CHAPTER 1

INTRODUCTION

One plus one makes three: this equation is the special alchemy of a merger or an
acquisition. The key principle behind buying a company is to create
shareholder value over and above that of the sum of the two companies. Two
companies together are more valuable than two separate companies - at least,
that's the reasoning behind M&A.

Merger

In the pure sense of the term, a merger happens when two firms, often of about the same
size, agree to go forward as a single new company rather than remain
separately owned and operated. This kind of action is more precisely referred
to as a "merger of equals." Both companies' stocks are surrendered and new
company stock is issued in its place.

Acquisition

When one company takes over another and clearly established itself as the new owner,
the purchase is called an acquisition. From a legal point of view, the target
company ceases to exist, the buyer "swallows" the business and the buyer's
stock continues to be traded.

Types of mergers

From the perspective of business structures, there is a whole host of different mergers.
Here are a few types, distinguished by the relationship between the two
companies that are merging:

•Horizontal merger - Two companies that are in direct competition and share the same
product lines and markets.

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•Vertical merger - A customer and company or a supplier and company. For ex. a cone
supplier merging with an ice cream maker.

•Market-extension merger - Two companies that sell the same products in different
markets.

•Product-extension merger - Two companies selling different but related products in the
same market.

•Conglomeration - Two companies that have no common business areas.

There are two types of mergers that are distinguished by how the merger is financed.
Each has certain implications for the companies involved and for investors:

•Purchase Mergers - As the name suggests, this kind of merger occurs when one
company purchases another. The purchase is made with cash or through the
issue of some kind of debt instrument; the sale is taxable. Acquiring
companies often prefer this type of merger because it can provide them with a
tax benefit. Acquired assets can be written-up to the actual purchase price, and
the difference between the book value and the purchase price of the assets can
depreciate annually, reducing taxes payable by the acquiring company.

•Consolidation Mergers - With this merger, a brand new company is formed and both
companies are bought and combined under the new entity. The tax terms are
the same as those of a purchase merger.

Mergers and acquisitions current status in India

Mergers and acquisitions in India are on the rise. According to the monthly deal report of
VCEdge, a financial research provider, M&A activity in the country more than
doubled in the first month of 2010 as deals worth nearly $3 billion (about
Rs13, 950 crore) were announced amid improved signs of liquidity, also the
M&A deal value during January 2010 stood at $2.8 billion, a whopping 126%
rise over the same period last year. In terms of deal count there was also an

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 upward trend, as there were around 53 deals in the first month of the year, as
compared to 32 deals witnessed during a year-ago period, the report added.
Domestic deals were in fervors during January 2010, as there were as many as
29 domestic deals worth $2,303 million as compared to 14 transactions worth
$589 million in January 2009. Meanwhile, the number of outbound deals more
than doubled from 6 in January 2009 to 13 in January 2010. Besides, the
average deals size also grew to $111.30 million in the first month of 2010 from
$84.28 million, the report said.

The process of mergers and acquisitions has gained substantial importance in today's
corporate world. This process is extensively used for restructuring the business
organizations. In India, the concept of mergers and acquisitions was initiated by the
government bodies. Some well known financial organizations also took the necessary
initiatives to restructure the corporate sector of India by adopting the mergers and
acquisitions policies. The Indian economic reform since 1991 has opened up a whole lot
of challenges both in the domestic and international spheres. The increased competition
in the global market has prompted the Indian companies to go for mergers and
acquisitions as an important strategic choice. The trends of mergers and acquisitions in
India have changed over the years. The immediate effects of the mergers and acquisitions
have also been diverse across the various sectors of the Indian economy.

Mergers and Acquisitions in India: the Latest Trends

Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises was
not so common. The situation has undergone a sea change in the last couple of years.
Acquisition of foreign companies by the Indian businesses has been the latest trend in the
Indian corporate sector.

There are different factors that played their parts in facilitating the mergers and
acquisitions in India. Favorable government policies, buoyancy in economy, additional

3
liquidity in the corporate sector, and dynamic attitudes of the Indian entrepreneurs are the
key factors behind the changing trends of mergers and acquisitions in India.

The Indian IT and ITES sectors have already proved their potential in the global market.
The other Indian sectors are also following the same trend. The increased participation of
the Indian companies in the global corporate sector has further facilitated the merger and
acquisition activities in India.

Mergers and acquisitions become the major force in the changing environment. The
policy of liberalization, decontrol and globalization of the economy has exposed the
corporate sector to domestic and global competition. It is true that there is little scope for
companies to learn from their past experience. Therefore, to determine the success of a
merger, it is to be ascertained if there is financial gain from mergers.

Mergers, acquisitions and corporate control have emerged as major forces in the modern
financial and economic environment. Mergers, a source of corporate growth, have been
the subject of careful examination by scholars. The mergers and acquisitions in India
have changed dramatically after the liberalization of Indian economy. The policy of
liberalization, decontrol and globalization of the economy has exposed the corporate
sector to domestic and global competition. Low cost products, with good quality have
become essential for a company to survive in the competitive market. Factors like low
interest rates, cheap labor, and liberal government policy, have helped the Indian
corporate sector to reduce their cost. It is in this context that corporate sectors view
mergers for further cost reduction through technology advancement or to make their
presence felt in the market. The liberalization policy of Government of India has
witnessed an unprecedented number of mergers and acquisitions in the country. In terms
of the growth rate in mergers and acquisitions deals, India occupies the second position
in the world.
There are different factors that played their parts in facilitating the mergers and
acquisitions in India. Favorable government policies, buoyancy in economy, additional
liquidity in the corporate sector, and dynamic attitudes of the Indian entrepreneurs are the

4
key factors behind the changing trends of mergers and acquisitions in India. A survey
among Indian corporate managers in 2006 by Grant Thornton found that Mergers &
Acquisitions are a significant form of business strategy today for Indian Corporates.

Drivers of M&A
Indian M&A transactions are primarily driven by the desire for growth. Indian companies
are leveraging their low-cost advantage to create efficient global business models; they
are seeking entry into fast-growing emerging markets and market-share in profitable
developed economies; they are looking to augment their knowledge, reach and
capabilities through acquisitions of companies for their brands, technology, talent and
product portfolios. Moreover, the competition to achieve these benefits is intense,
heightening the need for speed. Companies from Latin America, Eastern Europe, Africa,
the Middle East and across Asia are in a race to build their global businesses.

Indian companies have been active and visible players within this new M&A trend.
According to Accenture’s analysis of data from Thomson Financial, as many as 543
M&A deals were completed by Indian companies both at home and abroad in 2007, with
a total value of US$30.4 billion. This represents a compound annual growth rate (CAGR)
of 28.3 percent in deal value over the period 2000-2007. Figure 1 illustrates the increase
in both the number and size of deals over this period.

