Merger and Acquisition

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IMPACT OF MERGERS AND AMALGAMATION ON THE PERFORMANCE OF INDIAN COMPANIES By: Mahesh Kumar Tambi1

ABSTRACT:This paper is an attempt to evaluate the impact of Mergers on the performance of the companies. Theoretically it is assumed that Mergers improves the performance of the company due to Increased market power, Synergy impact and various other qualitative and quantitative factors. Although the various studies done in the past showed totally opposite results. These studies were done mostly in the US and other European countries. I evaluate the impact of Mergers on Indian companies through a database of 40 Companies selected from CMIE’s PROWESS, using paired t-test for mean difference for four parameters; Total performance improvement, Economies of scale, Operating Synergy and Financial Synergy. My study shows that Indian companies are no different than the companies in other part of the world and mergers were failed to contribute positively in the performance improvement.

KEY WORDS:Mergers, Amalgamation, Acquisition, Horizontal Mergers, Vertical Mergers, Backward Integration, Foreword Integration, Circular Mergers, Conglomerate Mergers, Congeneric Mergers,

1. INTRODUCTION:M&A are very important tools of corporate growth. A firm can achieve growth in several ways. It can grow internally or externally Internal Growth can be achieved if a firm expands its existing activities by upscaling capacities or establishing new firm with fresh investments in existing product markets. It can grow internally by setting its own units in to new market or new product. But if a firm wants to grow internally it can face certain problems like the size of the existing market may be limited or the exisiting product may not have growth potential in future or there may be government restriction on capacity enhancement. Also

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Author is Research Scholar at IIMT, Hyderabad-India and can be contacted at mkt_jpr@rediffmail.com

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firm may not have specialized knowledge to enter in to new product/ market and above all it takes a longer period to establish own units and yield positive return.

One alternative way to achieve growth is resort to external arrangements like Mergers and Acquisitions, Takeover or Joint Ventures. External alternatives of corporate growth have certain advantages. In case of diversified mergers firm can use resources and infrastructure that are already there in place. While in case of congeneric mergers it can avoid duplication of various activities and thus can achieve operating and financial efficiency. In addition, economic circumstances of industries may also favour M&As. Horizontal mergers in industries with excess capacity may be used to close the plants to bring capacities and sales into better balance. Firms in fragmented industries may become more effective when joined together. (Weston, pp123)

Mergers and amalgamations can be further classified based upon the objective profile of such arrangements as Horizontal, Vertical, Circular and Conglomerate mergers. A horizontal merger is the combinations of two competing firms belongs to the same industry and are at the same stage of business cycle. These mergers are aimed at achieving Economies of Scale in production by eliminating duplication of facilities and operations and broadening the product line, reducing investment in working capital, eliminating competition through product concentration, reducing advertising costs, increasing market segments and exercising better control over the market. It is also an indirect route to achieving technical economies of large scale. For example merger of Tata Industrial Finance Ltd. With Tata Finance Ltd., GEC with EEC and TOMCO with HLL.

A vertical merger is one where companies at different product or business life cycle combines. It can be Backward Integration where company merges its suppliers or Forward Integration where it merges its customers. The basic motive of these sorts of merges is to reduce...
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