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Volume-7, Issue-3, May-June 2017
International Journal of Engineering and Management Research
Page Number: 281-293
Corporate Restructuring: A Performance Appraisal of Manufacturing
Sector
Bharat Bhatt
Assistant Professor, Zakir Husain Delhi College, University of Delhi, INDIA
ABSTRACT The present study will discuss the impact of M&A
on company’s performance during 2001-2013 using two
approaches, stock analysis and accounting analysis. The
study purposes to test the impact of mergers and
acquisitions on company’s performance in manufacturing
sector. The study is conducted using two methods,
including event study method to measure stock
performance and financial ratios analysis to measure
accounting performance. Event study method analyzes the
cumulative abnormal return around announcement date
and completion date. Financial ratio analysis compares
performance of the bidder companies before and after the
merger and acquisition and explores the source of
performance changes.
The result of event study analysis shows
significant both positive and negative performance changes
of companies following mergers and acquisitions.
Meanwhile, the financial ratio analysis shows significant
negative changes of performance of companies following
mergers and acquisitions.
Keywords— Financial, company, management,
manufacturing sector
I. INTRODUCTION
(M&A) and corporate restructuring are a big
part of the corporate finance world. The phenomenon of
rising M&A activity is observed world over across
various continents, although, it has commenced much
earlier in developed countries (as early as 1895 in US
and 1920s in Europe), and is relatively recent in
developing countries.
Every day, investment bankers arrange M&A
transactions, which bring separate companies together to
form larger ones. Not surprisingly, these actions often
make the news. Deals can be worth hundreds of millions,
or even billions, of dollars. They can dictate the fortunes
of the companies involved for years to come. For a CEO,
leading an M&A can represent the highlight of a whole
career.
Mergers and acquisitions are among the most
effective ways to expedite the implementation of a plan
to grow rapidly. Companies in all industries have grown
at lightning speed, in part because of an aggressive
merger and acquisition strategy. M&As all shapes and
sizes have the same strategic objective—to build long-
term shareholder value and take advantage of the
synergies that the combined firms will create—but each
industry has its own specific objectives. Various studies
had been conducted on Post M&A Financial
Performance under different times by various
stakeholders. Grigorieva & Petrunina (2012) in their
research paper “THE PERFORMANCE OF MERGERS
AND ACQUISITIONS IN EMERGING CAPITAL
MARKETS: NEW EVIDENCE” have tried to define the
impact of corporate mergers and acquisitions on
company performance. They have contributed to the
existing literature by examining the influence of M&A
deals on company value in the short-run using the event
study method. Examining a sample of 80 deals initiated
by companies from emerging capital markets over 2002-
2009, they found that M&As are value-destroying deals
for the combined firms. Reddy, Nangia & Aggarwal
(2013) The study has applied earnings management
approach (event study) to compute average abnormal
returns (AAR) around the merger announcement for
select Indian M&A cases. Further, accounting ratios are
considered to assess the long‐run financial performance.
Thereafter, t‐stat was applied for testing the proposed
hypotheses. In particular, it has performed a later test to
the means of financial ratios and variables for both
services and manufacturing sectors in accounting ratios.
The selected Indian M&A cases showed superior
performance during the post‐merger period for both
manufacturing and services sectors, and observe a
balance sheet improvement in the long‐run. Shah &
Arora (2013) examined a sample of M&A
announcements in the Asia-Pacific region to identify the
post-facto effect of M&A announcements on the stock
prices of the target firms. The study has used the event
study methodology where the Cumulative Average
Abnormal Returns (CAAR) of the target firm’s stock
prices in different event windows have been analyzed. A
paired sample analysis has also been conducted by
comparing the pre-announcement and post-
announcement returns of the target and bidder firms’
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stock prices in the event window of ±2 days. Across all
the event windows, target firm’s stock price yields
positive CAAR that is significantly different from zero.