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Motives behind M & A

These motives are considered to add shareholder value:

 Economies of Scale: This generally refers to a method in which the average cost
per unit is decreased through increased production, since fixed costs are shared
over an increased number of goods. In a layman’s language, more the products,
more is the bargaining power. This is possible only when the companies merge/
combine/ acquired, as the same can often obliterate duplicate departments or
operation, thereby lowering the cost of the company relative to theoretically the
same revenue stream, thus increasing profit. It also provides varied pool of
resources of both the combining companies along with a larger share in the
market, wherein the resources can be exercised.

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 Increased revenue /Increased Market Share: This motive assumes that the
company will be absorbing the major competitor and thus increase its power (by
capturing increased market share) to set prices.

 Cross selling: For example, a bank buying a stock broker could then sell its
banking products to the stock brokers customers, while the broker can sign up the
bank’ customers for brokerage account. Or, a manufacturer can acquire and sell
complimentary products.

 Corporate Synergy: Better use of complimentary resources. It may take the form
of revenue enhancement (to generate more revenue than its two predecessor
standalone companies would be able to generate) and cost savings (to reduce or
eliminate expenses associated with running a business).

 Taxes: A profitable can buy a loss maker to use the target’s tax right off i.e.
wherein a sick company is bought by giants.

 Geographical or other diversification: this is designed to smoothen the earning

results of a company, which over the long term further smoothens the stock price
of the company giving conservative investors more confidence in investing in the
company. However, this does not always deliver value to shareholders.

 Resource transfer: Resources are unevenly distributed across firms and

interaction of target and acquiring firm resources can create value through either
overcoming information asymmetry or by combining scarce resources. Eg:
Laying of employees, reducing taxes etc.

 Improved market reach and industry visibility - Companies buy companies to

reach new markets and grow revenues and earnings. A merge may expand two
companies' marketing and distribution, giving them new sales opportunities. A

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 merger can also improve a company's standing in the investment community:
bigger firms often have an easier time raising capital than smaller ones.

Advantages of M&A’s:

The general advantage behind mergers and acquisition is that it provides a productive
platform for the companies to grow, though much of it depends on the way the deal is
implemented. It is a way to increase market penetration in a particular area with the help
of an established base.
Few reasons for M&A’s are:
 Accessing new markets
 maintaining growth momentum
 acquiring visibility and international brands
 buying cutting edge technology rather than importing it
 taking on global competition
 improving operating profit margins and efficiencies
 developing new product mixes
CHAPTER 2

LITERATURE REVIEW

Global literature
A number of studies were done in developed capital markets of Europe, Australia, and
the USA, on evaluation of corporate financial performance following mergers. Lubatkin
reviewed the findings of studies that have investigated either directly or indirectly the
question, “Do mergers provide real benefits to the acquiring firm?” The review suggested
that acquiring firms might benefit from merging because of technical, pecuniary and
diversification synergies.
Healy, Palepu, and Ruback examined post-acquisition performance for 50 largest U.S.
mergers between 1979 and 1984 by measuring cash flow performance, and concluded
that operating performance of merging firms improved significantly following

8
acquisitions, when compared to their respective industries. Ghosh examined the question
of whether operating cash flow performance improves following corporate acquisitions,
using a design that accounted for superior pre-acquisition performance, and found that
merging firms did not show evidence of improvements in the operating performance
following acquisitions. Weston and Mansingka studied the pre and post-merger
performance of conglomerate firms, and found that their earnings rates significantly
underperformed those in the control sample group, but after 10 years, there were no
significant differences observed in performance between the two groups. The
improvement in earnings performance of the conglomerate firms was explained as
evidence for successful achievement of defensive diversification.
Marina Martynova, Sjoerd Oosting and Luc Renneboog investigated the long-term
profitability of corporate takeovers in Europe, and found that both acquiring and target
companies significantly outperformed the median peers in their industry prior to the
takeovers, but the profitability of the combined firm decreased significantly following the
takeover. However, the decrease became insignificant after controlling for the
performance of the control sample of peer companies. Katsuhiko Ikeda and Noriyuki Doi
studied the financial performances of 43 merging firms in Japanese manufacturing
industry and found that the rate of return on equity increased in more than half the cases,
but rate of return on total assets was improved in about half the cases. However, both
profit rates showed improvement in more than half the cases in the five-year test,
suggesting that firm performances after mergers began to be improved along with the
internal adjustment of the merging firms: there was a necessary gestation period during
which merging firms learnt how to manage their new organizations.
Kruse, Park and Suzuki examined the long-term operating performance of Japanese
companies using a sample of 56 mergers of manufacturing firms in the period 1969 to
1997. By examining the cash-flow performance in the five-year period following
mergers, the study found evidence of improvements in operating performance, and also
that the pre- and post-merger performance was highly correlated. The study concluded
that control firm adjusted long-term operating performance following mergers in case of
Japanese firms was positive but insignificant and there was a high correlation between
pre- and post-merger performance.

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Research on post-merger performance in India
The following are the few existing studies reviewed which were conducted by
researchers in the view of analyzing the financial performance during merger activity in
different time periods.

The study entitled Effect of mergers on corporate performance in India, written by

Vardhana Pawaskar (2001), studied the impact of mergers on corporate performance. It
compared the pre- and post- merger operating performance of the corporations involved
in merger between 1992 and 1995 to identify their financial characteristics. The study
identified the profile of the profits. The regression analysis explained that there was no
increase in the post- merger profits. The study of a sample of firms, restructured through
mergers, showed that the merging firms were at the lower end in terms of growth, tax and
liquidity of the industry. The merged firms performed better than industry in terms of
profitability.

Mansur.A.Mulla (2003) in his case study Forecasting the viability and operational
efficiency by use of ratio analysis: A case study, assessed the financial performance of a
textile unit by using ratio analysis. The study found that the financial health was never in
the healthy zone during the entire study period and ratio analysis highlighted that
managerial incompetence accounted for most of the problems. It also suggested toning up
efficiency and effectiveness of all facets of management and put the company on a
profitable footing.
Pramod Mantravadi and Vidyadhar Reddy (2007) in their research study Mergers and
operating performance: Indian experience, attempted to study the impact of mergers on
the operating performance of acquiring corporate in different periods in India, after the
announcement of industrial reforms, by examining some pre- and post-merger financial
ratios, with chosen sample firms, and all mergers involving public limited and traded
companies of nation between 1991 and 2003. The study results suggested that there are
minor variations in terms of impact on operating performance following mergers in
different intervals of time in India. It also indicated that for mergers between the same

10
groups of companies in India, there has been deterioration in performance and returns on
investment.
A book entitled Mergers & acquisitions in the banking sector- The Indian scenario,
written by Selvam. M (2007) has analyzed the implications of stock price reactions to
mergers and acquisitions activities taken place in banking industry with special reference
to private and public sector banks. The author has found from the analysis that the share
prices are market sensitive. From the financial analysis it was observed that majority of
the banks went for branch expansion and this has affected profitability to some extent
and it resulted in unhealthy competition among the players.
To sum up the review of literature, many contributions have offered different
perspectives of merger in different industries worldwide and explained the valuation
techniques followed by merging companies, and shareholders wealth effect due to
merger. From the review of many excellent research papers analyzing the pre and post
merger performance of merged companies, it is inferred that majority of the studies
strongly support the concept of enhanced post merger performance due to merger and it
is beneficial to the acquirer companies.
CHAPTER 3

NEED FOR THE STUDY

Even though mergers and acquisitions (M&A) have been an important element of
corporate strategy all over the globe for several decades, research on M&As has not been
able to provide conclusive evidence on whether they enhance efficiency or destroy
wealth. There is thus an ongoing global debate on the effects of M&As on firms. Mergers
and acquisitions have become common in India today. Post-merger financial gain will be
generated only when the two companies are worth more together than apart. Therefore,
there is a need to study the impact of the mergers on the acquiring firms, which can be
helpful in assessing the success of merger.

