“A Study on Pre and Post Performance Evaluation of Merger and Acquisition of top Companies of BSE and NSE”Jigna Chandrakant trivediDr. Jigna Chandrakant Trivedi, is Assistant Professor, Shri Jairambhai Patel Institute of Business Management and Computer Applications, Gandhinagar. jigna2804@AbstractGrowth and extension have become indispensable for corporate. Mergers and Acquisitions (M&As) are an easy route to achieve the twin objective. Businesses across the corporate world have only two options in hand to expand their operation and gain substantial profits. One way is to grow through internal expansion by means of introducing new technologies, altering the course of operations, enhancing work performance, and establishing new lines of products or services. Through this business grow gradually over time but the new strategy of external expansion has completely changed the business sector across the world. This external expansion takes place in the form of merger, acquisitions, takeovers, and amalgamations, dramatically supporting the globalization of businesses (Mergers & Acquisitions, n.d.). M&A are value spinners for investors. Present paper tries to compare and evaluate the pre-merger and post- merger scenario of the deals.Key Words:Mergers & Acquisitions, Profitability Ratios, Synergistic Benefits IntroductionIncredible growth stories are witnessed through Mergers and Acquisitions deals. Overnight the companies are experiencing major breakthroughs in terms of size, operations and scale. M&As are favoured over the green-field and brown-field projects. M&A deals are found in various sectors like finance, pharmaceuticals, telecom, Fast Moving Consumer Goods (FMCG), automobiles, metals, banking etc. Domestic and cross border M&A activity are picking up momentum. Large Indian companies are going through a phase of growth as all are exploring growth potential in foreign markets and on the other end even international companies is targeting Indian companies for growth and development. Some of the major factors resulting in this sudden growth of merger and acquisition deal in India are favourable government policies, excess of capital flow, economic stability, corporate investments, and dynamic attitude of Indian companies. Present paper tries to evaluate the performance of companies after the M&A deals. Mergers & Acquisitions have become a common strategy to consolidate business. The basic aim is to reduce cost, reap the benefits of economies of scale and at the same time expand market share (Mergers & Acquisitions, n.d.).research objectives1. To understand the meaning and distinctionbetween mergers and acquisitions.2. To comprehend the significance of parametersinvolved in evaluating the financial performance such as: Profit before depreciation, interest and tax (PBDIT); Profit before tax (PBT); Profit after tax (PAT); Ratio of PBDIT and Total Income; Ratio of PBT and Total Income; Ratio of PAT and Total Income; Net Worth; Capital Employed; Return on Net Worth (RONW); Return on Capital Employed (ROCE); Quick Ratio; Current Ratio, Debt Equity Ratio, Interest Coverage Ratio and Earning per share (EPS).3. To evaluate the financial performance of the top companies listed on BSE and NSE three years before the M&A and three years after the M&A during the period 2006 to 2011 in terms of the parameters mentioned above.research MethodologyDescriptive research design was adopted for the study as the research had been based on secondary data. Non probability judgmental sampling technique was used for deciding the appropriate sample size. Sampling element mainly consisted of Indian companies which had undergone M&A process in the duration of 2006 to 2011. Sampling unit was decided on the basis of only those top companies which were listed on BSE and NSE and had undergone the M&A process in the duration of 2006 to 2011. Base for determining the sample size started with the top M&A deals of each individual year from 2006 to 2011. To choose top 30 companies out of the total 45 M&A deals which took place from the year 2006 to 2011, various sources like, money control market news, data from newspapers like The Mint, The Economic Times, The Business Standard and The Financial Express was taken. Data collected from the various sources were cross compared in terms of deal amount and deal size for verification, which was later arranged in descending order and finally the top 30 M&A deals based on the deal amount were taken for the study. Companies in which joint ventures or strategic alliance took place were not considered for determining the sample size.The detail of sample size is as follows:table 1 Sample Size Determination of top 30 M&A Deals in 2006-20115ONGC Videsh Imperial 2.820Aditya BirlaGroup Columbian Chemicals0.8756NTT DoCoMo TataTeleservices 2.721MahindraSatyam Tech Mahindra0.597SterliteIndustries Asarco 2.622Dr. ReddyLaboratoriesBetaPharmArzneimittel0.5628Tata Motors Jaguar andLand Rover 2.323Suzlon Energy Hansen Transmissions0.569GTLInfrastructure Aircel Ltd 1.7824TataConsultancyServicesCitigroupGlobalServices Ltd0.50510Suzlon Energy Re Power 1.725Mahindra &Mahindra Ssangyong0.46311RelianceIndustries ReliancePetroleum Ltd 1.626JSW Steel ltd.Ispat Industries0.45912Essar Steel Algoma SteelInc. 