Impact of Mergers and Acquisitions on Accounting-based Performance of Acquiring Firms in India

Abstract

Purpose: Merger is a corporate restructuring strategy that affects the performance of the company on many parameters. This study aims to examine the growth of M&A transactions in India in last two decades and the impact of merger on the accounting-based performance of the acquiring company.

Methodology: The data of 68 mergers during the year 2007-08 - 2011-12 is analysed to capture the said impact. The accounting-based performance is measured on seven variables divided into three categories- profitability, liquidity and solvency. The accounting-based performance five years’ pre-merger is compared with five years’ post-merger. The similar comparison is done for 3 years pre and post-merger. Average of all the 7 parameters pre and post-merger are compared arithmetically and then using paired sample ‘t’test. The firms were also divided into manufacturing and service sector firms to see the impact of merger on different categories of firms.

Findings: We found that merger has significantly impacted profitability and liquidity of the acquiring firm positively in five years but had no significant impact on solvency position of the company. Service sector firms have outperformed manufacturing firms and started showing significant improvement in accounting variables in medium term.

Originality: We assure the originality of the work done in this article.

Keywords

Merger accounting performance profitability liquidity solvency

Introduction

Mergers and acquisitions (M&A) is a widely used corporate restructuring strategy by the firms across the globe. Commensurate with the rising trends of M&A are a number of studies investigating the merger phenomenon (Boateng, Naraidoo, & Uddin, 2011). Reorganizations, in general, and M&A, in particular, are critical to enterprise development (Gao & Kling, 2008). While we witness increasing number of mergers happening around us, at the same time, the success of M&A has always been under discussion. Like other business practices, corporate reorganizations through M&A are, to a large extent, environmentally bound (Cooke, 1991). When a merger occurs, the market structure changes and so do optimal environmental policies. This flexibility in policy provides the incentive to merge even if there are no efficiency gains (Fikru & Lahiri, 2013). There are various strategic and financial objectives that influence merger (Kalra, Gupta, & Bagga, 2013). The success of M&A can be judged on the basis of merger motives and their realization in future. Many a times, the motive of merger is expansion across geographical locations. The other motive could be diversification or acquiring a customer or a supplier. With consolidation requiring horizontal combinations, a merger will reduce competition measured by a number of firms in the industry (Ladha, 2017). Merger motive could be any, but there is a need to measure the impact of merger on the acquiring firm. This impact would tell us about the success or failure of the merger. Acquiring a firm is not an overnight process. It is a herculean task that involves huge cost in terms of time, money and energy. Since merger involves substantial cost, its success or failure assumes vital importance for the management of the firm. As per the literature available, measuring the accounting performance of the acquiring firm helps in analyzing the impact of merger. Globally, researchers have explored the area widely and have come out with different conclusions on this. The success or failure of M&A is a matter of considerable debate among the practitioner and academic community (Bhaskar, Bhal, & Mishra, 2012).

Indian industries are facing intense competition due to increased globalization in the last decade. Firms are adopting various strategies to mark their place in this competitive world. M&A is a strategy to regain or retain or increase the market share of the firm within the industry. M&A process starts with the due diligence process that has to be based on multiple levels of analysis for identifying risks and opportunities of markets, industry characteristics and strength of the target’s competitive positioning (Caiazza & Volpe, 2015). M&A is an inorganic way of growing the business. Organic growth as a means to growth is time bound and it is a very long journey, whereas inorganic growth is a quick fix to reap growth (Bi, 2016). Although the purpose of every merger is to enhance the accounting performance, every merger is not able to achieve its stated objectives. In the pursuit of new markets or to acquire critical resources, managers must manage the overall risk profile of firm investments and protect shareholder capital (Dell’Acqua, Etro, Piva, & Teti, 2018). The reason of an unsuccessful merger could be any, namely, wrong choice of target, high cost of acquisition, forecasts not being achievable, cultural differences and so on. Whatever the reason be, but the impact would be reflected in the accounting performance after merger. Similarly, if the merger motives are achieved, then the impact would be seen in the financial statements. A wide variety of literature is available on the study of accounting-based performance of the acquirer after the merger. Some of the studies concluded that the merger has proved to be successful as various accounting measures have shown significant improvement. On the other hand, some studies have found that mergers have not been successful, and there has been a significant decline in the accounting performance of the firm after merger. Researchers have different opinions on the impact of merger on the accounting performance of the firm. Not only the results are contradicting, but the measures used to study the performance of merger also vary extensively. This study proposes to add to the existing knowledge in this area with focus on mergers in the Indian context.