OBJECTIVES OF THE STUDY

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The main objective of the study is to evaluate the pre and post merger performance of the
acquirer companies in three industries which are banking, pharmaceutical and aviation.
The supporting objective is to offer the findings, suggestions, conclusion and limitations.
The performance of Indian companies that have gone through mergers in India and
abroad in these three industries will be examined and seen if mergers had significant
impact on operating financial performance of acquiring companies. Also, it would be
checked whether the impact is different for different industries or not.

The reason behind choosing these three particular sectors is the larger number of mergers
happening in these sectors. The banking and pharmaceutical sectors are being seen as the
most sought out sectors for these corporate restructuring exercises.
The aviation sector is chosen to study the major deals that have happened like the Air
India-Indian Airline merger which has been in talks since then, justifying whether it was
a wise decision or not to merge these entities.

CHAPTER 4

OVERVIEW OF THE INDUSTRIES

Banking industry

Consolidation alone will give banks the muscle, size and scale to act like world-class
banks. We have to think global and act local and seek new markets, new classes of
borrowers. It is heartening to note that the Indian Banks' Association is working out a
strategy for consolidation among banks."
- P. Chidambaram

Mergers and acquisitions in banking sector have become familiar in the majority of all
the countries in the world. A large number of international and domestic banks all over
the world are engaged in merger and acquisition activities. One of the principal

12
objectives behind the mergers and acquisitions in the banking sector is to reap the
benefits of economies of scale.
Mergers and acquisitions in banking sector are forms of horizontal merger because the
merging entities are involved in the same kind of business or commercial activities.
Sometimes, non-banking financial institutions are also merged with other banks if they
provide similar type of services.

Reasons for mergers and acquisitions in the banking industry in India:-

1. Growth with External Efforts: With the economic liberalization the competition in
the banking sector has increased and hence there is a need for mega banks, which will be
intensely competing for market share. In order to increase their market share and the
market presence some of the powerful banks have started looking for banks which could
be merged into the acquiring bank. They realized that they need to grow fast to capture
the opportunities in the market. Since the internal growth is a time taking process, they
started looking for target banks.
2. Deregulation: With the liberalization of entry barriers, many private banks came into
existence. As a result of this there has been intense competition and banks have started
looking for target banks which have market presence and branch network.

3. Technology: The new banks which entered as a result of lifting of entry barriers have
started many value added services with the help of their technological superiority. The
older banks which can not compete in this area may decide to go for mergers with these
high-tech banks.

4. Over Capacity: The new generation private sector banks have begun their operation
with huge capacities. With the presence of many players in the market, these banks may
not be able to capture the expected market share on its own. Therefore, in order to fully
utilise their capacities these banks may look for target banks which may not have modern
day facilities.

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5. Customer Base: In order to utilise the capacity of the new generation private sector
banks, they need huge customer base. Creating huge customer base takes time.
Therefore, these banks have started looking for target banks with good customer bases.
Once there is a good customer base, the banks can sell other banking products like car
loans, Housing loans, consumer loans, etc., to these customers as well.

6. Merger of Weak Banks: There has been a practice of merging weak banks with a
healthy bank in order to save the interest of customers of the weak Bank. Narasimham
Committee–II discouraged this practice. Khan Group suggested that weak
Developmental Financial Institutions (DFIs) may be allowed to merge with the healthy
banks.

Following are the mergers and acquisitions considered for further study:-

1) HDFC Bank & Centurion Bank of Punjab

2) ICICI & Bank of Madura
3) SBI & State Bank of Saurashtra
4) OBC & Global Trust Bank
5) IOB and Bharat Overseas Bank

The reason behind choosing these mergers is that these are the major mergers happened
in the banking industry after 2000, two of these occurred recently in 2008, one in 2007
and the other one happened in 2001 and the fifth one in 2004. So, to make the sample
representative of the different years these mergers were chosen.

Pharmaceutical industry

The Indian Pharmaceutical Sector is currently the largest amongst the developing
nations. Given its current momentum of growth the Indian pharmaceuticals market is
expected to expand to US$ 25 billion by 2010. There is a worldwide structural trend
evolving in pharmaceuticals and Indian companies play a key role in this framework,

14
driven by their superior biotech and drug synthesis skills, high quality and vertically
integrated manufacturing assets, differentiated business models and significant cost
advantages.
Indian pharmaceutical companies reign supreme compared to their multinational
counterparts in India. Profit margins of Indian companies are on the rise and the recent
trend of mergers and acquisitions by Indian pharmaceuticals are likely to provide an
upside to the growth numbers. The total Indian Pharmaceutical Market is valued at US$
8790 million with a growth rate of 8%. The market is predominantly a branded generic
market with more 20,000 domestic manufacturers of end-use pharmaceuticals, making
the industry highly fragmented. In the organized sector of the Indian Pharmaceutical
industry there are about 250-300 companies, controlling about 70% of the total output in
value terms, with top 10 players accounting for one third of the total market.

The healthcare sector in India has experienced a paradigm a shift due emerging trends in
globalization, developing markets, industry dynamics and increasing regulatory and
competitive pressures.
Companies across the world are reaching out to their counterparts to take mutual
advantage of the other’s core competencies in R&D, Manufacturing, Marketing and the
niche opportunities offered by the changing global pharmaceutical environment.

The pharmaceutical sector offers an array of growth opportunities. This sector has always
been dynamic in nature and the pace of change has never been as rapid as it is now. To
adapt to these changing trends, the Indian pharmaceutical and biotechnology companies
have evolved distinctive business models to take advantage of their inherent strengths
and the "Borderless" nature of this sector. These differentiated business models provide
the pharmaceutical and biotechnology companies’ the necessary competitive edge for
consolidation and growth.

This sector is unique in the sense that it traverses across geographies, as health has no
boundaries, and this very boundary-less nature supports consolidation in this Industry.

15
With the easy availability of capital and increased global interest in the pharmaceutical
and biotech industry, the sector has become quite a `mergers-and-acquisitions' favorite.
With the easy availability of capital, increased global interest in India's research and
development capability, the country's pharmaceutical industry offers a good climate for
mergers and acquisitions. India’s strong manufacturing base will stand some global
companies in good stead as well. Other factors such as change in lifestyles, a greater per
capita expenditure on medicines, higher process and re-engineering skills, low
manufacturing costs and quick adaptation to new technology would also help the country
to position itself as a preferred manufacturing destination.