1.627Mahindra &MahindraJeco HoldingA G 0.18613Essar Oil StanlowRefinery Inc. 1.2628Tata Chemicals British Salt0.14314Tata Power PT kaltimprima coal 1.129Mahindra &MahindraGipps Aero andAerostaff 0.003815Tata Chemicals GeneralChemicalsIndustrialProduct Inc.1.0530Eicher MotorsLtd.Hoff &Associates 0.0035(Source: Author’s Compilation)The sample size of top 30 M&A deals could be segregated into sectors like automobiles and metal (5 each), oil and gas, power, telecom (4 each), chemical and Information Technology (IT) (3 each), FMCG, food and beverages and pharmaceutical (1 each). The period starting from 2006 to 2011 was sample duration for the study. As study is based on the evaluation of financial performance of top 30 M&A deals only secondary data was used in the research. Secondary data was collected from various sources like newspaper, magazines, books, periodicals etc. Websites especially of Bombay Stock Exchange (BSE), National Stock Exchange (NSE), money control, Center for Monitoring Indian Economy (CMIE), business beacon were referred for gathering data. Data was also retrieved from Ace Analyzer and Capitaline databases. Data was managed through Statistical Package for Social Sciences (SPSS 17) and Microsoft Excel2003. Descriptive statistics like mean, median, mode, skewness and kurtosis was used to test the normality of the data. Inferential statistics like Kolmogorov Smirnov Test (KS test), Shapiro Wilk test and Wilcoxon Signed Rank Test was applied for analysis. Frequency table was also used conducting analysis. The major limitation of the study was that more companies could have been taken for study. Time horizon could have been expanded and instead of 15 financial parameters more number of parameters could have been used for analysis.Meaning and Distinction between Mergers vs. AcquisitionsMerger and acquisition is often known to be a single terminology defined as a process of combining two or more companies together. The fact remains that the so-called single terminologies are different terms used under different situations. Though there is a thin line difference between the two but the impact of the kind is completely different in both the cases (Mergers & Acquisitions, n.d.).(Source: Mergers & Acquisitions, n.d.)Significance of Financial ParametersFinancial parameters like PBDIT, PBT, PAT, ROCE, RONW, profitability ratios are used as a fundamental tool for evaluating the performance of the company. The brief understanding and significance of each tool is discussed below.Analysis of financial Performance of Companies (3 Yrs Pre-M&A vs. 3 Yrs Post-M&A)In order to analyze the financial performance of companies three years pre merger and three post merger, normality of the data was checked. Normality test was performed to take a decision of whether to use parametric or non-parametric test for further analysis. Normality was accessed through three methods viz., graphical method (PP plots), descriptive statistics and hypothesis testing. 30 PP plots were made using SPSS. Overall it was observed that for most of the financial variables, the data was not found on the straight line of PP Plot. The data was highly scattered, it was either below or above the straight-line which meant that the data was not normally distributed and it represents highly skewed data. So, only nonparametric test were found suitable for further analysis of the data.Return on Capital Employed It represents company’s ability to generate returns from its available capital base. It measures company’s profitability. An ROCE ratio, as a very general rule of thumb, should be at or above a company’s average borrowing rate.Quick Ratio The quick ratio measures a company’s ability to meet its short-term obligations (current liabilities) with its most liquid assets. It excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position of the company.Current Ratio The concept behind this ratio is to ascertain whether a company’s short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better.Debt Equity Ratio It compares a company’s total liabilities to its total shareholder’s equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. To a large degree, the debt-equity ratio provides another vantage point on a company’s leverage position, in this case, comparing total liabilities to shareholders’ equity, as opposed to total assets in the debt ratio. Similar to the debt ratio, a lower the percentage means that a company is using less leverage and has a stronger equity position.Interest Coverage Ratio The interest coverage ratio is used to determine how easily a company can pay interest expenses on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. When a company’s interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable.Earning per share The portion of a company’s profit allocated to each outstanding share of common stock. An earning per share serves as an indicator of a company’s profitability. Higher is better.