form of shedding non-core activities in favour of core competencies and expansion through M&As, in a bid for survival. M&As were resorted to in order to expand in size to face the MNC onslaught (Nayar, 1998). Due to the ease of foreign firms also participating in M&As in India, inefficient firms are more likely to be the targets of takeovers (Rao, 1998). According to the market reformers, growth is the result of efficient utilization of resources on the supply side. In a free market economy, utilization becomes more efficient due to competition (Patibandla and Mallikarjun, 1996; Ahuja, 1999). It is thus my hypothesis that: H0: Mergers in India have resulted in improved long-term post-merger firm operating performance through enhanced efficiency. The next section outlines the research methodology that was adopted to test the hypothesis.

tive, statistical analyses with a view to understanding financial performance in the long run, post-merger.

Sample
The data for this study has been extracted from secondary sources. The main sources are Prowess database of Centre for Monitoring Indian Economy (CMIE), Capitaline, ISI Emerging Markets, India Business Insight, and web sites of Securities and Exchange Board of India (SEBI), Bombay Stock Exchange (BSE), and National Stock Exchange (NSE). Mergers and acquisitions are fairly recent in India and have been resorted to by corporates mainly after the economic liberalization and financial reforms of 1991 were initiated. They were almost negligible in the early 1990s and hence there is a dearth of data pertaining to this early period of Indian M&As. We initially identified 414 mergers between 1993 and 2005. Mergers taking place in the financial sector were dropped due to differing accounting standards applicable to them that make comparison with other firms difficult. Only the period January 1996 to March 2002 was considered for selection of merger pairs of target and bidder firms. All mergers in India occurring between January 1, 1996 and March 31, 2002 were identified. This period has been chosen, as it is relatively recent. It also helps obtain three years of financial data for companies both before and after the merger, for the purpose of the analyses. Only domestic mergers taking place in India were selected. Cross-border mergers, i.e., in which either the bidder or the target was based outside India, were dropped. This was done to ensure homogeneity of the economic and industrial environment so that generalizability of the results could be achieved for Indian M&As. Firms for which three years of data, both prior to and after the merger, were not available, were dropped from the list. Pairs, for which data was unavailable for both the target and the bidder, and for which complete information was not obtainable, were also dropped. The final sample size used for analyses was thus 87 pairs of mergers consisting of 174 firms (87 each of targets and bidders). The distribution of mergers across the years is presented in Table 2. The average relative size of the target to the bidder firm is 0.59, where size is measured as the total assets of the firm. This high relative size indicates that the target
LONG-TERM POST-MERGER PERFORMANCE OF FIRMS IN INDIA

RESEARCH METHODOLOGY
There appears to be little published research work on M&As in India and we are yet to understand whether mergers here have led to long-term financial benefits to the merging firms. The raison de etre of Indian mergers can be questioned if financial performance does not show any improvement in the long run. It is imperative for us to have a reasonable understanding of whether M&As in India at least make financial sense. Hence, I am attempting to understand, through this paper, whether Indian mergers have been successful where success is regarded as the long-term, post-merger financial success. This research is designed to collect essentially objective data on Indian mergers and to carry out quantita-

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Table 2: Distribution of Sample Mergers across Years

Year 1996 1997 1998 1999 2000 2001 2002 Total Number of Mergers Studied 1 11 17 8 8 26 16 87

might be playing an important role in determining the extent of post-merger success of the entity.