Accounting performance is an important aspect to be examined to evaluate the success of a corporate restructuring plan. External investors place more value on accounting disclosure by well-governed firms because firms with superior governance standards are less likely to intentionally disclose misleading information (Song, 2015). Reported earnings based on accounting standards are the most popular measure of a firm’s economic performance widely used by market participants and stakeholders for making economic decisions (Lee & Choi, 2016). From the perspective of information economics, accounting and financial reporting play a vital role in an efficient capital market (Chen, Chen, & Su, 2001). Managerial behaviour is also influenced considerably by the effects of accounting (Li, Wu, Zhang, & Chand, 2018). Accounting information helps to reduce information asymmetry among contracting parties and plays a crucial role in capital markets (Hu, Li, & Zhang, 2014).

The objective of our study is to analyze the impact of merger on the accounting performance of the acquiring firm. Merger is a corporate strategy which is bound to have a significant impact on the accounting performance of the acquiring firm. The success or failure of the merger would depend on the kind of change it has brought in the accounting performance of the acquiring firm. While merger is a widely used strategy, it is pertinent to know its impact on the accounting performance so that the firms operating in the same industry can have some evidence to look up to if they plan to adopt similar growth strategies. Our study analyzes the pre- and post-merger performance on seven parameters across 1, 3 and 5 years which clearly gives the impact of merger in 1, 3 and 5 years.

We have analyzed the accounting performance of 68 Indian firms pre- and post-merger. The period of study is from 2007–2008 to 2011–2012. Significant accounting parameters have been considered to measure the accounting performance during pre- and post-merger periods. The comparison is done for three different periods to study the time frame after which the impact of merger can be seen in the accounting performance of the firms. The words ‘merger’ and ‘acquisition’ are interchangeably used in our study. Also, the sample firms are categorized into manufacturing and service sector firms to see the impact of merger on the profitability position.

As per our analysis, acquiring firms are able to reap the benefits of merger. Profitability of the acquiring firms significantly increases in 5 years (long run) after merger. Also, liquidity position shows a significant increase. Similar positive changes are not seen in solvency position. This may be due to the fact that acquiring a firm is a huge investment which impacts the capital structure significantly. It will take more than 5 years to bring significant changes in the capital structure after the merger. It is also found that acquiring firms in service industry perform better than the manufacturing firms.

The rest of the article is organized as follows: the second section describes the literature review. The third section describes the data, research design and hypothesis. The fourth section reports the main findings and the fifth section finally concludes the article.

Literature Review

India has seen a drastic increase in corporate restructuring deals in the post-liberalization period since the 1990s. This has been due to increase in competition from foreign players with the opening up of economy, reduced bureaucratic intervention in the process leading to ease of bringing changes in corporate control, technology advancement making processes transparent and reducing transaction costs all along the business cycle. M&A has been the most popular form of corporate restructuring. There are various reasons behind firms going for M&A. The main corporate goals are to achieve more market power, have access to pioneering competencies, thus mitigating the risks related with the development of a new product or service, maximizing competence by way of economies of scale and scope and finally in some cases, reshaping a firm’s competitive scope (Hitt, Ireland, & Hoskisson, 2006).

Literature on M&A is dominated by pre- and post-merger performance of the merging entities. Although many in number, these studies are not conclusive in nature because the results are contradicting. Some of the studies have found that M&A is an effective tool of inorganic growth and also it leads to increase in shareholder’s wealth. However, others found that M&A deteriorates the shareholder’s wealth and leads to decline in the operating performance of the firm. The M&A literature is not only full of contradicting results, but measures of performance also vary to a large extent among these studies.