Mergers and Acquisitions (M&A) interest in India is currently very high in the pharma
industry. Size and end-to-end connectivity are major detriments in the global markets. To
achieve them, Western MNC’s have to look to Indian companies. India’s changing
therapeutic requirements and patent laws provide new opportunities for big pharma for
launching their patented molecules.
After traversing the learning curve through partnerships and alliances with international
pharmaceutical firms, Indian pharmaceutical companies have now moved up a step in the
value chain and are looking at inorganic route to growth through acquisitions. Many top
and mid tier Indian companies have gone on a global "shopping spree" to build up critical
mass in International markets.

Incentives for Mergers and Acquisitions by Indian companies

 Build critical mass in terms of marketing, manufacturing and research

infrastructure.
 Establish front end presence
 Diversification into new areas: Tap other geographies / therapeutic segments /
customers to enhance product life cycle and build synergies for new products
 Enhance product, technology and intellectual property portfolio
 Catapulting market share

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Following are the mergers and acquisitions considered for further study in this
sector:-

1) Dr Reddy & Betapharm

2) Jubilant Organosys and Draxis
3) Nicholas Piramal and Pfizer’s Morpeth unit
4) Glenmark and Bouwer Bartlett acquisition
5) Sun pharmaceuticals and Able Labs

As it is already discussed that pharma sector in one of the most favorite for merger and
acquisitions, so there are many mergers that have happened in this sector but in the study
only 5 have been chosen and the reason is that these five form the representative sample
from the population of all the deals that have happened after 2000 in terms of the amount
of deal.

Aviation industry

Aviation sector in India has been transformed from an over regulated and under managed
sector to a more open, liberal and investment friendly sector since 2004. Entry of low
cost carriers, higher house hold incomes, strong economic growth, increased FDI
inflows, surging tourist inflow, increased cargo movement, sustained business growth
and supporting government policies are the major drivers for the growth of aviation
sector in India. Forecasts by AAI for the next 5 years have projected a sustainable growth
rate of 16% for international and 20% for domestic aviation sector.
The sector also witnessed a significant increase in number of domestic air travel
passengers. Some of the factors that have resulted in higher demand for air transport in
India include the growing middle class and its purchasing power, low airfares offered by
LCA’s, the growth of the tourism industry in India, increasing outbound travel from
India, and the overall economic growth of India. In addition to these factors, the

17
emphasis on modernization of non-metro airports, fleet expansion by airlines, service
expansion by state owned carriers, development of the maintenance, repair and overhaul
(MRO) industry in India, opening up of new international routes by the Indian
government, establishment of new airports and renovation and restructuring of the
existing airports have added to the growth of the industry.

Some of the important factors considered by airlines in taking merger and

acquisition decisions are –

 The coverage area of the other airline. Strategically an airline would like to merge
with or acquire an airline that operates in routes different from its own. This helps
in expanding service coverage and avoiding overlapping of flight schedules.

 The quality of service and brand image of the other airline.

 If the other airline has any partnership with a rival group of airlines.

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From the point of view of customers mergers and acquisitions may lead to increased
airfares. This is because mergers and acquisitions reduce the number of operators thereby
reducing competition and pushing up prices in the aviation industry.
Airline mergers and acquisitions also have important impacts on the employees of the
participating airlines.

CHAPTER 5

RESEARCH METHODOLOGY

The pre-merger and post-merger averages for a set of key financial ratios were computed
for 2 years prior to, and 2 years after, the year of merger completion. The merger
completion year was denoted as year 0. For the years prior to a merger, the operating
ratios of the acquiring firm alone are considered. Post the merger, the operating ratios for
the combined firm are taken. The post-merger performance of the acquiring firms was
compared with the pre-merger performance. The ratios used are the operating profit
margin, net profit margin, debt equity ratio, current ratio, quick ratio, RONW and ROCE.

The ratios are described below:-

1) Operating profit margin: - A ratio used to measure a company's pricing strategy and
operating efficiency.

The formula is Operating profit margin=operating income/ net sales

Operating margin is a measurement of what proportion of a company's revenue is left

over after paying for variable costs of production such as wages, raw materials, etc. A
healthy operating margin is required for a company to be able to pay for its fixed costs,
such as interest on debt. Operating margin gives analysts an idea of how much a
company makes (before interest and taxes) on each dollar of sales. When looking at
operating margin to determine the quality of a company, it is best to look at the change in

19
operating margin over time and to compare the company's yearly or quarterly figures to
those of its competitors. If a company's margin is increasing, it is earning more per dollar
of sales. The higher the margin is, the better it is.

2) Net profit margin: - The ratio of net profits to revenues for a company or business
segment - typically expressed as a percentage – that shows how much of each dollar
earned by the company is translated into profits. Net margins can generally be calculated
as:
Net profit margin = net profit/ revenue

3) RONW- return on net worth = the ratio is after tax income to net worth
It reveals how much profit a company generates with the money that the equity
shareholders have invested.

4) ROCE- return on capital employed- A ratio that indicates the efficiency and
profitability of a company's capital investments.

ROCE= EBIT/ Total Assets- Current liabilities

ROCE should always be higher than the rate at which the company borrows; otherwise
any increase in borrowing will reduce shareholders' earnings.

5) Debt equity ratio - A measure of a company's financial leverage calculated by

dividing its total liabilities by stockholders' equity. It indicates what proportion of equity
and debt the company is using to finance its assets.

Debt equity ratio= total liabilities/ shareholders equity

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A high debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of the
additional interest expense.
If a lot of debt is used to finance increased operations (high debt to equity), the company
could potentially generate more earnings than it would have without this outside
financing. If this were to increase earnings by a greater amount than the debt cost
(interest), then the shareholders benefit as more earnings are being spread among the
same amount of shareholders. However, the cost of this debt financing may outweigh the
return that the company generates on the debt through investment and business activities
and become too much for the company to handle. This can lead to bankruptcy, which
would leave shareholders with nothing.

6) Current ratio: - A liquidity ratio that measures a company's ability to pay short-term
obligations. The Current Ratio formula is:

Current ratio= current assets/ current liabilities

The ratio is mainly used to give an idea of the company's ability to pay back its short-
term liabilities (debt and payables) with its short-term assets (cash, inventory,
receivables). The higher the current ratio, the more capable the company is of paying its
obligations. A ratio under 1 suggests that the company would be unable to pay off its
obligations if they came due at that point. While this shows the company is not in good
financial health, it does not necessarily mean that it will go bankrupt - as there are many
ways to access financing - but it is definitely not a good sign. For most industrial
companies, 1.5 is an acceptable current ratio.

7) Quick Ratio- An indicator of a company's short-term liquidity. The quick ratio

measures a company's ability to meet its short-term obligations with its most liquid
assets. The higher the quick ratio, the better the position of the company.

The quick ratio is calculated as:

21
 Quick ratio= current assets – inventory/ current liabilities

The quick ratio is more conservative than the current ratio, a more well-known liquidity
measure, because it excludes inventory from current assets. Inventory is excluded
because some companies have difficulty turning their inventory into cash. In the event
that short-term obligations need to be paid off immediately, there are situations in which
the current ratio would overestimate a company's short-term financial strength.