Data Analyses Method

For about two decades, from the early 1970s to the early 1990s, wealth effects of M&A activities were gauged using standard event study methodologies that calculated cumulative abnormal share price returns over a window period around the date of the announcement of the acquisition bid. However, such stock price returns around the time of merger / acquisition announcement are not indicative of the long-term performance postmerger of the combination. Such studies only reflect market expectations from the event and not the actual economic gains or losses that actually result over a period of time. Also, the real sources of such economic gains cannot be identified using share price returns (Cornett and Tehranian, 1992; Healy, Palepu and Ruback, 1992; Rahman and Limmack, 2004). This study thus uses long-term pre- and post-merger financial data to assess firm operating performance. A sufficiently long period is needed to analyse and understand the impact of a merger since efficiency improves over a long time horizon and not within short periods (Ghosh, 2001; Healy, Palepu and Ruback,1992; Manson, et al., 2000; Rahman and Limmack, 2004). Hence, we use data three years prior to and subsequent to the merger in line with Franks, Harris, and Titman (1991), Ghosh (2001), Magenheim and Mueller (1988), and Rau and Vermaelen (1998). Year 0, i.e., the year of the merger is excluded from our analyses since its inclusion may cause distortions due to changes in financial reporting caused due to adjustments in accounting necessitated due to the merger (Healy, Palepu and Ruback, 1992). Pre-tax operating cash flow returns scaled by the operating assets of the sample firms are used to measure
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the change in performance post-merger (Cornett and Tehranian, 1992; Ghosh, 2001; Healy, Palepu and Ruback, 1992; Rahman and Limmack, 2004). Actual economic gains from assets are captured by cash flow measures. The change in operating performance attributable to the merger is the comparison of the post- and premerger operating cash flows scaled by the operating assets. The pre-merger calculation done for both the target and the bidder for the period (-3 to -1) years, is the sum of their operating cash flows for each year scaled by the sum of their operating assets at the beginning of the relevant year. This provides an idea of their performance if they had not merged and had continued as separate entities. Every firm operates in a particular industry and is affected by the rules and regulations applicable, as also the economic factors impinging on that specific industry. It is thus necessary to take into account the effects of the economy and industry in which each firm operates, in order to make the comparison possible across firms (Cornett and Tehranian, 1992; Ghosh, 2001; Healy, Palepu and Ruback, 1992; Rahman and Limmack, 2004). This factoring out of the external environmental impact makes the comparisons across firms and industries meaningful. The raw operating performance figures obtained using the procedure outlined in the previous paragraph are thus adjusted for industry and economic effects by subtracting the median industry operating performance. Paired samples t-test is carried out to assess the difference in performance between AIACF I, POST and AIACFI, PRE, where AIACF denotes the aggregate industry-adjusted cash flows and the subscripts POST and PRE refer to the period after and before the merger, the subscript I referring to the pair of merging firms. The paired samples t-test compares the means of two variables from the same group. It determines whether the difference between the means of the two variables is significantly different from zero. In our case, the two variables are the aggregate industry-adjusted operating performance of each pair of merged firms both before and after the merger. Merger can be considered as an intervention that takes place in our set of sample firms. The paired samples t-test thus determines whether there is a significant change in the before/after merger performance and allows us to attribute the result to the merger. The following cross-sectional linear regression model is also estimated:

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AIACF I, POST = + .AIACF I, PRE + I This equation predicts the aggregate post-merger operating performance of the merged entities using data pertaining to the aggregate pre-merger performance. The y-intercept represents the change in annual controladjusted performance due to the merger and is independent of the pre-merger performance as its value is obtained when the value of AIACFI, PRE is 0. The slope represents the correlation between the cash flow returns in the years prior to and subsequent to the merger. It depicts how much each unit change of AIACFI, PRE changes the value of AIACFI, POST. I is the error term, i.e., the random disturbances from the regression line. The .AIACFI, PRE value is the effect of pre-merger performance on post-merger returns (Cornett and Tehranian, 1992; Ghosh, 2001; Healy, Palepu and Ruback, 1992; Rahman and Limmack, 2004).

merger years. The results are depicted in Table 4. Table 4: Paired Samples t-test of Aggregate IACFI between Specific Years Before/After Merger
Pair (years before/ after merger) (-3,+1) (-3,+2) (-3,+3) (-2,+1) (-2,+2) (-2,+3) (-1,+1) (-1,+2) (-1,+3)
** Significant at 5% level. * Significant at 10% level.

Mean 0.07 0.10 0.12 -0.01 0.01 0.02 -0.02 0.01 0.01

t-statistic 1.79 2.46 2.19 -0.53 0.47 0.66 -0.87 0.30 0.35

Significance (2-tailed) 0.078 * 0.016 ** 0.032 ** 0.595 0.643 0.514 0.385 0.763 0.729

EMPIRICAL RESULTS
As already stated, the hypothesis is that mergers in India have resulted in improved long-term post-merger firm operating performance. The paired samples t-test for comparison of means provides a test statistic of 1.873 that is found significant at the 10 per cent confidence level, as shown in Table 3. Table 3: Paired Samples t-test for Before/After Merger Performance Comparison
Value Mean 0.028
*Significant at 10% level.