Both accounting-based and market-based measures have been used extensively in the studies conducted so far. Market-based measures intuitively seem to be better indicators of firm’s performance, but top executives trust the accounting measures more for long-term post-merger performance. Accounting rates of return are widely used in empirical studies to assess post-merger performance (Stanton, 1987). Kukalis (2007) conducted a survey, where CEOs, in a sample of the 400 largest M&A transactions between 1995 and 2000, were asked which type of measure in their opinion best gauges the post-merger performance. The majority of surveyed CEOs indicated that accounting-based measures are a better indicator of post-merger performance and are preferable to using market-based measures (share price). The role of accounting numbers in firm valuation is of fundamental interest to analysts, investors and researchers alike (Habib & Azim, 2008). Earnings is a key metric used to evaluate firm and managerial performance (Cheng, Ferris, Hsieh, & Su, 2005). Fundamental analysis of the company with the help of ratio analysis and comparative statement analysis is there to see the potential and capitalized synergy in cases of M&As in the long run (Kumar & Bansal, 2008). Due to the wide acceptability of the accounting performance measures, we have analyzed the success of merger based on its impact on accounting performance. The literature review on post-merger performance of the acquiring entities has been divided into two parts. First, the studies which found that merger has a positive impact on the performance of the acquiring entity. Second, the studies that have concluded that merger has a negative impact on the post-merger performance of the acquiring entity.

Positive Impact on Post-acquisition Performance

There are lot of studies available in the literature which have seen the positive impact of M&A on the accounting performance of the acquiring firm. Some of the studies have differentiated between related and unrelated acquisitions. These studies conclude that acquisitions by a related acquirer are very likely to lead to acquiring firms’ managers recognizing and reducing inefficiencies in the target due to their experience of managing similar lines of businesses (Hambrick & Canella, 1993; Walsh, 1988). Our study does not make any distinction of this kind. In today’s competitive world, firms go for unrelated acquisition for adding product line or for diversification and so on which can be analyzed on the same grounds as of the related mergers.

Banking sector is highly explored by researchers for the impact of merger on the financial performance of the acquiring bank. This is probably because banking sector sees a large number of M&A transactions. Cornett and Tehranian (1992) explored the post-acquisition performance of large mergers in banking sector and found that post-merger banks showed better performance due to enhancement in the ability to attract loans and deposits and employee productivity. Vennet (1996) studied a sample of 494 takeover over the period of 1988–1993 and observed that mergers improved the performance of the merged bank. He also found improvement in cost efficiency in cross-border acquisitions. Fraser and Zhang (2009) studied a sample of mergers between 1980 and 2001 from non-US banking organizations. They found that cross-border acquisitions produce improved target performance. M&A provides path of quick progress for the banks (Trivedi, 2013). Banks avail the benefits of economies of scale, scope, size and improved bottom-lines and top-lines. Trivedi (2013) concluded that M&A activity provides a lot of qualitative synergistic benefits to the banks. Banking as a sector can have different merger motives like geographical expansion and so on and is under banking regulations of a country which are specific to banking sector. Our study analyzes non-banking acquisitions and is open for all other sectors.

There is a plethora of studies which have examined the impact of merger of financial performance of the acquiring firm. The period of study and area of study of course are varied. Healy, Palepu, and Ruback (1992) examined the post-merger cash flow performance of acquiring firms. Their sample included 50 largest US mergers between 1979 and 1984. Their study found that the merged entity shows enormous improvements in asset productivity leading to higher operating cash flow returns. The improvements were found strong especially for the firms in overlapping business. Healy et al. (1997) divided mergers into two types, namely strategic and financial, and found that strategic takeovers generated substantial gains for acquirers. Financial transactions broke even at best. Capron (1999) observed the data from 253 acquisitions made by the European and the US firms in manufacturing industries from 1988 to 1992. The results from this study show that both asset divestiture and resource redeployment can contribute to acquisition performance. Heron and Lie (2002) studied a large sample of acquisitions between 1985 and 1997 and found that post acquisitions, acquiring firms exhibit operating performance levels higher than their respective industry counterparts and significantly outperform control firms with similar pre-event operating performance. Karim, Sarkar, and Zhang (2016) found that the acquiring firms do manage earnings surrounding mergers when the method of payment is acquirer’s stock, but there is no such evidence when the method of payment is cash. Rahman and Limmack (2004) examined the operating cash flows of the merged firms on the Malaysian data between 1988 and 1992. They concluded that, in the long run, operating cash flows improved after the takeover, and as a result, shareholder’s wealth also increased after the merger. Like the studies of Rahman and Limmack (2004), some studies have bifurcated the post-merger performance in the long run and short run. The majority of these kinds of studies reveal that in the long run, the performance of the merged entity has increased as compared to the short run. Kumar and Rajib (2007) studied the operating performance of 57 firms after merger during the period 1995–2002. They have given their conclusion in two parts. It is found that corporate performance based on book value of assets and sales model improves after merger, but the model based on market value of assets does not support this view. Kumar and Bansal (2008) concluded that financial performance of the firms improves in the post-merger scenario. Mantravadi and Reddy (2008) studied a sample of Indian mergers between 1991 and 2003. Their study revealed that there are minor variations in terms of impact on operating performance following mergers, in different industries in India. Sinha, Kaushik, and Chaudhary (2010) performed their analysis on the mergers between 2000 and 2008 and concluded 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. Hong Kong market has also shown that mergers have helped the merged firms to increase their market power and market share (Lee, 2005). Similar results are obtained by Alhenawi and Stilwell (2017) where they show that M&A transactions create value in the long run, and the gain is commensurate with the acquirer’s historical performance and the target’s pre-acquisition value. They have studied the acquisitions from the USA from 1998 to 2010.

