Original Article

Impact of Mergers and Acquisitions Global Business Review

1–19
on Accounting-based Performance © 2019 IMI
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of Acquiring Firms in India in.sagepub.com/journals-permissions-india
DOI: 10.1177/0972150919852009
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Puja Aggarwal1,2
Sonia Garg1

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,

1
LM Thapar School of Management, Thapar Institute of Engineering and Technology, Patiala, Punjab, India.
2
Institute of Management Technology, Ghaziabad, Uttar Pradesh, India.

Corresponding author:
Puja Aggarwal, Institute of Management Technology, Raj Nagar, Hapur Road, Ghaziabad, Uttar Pradesh, India.
E-mail: pujaaggarwal@imt.edu
2 Global Business Review

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
Aggarwal and Garg 3

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
4 Global Business Review

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.
Aggarwal and Garg 5

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
6 Global Business Review

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:
1. To examine the growth of M&A deals in recent times in India.
2. To study the impact of M&As on the accounting performance of the outcomes in medium term
and long term.
3. 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
Aggarwal and Garg 7

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
(Table 1 Continued)
8 Global Business Review

(Table 1 Continued)

Year No. of Mergers and Acquisitions Change (%)

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:
1. For profitability position (return to shareholders), return to equity (ROE), return on capital
employed (ROCE) and return on assets (ROA) is studied.
2. For liquidity position, liquid ratio and quick ratio are studied.
3. 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

Total Total
ROE ROE ROA D/E D/E ICR ICR CR CR LR +ves +ves
Δ5 Δ3 ROCE ROCE ROA Δ3 Δ5 Δ3 Δ5 Δ3 Δ5 Δ3 Δ5 LR Δ3 in 5 in 3
Parent Firm Yrs Yrs Δ5 Yrs Δ3 Yrs Δ5 Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs
M&M + − + − + − − + − − + − + − 5 1
India Glycols − − − − − − + + − − − − + + 2 2
Colgate + + + + + + − + − + + + + + 5 7
Gati − − − − + − − + − − + − + − 3 1
Carborund + − + − + − + + − − + + + − 6 2
Exide + + + + + + − − + + + + + + 6 6
Forbes − − + − + − + − − − + − + − 5 NIL
Sical − − − − + − − + − − + − + − 3 1
Sun Pharm − − + + + + − − + + − − − − 3 3
Genesys + + + + + + − − + + − − − − 4 4
OCL India + − + + + + − − + + − − + − 5 3
Pidilite + + + − + − + + + − + − + + 7 3
MoldTek + − + − + − − − + − − − + − 5 1
Vinyl + + + + + + − − + + − − + − 5 4
Mahindra & + − + − + − − − − − + − + − 5 NIL
Mahindra
Religare − − − − − − + − − − + + + + 3 2
Wipro + − − − − − + + − − + − + − 4 1
Jay Shree Tea + + + + + + + + + + − − − − 5 5
Mukta Arts + − + − + − + + − − − − − − 4 1
Graphite + − + + + + − − + + + − + − 6 3
Dynamatic − − − − − − + + − − + − + − 3 1
Transwarranty − − − − − − − + − − − − − − NIL 1
iPower + + + + + + + + + + + + + + NIL NIL

(Table 2 Continued)
(Table 2 Continued)