(Source: Investopedia, n.d.)table 4 Pre and Post Merger Descriptive Statistics of financial ParametersDescriptive statistics like mean, median mode, skewness and kurtosis were calculated using SPSS for testing the normality of the data. The table reveals the following results.From table 4 it may be inferred that mean, median and mode of all top 30 companies before and after M&A are not equal. Also skewness and kurtosis of the financial parameters before and after M&A are not equal to zero. It means that financial data of all 30 top companies listed on BSE and NSE, which have undergone M&A is not normally distributed. So, it can be deduced that non-parametric tests were found suitable for analysis of the data.Normality of the data was tested using KS test and Shapiro Wilk test. The hypothesis for testing the normality is as follows:H01: Financial data of all top companies listed on BSE and NSE which had undergone the M&A process in the duration of 2006 to 2011 is normally distributed.H11: Financial data of all top companies listed onBSE and NSE which had undergone the M&Atable 5 test Statistic for Normality testPre PBT/ Total Income0.19290.01*0.91290.01* Post PBT/ Total Income0.15290.08*0.90290.01* PRE PAT/ Total Income0.24290.000.87290.00 Post PAT/ Total Income0.13290.20*0.85290.00 Pre Return on Net-worth 0.46290.000.24290.00 Post Return on Net-worth0.52290.000.20290.00 Pre Return on CapitalEmployed0.29290.000.48290.00 Post Return on CapitalEmployed0.19290.01*0.91290.01* Pre Net-worth 0.40290.000.54290.00 Post Net-worth0.34290.000.57290.00 Pre Quick Ratio0.48290.000.39290.00 Post Quick Ratio0.48290.000.34290.00 Pre Current Ratio0.42290.000.26290.00 Post Current Ratio0.45290.000.22290.00 Pre Debt Equity Ratio0.29290.000.67290.00 Post Debt Equity Ratio0.19290.01*0.79290.00 Pre Interest Coverage Ratio0.44290.000.41290.00 Post Interest Coverage Ratio0.43290.000.34290.00 Pre Capital Employed0.38290.000.52290.00 Post Capital Employed0.33290.000.55290.00 Pre EPS0.11290.20*0.94290.12* Post EPS0.10290.20*0.94290.09* Note: * represents p-value > 0.05(Source: SPSS Output)process in the duration of 2006 to 2011 is not normally distributed.At 95% level of confidence for most of the financial parameters the p-value is less than 0.05 (p-value<0.05) in which case H0 is rejected and H1 is accepted, i.e. the data is not normal. Only for asterisk marked financial parameters the p-value >0.05, which means H0 is not rejected i.e. data is normal in such parameters. Overall, it was found that non-parametric tests are ideal for further analysis of the data.For analyzing the operating performance of companies, the financial data of these companies three years prior to and three years post M&Awas collected. From data it was found that financial data of these companies were skewed. There was exponential increase or decrease in the figures of financial data of these companies. So, arithmetic mean was not considered to be an appropriate to measure to be applied in the case of skewed financial data of these companies. It was decided that for the positive numbers of all parameters of financial data the geometric means was calculated and for the negative numbers of the all parameters of financial data arithmetic means was calculated. A comparison of the performance means for three years prior to and three years’ post M&A was sought. Since the data does not confirm to normality, non parametric test for comparison of means has been used. The test applied was Wilcoxon Signed rank test to test that the mean or median differences between all pairs were zero.H02: There is no significant difference in the financial performance parameters of all top companies listed on BSE and NSE which had undergone the M&A process during 2006 to 2011.H12: There is a significant difference inthe (Source: SPSS Output)13financial performance parameters of all top companies listed on BSE and NSE which had undergone the M&A process during 2006 to 2011.At 95% level of confidence, the null hypothesis is not rejected for financial parameters like PBDIT/Total Income Ratio, PBT/Total Income Ratio, PAT/Total Income Ratio, Quick Ratio, Current Ratio, Debt-Equity Ratio, Interest Coverage Ratio and EPS, as the significant p-value of Wilcoxon Signed Rank Test was more than 0.05. So, H0 cannot be rejected i.e. There is no significant difference in the financial performance parameters of all top companies listed on BSE and NSE which had undergone the M&A process during 2006 to 2011.At 5% level of significance, the null hypothesis is rejected for financial parameters like PBDIT, PBT, PAT, Return on Net-Worth, Return on Capital Employed, Net-Worth and Capital Employed, as the significant p-value of Wilcoxon Signed Rank Test was less than 0.05. So, H0 was rejected and H1 was accepted i.e. There is a significant difference in the financial performance parameters of all top companies listed on BSE and NSE which had undergone the M&A process during 2006 to 2011. findings on financial PerformanceThe analysis of 15 financial parameters corresponding to top M&A deals of companies listed on BSE and NSE during 2006-2011, couldbe summarized as follows.