Statistic 1.873 (t-statistic)

Significance (2-tailed) 0.064*

This indicates that the positive mean difference of 0.028 between AIACFI, POST and AIACFI, PRE is not due to chance, and that merger has led to a significant improvement in firm performance. This validates our hypothesis that mergers in India have resulted in improved long-term post-merger firm operating performance. This result is the same as found by Cornett and Tehranian (1992), Ghosh (2001), Healy et al. (1992), Manson et. al. (2000), and Rahman and Limmack (2004), but is contrary to the findings of negative post-merger returns found by Clark and Ofek (1994), and Ravenscraft and Scherer (1987), among others. Paired samples t-test is also carried out comparing the aggregate industry-adjusted cash flow of each of the three post-merger years against each of the three pre-

The firm performance appears to have improved significantly in each of the three post-merger years in comparison to the third year before the merger. The improvement seems to be higher as the years progress post-merger the average IACFI in the first year after the merger is 0.07 (significant at the 10% level), increasing to 0.10 (significant at the 5% level), and 0.12 (significant at the 5% level) in post-merger years two and three. The change in post-merger performance in each of the three subsequent years compared to two years and one year before the merger is not significant. The paired samples t-test just described is one of the techniques for determining any significant change in firm performance, post-merger. A cross-sectional regression model is developed, after controlling for the effect of the pre-merger average industry-adjusted cash flow on the post-merger performance. This helps in determining whether post-merger firm performance improves irrespective of the possible impact of the performance before the merger. This second technique has thus been adopted to act as a confirmatory tool for the previous findings. This model takes the form: = 0.043 + 0.678.AIACF I, PRE (3.034)*** (8.628) *** R2 = 0.467, F = 74.446***, N = 87, t-statistic in parentheses
POST ***Significant

AIACF I,

at 1% level, using a 2-tailed test.

The F-ratio, with a value of 74.446, is significant in this model, which indicates that the regression is sigLONG-TERM POST-MERGER PERFORMANCE OF FIRMS IN INDIA

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nificant. Further an R2 value of 0.467 shows that about 47 per cent of the variation in the dependent variable is explained by the independent variable. We find that both the intercept and AIACFI, PRE are significant at the 1 per cent level. This shows that the pre-merger firm performance has a positive effect (0.678) on the post-merger returns, i.e., for every unit change in this explanatory variable, the dependent variable AIACFI, POST increases by 0.678 units. Even after controlling for the effects of pre-merger performance (AIACFI, PRE), the firms still show increasing cash flow returns post-merger, at an annual rate of 4.3 per cent, depicted by the intercept value of 0.043. This means that firm performance after the merger has improved significantly irrespective of the impact of the pre-merger performance.

SOURCES OF ECONOMIC GAIN ON MERGER

We now decompose our measure of operating performance into its constituents, in order to ascertain the source of the better long-term post-merger returns. Operating cash flow scaled by the operating assets is the product of the operating margin and the sales turnover. Thus, CF/A = (CF/S) x (S/A) Here, CF S A CF/A CF/S S/A = = = = Operating cash flow Net sales Operating assets My operating cash flow performance measure = Operating margin = Sales turnover

Two pairs of merging firmsSun Pharmaceuticals and M J Pharmaceuticals, and Usha Ispat and Usha Udyogare dropped from this analysis, since on analysing for outliers, it was found that the values pertaining to these pairs lie beyond three standard deviations. Data on three pairs of merging firms could not be obtained. The new sample size is thus 82 pairs of merging firms. From Table 5, it is found that the aggregate post- and pre-merger industry-adjusted operating margins (AIAOMI, POST and AIAOMI, PRE) are 5.17 per cent and 1.82 per cent across the sample of 82 merging pairs of firms. The average operating margin appears to have increased after the merger. We find that the firms have not been faring significantly differently from the industry before the merger. Except for the year -2 before the merger, the industryadjusted operating margins are insignificant in every year pre-merger, with the aggregate across the three years also being insignificant. But, we find that the industry-adjusted operating margin is significantly positive every year after the merger, except in year +3 where it is positive though not significant, and the aggregate across the three years post-merger is also significantly positive. We have used paired t-test to ascertain whether there is an improvement in firm operating margins, postmerger.

Table 5: Comparative Pre- and Post-merger Industryadjusted Operating Margin Performance of the Combined Firms, N=82
Year Relative to Merger Industry-adjusted Average Operating Margin of the Combined Firm (%) -9.70 (-0.505) 18.53 (1.868) * -14.69 (-0.719) -1.82 (-0.23) 5.91 (3.829) *** 6.78 (2.967) *** 2.82 (1.447) 5.17 (4.672) ***

The operating margin depicts the cash flow return obtained through each rupee of sales. The sales turnover ratio provides me the unit sales generated through investment in every rupee of assets, i.e., it connotes the efficiency with which assets are utilized to generate sales. The performance of the merging firms on each of these measures is studied next.