The target firms depict that the post announcement
returns are significantly greater than the pre-
announcement returns, indicative of the immediate
market reaction to the information disclosure. Sinha,
Kaushik & Chaudhary (2010) in their research paper
“Measuring Post Merger and Acquisition Performance:
An Investigation of Select Financial Sector
Organizations in India “- examined the impact of
mergers and acquisitions on the financial efficiency of
the selected financial institutions in India. The analysis
consisted of two stages. Firstly, by using the ratio
analysis approach, calculated the change in the position
of the companies during the period 2000-2008.
Secondly, examined changes in the efficiency of the
companies during the pre and post-merger periods by
using nonparametric Wilcoxon signed rank test. Results
showed a significant change in the earnings of the
shareholders, there is no significant change in liquidity
position of the firms. The result of the study indicate that
M&A cases in India show a significant correlation
between financial performance and the M&A deal, in the
long run, and the acquiring firms were able to generate
value. Campa &Hernando (2005), in their research
paper “M&A performance in the European Financial
industry”, reported evidence on shareholders returns
from mergers. Mergers announcements brought positive
excess returns to the shareholders of the target company
around the date of the announcement. Returns to
shareholders of the acquiring firms were essentially zero
around announcement. One year after the announcement,
excess returns were not significantly different from zero
for both the firms i.e. acquirer and the target firm.
Dhiman, & Parray, in their research paper titled
“Impact of Acquisition on Corporate Performance in
Indian Manufacturing sector” found out the result and
analysis of the key financial ratios of the acquiring firms
shows that there is no significant effect on the
profitability of the firms following acquisitions. The
main finding of the study is that there is strong evidence
that the profitability of a firm that performed an
acquisition has no statistical difference between pre
acquisition period and post acquisition period.
Dilshad(2012)- A merger or acquisition is assumed to
create value if the returns on the shares of the acquirers
and targets increase on the announcement of the merger.
This research had one primary objective that is to
examine the effects of a merger announcement of banks
on stock values. Evidence here supports that significant
cumulative abnormal returns were short lived for the
acquirers. At the end of the event window, the
cumulative abnormal returns were 0. Evidence of excess
returns after the merger announcement was also
observed along with the leakage of information that
resulted in the rise of stock prices few days before the
announcement of merger or acquisition. At the same
time, the results of cumulative abnormal returns showed
that target banks earned abnormal returns on the merger
announcement day. Pilloff (1996) used both the
accounting and market data to study the gains achieved
in a sample of forty-eight mergers involving publicly
traded institutions that merged between 1982 and 1991.
To assess the overall gain in wealth, the consolidated
sum of acquirer and target abnormal return was
measured. The results suggest that merger announcement
typically do not lead to overall gain in stockholder
wealth. The abnormal return findings suggest that on
average market does not expect mergers to lead to gains
in performance, a result consistent with actual measured
performance gains.
Liargovas (2010) in his reseach paper titled
“The Impact of Mergers and Acquisitions on the
Performance of the Greek Banking Sector: An Event
Study Approach examined the impact of mergers and
acquisitions on the performance of Greek banking sector
over the period 1996-2008, by using two approaches;
event study methodology and operating performance.
The results from event study methodology, using a 30-
day event window indicate that stock prices show
significant positive cumulative average abnormal returns
(CAARs) before the announcement for a period of ten
days (for targets and bidders banks). The overall results
(the weighted average of gains to the bidder and target
bank), indicate that bank mergers and acquisitions have
no impact and do not create wealth. The empirical results
also indicate significant implications for rejection of the
“semi-strong form” of Efficient Market Hypothesis
(EMH) of the Athens Stock Exchange, possibly
reflecting leakage of information. By measuring twenty
financial ratios, it was found that the Greek banking
industry is moderate and not highly concentrated (many
banks with low market shares). Operating performance
does not improve following mergers and acquisitions
while there are controversial results when comparing
merged banks with the group of non-merging banks.
David A. Becher (2000) examined the valuation effects
of sample of 558 bank mergers from 1980- 1997. The
overall results indicated that bank mergers create wealth.