The time frame considered for the mergers is after 2000. The details about the mergers
were compiled from several sources like newspapers, magazines, various web sites and
database of Prowess.

The final sample included 13 cases of mergers, in the defined period of study.

The impact of these mergers on the acquiring firms was studied though the examination
of the seven financial ratios discussed above and also, the impact was analyzed industry
wise. As it is known that not all the mergers are successful, so the reason for a success or
a failure of a merger is also checked.

22
 CHAPTER 6

ANALYSIS OF THE MERGERS

BANKING

1) ICICI Bank & Bank of Madura

ICICI bank acquired Bank of Madura in 1991 at a swap ratio of 2:1 i.e., two shares of
ICICI Bank for each share of BoM.

Benefits of the merger

The branch network of the merged entity increased from 97 to 378, including 97
branches in the rural sector. The Net Interest Margin increased from 2.46% to 3.55 %.
The Core fee income of ICICI almost doubled from Rs 87 crores to Rs 171 crores. ICICI
gained an additional 1.2 million customer accounts, besides making an entry into the
small and medium segment. It possessed the largest customer base in the country, thus
enabling the ICICI group to cross-sell different products and services. With a combined
asset base of 16000 crore, ICICI bank became one of the largest private sector banks in
India which gave it the capability of greater resource/ deposit mobilization.

Table 1 - Mean pre-merger and post-merger Ratios for ICICI

Financial ratios Pre Merger Post Merger
Operating profit margin (%) 75.56 83.14
Net profit margin (%) 18.23 22.43
RONW (%) 13.1 -0.04
ROCE (%) 8.71 0.2
Quick Ratio( times) 3.22 1.27

23
Current Ratio(times) 3.31 1.42
Debt Equity ratio(times) 0.92 6.05
This merger although gave ICICI an edge in terms of branch network and geographic
base but as we can see that after the merger all the ratios except the operating profit
margin, net profit margin and debt equity ratio have declined.
As can be seen that the liquidity ratios i.e the current and the quick ratio have declined,
this shows that the company's ability to pay short-term obligations has gone down. Also
the increased debt equity ratio shows that ICICI has had taken more debt in comparison
to the shareholders’ equity which may effect its operations if the cost of debt exceeds its
earnings. The profitability has increased but the RONW & ROCE has decreased showing
that it is not able to generate much profit out of the net worth and the capital employed.

There were some problems in the merger which were for ex. the cultural difference in the
bank, with BoM having a trade-union system. ICICI workers were young and upwardly
mobile, unlike those for BoM. There were technological issues as well; ICICI used Banks
2000 software, which was very different from BoM's ISBS software. With the manual
interpretations and procedures and the lack of awareness of the technology utilisation in
BoM, there were hindrances in the merged entity.
Also, since BoM had comparatively more NPAs than ICICI, the Capital Adequacy Ratio
of the merged entity was lower (from 19% to about 17%).

2) OBC & GTB

OBC acquired GTB in 2004. For Oriental Bank of Commerce there was an apparent
synergy post merger as the weakness of Global Trust Bank had been bad assets and the
strength of OBC lay in recovery. In addition, GTB being a south-based bank gave OBC
the much-needed edge in the region apart from tax relief because of the merger. GTB had
no choice as the merger was forced on it, by an RBI ruling, following its bankruptcy.

Leaving aside the liabilities of GTB, OBC was awarded with a good network of GTB
branches with trained employees, who were using the similar software for the banking
operations.

24
Table 2 - Mean pre-merger and post-merger Ratios for OBC

Financial ratios Pre Merger Post Merger

Operating profit margin (%) 84.97 74.86
Net profit margin (%) 17 11.73
RONW (%) 28.65 11.42
ROCE (%) 19.58 9.58
Quick Ratio( times) 3.15 2.94
Current Ratio(times) 3.22 3.12
Debt Equity ratio(times) 0.41 0.33

The above table shows that the merger has not had any positive impacts as can be seen by
the declining ratios post merger. The profit margins have decreased significantly due to
the increase in sticky assets and lowered net interest margin.

The returns on the shareholders equity and on the total capital employed have also
reduced. Decline in liquidity ratios show that the ability of OBC to pay the short term
liabilities has reduced.

The reason behind all these decrease in the operational performance could be that the
merger resulted in a low CAR for OBC, which was detrimental to solvency. The bank
also had a lower business growth (5% vis-à-vis 15% of peers). A capital adequacy ratio
of less than 11 per cent also constrained dividend declaration, given the applicable RBI
regulations. Also, many of the employees of GTB resigned after the merger due to the
lack of synergy in the operations.

So, this merger was not very beneficial to OBC.

3) HDFC & Centurion Bank of Punjab

25
On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC Bank was
formally approved by Reserve Bank of India to complete the statutory and regulatory
approval process. As per the scheme of amalgamation, shareholders of CBoP received 1
share of HDFC Bank for every 29 shares of CBoP.

Benefits from the merger

The deal created an entity with an asset size of Rs 1, 09,718 crore (7th largest in India),
providing massive scale economies and improved distribution with 1,148 branches and
2,358 ATMs (the largest in terms of branches in the private sector). CBoP's strong SME
relationships complemented HDFC Bank's bias towards high-rated corporate entities.

Table 3 - Mean pre-merger and post-merger Ratios for HDFC

Financial ratios Pre Merger Post Merger
Operating profit margin (%) 95.93 94.09
Net profit margin (%) 27.36 20.81
RONW (%) 27.84 18.2
ROCE (%) 3.58 2.74
Quick Ratio( times) 0.25 0.33
Current Ratio(times) 0.29 0.36
Debt Equity ratio(times) 5.79 6.38

As we can see in the above table operating profit margin, net profit margin, RONW,
ROCE have declined post merger but there is an increase in the quick, current and debt
equity ratio which shows that HDFC has expanded its debt base compared to equity and
it has become more able to meet its short term obligations. But according to the data,
HDFC, after the merger is not able to get much returns on its net worth and the capital
employed.

But, since the merger is a recent one so nothing much could be said about its success or
failure because a merger takes time to show its effects.
4) IOB and Bharat Overseas Bank
Bharat Overseas Bank (BhOB) was a private bank based in Chennai, India. In 2007 it
merged with Indian Overseas Bank, which took over all the bank's employees, assets, and
deposits. With the merger of BhOB, IOB's balance sheet stood augmented by around 6%

26
along with an addition of 103 branches, six extension counters, one overseas branch in
Bangkok and 23 ATMs.

Table 4 - Mean pre-merger and post-merger Ratios for IOB

Financial ratios Pre Merger Post Merger
Operating profit margin (%) 73.55 77.74
Net profit margin (%) 15 11.68
RONW (%) 26.8 20.93
ROCE (%) 13.8 10.66
Quick Ratio( times) 1.99 1.72
Current Ratio(times) 2.1 1.83
Debt Equity ratio(times) 1.08 1.1

All the ratios except the operating profit margin have declined showing that the merger
was not very beneficial to IOB.
There has been an increase in the debt as compared to equity. The liquidity ratios have
declined. The net profit margin has declined and the reason may be that due to the
increase in debt there has been more payment of interest and taxes leading to a lower
PAT. And reduction in PAT may also be a reason for a lowered RONW.
The ROCE has also declined.