-3 -2 -1 Aggregate pre- merger performance for years -3 to -1 +1 +2 +3 Aggregate post-merger performance for years +1 to +3

Post-merger Long-term Operating Margin Performance

This section examines the operating margin performance of the combined firms after the merger. The attempt is to determine whether this performance is better as compared to the pre-merger performance of these same firms that had not merged.

t -values in parentheses *** Significant at 1% level, using a two-tailed test. * Significant at 10% level, using a two-tailed test.

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Table 6: Do Operating Margins Change Post-merger? (N=82)

Test Used Paired t-test for equality of the means of the aggregate industry-adjusted operating margin post- and pre-merger Test Statistic t = -0.901

The test statistic, -0.901, is insignificant as shown in Table 6. Even though the test for equality of means shows an insignificant t-statistic, we see from Table 5, that the industry-adjusted aggregate operating margin in the premerger period is insignificant, whereas it is significant in the post-merger period. This indicates an absolute improvement in the operating margin performance of the merging firms in the post-merger period compared to their industries, though statistically, this performance does not appear to be significantly better than in the premerger period. We have constructed a cross-sectional regression model controlling for the effect of the aggregate industry-adjusted operating margin pre-merger (AIAOMI, PRE) on the aggregate industry-adjusted operating margin post-merger (AIAOMI, POST). This helps in determining whether post-merger firm operating margin performance improves irrespective of the possible impact of the performance before the merger. The model takes the form: = 0.052 + 0.027.AIAOM I, PRE (4.773) *** (1.741) * 2 = 0.037, F = 3.032*, N = 82, t-values in parentheses R
POST *** Significant * Significant

depicted by the intercept value of 0.052. This means that firm operating margin after the merger is significantly positive irrespective of the impact of the pre-merger performance. It is not zero or negative. Since we have scaled the operating cash flow measure by the net sales of the merging firm, the significant post-merger operating margin reported above, indicates that the merged firms appear to have generated higher operating cash flows per unit net sales, after the merger. This is especially obvious since the pre-merger firm raw operating margin performance is not better than the corresponding industry performance. This means that the merger has led to better operating margins. The better operating margin might reflect the lowering of fixed costs due to the merger, which in turn might indicate the growth in the economies of scale. My earlier observation that the industry in India has been fragmented for historical reasons, with economic liberalization leading firms on a quest to derive higher economies of scale through M&A activity, thus appears to be vindicated through this improvement in post-merger firm operating margins.

Post-merger Long-term Sales Turnover Performance

We now study, in a similar manner, the sales turnover performance of the combined firms after the merger takes place. One pair of merging firmsIndia Foils and Light Metal Industrieshas been dropped from this analysis, since on analysing for outliers, the values pertaining to this pair was found to lie beyond three standard deviations. Even data on three pairs of merging firms could not be obtained. The new sample size is thus 83 pairs of merging firms. From Table 7, we find that the aggregate postand pre-merger industry-adjusted sales turnovers (AIASTI,POST and AIAST I, PRE) are 25.91 per cent and 19.33 per cent across the sample of 83 pairs of merging firms. The average sales turnover appears to have increased after the merger. We find that the merging firms have not been faring significantly differently from the industry before the merger. The industry-adjusted sales turnovers are insignificant in every year pre-merger, with the aggregate across the three pre-merger years also being insignificant. But, we find that the industry-adjusted sales turnover is significantly positive every year after the merger,

AIAOM I,

at the 1% level, using a two-tailed test. at the 10% level, using a two-tailed test.

We find that both the intercept and the aggregate industry-adjusted operating margin pre-merger (AIAOMI, PRE) are significant. This shows that for every unit change in the pre-merger firm operating margin performance, the dependent variable, the aggregate industry-adjusted operating margin post-merger (AIAOMI, POST), increases by 0.027 units. Thus, it indicates persistence of pre-merger operating margin performance in the post-merger period considered. Even after controlling for the effect of the aggregate industry-adjusted operating margin pre-merger (AIAOM I, PRE) , the firms still show increasing operating margin post-merger, at an annual rate of 5.2 per cent,

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LONG-TERM POST-MERGER PERFORMANCE OF FIRMS IN INDIA

Table 7: Comparative Pre- and Post-merger Industryadjusted Sales Turnover Performance of the Combined Firms, N=83
Year Relative to Merger Industry-adjusted Average Sales Turnover for the Combined Firm (%) 27.94 (1.562) 16.94 (1.252) 15.3 (1.397) 19.33 (1.645) 29.04 (2.122) ** 20.17 (1.412) 28.52 (2.256) ** 25.91 (2.057) **

= 0.120 + 0.720.AIASTI, PRE (1.257) (8.163) *** R2 = 0.451, F = 66.634***, N = 83, t-values in parentheses
POST
*** Significant

AIASTI,

at 1% level, using a two-tailed test.