Negative Impact on Post-acquisition Performance

Not all the studies have found that M&A is an effective tool for inorganic growth. There are many studies that have found that post-merger performance of the acquiring firm has declined. The expected benefits from the synergies could not be seen. Dickerson, Gibson, and Tsakalotos (1997) showed no evidence that acquisition has a net beneficial effect on firm performance as measured by profitability. On the contrary, they found that acquisitions have a systematic detrimental impact on firm performance. Ghosh (2001) compared the pre- and post-acquisition operating cash flows. He could find no evidence of the increase in the operating performance after the acquisition. Langhe and Ooghe (2001) studied the performance of small unquoted firms, and for these firms, they could not find any significant improvement in the operating performance after the merger. Sharma and Ho (2002) studied a sample of 36 Australian acquisitions occurring between 1986 and 1991. Their study found that corporate acquisitions did not lead to significant post-acquisition improvements in corporate operating performance. Andre, Kooli, and L’Her (2004) studied the long-term performance of 267 Canadian M&A that took place between 1980 and 2000. They found that Canadian acquirers significantly underperform over the 3-year post-acquisition period. They also found that cross-border deals perform poorly in the long run. Pazarskis, Vogiatzogloy, and Christodoulou (2006) studied the M&As from 1998 to 2002 and found a strong evidence that the profitability of a firm decreased after the merger/acquisition event. Singh and Mogla (2008) studied a sample of 56 firms merged between 1994 and 2002 in India and found that profitability declined significantly after the mergers.

The studies available in the literature are largely on non-Indian data. Also, the available studies on Indian data are from timeworn data. We have tried to fill this gap by considering only Indian data of non-banking firms and have analyzed the financial performance of the firms till 2016–2017 which is the latest available financial statement. Our study would add to the existing literature on the post-merger performance of the acquiring firms. Taking into considerations the conclusions made by Kukalis (2007), we have used accounting-based measures to examine the post-merger performance.

Objective of the Study, Hypothesis, Data and Research Design

Objective of the Study

The present study is an attempt to check the performance of M&A deals in India in the long run, with the following objectives:

To examine the growth of M&A deals in recent times in India.

To study the impact of M&As on the accounting performance of the outcomes in medium term and long term.

To compare and contrast the results of merger deals in manufacturing sector with service sector.

Our study examines if there is any improvement in accounting-based performance of acquiring firms in the post-merger scenario. Also, we would examine if there is a significant difference in accounting-based performance of manufacturing sector acquiring firms and service sector acquiring firms in the post-merger scenario.

Data

As stated earlier in the literature review, we have considered only non-banking firms since a plethora of studies are available on banking industry in the area of M&A. We have studied the Indian mergers during 5 years from 2007–2008 to 2011–2012. The data of acquisitions during research period are sourced from Thomson Reuters. We received the data of 153 non-banking firms which went into M&A during our research period. Out of 153 firms, 31 firms were not listed. We removed these firms as data are not readily available for a non-listed firm. Out of the rest 112 firms, for 32 firms, pre-merger data of all the 7 variables for 5 years were not available. For 22 firms, post-merger data for 5 years were not available as they had got merged with some other firm within that period. After removing all these firms, we finally left with 68 non-banking public limited firms listed at Bombay Stock Exchange which went into M&A during 2007–2008 to 2011–2012. We have considered the acquisitions only till 2011–2012 so that we can consider the accounting performance for 5 years’ post-acquisition which goes up to 2016–2017. The 68 firms represent all the 5 years under study largely on a symmetrical basis. The effective year of acquisition as given in Bloomberg was manually verified from the corporate announcements section of Bombay Stock Exchange website. The accounting data have been taken from Ace Equity.