A basic event study was done to calculate abnormal
returns for target and bidder firms and the author focuses
on two different widow periods, 36 day window and an
11 day window. The returns to the bidder firms were
statistically negative in the 11- day window, while the
returns to the target firms and combined firms remain
statistically positive in both windows. Their results are
also consistent with the notion that bank mergers occur
for synergistic reasons and are not the result of empire
building. Kithinji & Waweru, (2007) found out from
his studies that results are mixed for stock market
approach and accounting based approach. The analysis
of pre and post-merger profitability and efficiency ratios
for the acquiring firms shows that there is a differential
impact of mergers for different ratios and different
sectors.
In nutshell, it is observed that company
performance after M&A are situational and the
performance vary accordingly influenced by different
factors relating to M&A. Thus, to overcome the
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situation, the factors affecting M&A needed to be
determined and how it can affect need to be explored so
as to act accordingly.
II. RESEARCH METHODOLOGY
OBJECTIVES OF STUDY
The broad objective of this study is to measure
the performance of manufacturing sector companies
after corporate restructuring using two basic
approaches namely: MARKET MODEL METHOD
AND FINANCIAL RATIOS APPROACH in Indian
corporate Sector .A sample of 8 companies have been
undertaken which have undergone corporate
restructuring during the period of 2000-2014. Many
scholars examined the impact of M&A on corporate
performance using two different approaches. Some
research analyzed performance of companies around
M&A through providing evidence on stock market
reactions for the companies involved in M&A. Other
researchers measured the M&A effect on companies
performance based on accounting data.
1) The present study purposes to test the impact of
mergers and acquisitions on Bidder Company’s
performance first by using market model method.
Event study method analyzes the cumulative abnormal
return around announcement date and dividing the time
as pre-merger and post-merger. The amount of
announced M&A in most industry decreased during
2007 to 2009, and increase during 2009 to 2010.
Financial crisis is suspected as one of the cause of
fluctuating movement of amount of announced M&A
during 2007 to 2010.
Previous literature about M&A generally shows
increasing in return to target firm and some show
insignificant impact for bidder firms. The positive
impact of M&A comes from many sources, such as
revenue enhancement and cost reduction (Cornett, et al.,
2006). The negative impact is caused by some reasons,
like agency problems and the cost of integration
(Bertrand & Betschinger, 2012.
Performance changes are measured by stock
prices data of companies between pre- and post- M &
As.
2) To examine and evaluate the impact of mergers and
acquisitions on the liquidity and leverage position of the
selected units by some important parameters of liquidity
and leverage& management efficiency ratios such as:-
Current Ratio
Debt to Equity Ratio
return on assets
Earnings per share(EPS)
BVS(book value per share)
Net profit margin
Interest coverage ratio
Return on capital employed
III. SCOPE OF STUDY
The scope of the study is limited to the merger
and acquisitions of the 8 Indian companies in the
corporate sector involved in corporate restructuring with
domestic as well as cross border companies.
The period of coverage to study the
performance of mergers and acquisitions in the Indian
corporate sector is from 2000 to 2014.
IV. DATA
Data for event study analysis has been gathered
from various sites like NSE etc.
This empirical study analyses the financial data
of selected merging firms in the period 2000-2013. In
order to evaluate the financial performance of the
merging firms in the long run, at least three years
financial data is required, for one year before the merger
and one year after the merger.
Data for financial ratios analysis has been
collected from CMIE Prowess database, annual financial
statements of companies and various other internet sites
to determine the financial performance of the firm in
ultimate long run using standard ratios.
Data Sample
Companies under study has been selected on a
random basis.
Table 1 gives the overview of key information
of the selected mergers in the sample has been given.
