Title - Impact of Mergers on the Corporate Performance of Acquirer And Target Companies in India

Title - Impact of Mergers on the Corporate Performance of Acquirer And Target Companies in India

(Subject Area: Finance)

Abstract

Mergers and acquisition becomes 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. The present study is limited to a sample of companies which underwent merger during the period of 2002-2005.

It is proposed to compare the performance of the acquirer and target companies before and after the period of mergers by using ratio analysis and t-test during the study period of three years. The study found that the shareholders of the acquirer companies increased their financial performance after the merger event.

Keywords: Merger, Acquirer, Target, Financial Performance, Ratio analysis

Chapter 01

Introduction

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.

Merger is a routine event in the changed economic environment. 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 wealth enhancement with respect to mergers, which can be helpful in assessing the success of merger. Many studies have been conducted to analyze both acquiring and target companies in the pre-merger period and more specifically, acquirer companies in the pre- and post-merger periods. It is equally important to analyze from the view point of the acquirer and target companies in the pre-and post-merger periods also. Hence an attempt has been made to study the wealth of both acquirer and target companies in the pre- and post-merger period.

Mergers, acquisitions and corporate control have emerged as major forces in the modern financial and economic environment. Mergers a source for corporate growth have been the subject of careful examination in the literature. The general rubric of corporate synergy signifies that the value created by the combination of firms may result in more efficient management, economies of scale, improved production techniques, a combination of complimentary resources, the redeployment of profitable uses, and the exploitation of market power or any number of values creating mechanisms. One of the The Effect of Mergers on Corporate Performance of Acquirer and Target Companies in India 15 significant objectives of any corporate sector is to achieve high rate of economic growth. For achieving this, it keeps reviewing and improving its policies from time to time and introduces various measures, both at micro and macro-levels. It also requires various regulatory measures to channelize all economic efforts to achieve its social and economic objectives and to prevent unhealthy practices entering into its economic system which is detrimental to public welfare. The mergers and acquisitions in India have changed dramatically after the liberalization of Indian economy. The policy of liberalization, decontrol and the globalization of the economy have exposed the corporate sector to manage domestic and global competition. The factors like low interest rates, cheap labour, and liberal government policy, have helped the Indian corporate sector to reduce their cost. However, the corporate sectors view mergers for further cost reduction through technology advancement or to make their presence felt in the market.

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