Table 1 shows the growth of number of M&A deals in India over last two decades. The growth has been magnificent with CAGR of 43 per cent.

Table 1 shows the increase in number of M&A deals in India in the last two decades. Table 1 also shows that M&A deals increased till the year 2005–2006. Post-liberalization, the Indian firms geared up for large-scale restructuring following the competition from offshore firms coming to India. Ease in government regulations also facilitated the M&A of the firms. Many companies found it vital to merge with related units to bring cost effectiveness and increased production. With increasing competition and the economy heading towards globalization, M&A is expected to occur at a much larger scale than any time in the past (Kumar & Bansal, 2008) and the same happened in the first few years till 2005–2006. After this period, M&A transactions started reducing considerably. This was not because M&A is not an effective tool for corporate restructuring but because Indian firms were not experienced to take the true benefits of acquisitions. They entered into M&A deals in acceleration, to beat the competition and hoped to gain synergies in a short period of time without considering the challenges of M&A. Literature shows that many firms suffered losses post-acquisition. Indian firms took time to come up to the terms and conditions of a successful M&A. During the period 2006–2007 to 2013–2014, a smaller number of M&A deals were announced, but majority of them were able to gain from the resulting synergies and thus reaping the benefits of acquisitions. Our period of study in the article is between this period and shows that acquisitions had a positive impact on the accounting performance of the acquired firms. Since Indian firms evidently became more mature and experienced to gain from the synergies arising out of M&A, we again see an upward trend in M&A deals from 2014 to 2015.

Table 1.

Growth of Mergers and Acquisitions in India in the Last Two Decades

Year	No. of Mergers and Acquisitions	Change (%)
1998–1999	99	—
1999–2000	324	69.44444
2000–2001	554	41.51625
2001–2002	401	−38.1546
2002–2003	419	4.295943
2003–2004	500	16.2
2004–2005	556	10.07194
2005–2006	1005	44.67662
2006–2007	944	−6.46186
2007–2008	950	0.631579
2008–2009	958	0.835073
2009–2010	918	−4.3573
2010–2011	870	−5.51724
2011–2012	726	−19.8347
2012–2013	746	2.680965
2013–2014	574	−29.9652
2014–2015	774	25.83979
2015–2016	885	12.54237
2016–2017	914	3.172867
2017–2018	1026	10.91618

Source: Ace equity.

Research Methodology

The accounting data of the acquiring firm were collected for 10 years, 5 years before the acquisition and 5 years after the acquisition. The effective year during which the merger was affected has not been considered. The accounting data were studied at three levels, 1 year (short term) before and after acquisition, 3 years (medium term) before and after merger and 5 years (long term) before and after merger to know the time period during which impact of merger gets visualized. The accounting data were analyzed using seven variables which are classified into three broad parameters. The three parameters are: profitability position (return to shareholders), liquidity position and solvency position. The seven variables under these three parameters are:

For profitability position (return to shareholders), return to equity (ROE), return on capital employed (ROCE) and return on assets (ROA) is studied.

For liquidity position, liquid ratio and quick ratio are studied.

For solvency position, debt equity ratio and interest coverage ratio (ICR) are studied.

M&A increases operating performance through improvements in profitability due to improvements in technical efficiency and cost efficiency (Aik, Hassan, & Mohamad, 2015). All corporate strategies aim towards increasing return to shareholders. If the profitability position of the firm does not improve after the acquisition of another firm, the deal cannot be said as successful. Therefore, it becomes utmost important to analyze the profitability position of the firm after the acquisition. Liquidity position informs us the ability of the firm to meet its short-term obligations. The acquisitions result in change in the working capital structure of the firm which in turn affects the liquidity position of the firm. If the acquisition is carried out effectively and gives the desired result, then the liquidity position should also show an improvement.

Solvency position changes immensely as a result of M&A. The mode of financing an acquisition could be any, but solvency position is bound to get a hit initially when the acquisition takes place. All the three parameters are very significant to measure the success of an M&A.

For the 68 firms under study, all the seven variables mentioned above are analyzed. Average of these individual variables (5 years before the acquisition years and 5 years after the acquisition years) is compared to examine the increase or decrease in these variables. Also, paired sample t-test is applied to analyze the significance of improvement in profitability, liquidity and solvency position of the acquiring firm in 3 and 5 years after the acquisition.

Table 2.