The sample covers companies in Indian corporate sector
who underwent corporate restructuring in the period
2000-2013 countries. From the data set, it can be seen
that mergers vary in sizes from small ones like Lakshmi
& TVS merger and big ones like Satyam and tech
Mahindra
TABLE 1: COMPANIES SELECTED UNDER STUDY
Acquiring firm Target firm
1 Dhampur sugar limited JK sugar mills
2 Satyam computers Tech Mahindra
3 Reliance industries limited Indian petrochemicals limited
4 VIP industries limited Aristocrat luggage limited
5 Tata chemicals General chemicals limited
6 TVS limited Lakshmi auto parts limited
7 Hindalco Indo gulf cooperation limited
8 JK tyres Tornel
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V. TOOLS OF ANALYSIS
Two methods are used to study the success of
mergers and acquisitions- event study analysis via
market model method and financial ratios using
accounting data.
VI. DATA ANALYSIS AND
INTERPRETATION
Analysis of event studies based approach
DHAMPUR SUGAR MILLS & JK SUGAR LIMITED
Where the regression equation is
Y= 0.0007+ 0.695078 X
Where .0007 represents the intercept of the
regression equation (if a return on reference stock index
is 0 then firm’s return will be .0007 which is a negligible
case.
And .695 represents the slope (change in the
reference stock will cause change in firm’s stock) for
every additional increase in the returns of reference stock
index there will be 0.695 times increase in the firm’s
stock.
MULTIPLE R-29% of positive correlation
exists between the two variables. This is a very weak
relationship
R SQUARE- 8% percentage of variance in the
dependent variable (firms return) that can be explained
by the independent variable (returns on reference index
CNX NIFTY).whereas 92% of variance in dependent
factor is attributable to other factors.
Abnormal returns over the estimation window
of 120 days. Just before the merger announcement AR
has fallen steeply. Around the merger news it is on a
little bit rise but after the news it has fallen steeply with
little magnitude of rise.
VII. MAHINDRA SATYAM & TECH
MAHINDRA
Y=0.002065276+ 0.282984806X
Where .0020 represents the intercept of the
regression equation (if returns on reference stock index
is 0 then firm’s return will be .0020 which is
negligible.And.2829 represents the slope (change in the
reference stock will cause change in firm’s stock) for
every additional increase in the returns of reference stock
index there will be 0.282 times increase in the firm’s
stock.
MULTIPLE R-15% of positive correlation
exists between the two variables which is a very weak
relationship.
R SQAURE- 2% percentage of variance in the
dependent variable (firms return) that can be explained
by the independent variable (returns on reference index
CNX NIFTY). This means that 98% variation in firm’s
stock prices is accounted by other factors.
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Abnormal returns over the estimation window of
120 days.
VIII. RELIANCE INDUSTRIES
LIMITED& IPCL
Y= .0001446+1.044X
Where .000144 represents the intercept of the
regression equation (if returns on reference stock index
is 0 then firm’s return will be .000014 which is
negligible.
And 1.04 represents the slope (change in the
reference stock will cause change in firm’s stock) for
every additional increase in the returns of reference stock
index there will be 1.044 times increase in the firm’s
stock.
MULTIPLE R- 83% of positive correlation
exists between the two variables which shows high
degree of correlation between the two variable.
R SQUARE- 69% percentage of variance in
the dependent variable (firms return) that can be
explained by the independent variable (returns on
reference index CNX NIFTY). the remaining 31% of
variation in dependent variable is explained by other
factors.
Abnormal returns over the estimation window
of 120 days. Around the merger announcement AR is on
rise. But before merger it rising and falling
inconsistently. After the merger it is on a rise majorly.
IX. VIP INDUSTRIES& ARISTOCRAT
LUGGAGE LIMITED
Y= -0.000677396+0.403087384X
Where -0.00067 represents the intercept of the
regression equation(if returns on reference stock index is
0 then firm’s return will be -0.00067 which is a
negligible case.
And 0.403 represents the slope (change in the reference
stock will cause change in firm’s stock) for every
additional increase in the returns of reference stock index
there will be .403 times increase in the firm’s stock.
MULTIPLE R- 24% of positive correlation
exists between the two variables which is a very weak
relationship.
R SQUARE- 5% percentage of variance in
the dependent variable (firms return) that can be
explained by the independent variable (returns on
reference index CNX NIFTY) whereas 95% variation in
dependent variable is due to other factors.
