The impact of mergers and acquisitions on the operating performance of the firm in india.

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Chapter-1: Introduction

1.1 Introduction

Along with boosting their own profits, businesses create gains for their shareholders and exist to serve customers. According to Ghosh and Das (2003) these aims can be achieved a) by reducing costs since this increases competitiveness and market share and so wins over more customers, b) by capturing wider markets through offering an increased range of products and services, c) by undertaking diversification operations, and d) by undertaking mergers to grow the company inorganically.

Mergers and acquisitions (M&As) are suggested as measures to revive failing companies and as strategic tools. Conducive to strategic alliances and mergers in an increasingly competitive business environment are global economies, favorable policies and incentives, relaxed rules, and liberalization. New products, diversification, R&D etc. have also been included as critical factors when businesses scale up operations and responsibilities along with increased roles in world economies as has been noted by Yadav and Kumar (2005). Due to brand building and PR exercises, a few M&A deals may have taken place as pointed out by Malatesta (1983) and Roll (1986).

One fact prevalent across numerous sectors relates to an increase in M&A competence levels and competitiveness. Corporations involved in M&A deals around the world consist Air France and KLM in the airlines sector, Daimler-Benz and Chrysler in the automobile sector, and SBC and AT&T in the telecom domain. A lot of research on shareholder gains in the event of an M&A exists today. When word gets out that an M&A is imminent, the stock prices of both companies goes up tremendously and favorably impacts shareholder value. As the nature of the market reports why details of impending mergers are not leaked and could lead to stock crashes affecting prices many reasons are there.

While M&As may lead to healthier bottom lines and improved cash flows as felt by most business managers, however, to the shareholders, some mergers and acquisitions may be loss making enterprises which are of no use. So to generalize that M&As always result in favorable circumstances for the shareholders is not always true. Due to the fact that in terms of synergy, expertise, and objectives, the companies do not match up some mergers may not be effective. If the following are not aligned correctly i.e. asset allocation, resources, and core strengths and if through a planned integrated approach, care is not taken to fuse the two companies into one then, along with an expose of operating weaknesses, share value can fall. This may lead to erosion and drying up of capital. The failures in M&A deals are placed at over 60% as estimated by Schweiger (2003).

1.2 Background of the study

Through the economic activities across Europe and the world it is clear that FDI activity has risen over the past decade. In addition, the merger and investment acquisition mode has risen sharply and as a percentage of all FDO risen as noted by Lipsey (2002). From 1995-2001 the “Global Wave” has been labeled as the most recent merger wave by Jobanovic and Rousseau (2002), through an emphasis on their importance and a move to more cross-border mergers. According to Jovanovis and Rousseau in the EU in 2000-2001, about 40% of all mergers occurred through cross-border deals and from 1991-2000 these deals accounted for about 100% of the total number of mergers in the EU.

According to the EC (2001), to make acquisitions for euro-zone companies becomes easier by increased financial markets' integration. Among the EU nations, a rapidly increasing number of cross-border M&A were contributed to by an active market for corporate control given the boom of the 1990s. Similar to Ueng and Ojah's research (1998) the FDI wealth effects investigation the effects of these integrating transactions on form shareholders using methods are examined in this study. In the EU nations, the merger analysis and acquisition activity is warranted certainly as suggested by the importance of the international business community and increased activity. In the EU, of the integration process, a significant piece is owed to cross-border mergers and more than others, the benefits have filtered in to some countries. Therefore, it is important to understand who has gained or lost, and why.

Instead of the individual states of the United States (US), the EU nations have greater political disparity. This would seem to imply that across the US the nations across EU are of greater importance in a level playing field in the business community. Within the US however, instead of a similar study of interstate transactions, this key factor makes this study much more interesting.

1.3 Statement of the problem

In terms of markets, resources, technology, money, or skills, mergers have a high chance of taking place in terms of the size of the top managements of two similar companies and when they are evenly matched to register and contribute to the merger as observed by Samuel and colleagues (1990). Between equals, these mergers are mergers and generally, when the existing companies do not function as an entity anymore, they are complete and a new structure is created to merge the assets and resources of both the companies. The new company's shares are then redistributed among both the companies' shareholders.

In another scenario, giving them a majority shareholding by buying a large percentage of their shares, a company may acquire another company and become the new ‘owners.' This is termed an acquisition and the company acquired is merged into the existing business of the company. The target ceases to be an independent entity legally. Along with trading on the stock exchanges the shares of the acquiring company still exist.

1.7 Significance of the study

In the industry involved the three big entities Lloyds TSB and HBOS have special significance as their merger proves through the rationale behind this topic. This merger sought to create the largest steel company and this leaves much scope for research.

1.8 Possible contribution to knowledge

Based on the home country of the target and the acquiring firms, there are differentials in the average wealth effects of cross-border mergers and a study of this is the possible contribution of this research. From the EU averages it is clear that several EU nations differ significantly, which would imply that from cross-border mergers than those in other countries the owners i.e. shareholders of firms in particular countries stand to benefit more. Why these differences exist, the research continues to explain empirically and this is beyond showing that such country-specific differences exist. In Europe, by examining a small sample of cross-border mergers, it is evident that these findings are not unique to the EU.

1.9 Limitations of the study

The research deals with a specific industry and that is the key limitation of the study. Hence, the implications of this study cannot be applied as every industry has its own conceptualization with regard to the effects of mergers and acquisitions. The country-specific nature is the other limitation, since these organizations work within individual financial environments pertinent to these countries.

1.3. Purpose of the research and aims

“What is the impact of mergers and acquisitions on the operating performance of the firm?”

Objectives of the Research

  • To critically analyze the impact of mergers and acquisitions on the operating performance of the firm in India.
  • To strategically evaluate the impact on shareholders' wealth post-M&A.

1.4. Structure of the rest of the report

Chapter 1- Introduction: Chapter one is the Introduction which will cover the brief aspects about mergers and acquisitions.

Chapter 2- Literature Review: Chapter Two will deal with Literature Review which will draw theoretical underpinnings on the subject area of the research.

Chapter-3-Conceptual Framework: Chapter Three will discuss the Indian Banking Industry with the perspective of M&As.

Chapter 4- Research Methodology: Chapter Four will be on Research Methodology and Process which will cover the process which is adopted by the researcher for conducting the research.

Chapter 5-Data Findings and Analysis: Chapter Five will be on Data Findings and Analysis which will cover broadly the sectors which are involved in the mergers and acquisitions.

Chapter 6- Conclusion: Chapter Six will be the Conclusion which will specify the way the entire research has been conducted and the end result of the same.