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The impact of mergers and acquisitions

The Impact Of Mergers And Acquisitions On Corporate Performance In India By Satish Kumar And Lalit.K.Bansal:Journal Of Management Decision

Introduction

With rapid technological advances and forces of globalisation in the past decade, Mergers and Acquisitions has become one of the key pavestones of the modern business world. It has a unique phenomenal tendency to redesign companies radically and to contribute to a major corporate renewal.

Considering the significance of the global market, I have chosen this quantitative article for this assignment. In addition, I am particularly interested in the field of economical studies enclosing advanced technologies and its relationship with the business environment. This is why the subject inexorably has direct or indirect impact on our working manners and our changing lifestyle. Furthermore, it is always stimulating to know how the innovative strategies of the corporate level affect the current market situation in a positive or negative manner. In the recent years the importance of acquisitions has increased rapidly. There are various reasons when a company goes for mergers and acquisitions. To understand this article deeply I have analysed major corporate advantages which are not only to gain greater market coverage, but also to minimise the risks involved in a new service or product, maximise profits through large scale production and finally in some cases restructure a firm's competitive horizon.

Aims And Context Of The Research

The aim for this research paper has been clearly set to measure the growth of companies, when M&A takes place. The data is collected in quantitative way to use a deductive research approach. The author in this article seeks to explore the effect of mergers & acquisitions on financial performance of the company. However the Analysis further shows that the merger did not lead to excess profits for the acquiring firm (Pawaskar,2001). According to B.Lalit & K.Satish the companies hope to enhance cost efficiencies and revenue enhancement from takeovers and strategic alliances in restructuring the face of cut throat competition from multinational corporations as well as exploiting new opportunities. However this section presents the knowledge-based view of the firm (Nelson & Winter, 1982; Kogut and Zander, 1992; Grant, 1996).

The objective of this research is clear but does not cover all the aspects, it could be argued that apart from financial performance, market share analysis could also be taken into consideration. The author has limited his research concentrating only on Indian companies, while there is a wider scope for this study on global level.

Evaluation Of Strength And Weaknesses

Structure, Presentation And Writing Style

The author has structured the article clearly with various sections explaining the literature review with comparative statement analysis. Furthermore, the links between the various sections are smooth thus making it reader friendly. He also mentions that the companies can be measured by the profits in their long term relation. On the other hand, the author could avoid the repeated sentences in the research design (pp:1535). Overall, the presentation and the writing style is classic, clear and consistent.

Review Of Literature

The author has provided a brief literature review in this article with references from the journals of parallel area of studies. According to Phillips and Pugh (2005), a good literature review sets the study within its wider context showing a good relationship between the work that has been done and the topic.

The author has enlightened financial performance of the company in the long run situation, however in subsequent work, Walsh and Ellwood (1991) found that post-acquisition turnover can be explained by characteristics of the negotiation process and by the pre-acquisition profitability of the acquirer. According to Jemison and Sitkin (1986) indicate that it is useful to think about acquisitions in terms of both their strategic fit and organizational fit whereas Datta and Grant (1990) and Shanley (1994) attempted to test the performance implications of this particular decision, and found some weak support for a positive influence.

Although the knowledge-based variables in this model show interesting effects on financial performance, its study has some limitations. The author simply talks about the M&As in Indian context, hence its applicability in the global market cannot be commented upon. Barney (1988) has argued that for acquirers to earn positive abnormal returns on their investments, they must create a uniquely valuable and non-imitable combination of their assets with those of the acquired firm. According to this argument, these conditions do not materialize systematically and acquirers, therefore, cannot expect to have positive abnormal returns based on the degree of relatedness of their assets with those of the target firm (Barney, 1988).

Research Objectives

This research paper attempts to elaborate the financial performance of merger and acquisition deals in India in a long term relation with the objectives to explore the growth of the companies and the effect of M&A deals in recent time in India. According to the author there was no evidence of cost reduction after M&As; however, the profitability eventually increased for the merging corporations because of a more efficient use of capital and in few cases, it is noted that there had been a subsequent increase in the profit before the merger period but after the merger period the profits considerably went down.