“A Study on Pre and Post Performance Evaluation of Merger and Acquisition of Top Companies of BSE and NSE”PBT/Total Income Ratio NotsignificantIn absolute terms it was observed that PBT has improved. But theratio of PBT to total income after M&A is not significant, whichhighlights that after the M&A the profit and total income have notincreased to the expected level and hence the status remains constant.PAT/ Total Income Ratio NotsignificantPAT in absolute terms has improved, but the ratio of PAT to totalincome was found insignificant after M&A. This indicates thatcompanies after M&A tend to take time to maintain stability andimprove upon the ratio. It is appreciative that the ratio has notdeteriorated after M&A, company has been successful in maintainingthe status quo.Return onNet-Worth Significant It indicates that companies’ performance had improved after M&A. Company’s profit generation had increased with the due investment of shareholders fund.Return on Capital Employed SignificantROCE expresses the profits in relation to the capital. On scrutinizingthe absolute value of ROCE it was found that there was a negativeROCE, which means that company has made a loss. After the M&A,ROCE turns out to be negative due to heavy interest costs and otherexpenses.Net-Worth Significant The entity has become of more worth after M&A, its assets have exceeded its liabilities. Existing companies assets base have considerably increased after M&A.Quick Ratio Notsignificant It indicates companies position to pay its current liability have remained unchanged after M&A. On evaluating the absolute the figures of quick ratio it was found that pre merger quick ratio was marginally higher than the post merger quick ratio. A non decline in quick ratio after M&A indicates that companies have enough liquid assets to pay its short term obligations. Companies have been successful in maintaining the status quo of quick ratio.Current Ratio NotsignificantIt indicates companies position to pay its current liability haveremained unchanged after M&A. On evaluating the absolute thefigures of current ratio it was found that pre merger current ratio wasmarginally higher than the post merger current ratio. A non decline incurrent ratio after M&A indicates that companies have enough currentassets to pay its short term obligations.Debt-Equity Ratio NotsignificantThe ratio provides a signal of the relationship between the capitalcontributed by creditors and that contributed by shareholders. A highratio typically would demonstrate that the company has aggressivelyfinanced its growth through debt. There was no change in debt equityratio after M&A, which means the companies have maintained therequisite standard of debt-equity ratio. A debt-equity ratio belowspecified standard would turn out to be a matter of worry.Jigna Chandrakant TrivediSIES Journal of Management, September 2013, Vol. 9(2)14ConclusionM&A provides path of quick progress for the companies. Companies’ avail the benefits of economies of scale, scope, size and improved bottom-lines and top-lines. It may be concluded that M&A activity provides lot of qualitative synergistic benefits to the company. The top companies PBDIT, PBT and PAT improved significantly after the M&A. There was no difference in EPS post M&A, due to large number of shareholders. Overall it can be learnt that with the passage of time EPS would improve in future. Thus, M&A is a tool for expansion and wealth maximization for companies and shareholders respectively. references:• Investopedia (n.d.). Dictionary.Retrieved November 10, 2012, from /dictionary/#axzz2C4nueNan• Mergers and Acquisitions (n.d.). Difference between Merger and Acquisition. RetrievedNovember 14, 2012, from http://www.mergersandacquisitions.in/difference-between-merger-and-acquisition.htmInterest Coverage Ratio NotsignificantIt indicates company’s ability to pay fixed charge obligations, hasnot changed significantly. Companies’ interest coverage ratio evenafter M&A is good and it is capable to discharge the fixed burden ofinterest, which indicates that company is operationally well managedafter M&A. Operational excellence makes the payment of interestpossible without any hurdle.CapitalEmployed Significant It indicates that the companies’ value of assets employed in the business has changed significantly. Companies have raised money through equity or debt for M&A. The assets have increased after M&A.EPS Notsignificant It was found that there was no change in the EPS post M&A. It was observed that PAT in absolute terms had improved significantly, but the EPS did not improve significantly. The reason for no change in EPS could be attributed to post merger large number of shareholders.(Source: Primary Analysis)“A Study on Pre and Post Performance Evaluation of Merger and Acquisition of Top Companies of BSE and NSE”15Copyright of SIES Journal of Management is the property of SIES College of Management Studies and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission.However,users may print, download,or email articles for individual use.。