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Abnormal returns over the estimation window
of 120 days. Normal behavior of AR is showing very
steep rise before the merger announcement. Then rising
and falling at a normal rate after announcement news.
Around the end of merger period it is falling steeply.
X. HINDALCO AND INDO GULF
CORPORATION LIMITED
Y=-0.00011741 +0.440002314 X
Where -.000117 represents the intercept of the
regression equation (if returns on reference stock index
is 0 then firm’s return will be -.000117 which is a
negligible case.
And .4400 represents the slope (change in the reference
stock will cause change in firm’s stock) for every
additional increase in the returns of reference stock index
there will be .4400 times increase in the firm’s stock.
MULTIPLE R-29% of positive correlation
exists between the two variables which is low degree of
correlation.
R SQAURE- 8% percentage of variance in the
dependent variable (firms return) that can be explained
by the independent variable (returns on reference index
CNX NIFTY). Whereas 92% variation in dependent
variable is caused by other factors.
Abnormal returns over the estimation window
of 120 days. Major behavior of AR is showing deep falls
in the estimation window. After the merger
announcement has fallen steeply. Fall of AR is
magnificent than the rise of AR.
XI. JK TYRES & TORNEL
Y=-0.00075+0.812465 X
Where -.00075 represents the intercept of the
regression equation(if returns on reference stock index is
0 then firm’s return will be -.000117 or case of negative
returns.
And .812 represents the slope (change in the reference
stock will cause change in firm’s stock) for every
additional increase in the returns of reference stock index
there will be .812 times increase in the firm’s stock.
MULTIPLE R- 53% of positive correlation
exists between the two variables which is a moderate
degree of correlation between two variables.
R SQAURE- 28% percentage of variance in the
dependent variable (firms return) can be explained by the
independent variable (returns on reference index CNX
NIFTY). Whereas remaining72% variation in dependent
variables is attributable to other factors.
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Abnormal returns over the estimation window
of 120 days. Pattern of AR is showing steep rises and
steep falls around the estimation period showing
inconsistency.
The returns are negative both on pre and the
post announcement date due to the financial crisis of
USA affecting Indian stock markets in 2008.
XII. TATA CHEMICALS LIMITED&
GENERAL CHEMICAL LIMITED
Y=0.000108624+0.879548278X
Where .0001 represents the intercept of the
regression equation(if returns on reference stock index is
0 then firm’s return will be .00001 which is a negligible
case.
And .879 represents the slope (change in the
reference stock will cause change in firm’s stock) for
every additional increase in the returns of reference stock
index there will be .879 times increase in the firm’s
stock.
60% of positive correlation exists between the
two variables(firms return and returns on reference index
CNX NIFTY) which is a moderate degree of correlation.
36% percentage of variance in the dependent
variable (firms return) that can be explained by the
independent variable (returns on reference index CNX
NIFTY).whereas remaining 64% variation in dependent
variable is caused by other factors.
Abnormal returns over the estimation window
of 120 days. 60 days before and 60 days after the
merger. Before the merger, AR is falling and rising
inconsistently but around the merger date, AR is
plummeting steeply.
TVS MOTOR COMPANY& LAKSHMI AUTO
COMPONENTS
Y=-0.0038083 +0.60318362X
Where -.003 represents the intercept of the
regression equation (if returns on reference stock index
is 0 then firm’s return will be -.0013 or negative returns.
And .603 represents the slope (change in the reference
stock will cause change in firm’s stock) for every
additional increase in the returns of reference stock index
there will be .603 times increase in the firm’s stock.
9% of positive correlation exists between the two
variables.which is a very low degree of relationship
between two variables.
.08% percentage of variance in the dependent
variable (firms return) that can be explained by the
independent variable (returns on reference index CNX
NIFTY).
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Abnormal returns over the estimation window
of 120 days. AR of TVS is insignificant and around 0
almost in the whole estimation period expect in last few
days where it had a drastic fall.