Research Design & Methods

Deductive approach is used in this research and numerical data of the firms is collected in quantitative way by analysing the financial performance of the company. The approach used by the researcher provides an advantage to illustrate the concept in more enhanced way. The research design is longitudinal as the author has taken into consideration the financial data of companies of six years taking the fourth year as the event year. Comparative statement analysis is used to measure profitability in the long run situation. Spearman's rho correlation and Chi-square test method were carried out as well. There were null hypothesis found in the article as there is no significant difference in the performance of the organization between takeovers and mergers. Therefore it could be argued that qualitative research method could be used in the same study to reach to a better conclusion.

Data Collection & Analysis

The data collected in this research was through various primary sources. More than 200 cases of M&A deals in India for the year 2003 were collected but only 74 cases were selected on the basis of available financial data. To give more evidence to the report maximum effort was made to include all the major M&A deals in India over the time period. In order to confirm the financial period of any company in long run, at least three years financial data is required. Hence the researcher has selected the year 2003 as the base year so that a comparison can be made to identify the financial performance of the pre-merger and post-merger status of the company.

It has been noted that the author has collected the sources of the year 2003 from the company cases Journal; Business Line and Economics Times newspapers; Business Today and Business World magazines; Centre for Monitoring Indian Economy pvt ltd (CMIE) data-base PROWESS and the sources for acquisition deals are SEBI web site; newspapers and magazines.

Conclusion Limitations

Out of the total merger cases, for more than half of the cases the financial performance has improved in the post-merger phase as compared to the pre-merger phase of the same company. Whereas, in case of 52 acquisition deals, more than 60 percent of the cases showed an improvement in the financial performance in the post-acquisition period. The research supports the awareness about M&A's that synergy can be generated with efficient use of resources available. The result also aims that management cannot take it for granted that synergy will be generated and profits will increase simply by going for mergers and acquisitions.

In the light of this article, it can be observed that M&A's can be measured on financial performance but the author fails to include market structure analysis and integration processes which are crucial points to be taken into account. It may be argued that similar studies could be carried out on the larger set of M&A deals. I strongly believe that this study needs some further research to cover the entire basis and could have had a more specific conclusion.

Directions For Future Research

During this present study, various avenues of mergers and acquisitions are highlighted which possess a yearning scope for future research. M&A is a very multidisciplinary and an extremely complex concept in the view of comparative management. This article was an initial result of an ongoing research. Innovative ideas have challenged the traditional way of thinking which would help to increase the competitiveness and profitability of the companies in the global market. More importantly, companies seem to skilfully develop vague capabilities that allow them to constantly improve their chances of success.

References

Barney,J.B.(1988),Returns to bidding firms in mergers and acquisitions: reconsidering the relatedness hypothesis. Strategic Management Journal, 9 (Special Issue): 71-78.

Datta, D. K. & Grant, J. H. 1990. Relationships between type of acquisition, the autonomy given to the acquired firm, and acquisition success: an empirical analysis. Journal of Management, 16(1): 29-44.

Grant, R. M. 1996. Toward a knowledge-based theory of the firm. Strategic Management Journal, 17(Winter Special Issue): 109-122.

Jemison, D.B. & Sitkin, S.B. 1986. Corporate acquisitions: a process perspective. Academy of Management Review, 11: 145-163.

Kogut B & Zander U. 1992. Knowledge of the firm, combinative capabilities and the replication of technology. Organization Science, 3(3): 383-397.

Nelson, R. & Winter, S. 1982. An evolutionary theory of economic change. Cambridge, MA: Harvard University Press.

Pawaskar, V. (2001), “Effects of mergers on corporate performance in India”, Vikalpa, Vol. 26 No. 1, pp. 19-32.

Phillips, E.M. and Pugh, D.S. (2005), How to get a PhD (3rd Edition), Maidenhead, Open University Press.

Shanley M.T. 1994. Determinants and consequences of post-acquisition change. In: G. Von Krogh, A.Sinatra & H. Singh (eds). Managing Corporate Acquisitions: A Comparative Analysis: 391-413 London, UK: McMillan Press.

Walsh,J.P. & Ellwood J.W. 1991. Mergers, acquisitions and the pruning of managerial deadwood. Strategic Management Journal, 12(3): 201-217.

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