Change in the Accounting Ratios of Parent Firm in 3 and 5 Years of Spin-off

Parent Firm

ROE Δ5 Yrs

ROE Δ3 Yrs

ROCE Δ5 Yrs

ROCE Δ3 Yrs

ROAΔ5 Yrs

ROAΔ3 Yrs

D/E Δ5 Yrs

D/E Δ3 Yrs

ICR Δ5 Yrs

ICR Δ3 Yrs

CR Δ5 Yrs

CR Δ3 Yrs

LR Δ5 Yrs

LR Δ3 Yrs

Total +ves in 5 Yrs

Total +ves in 3 Yrs

M&M

−

India Glycols

−

Colgate

−

Gati

−

Carborund

−

Exide

−

Forbes

−

NIL

Sical

−

Sun Pharm

−

Genesys

−

OCL India

−

Pidilite

−

MoldTek

−

Vinyl

−

Mahindra & Mahindra

−

NIL

Religare

−

Wipro

−

Jay Shree Tea

−

Mukta Arts

−

Graphite

−

Dynamatic

−

Transwarranty

−

NIL

iPower

NIL

Sundaram - Clayton

−

LG Balakri

−

Cadila

−

Continental

−

Kothari Pro

−

Kriti Indus

−

Pratibha Ind.

−

Havells

−

United Spirits

−

NIL

Anik Indus

−

ACC

−

Inox Leisure

−

Royal Orch

−

Asian Hotel

−

Ajmera Reality

−

Emami

−

GKW

−

Idea Cellular

−

NIL

RSWM

−

Zenith Birla

−

Welspun

−

Zee Ent

−

United Spirits

−

Ultratech

−

NIL

Trent

−

Sagar Cements

−

NMDC

−

NIL

Mindtree

−

APL Apollo

−

Blue Star

−

Cipla

−

Gitanjali

−

Globus Spirits

−

Jay Shree

−

Jagran Prakashan

−

Automotive

−

First Object

−

Five Core

−

NIL

Hindoostan Mills

−

Total +ves

Source: The authors.

Notes: ‘+’ denotes increase in ratio; ‘−’ denotes decrease in ratio.

Δ 5 yrs denotes change in the average ratio for 5 years post-acquisition over 5 years pre-acquisition.

Δ 3 yrs denotes change in the average ratio for 3 years post-acquisition over 3 years pre-acquisition.

This tables shows changes in various accounting parameters of the parent firm within a span of 3 years (medium term) and 5 years (long term) after the spin-off got effective.

Research Findings

Table 2 shows the comparison of the average ratios 5 years pre and 5 years post and 3 years pre and 3 years post the acquisition. From the table, we can see the difference in the impact of acquisition on the accounting performance of the firms during 3 and 5 years. The number of firms showing improvement in 1 year was almost negligible. It is not shown in the table, but the same is reflected in Figure 1.

The finding from Table 2 can be summarized as follows:

Of all firms under study, 19 firms (28%) show improvement in return on equity (ROE) in 3 years after acquisition. On the contrary, 35 firms (51.5%) firms show improvement in ROE in 5 years after merger.

Twenty-one firms (31%) show increase in ROCE in 3 years after acquisition, whereas 39 firms (57%) show increase in ROCE in 5 years after merger.

Return on assets (ROA) increased for 20 firms (29%) in 3 years after merger. However, 45 firms (66%) improved their ROA in 5 years after merger.

Impact on debt equity ratio has not changed from 3 to 5 years. Almost 50 per cent of the firms show increased D/E ratio in 3 years and 5 years after merger.

ICR has seen improvement in 22 firms (32%) in 3 years’ post-merger and in 26 firms (38%) in 5 years’ post-merger.

Current ratio improved for 13 firms (19%) in 3 years and for 36 firms (53%) in 5 years’ post-merger.

Twelve firms (17.5%) show improvement in liquid ratio in 3 years’ time and 42 firms (62%) show improvement in 5 years’ post-merger.

From the aforementioned analysis, we can say that majority of firms are showing improved performance in 5 years post-merger. Some firms showed improvement within 3 years also but majority took 5 years to depict substantial improvement.

The aforementioned facts are more clearly presented in Figure 1.

Figure 1.

Source: The authors.

Table 3.