XIII. MEASURING CORPORATE PERFORMANCE OF MERGER USING FINANCIAL
RATIOS
Dhampur sugar & JK sugar limited-
CLASS OF
RATIOS
2011 2012 2013 performance
LIQUIDITY current ratio 0.82 0.65 0.56 poor
FINANCING debt equity ratio 1.81 1.87 2.9 poor
PERFORMANCE return on capital employed 7.89 10.17 8.51 good
PERFORMANCE EPS 1.53 5.24 3.1 good
PERFORMANCE BVS 92.77 88.39 84.93 poor
PERFORMANCE return on assets 92.77 88.39 84.93 good
PERFORMANCE net profit margin(%) 0.37 1.85 1.53 good
LIQUIDITY interest coverage ratio 0.88 1.46 1.35 good
According to this approach, Dhampur sugar has
performed good on the performance parameters like
book value per share, return on assets, return on capital
employed, EPS and on interest coverage ratio. 5
parameters out of 8 has improved for Dhampur after
merger with JK sugar.
Satyam and tech Mahindra
CLASS OF
RATIOS
2012 2013 2014 performance
LIQUIDITY current ratio 0.98 0.95 2.1 good
FINANCING debt equity ratio 0.33 0.26 0.03 good
PERFORMANCE return on capital employed 16.05 17.51 32.61 good
PERFORMANCE EPS 36.13 50.93 115.02 good
PERFORMANCE BVS 70.08 326.45 367.86 good
PERFORMANCE return on assets 270.08 326.45 367.86 good
PERFORMANCE net profit margin(%) 8.78 10.87 16.48 good
LIQUIDITY interest coverage ratio 9.46 8.5 36.92 good
According to this approach, satyam and tech
Mahindra has outperformed
on all the 8 ratios used to access the performance of a
company after merger. All the ratios have improved after
the merger of the two technical giants.
Reliance industries & IPCL
CLASS OF
RATIOS
2006 2007 2008 performance
LIQUIDITY current ratio 0.83 0.77 0.98 poor
FINANCING debt equity ratio 0.48 0.45 0.46 poor
PERFORMANCE return on capital employed 17.37 18 15.68 poor
PERFORMANCE EPS 65.08 85.71 133.86 good
PERFORMANCE BVS 324.03 439.57 542.74 good
PERFORMANCE return on assets 10.55 10.53 12.7 good
PERFORMANCE Net profit margin(%) 11.4 10.69 14.54 good
LIQUIDITY interest coverage ratio 13.28 13.51 17.05 good
Reliance has performed well on all performance indicators except ROCE and it has shown poor performance 3
indicators out of 8 parameters employed.
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VIP industries & aristocrat luggage-
CLASS OF
RATIOS
2006 2007 2008 performance
LIQUIDITY current ratio 0.65 1 0.97 poor
FINANCING debt equity ratio 1.42 1.01 0.95 good
PERFORMANCE return on capital employed 12 17.8 18.43 good
PERFORMANCE EPS 5.22 5.63 7.11 good
PERFORMANCE BVS 43.12 44.24 46.98 good
PERFORMANCE return on assets 37.67 39.01 42.39 good
PERFORMANCE Net profit margin(%) 2.58 3.22 3.6 good
LIQUIDITY interest coverage ratio 3.01 3.13 3.43 good
Vip industries has performed good on all the
indicators after merger except one. So it seems that it has
reaped the merger benefits according to this appraoch
Hindalco& gulf corporation-
CLASS OF
RATIOS
2006 2007 2008 performance
LIQUIDITY current ratio 3.59 1.76 1.2 poor
FINANCING debt equity ratio 0.16 0.21 0.39 poor
PERFORMANCE return on capital employed 20.43 15.2 13.08 poor
PERFORMANCE EPS 91 92.12 62.95 poor
PERFORMANCE BVS 587 615 669.44 good
PERFORMANCE return on assets 587.98 615.25 669.44 good
PERFORMANCE net profit margin(%) 28.38 27.66 11.29 poor
LIQUIDITY interest coverage ratio 13.11 18.47 9.36 poor
Hindalco has performed poor on 7 indicators
out of 8. Only BVS of the company has improved after
the merger with gulf cooperation.