5) SBI & State Bank of Saurashtra

The State Bank of Saurashtra, one of the associate banks of SBI merged with the parent
bank in 2008 and it was a move to strengthen SBI both in terms of internal functioning
and broadening customer services. The effect of merger is not glaringly evident since it
has been only a year while SBS merged with SBI.

Table 5 - Mean pre-merger and post-merger Ratios for SBI

Financial ratios Pre Merger Post Merger
Operating profit margin (%) 73.66 75.59
Net profit margin (%) 11.51 11.92
RONW (%) 16.72 16.95
ROCE (%) 6.71 7.1
Quick Ratio( times) 1.5 1.82
Current Ratio(times) 1.6 1.87
Debt Equity ratio(times) 1.49 1.45

27
As can be seen from the table all the ratios have increased whether it be the profitability
or liquidity. The RONW & ROCE has also increased showing that SBI is able to have an
increased PAT which is leading to an increase in these ratios i.e the returns on the net
worth and capital employed have increased.

Although the effect of merger of State Bank of Saurashtra (SBS) with State Bank of
India (SBI) has not shown a very significant impact may be due to the shorter period of
time since it has been merged or due to its high NPA ratio, but still it has prompted the
government for further mergers. It is soon going to start the procedure of the merger of
the other associate banks. The mergers would help SBI consolidate its position as the
country's biggest bank and widen the gap with its nearest rival ICICI Bank. The mergers
will also enable State Bank to scale up its business in terms of footprint, manpower and
resources.

PHARMACEUTICAL INDUSTRY

1) Dr Reddy’s laboratories & Betapharm

In February 2006, Dr. Reddy's Laboratories Limited (DRL), a leading Indian
pharmaceutical company, acquired the fourth largest generic pharmaceutical company in
Germany, betapharm Arzneimittel GmbH (betapharm) from the 3i Group PLC (3i) for
US$570 million (€480 million).

Table 6 - Mean pre-merger and post-merger Ratios for Dr Reddy laboratories

28
RATIOS PRE MERGER POST MERGER
Operating profit margin 12.79 20.1
(%)
Net profit margin (%) 6.41 12.33
ROCE (%) 4.88 10.44
RONW (%) 5.21 10.64
Debt Equity Ratio(times) 0.275 0.11
Current Ratio(times) 2.15 1.6
Quick Ratio(times) 1.5 0.9

All the ratios except the debt equity, current and quick ratio have increased. This shows
that there is a decline in the liquidity of the company but the profits have increased.
The returns have also increased on net worth and the capital employed and the reason
may be an increased PAT. The debt equity has declined showing that Dr Reddy has
financed its assets more through equity than through debt after the merger.
This acquisition gave DRL access to the German generic drugs market, the second-
largest generic drugs market in the world, as well as help DRL leverage the strong
marketing and distribution channels of betapharm in Germany. betapharm benefited from
the addition of more products to its portfolio and utilize DRL's low cost manufacturing
and product development infrastructure.
Thus overall, in a nutshell it can be said that this merger was a success for Dr Reddy
Laboratories.
2) Jubilant Organosys and Draxis
Jubilant acquired Draxis for US$ 253 million in 2008. This acquisition is the largest by
an Indian pharmaceutical company in Canada, through this Jubilant got entry into the
attractive radiopharmaceutical market. It enhanced Jubilant’s position in contract
manufacturing of sterile products. There are Current and pipeline contracts in CMO for
sterile and non-sterile products estimated at over US$200 million for Jubilant.

Table 7 - Mean pre-merger and post-merger Ratios for Jubilant

RATIOS PRE MERGER POST MERGER
Operating profit margin 24.41 17.42
(%)
Net profit margin (%) 16.72 9.72

29
ROCE (%) 14.4 6.73
RONW (%) 33.37 17.09
Debt Equity Ratio(times) 1.21 1.89
Current Ratio(times) 1.86 1.44
Quick Ratio(times) 0.92 0.85

The above table at present shows that the performance of jubilant has declined in terms
of liquidity as these ratios have declined; the profit margins have also declined.
Also the RONW & ROCE have declined and the reason can be the decrease in the profits
coming to Jubilant. Following the acquisition, it has also become more leveraged as can
be seen through its increased debt equity ratio.

But then as this is a very recent acquisition in 2008 and the merger benefits are seen in a
longer period of time, so it may prove fruitful in the longer run. Also, according to a
study, the growth outlook for Jubilant is robust for the next five years following this
acquisition.

3) Nicholas Piramal and Pfizer’s Morpeth Unit

Nicholas Piramal India Ltd had completed the acquisition process of Pfizer Inc at
Morpeth, UK, on an asset purchase basis in 2006. The deal includes a supply agreement
till November 2011 totaling potential revenues of above US$350 million, site fixed assets
and property and certain net current assets. The Morpeth unit is one of Pfizer's global,
integrated facilities with end-to-end production and supply chain capabilities that cover
Active Pharmaceutical Ingredients, finished dosage, packaging and distribution. The
purchase by the company's subsidiary, NPIL Pharmaceuticals, expanded its global
footprint, particularly in the finished Active Pharmaceutical Ingredient, contained
finished dosage, packaging and supply chain areas.

Table 8 - Mean pre-merger and post-merger Ratios for Nicolas Piramal

RATIOS PRE MERGER POST MERGER

30
Operating profit margin 31.45 32.23
(%)
Net profit margin (%) 9.38 10.6
ROCE (%) 10.99 22.4
RONW (%) 28.25 27.25
Debt Equity Ratio(times) 1.37 0.85
Current Ratio(times) 1.04 1.78
Quick Ratio(times) 0.54 1

The operating and the net profit margin have increased which means that Nicolas is able
to make more profits per dollar of revenue earned. The returns on the net worth have also
increased. The liquidity ratios have also improved after the merger showing that it is
becoming healthier in terms of paying its short term obligations and reduced debt equity
ratio shows that it is using its equity more for the financing purpose.
With the acquisition of this facility, NPIL has become the biggest supplier (in terms of
spend) within Pfizer’s Global Custom Manufacturing network with supplies to over 100
global markets. Piramal secured initial 6 contracts within 6 months of starting operations
at Morpeth. So we can say that this has proved to be a successful merger till now.
4) Glenmark & Bouwer Bartlett
GLENMARK Pharmaceuticals acquired Bouwer Bartlett Pvt Ltd, a South African sales
and marketing company in 2005. The acquisition was through wholly owned subsidiary,
Glenmark Pharmaceuticals SA, and marks the company's entry into the South African
market, one of the largest and fastest growing pharmaceutical markets in Africa.