Paired Sample t-Test Result for 1, 3 and 5 Years Pre and Post-Merger Comparative Ratios

Ratio	t-Statistic- 5 Years Comparative	t-Statistic- 3 Years Comparative	t-Statistic 1 Year Comparative	p-Value 5 years Comparative	p-Value 3 Years Comparative	p-Value 1 Year Comparative
Return on equity	4.976	2.885	0.923	0.000*	0.004*	0.359
Return on capital employed	6.983	1.589	0.427	0.003*	0.114	0.671
Return on assets	4.106	2.573	0.918	0.000*	0.011**	0.362
Debt equity ratio	1.620	0.202	−0.280	0.106	0.841	0.780
Interest coverage ratio	−1.369	−0.887	−0.831	0.172	0.376	0.409
Current ratio	2.484	1.711	0.960	0.013**	0.089***	0.456
Liquid ratio	2.430	1.685	0.887	0.016**	0.094***	0.567

Source: The authors.

Notes: The table shows the t-statistic values and p-values of the seven variables of the paired sample t-test. *, ** and ***Denote significance at 1%, 5% and 10% levels, respectively.

Figure 1 clearly shows that the number of firms that have shown improvement in ROA, ROE, ROCE, CR and QR has substantially increased from 1 to 3 to 5 years of mergers. This means that majority firms are able to reap the benefits of merger in long term.

The result of paired sample t-test is fairly in agreement with the aforementioned comparison of the average ratios. Table 3 depicts the result of paired sample t-test for the seven variables for 3 years pre- and post-merger performance and 5 years pre- and post-merger performance.

ROE: Equity shareholders are the real owners of the firm. They bear the maximum risk on their investment in any firm. Therefore, it becomes extremely important for any firm to give expected return to their equity shareholders. As it can be seen from Table 3, ROE has increased significantly both in the span of 3 and 5 years. This shows that merger has proved to be profitable for the equity shareholders.

ROCE: Apart from equity shareholders, debt providers are also major stakeholders in the firm. It is of vital importance to the firm that ROCE improves as a result of any strategic decision. It helps the firm in raising capital in future easily and at comparatively lower rates. Table 2 shows that ROCE has increased significantly in a span of 5 years after the merger. ROCE did not show any significant improvement in a span of 3 years.

ROA: It is very important for a firm to get increasing returns on its assets. It shows how profitably the firm is able to employ its assets. We can see from Table 3 that as a result of merger, ROA has significantly increased during 3 and 5 years after the merger. It improved at a significance level of 5 per cent in 3 years after merger and at a significance level of 1 per cent in 5 years’ post-merger.

D/E ratio: This ratio tells the presence of debt in firm as compared to the equity funds. This ratio is also impacted by the way in which the merger has been financed. Deal financing issues have not been captured in this article. Moreover, as shown in Table 3, debt equity ratio has not shown any significant improvement after the merger, neither in 3 years nor in 5 years.

ICR: Debt comes with a fixed rate of interest, and a firm should have enough profits to pay off the interest comfortably. Since the debt has not shown any increase in the period after merger, in the same way, ICR has not shown any significant change post-merger (Table 3).

Current ratio and liquid ratio: These ratios depict the liquidity position of the firm. It is good to have a high current and liquid ratio. It represents a day-to-day operating liquidity available to the firm. Table 3 shows that both the ratios have improved significantly post-merger. In a span of 3 years, the ratios increased at a significance level of 10 per cent, and further in a span of 5 years, it showed significant improvement at a significance level of 5 per cent.

From the aforementioned analysis, it is seen that acquirer firms do not show any positive improvement in short term (1 year) but start showing significant improvement at 5 per cent in medium term (3 years) and a significant improvement at 1 per cent level of significance is seen in the profitability in long term (5 years). Liquidity ratios also showcase improvement in medium term but at 10 per cent level of significance. But in long term, the liquidity position of the acquiring firms is significantly improving at 5 per cent level of significance. Solvency position of the acquiring firms is not changing significantly as a result of merger.

Further, we have categorized our sample firms into manufacturing and service sectors. Out of the sample of 68 firms, 40 firms are from manufacturing sector and rest 28 are from service sector. Structure of operations is different for manufacturing and service sector firms, so the impact of acquisition may also be different on both. Figure 2 shows the segregation of sample firms into manufacturing and service sector firms.

We have evaluated only profitability for medium term and long term for the manufacturing and service sector categories. This is done because profitability is the foremost factor that needs to be examined to observe the impact of any strategy.