Tata chemicals and general chemicals limited
CLASS OF
RATIOS
2008 2009 performance
LIQUIDITY current ratio 0.62 0.62 poor
FINANCING debt equity ratio 0.66 1.01 poor
PERFORMANCE return on capital employed 11.3 13.36 poor
PERFORMANCE EPS 40.56 19.22 poor
PERFORMANCE BVS 152 154.01 good
PERFORMANCE return on assets 152.61 154.01 good
PERFORMANCE net profit margin(%) 22.77 5.32 poor
LIQUIDITY interest coverage ratio 31 6.71 poor
Tata chemicals has performed poor on 6
parameters out of 8 after merger. Its performance has
improved on ROCE which is a important indicator. May
be Tata would reap merger benefits from general
chemicals limited after 1 or two year.
Tvs motors & Lakshmi auto parts limited-
CLASS OF
RATIOS
2003 2004 performance
LIQUIDITY current ratio 0.85 0.73 poor
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FINANCING debt equity ratio 0.29 0.21 good
PERFORMANCE return on capital employed 38.01 32.29 good
PERFORMANCE EPS 56 5.94 poor
PERFORMANCE BVS 183.09 24 poor
PERFORMANCE return on assets 183.09 24.33 poor
PERFORMANCE net profit margin(%) 4.74 4.8 good
LIQUIDITY interest coverage ratio 18.43 21.76 good
TVS has performed good on 4 important
indictors like net profit margin, debt equity ratio, ROCE,
interest coverage liquidity. But poorly on ROA which is
an important indicator of managerial efficiency
Jktyres and tornel
CLASS OF
RATIOS
2007 2008 2009
LIQUIDITY current ratio 0.67 0.65 0.6 poor
FINANCING debt equity ratio 1.71 1.82 1.91 poor
PERFORMANCE return on capital employed 13.26 14.02 14.94 good
PERFORMANCE EPS 21.67 10.56 4.64 poor
PERFORMANCE BVS 19.22 2.97 2.97 poor
PERFORMANCE return on assets 170.71 150.42 138.97 poor
PERFORMANCE net profit margin(%) 2.37 1.4 0.38 poor
LIQUIDITY interest coverage ratio 2.11 1.7 1.55 poor
Jk tyres has performed good on just one
indicator ROCE. Records show that jk tyres reaped the
merger benefits from tornel after 2011 because of the US
financial crisis that occurred in 2007 in USA. Tornel is a
Mexican firm who was also affected by the global
slowdown. So the performance of this cross merger
improved after the ending regime of crisis.
XIV. SUMMARY AND CONCLUSIONS
METHOD 1- EVENT ANAYSIS USING MARKET MODEL METHOD
DAILY CAR (CUMULATIVE ABNORMAL RETURNS) of companies in corporate sector.
The above diagrammatic representation shows
that the abnormal returns picked a rise before the merger
news. Around the merger news, the returns start falling
as shareholders started selling their share because of
earlier over valuation.
1 5 9
13
17
21
25
29
33
37
41
45
49
53
57
61
65
69
73
77
81
85
89
93
97
101
105
109
113
117
121
CA
R
number of days
DAILY CAR OF SELECTED COMPANIES IN CORPORATE SECTOR FROM 2000-2013
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But few days after the merger again the returns have gain
momentum before a slant fall at the end of the estimation
period.
In this study, few significant mergers took place
in the year 2002, 2007, 2008.
These years are considered to be the years of
financial turmoil because of trashing of World Trade
Centre of USA in 2002 and the arrival of USA subprime
crisis in mid October 2008 when the Indian stock market
crashed significantly because of financial contagion as a
result of globalization. Any event in global stock market
directly affect Indian stock market which increases its
volatility too much.