Table 9 - Mean pre-merger and post-merger Ratios for Glenmark

RATIOS PRE MERGER POST MERGER

Operating profit margin 13 32.77
(%)
Net profit margin (%) 5.9 20.98
ROCE (%) 8.79 22.95
RONW (%) 11.5 39.02
Debt Equity Ratio(times) 9.3 1.2
Current Ratio(times) 6.98 1.4

31
Quick Ratio(times) 10.08 0.8

The profit margins have jumped to a very large numbers, also the ROCE and RONW has
increased significantly showing that Glenmark is making more profits after the merger.
It is becoming less leveraged but the liquidity ratios have reduced very much, which
means the company’s financial health has deteriorated and especially the quick ratio has
decreased drastically showing that the company can face problems in meeting its short
term obligations if they are to be paid instantly.
But seeing the increased profits and returns on net worth and capital employed , we can
say that this merger was a success.

5) Sun pharmaceuticals and Able Labs

Sun Pharma successfully completed the purchase of the dosage form manufacturing
operations of Able Labs in the U.S. for $23.15 million in 2005. The acquisition was done
by Sun's wholly owned subsidiary company, Sun Pharmaceutical Inc., Michigan.

Table 10 - Mean pre-merger and post-merger Ratios for Sun pharmaceuticals

RATIOS PRE MERGER POST MERGER
Operating profit margin 28.96 30.7
(%)
Net profit margin (%) 23.54 27.88
ROCE (%) 22.29 22.22
RONW (%) 31.8 30.95
Debt Equity Ratio(times) 1 0.23
Current Ratio(times) 3.44 3.45
Quick Ratio(times) 2.62 2.72

The liquidity ratios, operating and net profit margin has increased but the debt equity
ratio has declined showing that sun pharma is financing its assets through equity more as

32
compared to debt. Also there is not much difference in the RONW & ROCE after the
merger with the able labs.

In all, this was a beneficial merger to sun pharma because With the Able lab assets, it
added capacity for controlled substance manufacturing which would have cost about
USD 45 million if it had began from scratch, not counting the time requirement, which
has helped it to generate more profits.

AVIATION INDUSTRY

1) Jet Airways & Air Sahara

Jet Airways acquired Air Sahara in 2007 for Rs 1,450 crore. Jet named the airlines as
Jetlite. Jet Airways has been the pioneer in providing quality service to air passengers.
And after the merger better quality service at a much lesser rate was expected. The
reason being the thinking that the capital expenditure and the operational expenditure
would be reduced with the acquisition, so, the frequent fliers also started expecting the
rates to come down comparatively with quality service.

Table 11 - Mean pre-merger and post-merger Ratios for Jet Airways

Financial ratios Pre merger Post merger
Operating profit margin (%) 12.79 9.42
Net profit margin (%) 0.37 -3.06
RONW (%) -9.2 -45.65
ROCE (%) -3.01 -11.55
Quick Ratio (%) 0.92 0.78
Current Ratio (%) 1.13 0.99
Debt Equity ratio (%) 2.95 12.65

33
Seeing the above ratios it could be said that the profits have come down drastically. Jet
has become a more leveraged company, the liquidity ratios have also come down
showing the decline in the financial health of the company. Also, the ROCE & RONW
have become more negative after the merger.
One of the reasons for the Jet Sahara fallout is that Jet Airways enthusiastically
overvalued Air Sahara, and later wanted a discount on the original price (20 to 25
percent). This is typically a case of overvaluing a company whose business model was
not robust.

2) Kingfisher Airlines and Air Deccan

Kingfisher acquired 26% stake in Air Deccan in 2007. In their coming together, the two
players are a study in contrast. Kingfisher is known to lavish its customers with the best
of cuisine and comfort on board while Deccan would want its passengers to even pay for
water. Deccan is a no-frills airline while Kingfisher would like to be known for luxury.
UB spent Rs 550 crore for this stake, at a price of Rs 155 per share, roughly valuing
Deccan, which had the second largest market share (after Jet but before Indian Airlines)
at Rs 2,200 crore. In return, UB got a preferential allotment of equity shares.

Table 12 - Mean pre-merger and post-merger Ratios for Kingfisher Airlines

Financial ratios Pre Merger Post Merger
Operating profit margin (%) -20.73 -17.56
Net profit margin (%) -25.19 -25.41
RONW (%) -335.16 185.39
ROCE (%) -93.76 -142.71
Quick Ratio(times) 1.02 0.17
Current Ratio(times) 1.2 0.37
Debt Equity ratio(times) 2.58 -2.6

As can be seen in the above table the losses have been reduced and the liquidity of
kingfisher has also declined deteriorating the health of Kingfisher.
The negative debt equity ratio post merger shows that kingfisher is not using leverage
and using the shareholder’s equity to finance its assets.

34
The merger benefits to Kingfisher is that it did not need to invest more in infrastructure
or in spare planes, thereby reducing costs and increasing profitability.
� A formal understanding to end undercutting
� Better bargaining power with the government for seeking reduction in fuel prices and
a cut in airport taxes.
� The combined share of the two carriers increased to 33% of the domestic market
marginally ahead of Jet Airways (22%) and Air Sahara (9%) combine. (As per data of
April 07).
3) Air India and Indian Airlines
The Government of India, on 1 March 2007, approved the merger of Air India and Indian
Airlines. Consequent to the above, a new Company viz National Aviation Company of
India Limited (NACIL) was incorporated under the Companies Act, 1956 on 30 March
2007.

Table 13 - Mean pre-merger and post-merger Ratios for Air India

Financial ratios Pre Merger Post Merger
Operating profit margin (%) 2.75 0.17
Net profit margin (%) -4.65 -5.1
RONW (%) -1135.27 -1195.23
ROCE (%) -101.65 -103.5
Quick Ratio(times) 0.21 0.24
Current Ratio(times) 0.39 0.45
Debt Equity ratio(times) -70.03 -72.3

The ratios above tell the failure of the merger between AI & IA. The profit margins have
decreased; the RONW & ROCE has declined. But the liquidity ratios have increased but
then also they are far below than the standard accepted ratio of 1.5:1, showing a very
poor financial health of the company.

The reasons for the failure of the merger are many like the decision to merge Air India &
Indian Airlines was taken in haste, without required homework & consultations. As a
result the entire process has been unduly delayed. It has given rise to many problems
concerning financial, administrative & operational."

35
Two major objectives of merger 'economies of scale' & 'increased leverage' couldn't be
achieved without proper synergies. The Air India fleet consists of Boeing aircrafts being
normally used for long distance international destinations, the Indian Airlines fleet
consists of Airbus aircrafts which are used for the domestic destinations. Operational
crews, engineers &technicians cannot be cross utilized on another."
The entire aircraft acquisition program lacked transparency. "There has been a question
mark on the logic behind purchasing a large number of aircrafts when the aviation
industry was under huge losses due to global economic recession. Reasons for going
ahead with purchases by the Ministry despite Air India & Indian Airlines not having the
capacity to support it, are still not clear. There was no budgetary provision for this
purchased & Rs 50,000 crores had to be raised through loans only. The entire aircraft
acquisition program lacked required transparency."