When the accounting variables were applied to the manufacturing and service sector firms individually, the results were quite interesting. Figure 3 shows the percentage number of manufacturing and service sector firms, showing improved profitability in 3 and 5 years of acquisition.

Figure 2.

Source: The authors.

Figure 3.

Source: The authors.

Table 4

Paired Sample t-Test Result for 3 and 5 Years Pre- and Post-merger Comparative Ratios

Ratio	t-Statistic 5 Years Comparative (manufacturing)	t-Statistic 3 Years Comparative (manufacturing)	p-Value 5 Years Comparative (manufacturing)	p-Value 3 Years Comparative (manufacturing)	t-Statistic 5 Years Comparative (service)	t-Statistic 3 Years Comparative (service)	p-Value 5 Years Comparative (service)	p-Value 3 Years Comparative (service)
Return on equity	3.296	1.537	0.001*	0.127	3.744	2.571	0.000*	0.012**
Return on capital employed	0.972	0.357	0.332	0.708	3.401	1.987	0.001*	0.048**
Return on assets	2.979	1.948	0.003*	0.054***	3.008	1.823	0.003*	0.072***

Source: The authors.

Notes: The table shows the t-statistic values and p-values of the three profitability variables of the paired sample t-test. *, ** and ***Denote significance at 1 per cent, 5 per cent, 10 per cent levels, respectively.

Figure 3 shows that majority of manufacturing firms are not showing improvement in profitability in 3 years of acquisition. Majority firms are taking long period of time to realize the synergies and reap the benefits of merger. Although some manufacturing firms have shown increased profitability in 3 years, majority of manufacturing firms are able to increase their profitability only in 5 years of acquisition. However, when we see the graph of service sector firms, we find that majority firms have started reaping the benefits of acquisition in a span of 3 years. All the three profitability ratios are showing improvement in 3 years of acquisition for majority of the firms. In 5 years, most of the firms are showing a positive impact on profitability. Paired sample ‘t’ test was also applied to see the significance of the increase in profitability ratios for manufacturing and service sector firms. Table 4 shows the results of the same.

Table 4 clearly shows that service sector firms outperform manufacturing firms both in 3 and 5 years of acquisition. Manufacturing firms are not showing any positive results in medium term. Significant results for manufacturing firms are visible only in long term. Service sector firms are showing a significant increase in profitability at 5 per cent level of significance in medium term and at 1 per cent level of significance in long term. Synergies take time to arise in case of manufacturing firms. The reason could be that in service sector firms manufacturing facilities are not to be integrated. Integration of manufacturing facilities is a challenging task and requires efficient implementation.

Conclusion

M&A is a strategic move which is planned to improve the accounting-based performance of the firm on all parameters. The integration requires time to fetch its desired results. As it can be seen from Table 2, very few firms showed positive results in 1 year of acquisition, less number of firms could show improvement in accounting performance in 3 years after the merger, but more than 50 per cent of firms have shown improvement in accounting parameters in a span of 5 years. Similar results are obtained from paired sample t-test, as shown in Table 3. In 5 years, profitability and liquidity positions have improved significantly. Out of manufacturing and service sector firms, synergies start arising for service sector firms in medium term and continue with a positivity in long term also. Manufacturing firms are able to show significant improvement in long term. As stated earlier, the reason could be the fact that integration required in manufacturing firms are likely to be more intricate and thus time-taking. This results in delay in realizing the synergies arising from merger.

M&A give results in long term. Huge cost is involved in acquiring a firm and operational integration also takes time to materialise; cultural integration is again a herculean task. Due to all these factors, the synergies do not arise in a short period of time. We can say that M&A is a long-term investment which gives positive results and improves accounting and financial position of a firm in long term. In long term, Indian firms are able to generate synergies from the acquisitions made by them.

Limitations and Future Scope of the Study

We have included only listed companies which went into M&A during our research period. Only those firms could be taken whose 10 years’ financial data were available. Moreover, in the long term, the accounting performance of the acquiring firm may be impacted by other micro- and macro-economic factors also apart from M&A. In the present study, we have seen the impact of merger on the accounting performance of the acquiring firm which leaves a future scope to examine the long-term impact of merger on the stock prices of the acquiring firm. Also, cross-border acquisitions can also be examined separately.

Footnotes

Acknowledgement

The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve the quality of the article.

Declaration of Conflicting Interests

Funding

The authors received no financial support for the research, authorship and/or publication of this article.

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