According to this approach companies like
reliance and IPCL merger, VIP and aristocrat merger,
TVS and Lakshmi auto parts limited, they proved to be
the winners as their merger synergy effects are visible on
the stock markets.
Various companies like JK tyres and Tornel,
Tata chemicals and general chemicals limited merger
reaped the merger benefits after some time due to several
factors affecting the Indian stock market at the time of
their merger.
XV. RESULT OF HYPOTHESIS TESTING OF CAR (CUMULATIVE ABNORMAL
RETURNS) USING Z- TEST
z-Test: Two Sample for Means
Variable 1 Variable 2
Mean 0.035762165 -0.203202211
Known Variance 0.02 0.31
Observations 60 60
Hypothesized Mean Difference 0
Z 3.222194994
P(Z<=z) one-tail 0.000636063
z Critical one-tail 1.644853627
P(Z<=z) two-tail 0.001272125
z Critical two-tail 1.959963985
Hypothesis testing suggests that the alternate
hypothesis is true that there is increase or decrease in the
shareholder’s wealth after the merger. Even from the
diagrammatic representation of CAR over the estimation
period shows that the AR around the merger news
started falling for few days. They gain a momentum after
the merger with positive CAR for few days before taking
a sharp fall around the end of the estimation period. May
be due to leakages in the information of merger news
spreads into the whole market leading to the rising
returns of stocks.
But around the merger news period, shareholders start
selling their stocks due to its overvaluation caused by
leakages in the merger news. And this ultimately causes
the price to fall around the merger period.
But again after some time stocks start rising may be
because of hyped synergy benefits from any merger deal
announced by the company.
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XVI. METHOD 2-FINANCIAL PERFORMANCE USING ACCOUNTING RATIOS
CLASS OF RATIOS NAME
Number of poor performance
companies(post-merger year)
Number of good performance
companies(post-merger year)
LIQUIDITY current ratio 1 7
FINANCING debt equity ratio 4 4
PERFORMANCE return on capital employed 5 3
PERFORMANCE EPS 4 4
PERFORMANCE BVS 5 3
PERFORMANCE return on assets 5 3
PERFORMANCE Net profit margin (%) 5 3
LIQUIDITY interest coverage ratio 5 3
According to this approach, most of the
companies have performed well on the performance
indicators Like Book value per share, return on assets,
return on capital employed, net profit margin which
shows their Managerial efficiency. All the companies
except 1 failed to maintain the ideal current ratio. The
current ratios of most of the companies are really poor
after the merger. There is no significant improvement in
the company’s ability to maintain liquidity. Whereas
50% of the total companies have shown good
performance in their BVS and debt equity ratio
If we talk individually, then tech Mahindra and
Satyam merger outperformed according to this financial
ratios approach. All the ratios of this company have
shown good performance after the merger. Majority
companies took time to reap the merger benefits due to
several reasons. They took more than a year to absorb
the merger synergy benefits to reflect the glow in their
performance.
XVII. SUMMARY
A merger or acquisition is assumed to create
value if the returns on the shares of the acquirers firm
increase on the announcement of the merger and
improve the performance in terms of accounting ratios.
Eight acquiring companies and 8 target
companies were used in the sample for the study of price
reactions of stocks. Returns on stocks of companies were
compared to the market returns i.e. CNX Nifty index.
The findings reveal that there is definitely action in the
returns of stock around Day 0, but the analysis also
shows that the merger may not be significant in
determination of the reason for the particular behavior on
the movements of stocks.
There are so many other abnormal events like
global financial depressions, announcement of the
budget of the central government etc. that have captured
their effect on the returns of stocks around the
announcement news of merger in this study.
Whereas the other accounting ratio approach
concludes that it takes time to absorb the synergy
benefits arising from merger. Period of one year is not
sufficient to measure the performance of the companies
in terms of their financial ratios after one year. May be
even after one year synergy benefit wont arise from the
corporate restructuring deal because success of any
M&A deal depends on so many factors that were not
taken into account implicitly.
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http://www.jstor.org/stable/3694891
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