Overall, this merger is a big failure.

COMPARATIVE ANALYSIS OF THE IMPACT ACROSS THE THREE

SECTORS
I) Banking Industry- Average of all the companies

Table 14 - Mean pre-merger and post-merger Ratios for the merging firms
Financial ratios Pre Merger Post Merger
Operating profit margin (%) 80.73 81.08
Net profit margin (%) 17.82 15.71
RONW (%) 22.62 13.49
ROCE (%) 10.47 6.01
Quick Ratio(times) 2.03 1.6
Current Ratio(times) 2.1 1.72
Debt Equity ratio(times) 1.9 3.06

Over all in the banking sector, the operating profit margin has increased but the net profit
margin has declined. As can be seen that the debt equity ratio has increased significantly
which means that in the banking sector, the banks have become more leveraged i.e they
are using more debt than the equity for financing purpose and this in turn may have been

36
the reason of volatile earnings of the banks due to additional interest expense which in
turn may be the reason for a lowered net profit margin after the merger.
The liquidity ratios have declined showing that the banks performance in terms of
meeting short term obligations have reduced. The RONW & ROCE have also declined
and the reason may be again the reduction in the returns by the banks.
These findings suggested that for this industry, mergers had improved operational cost
efficiencies and increased operating profitability margins, but the increased efficiencies
could not be translated into higher net profit, due to increase in debt levels consequent to
the merger.

II) Pharmaceutical Industry- Average of all the companies

Table 15 - Mean pre-merger and post-merger Ratios for merging firms

RATIOS PRE MERGER POST MERGER
Operating profit margin 22.12 24.24
(%)
Net profit margin (%) 12.39 16.3
ROCE (%) 12.27 16.95
RONW (%) 22.04 24.99
Debt Equity Ratio(times) 2.63 0.86
Current Ratio(times) 3.09 1.94
Quick Ratio(times) 3.13 1.25

As we can see from the above table the operating profit margin, net profit margin, ROCE
& RONW has increased. The debt equity ratio has declined showing that the companies
in the pharma sector are using more equity rather than debt for financing purposes. But
the liquidity ratios have reduced which means that in this sector after the merger, the
companies’ financial health has effected in terms of meeting its short term liabilities.
For this industry, the consolidation through mergers had helped increase the scale of
operations and asset size significantly affecting the profit margins and increase in return
on assets and investments.
Thus the mergers in case of the pharma industry can be said to a success as these have
helped the companies to generate more profits and returns.

37
 III) Aviation Industry- Average of all the companies

Table 16 - Mean pre-merger and post-merger Ratios for merging firms

RATIOS PRE MERGER POST MERGER
Operating profit -1.73 -2.65
margin(%)
Net profit margin (%) -9.82 -11.19
RONW (%) -493.21 -318.49
ROCE (%) -66.14 -85.92
Quick Ratio (times) 0.71 0.39
Current Ratio (times) 0.9 0.6
Debt Equity Ratio(times) -21.5 -20.75

The financial ratios for the aviation industry have deteriorated after the merger. The
profits have declined, the ROCE has reduced. The liquidity ratios have also gone very
low, even these are not up to the accepted level of 1.5:1 showing that the financial
performance of the companies in this industry has effected very much.
The debt equity ratio has increased which may have resulted in more interest expenses
leading to a lower net profit margin.
Thus we can say that the mergers have not proved successful for the acquiring firms in
the aviation industry.

CHAPTER 7

38
CONCLUSION
The objective of M&As is wealth maximization of shareholders by seeking gains in
terms of synergy, economies of scale, better financial and marketing advantages,
diversification and reduced earnings volatility, improved inventory management,
increase in domestic market share, to capture fast growing international markets abroad,
to improve operating profit margins and efficiencies and to develop new product mixes.
But it is seen that many mergers do not give the required results.

The main objective of this study was to analyze the impact after the merger on the
acquiring firms in the three sectors which are banking, pharmaceutical and aviation in
terms of the seven financial ratios and also to study whether the impact varies across the
different industries or not. After doing all the analysis i.e. examining all the ratios pre
and post merger of each of the 13 cases it can be said that for some companies the merger
is a success but for some it has proven to be a failure. Thus all the cases have been
further analyzed to find the reasons for the success or the failure of a merger.
Also it was found that these ratios have differential impact on different industries. The
after effects of the mergers on the acquiring firms is best for the pharmaceutical industry
followed by the banking industry but for the aviation industry it has not proven very
effective till now. As the mergers in the aviation industry are recent ones in 2007, so
these may prove fruitful to be in the longer span of time.
Thus we can say that many mergers even after so many scrutiny and valuations fail,
sometimes due to lack of synergy or due to improper valuation or due to poor cultural fit
etc. so there is a need to understand all the facets of the merger before entering into it.

CHAPTER 8

39
SUGGESTIONS
"70 percent of mergers fail to achieve their anticipated value."
-Weekly Corporate Growth Report

"Most [mergers] fail to add shareholder value-indeed, post-merger, two-thirds of the

newly formed companies perform well below the industry average."
-Harvard Management Update

The above statements are clearly stating that the firms should not go into a merger in
haste; rather it should carefully analyze it and then enter into it.
Below are mentioned some steps which the firms should consider before entering into a
merger:-
1) Meticulous pre-merger planning including conducting proper due diligence,
effective communication during the integration, committed and competent
leadership, speed with which the integration plan is integrated are all very
important for a successful merger.
2) While making the merger deals, it is necessary not only to make analysis of the
financial aspects of the acquiring firm but also the cultural and people issues of
both the firms for proper post-acquisition integration.
3) There is a need to note that merger or large size is just a facilitator, but no
guarantee for improved profitability on a sustained basis. Hence, the thrust should
be on improving risk management capabilities, corporate governance and
strategic business planning.
4) Make use of the best practices of both the acquirer and the target firms to make
most out of the merger.

CHAPTER 9

40
LIMITATIONS
• Only three sectors were taken and the small sample size of mergers in each
industry sector might bring in the question of statistical validity of the results.
• The data was taken for two years before and two years after the merger but this
was not available for the mergers happened in 2008, so for them only one year
data was taken.
• The study has also not used any control groups for comparison (industry average
or firms with similar characteristics).
• Also, these sectors were analyzed on the basis of common seven financial ratios,
there are some ratios which are specific to the industry like the CASA, NII, and
NIM for the banking industry but these have not been discussed to maintain the
common platform of ratios among the industries.

REFERENCES AND BIBLIOGRAPHY

1) investopedia.com

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2) http://finance.mapsofworld.com/merger-acquisition/india.html
3) http://www.economywatch.com/mergers-acquisitions/india.html
4) http://www.livemint.com
5) www.icai.org/resource_file/9846927-941.pdf
6) http://www.aimaind.org
7) http://ibef.org/download%5CNicholas_Piramal.pdf
8) http://www.thehindubusinessline.com
9) http://www.hindu.com
10) http://www.sunpharma.com/admin/news/upload/274.pdf
11) http://profit.ndtv.com
12) http://beginnersinvest.about.com

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