-3 -2 -1 Aggregate Pre- merger Performance for years -3 to -1 +1 +2 +3 Aggregate Post-merger Performance for Years +1 to +3

t -values in parentheses *** Significant at 1% level, using a two-tailed test. ** Significant at 5% level, using a two-tailed test.

except in year +2, and the aggregate across the three years post-merger is also significantly positive. We have used paired t-test, as before, to ascertain whether there is an improvement in the firm sales turnover performance, post-merger. Table 8: Does Sales Turnover Change Post-merger? (N=83)
Test Used Paired t-test for equality of the means of the aggregate industry-adjusted sales turnover post- and pre-merger Test Statistic t = -0.665

We find that the aggregate industry-adjusted sales turnover pre-merger (AIASTI, PRE) is significant. This shows that for every unit change in the pre-merger firm sales turnover performance, the dependent variable, the aggregate industry-adjusted sales turnover post-merger (AIAST I, POST), increases by 0.72 units. Thus, it indicates persistence of pre-merger sales turnover performance in the post-merger period considered. However, the intercept, 0.120, is not significant. This means that we cannot infer that firm sales turnover after the merger is significantly different from pre-merger levels. We cannot thus conclude that mergers have led to a higher sales turnover, which indicates that it is rather unlikely that merged firms have generated higher incremental sales utilizing their assets more efficiently. The analyses indicate the possible increase in market power due to mergers in India. This is supported by the finding of a significant increase in the operating margins after the merger, though the effect on the output has not been studied in order to be able to make confirmatory comments. However, the efficiency of utilization of assets to generate higher sales does not appear to have increased as shown by the insignificant change in sales turnover post-merger.

CONCLUSION
The objective of this paper was to test the hypothesis that mergers in India have helped firms perform better in the long-term. A comprehensive understanding and an analysis of the Indian industrial and economic context, juxtaposed with studies carried out in the other markets, assisted in my arriving at this hypothesis, as is evident from the section on the review of extant empirical literature. My hypothesis that mergers in India have resulted in improved long-term post-merger firm operating performance stands validated through this study. We are in a position to conclude that, on an average, merging firms in India appear to have performed better financially after the merger, as compared to their performance in the pre-merger period. This improvement in performance can be attributed to the merger. Enhanced efficiency of utilization of their assets by the

The test statistic, -0.665, is insignificant as shown in Table 8. This indicates that the mean difference between the aggregate industry-adjusted sales turnover postmerger (AIAST I, POST) and the aggregate industry-adjusted sales turnover pre-merger (AIAST I, PRE) is due to chance, and it cannot be inferred that merger has led to a significant improvement in firm sales turnovers. A cross-sectional regression model has also been constructed, controlling for the effect of the aggregate industry-adjusted sales turnover pre-merger (AIAST I, PRE) on the aggregate industry-adjusted sales turnover postmerger (AIAST I, POST ). This helps in determining whether post-merger firm performance improves irrespective of the possible impact of the performance before the merger. The model takes the form:

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

generated per unit net sales by the firms after the merger. This means that higher profits (before accounting for depreciation, interest, and taxes) are now being generated through the net sales. This might also indicate size effects, i.e., the economies of scale obtained by the merged firms due to which the fixed costs appear to have been lowered. On the other hand, there does not appear to be any change in the sales turnover of the firms, on an average, after the merger. We cannot therefore conclude that the net sales per unit of asset invested have increased after the merger, i.e., the increase in the efficiency of utilization of assets to generate higher net sales cannot be inferred from our findings. To sum up, this study renews or reaffirms confidence in the Indian managerial fraternity to adopt M&As as fruitful instruments of corporate strategy for growth.

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K Ramakrishnan is an Assistant Professor in the Strategic Management Group at the Indian Institute of Management, Lucknow, India. He teaches the core Strategic Management course and also offers an elective course on Mergers and

Acquisitions. His other areas of research interest are Strategic Decision Making, Strategic Alliances, and Applications of the Resource Based View to Strategy. e-mail: ramki@iiml.ac.in

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