Total Total
ROE ROE ROA D/E D/E ICR ICR CR CR LR +ves +ves
Δ5 Δ3 ROCE ROCE ROA Δ3 Δ5 Δ3 Δ5 Δ3 Δ5 Δ3 Δ5 LR Δ3 in 5 in 3
Parent Firm Yrs Yrs Δ5 Yrs Δ3 Yrs Δ5 Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs
Sundaram - + − − − − − + + − − + − + − 4 1
Clayton
LG Balakri + + + + + + − − + + + − + − 6 4
Cadila + + + + + + − − + + + − + − 6 4
Continental + + + + + + + + + + − − − − 5 5
Kothari Pro + − + − − − + + − − − − − − 3 1
Kriti Indus + + + + + + − − + + − − + − 5 4
Pratibha Ind. − − − − + − + + − − + − + − 4 1
Havells − − − − + − − − + + + − + − 4 1
United Spirits − − − − − − + − − − − − − − 1 NIL
Anik Indus + − + − + − − + − − − − − − 3 1
ACC − − − − − − − − − − + + + + 2 2
Inox Leisure + − + − + − − + − − − − − − 3 1
Royal Orch − − − − − − + + − − − − − − 1 1
Asian Hotel − − − − − − + + − − + − + − 3 1
Ajmera Reality − − − − + − − − + + + + + − 4 2
Emami + + + + + + − − + + − − − − 4 4
GKW − − − − − − + − − − + + + + 3 2
Idea Cellular − − + − + − − − + − − − − − 3 NIL
RSWM + + + + + + + + + + − − − − 5 5
Zenith Birla − − − − − − − + − − + − + − 2 1
Welspun + + + − + + − − + − − − − − 4 2
Zee Ent + + + + + + − − + + + + + + 6 6
United Spirits − − − − − − + + − − − − − − 1 1

(Table 2 Continued)
(Table 2 Continued)

Total Total
ROE ROE ROA D/E D/E ICR ICR CR CR LR +ves +ves
Δ5 Δ3 ROCE ROCE ROA Δ3 Δ5 Δ3 Δ5 Δ3 Δ5 Δ3 Δ5 LR Δ3 in 5 in 3
Parent Firm Yrs Yrs Δ5 Yrs Δ3 Yrs Δ5 Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs Yrs
Ultratech − − − − + − − − − − + − + − 3 NIL
Trent + − + − + − − − − − + − + − 5 1
Sagar Cements + − + − + − − − − − + − + − 5 1
NMDC − − − − − − + NC + NC + − + − 4 NIL
Mindtree + + + + + + − − + + + + + + 5 5
APL Apollo − − + − + − − + − − − − − − 2 1
Blue Star − − − − − − + + − − + − + − 3 1
Cipla − − − − + − − − − + + + + + 3 3
Gitanjali + − + + + − + + − − − − − − 4 2
Globus Spirits − − − − − − + + − − − − + − 2 1
Jay Shree − − + − + − + + − − − − − − 3 1
Jagran + + + − + − + + − − − − − − 4 1
Prakashan
Automotive − − − − − − − − + − + − + − 3 1
First Object − − − − − − + NC − − − + − + 1 2
Five Core − − − − − − + NC − − − − − − 1 NIL
Hindoostan − − − − − − + + + + − − − − 2 2
Mills
Total +ves 35 19 39 21 45 20 33 34 26 22 36 13 42 12
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.
12 Global Business Review

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:
1. 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.
2. 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.
3. 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.
4. 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.
5. ICR has seen improvement in 22 firms (32%) in 3 years’ post-merger and in 26 firms (38%) in 5
years’ post-merger.
6. Current ratio improved for 13 firms (19%) in 3 years and for 36 firms (53%) in 5 years’
post-merger.
7. 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. Number of Firms Showing Improvement in Different Financial Parameters in Short Term, Medium
Term and Long Term
Source: The authors.
Aggarwal and Garg 13

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

t-Statistic- t-Statistic- t-Statistic p-Value p-Value p-Value

5 Years 3 Years 1 Year 5 years 3 Years 1 Year
Ratio Comparative Comparative Comparative Comparative Comparative Comparative
Return on equity 4.976 2.885 0.923 0.000* 0.004* 0.359
Return on capital 6.983 1.589 0.427 0.003* 0.114 0.671
employed
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 −1.369 −0.887 −0.831 0.172 0.376 0.409
ratio
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).
14 Global Business Review

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. Segregation of the Sample Firms into Manufacturing and Service Sectors
Source: The authors.
Table 4 Paired Sample t-Test Result for 3 and 5 Years Pre- and Post-merger Comparative Ratios

t-Statistic t-Statistic t-Statistic t-Statistic p-Value

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

Figure 3. Percentage of Manufacturing and Service Firms Showing Improvement in 3 and 5 Years of Acquisition
Source: The authors.

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
Aggarwal and Garg 17

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.

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

The authors declared no potential conflicts of interest with respect to the research, authorship and/or
publication of this article.

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

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